The Hidden Forces That Shape Our Decisions
HarperCollins, 2008, 279 pp. ISBN 978-0-06-135323-9
Ariely is a professor of behavioral economics at Duke University. On the basis of many behavioral experiments and anecdotes (some amusing and some disgusting), Ariely describes how our decisions are systematically and predictably different from supposed rational judgments. Expectations, emotions, social norms, and other seemingly illogical forces influence our behaviors. Understanding how we tend to operate can help us make better decisions.
Chapter 1. The Truth about Relativity
Everything is relative – even when it shouldn’t be. Marketers offer a “decoy” offer, one they don’t expect us to buy, but which helps move us up to a higher level purchase by making it look like a better deal. Here’s an example of a web subscription offer to The Economist.
On-Line - $59
Print - $125
Print & Web - $125
Since the person is reading the ad on-line, he would probably tend toward the cheaper on-line subscription. He notices the print edition, which he doesn’t need or want to pay for, is $125. But then he notices he can get the print plus the web for the same price. Now, that sounds like a deal!
Or the marketer will put in a bigger, higher priced model that he doesn’t expect to sell, to get someone to move up from the economy model to the intermediate model, which he is hoping to sell. Here’s an example:
36-inch Panasonic for $690
42-inch Toshiba for $850
50-inch Philips for $1,480
The customer may have been originally looking for a 36-inch TV. But the overpriced huge model makes the intermediate Toshiba look like a pretty good deal. (1-3)
2. The Fallacy of Supply and Demand
The market isn’t always controlled by supply and demand. It is controlled by images in our minds. How much something is worth to us is often “anchored” by the first price we see. We are “imprinted” by what we see first. Once this price is fixed, future prices seem high or low to us, not because of supply but by comparison with the “anchor” price. First impressions are important.
“Starbucks did everything in its power … to make the experience feel different—so different that we would not use the prices at Dunkin’ Donuts as an anchor, but instead would be open to the new anchor that Starbucks was preparing for us.” (39) The first time we did it for a special treat. The second time it was easier to justify. After that it became a habit and we no longer questioned it. And that’s how we moved up from spending $1.50 to $4.50 for coffee. So pay attention to first time decisions and question your habits. (37-44)
3. The Cost of Zero Cost
We often pay too much when we pay nothing. We get something we don’t really need, or more than we need, in order to get something else we don’t need for free.
4. The Cost of Social Norms
Attorneys may not be willing to help the poor for a reduced fee and yet they might be willing to donate their time for free. It’s the difference between responding to the market value and responding to a social obligation. (71) Social and market norms have different rules. When you mix the two you get in trouble. Try offering your mother-in-law payment for an excellent Thanksgiving dinner or mentioning the price of the restaurant selections to your dinner date. Or, as a corporation, appeal to your workers as part of “the family” to give a huge effort to complete an important project and then lay off a bunch of people or cut their insurance benefits when finances are tight.
“You can’t treat your customers like family one moment and then treat them impersonally…a moment later when this becomes more convenient or profitable. This is not how social relationships work. If you want a social relationship, go for it, but remember that you have to maintain it under all circumstances.” (79)
6. The Problem of Procrastination and Self-Control
We are emotionally ‘cool’ when we make our resolutions. But when we’re emotionally ‘hot,’ (tempted) we tend to go for the immediate gratification. Without precommitments, we keep falling for temptation.
7. The High Price of Ownership
We overvalue what we already have. Why does the asker ask an unreasonably high price and the purchaser seek a much lower price? Why don’t we both value it the same? When we own something we tend to value it more than other people do. We fall in love with what we already have. We focus more on loss than gain. Loss is a strong emotion and we have an aversion to it. Once we have the higher speed internet or the gold package or the 30-day trial, it is very difficult to give it up. We are everywhere tempted to improve the quality of our lives with a larger house, a new dishwasher, a riding lawn mower. But each time we move up, we have a very hard time moving back to the previous state. Even thinking about the purchase tends to move us toward the ownership mindset. So try to look at each transaction as a non-owner.
This is also true of ideas or points of view. Once we take ownership of an idea, whether it is sports, politics, or religion, we prize it perhaps more than it’s worth. And we have trouble letting go of it because we can’t stand the loss. “What are we left with then? An ideology—rigid and unyielding.” (138)
8. Keeping Doors Open
We have an irrational compulsion to keep all our options open. But there is a cost. We sometimes fail to spend enough time on what is really important. In our society people aren’t faced with a lack of opportunity but a dizzying abundance of it. Choosing between two similarly attractive possibilities is one of our most difficult decisions. Congress is frequently deadlocked over the details of legislation both parties essentially support.
9. The Effect of Expectations
The mind gets what it expects. Impressions made in our minds, even subconsciously, affect what we experience. When we believe in advance that a food will be tasty, or a medicine will be effective, we tend to experience what we expect. We tend to react toward people according to stereotypes in our minds. And people tend to respond according to their stereotype if they are aware of it.
10. The Power of Price
We cannot avoid thinking that a more expensive drug will be more effective than a cheaper one. Placebos often yield at least short term improvements in patient. Price can change the experience. We are likely to think that a discounted product is not as good or effective as one at a normal or higher price. It is amazing how our minds control our bodies.
11. The Context of Our Character, Part I
Honest people tend to cheat a little. In experiments, the majority of people cheated just a little bit. However, when in some indirect way, the Ten Commandments were brought to their consciousness before the experiment, they didn’t cheat. “In other words, when we are removed from any benchmarks of ethical thought, we tend to stray into dishonesty. But if we are reminded of morality at the moment we are tempted, then we are much more likely to be honest.” (213)
12. The Context of Our Character, Part II
People tend to steal a little if it’s not actually cash. Many people make an insurance claim for the loss of a 32-inch television set when it was really only a 27-inch set. There seems to be a conscience threshold below which the conscience isn’t triggered. “Even good people are not immune to being partially blinded by their own minds.” (227) “We can be dishonest without thinking of ourselves as dishonest. We can steal while our conscience is apparently fast asleep.” (229)
Companies do it too. Try to redeem your airline miles and you may find all the dates you want are “blacked out.” But if you are willing to spend twice as many miles, the dates will become available. Credit card companies find “trick” ways to charge you.
13. Beer and Free Lunches
“We are all far less rational in our decision making than standard economic theory assumes. Our irrational behaviors are neither random nor senseless—they are systematic and predictable. We all make the same types of mistakes over and over, because of the basic wiring of our brains.” (239)
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