Predictably Irrational – The Hidden Forces That Shape Our Decisions by Dan Ariely is a book on behavioral economics written in a very easy-to read format. The book has a series of experiments that demonstrate irrational human behavior. The results of his experiments are truly fascinating. The decisions maybe irrational, but analyzing them through a series of experiments, as Dan Ariely has done in this book, will aid entrepreneurs develop products and market to consumers.
Five irrational human behaviors
1) Theory of relativity: Dan Ariely reasons that humans rarely choose things in absolute terms. We like to compare things to assess the relative advantage of one over the other. Through a series of experiments, he demonstrates that when comparing two objects A and B, introducing an inferior product (A-) that is similar to object A will influence us to choose object A over B.
2) Pricing anchors: Anchor is the first piece of information (price) that is offered when introducing a new product. From that point on, the consumer is anchored to that price for that product. Traditional economics of supply and demand assumes that the price at which supply and demand intersect determines the price of the object. Again, through a series of experiments, Dan Ariely demonstrates how advertisements and the MSRP of products can be used effectively to set the anchor price on products, and therefore, challenging the conventional wisdom that market forces determine pricing.
3) Power of price: Dan Ariely notes that price has a psychological effect on how we perceive things. It’s more profound in health care as we are always looking for the best medicine that’s available. We seldom buy cheaper medicines. Through experiments he demonstrates how placebos become effective treatment options based on how the patients perceive they are getting treated for their illness.
4) Allure of FREE: The word “free” blinds us from making rational choices. The book has classic examples through which we can see how we end up owning things we don’t need and we also don’t make the best economic decision.
5) Effect of expectations: Expectations shape the decisions we make. The book has a few scenarios including one involving Joshua Bell playing his violin at L’Enfant Plaza metro station during peak hours where 63 people passed by without noticing that a street musician was playing his violin. The same Joshua Hall had sold out Boston’s Symphony hall 3 nights ago. This clearly shows how our expectations change based on the surrounding environment.
The human mind is constantly processing the vast amount of information presented to us on a day-to-day basis. Mechanisms such as stereotyping, pricing anchors and expectations enable the mind to make sense of all this information in a very short amount of time. There is not enough time to take each object or information in abstract and process it objectively.
Suggestion on how to improve the book
The subjects of the experiments were primarily MIT students and the conclusions drawn are based on results from the experiments. Perhaps people from other countries may behave differently. I would have liked to see a more diverse sample and the experiments conducted internationally to study how the ecosystem affects human behavior in different countries. This would have helped put a global perspective to the results and would have especially aided entrepreneurs who are marketing to a global audience.
Comments on Amazon
80% of the 608 users on Amazon rated this book 4 or higher. The majority of the users found the book very engaging and fascinating in analyzing the human behavior. There was a general agreement that book was very easy to read. Some of the criticism the audience had were that conclusions drawn based on experiments conducted on students were inappropriate and perhaps Dan Ariely would be naïve to think that these behaviors could be used when developing government policies.
Dan Ariely in his book reveals that significant burn injuries led him down the path of analyzing irrational behavior and subsequently write this book. When he was an eighteen, a magnesium flare left him with third degree burns on 70% of his body. He went through painful treatment over the years to recover from this injury. He was isolated while he was recovering and was unable to participate in the daily social activities. He started observing as an outsider and started reflecting on human behavior. I believe analyzing human behavior provided him a sense of purpose to his inquisitive mind at that time. Dan Ariely has written two other books on similar topics and his book on Predictably Irrational has been translated in 30 other languages. All his books are published by Harper Collins, one of the largest publishing house companies.