Predictably Irrational - DAN ARIELY

The Truth about Relativity

The Economist ad, the visual demo. Most people don't know what they want unless they see it in context Everything is relative, and that's the point. Like an airplane pilot landing in the dark, we want runway lights on either side of us, guiding us to the place where we can touch down our wheels. RELATIVITY IS (RELATIVELY) easy to understand. But there's one aspect of relativity that consistently trips us up. It's this: we not only tend to compare things with one another but also tend to focus on comparing things that are easily comparable—and avoid comparing things that cannot be compared easily.The decoy - like a third house or like taking a friend to meet potential partner.RELATIVITY HELPS US make decisions in life. But it can also make us downright miserable. Why? Because jealousy and envy spring from comparing our lot in life with that of others. One of the Ten Commandments - "Neither shall you desire your neighbor's house nor field, or male or female slave, or donkey or anything that belongs to your neighbor." Salary details of CEOs coming in open only increased it manifold, That's a lesson we can all learn: the more we have, the more we want. And the only cure is to break the cycle of relativity.

The Fallacy of Supply and Demand

Why the Price of Pearls—and Everything Else— Is Up in the Air. Imprinting - the first impression about something esp - the price attached to something. We then get anchored to this price. Arbitrary coherence - if the price imprinted is arbitrary then after some time we get anchored to it.Tom had discovered a great law of human action, namely, that in order to make a man covet a thing, it is only necessary to make the thing difficult to attain."First impressions are important, whether they involve remembering that our first DVD player cost much more than such players cost today (and realizingthat, in comparison, the current prices are a steal) or remembering that gas was once a dollar a gallon, which makes every trip to the gas station a painful experience. Behavior herding. It happens when we assume that something is good (or bad) on the basis of other people's previous behavior, and our own actions follow suit. eg: Rush at MTR or paradise biryani. Self-herding - is when you do something and based on that experience repeat it. Like star bucks coffee.The many choices we make, from the trivial to the profound,in which anchoring plays a role.Become aware of this vulnerability ask yourself it this is worth it?We should also pay particular attention to the first decision we make in what is going to be a long stream of decisions (about clothing, food, etc.). When we face such a decision, it might seem to us that this is just one decision, without large consequences; but in fact the power of the first decision can have such a long-lasting effect that it will percolate into our future decisions for years to come. Given this effect, the first decision is crucial, and we should give it an appropriate amount of attention. [Ajay]:Maybe we should teach our children to be prudent with money. Traditional economics suggest price is dependent on demand supply, arbitrary coherance and other points mentioned above challenge this. Demand - Many a times the customer do not even know what they want and if they do they can be easily manipulated to pay. It seems then that instead of consumers' willingness to pay influencing market prices, it is market prices themselves that influence consumers' willingnessto pay. What this means is that demand is not, in fact, a completely separate force from supply. The price changes would make a huge impact on demand if people remembered the previous prices and noticed the price increases; but I also suspect that without a memory for past prices, these price changes would have a trivial effect, if any, on demand. But over the long run, and once consumers readjusted to the new price and the new anchors - the demand is back to where it was. The demand supply theory the market forces theory may be in-correct. Our choices are often affected by random initial anchors, the choices and trades we make are not necessarily going to be an accurate reflectionof the real pleasure or utility we derive from those products. In other words, in many cases we make decisions in the marketplace that may not reflect how much pleasure we can get from different items. Now, if we can't accurately compute these pleasure values, but frequently follow arbitrary anchors instead,then it is not clear that the opportunity to trade is necessarily going to make us better off.

The Cost of Zero Cost

Why We Often Pay Too Much When We Pay Nothing

We all love to grab FREE things. Zero is not just another price, it turns out. Zero is an emotional hot button—a source of irrational excitement.What is it about zero cost that we find so irresistible? Why does FREE! make us so happy?The critical issue arises when FREE! becomes a struggle between a free item and another item—a struggle in which the presence of FREE! leads us to make a bad decisionI think it's because humans are intrinsically afraid of loss. The real allure of FREE! is tied to this fear. There's no visible possibility of loss when we choose a FREE! item (it's free). But suppose we choose the item that's not free. Uh-oh, now there's a risk of having made a poor decision—the possibility of a loss. And so, given the choice, we go for what is free. "buying something for nothing" is a bit of an oxymoron.WHEN CHOOSING BETWEEN two products, then, we often overreact to the free one. Free Shipping above certain value - we will end up reaching that value.Think how powerful that idea is! Zero is not just another discount. Zero is a different place. The difference between two cents and one centis small. But the difference between one cent and zero is huge!

The Cost of Social Norms

Why We Are Happy to Do Things, but Not When We Are Paid to Do Them

We live simultaneously in two different worlds— one where social norms prevail, and the other where market norms make the rules.When we keep social norms and market norms on their separate paths, life hums along pretty well.Eg: doing social work for free and refusing to do the same if it offers some money (very less compared to our regular income) but the same is ok if offered as gift (Social norm prevail), Mentioning the value of the gift crosses over to market norm. Another eg: Israel day care center story - fine for coming late was introduced and thereafter many parents would be late. MONEY, AS IT turns out, is very often the most expensive way to motivate people. Social norms are not only cheaper, but often more effective as well.

The Influence of Arousal

Why Hot Is Much Hotter Than We Realize
An experiment conducted with male students showed that - when the participants were in a cold, rational, superego-driven state, they respected women; they were not particularly attracted to the odd sexual activities; they always took the moral high ground; and they expected that they would always use a condom. They thought that they understood themselves, their preferences, and what actions they were capable of. But as it turned out, they completely underestimated their reactions. They were simply unable to predict the degree to which passion would change them. These results apply most directly to sexual arousal and its influence on who we are; but we can also assume that other emotional states (anger, hunger, excitement, jealousy, and so on) work in similar ways, making us strangers to ourselves. In the heat of passion, suddenly, with the flip of some interior switch, everything changes. eg: Road rage. In Freudian terms, each of us houses a dark self, an id, a brute that can unpredictably wrest control away from the superego. The most brilliant and rational person, in the heat of passion, seems to be absolutely and completely divorced from the person he thought he was. Safe Sex / Safe Driving / Better life decisions - Avoiding temptation altogether is easier than overcoming it. We need to explore the two sides of ourselves; we need to understand the cold state and the hot state; we need to see how the gap between the hot and cold states benefits our lives, and where it leads us astray. Just being aware that we are prone to making the wrong decisions when gripped by intense emotion may help us, in some way, to apply our knowledge of our "Hyde" selves to our daily activities.

The Problem of Procrastination and Self-Control

Why We Can't Make Ourselves Do What We Want to Do

We promise to save for retirement, but we spend the money on a vacation. We vow to diet, but we surrender to the allure of the dessert cart. We promise to have our cholesterol checked regularly, and then we cancel our appointment.Giving up on our long-term goals for immediate gratification is procrastination. We all do procrastinate, tight restrictions are the best cure for procrastination. The biggest revelation is that by simply precommitting to deadlines - helps in achieve better results. Resisting temptation and instilling self-control are general human goals, and repeatedly failing to achieve them is a source of much of our misery. Because without precommitments, we keep on falling for temptation. Of course, barking orders, while very effective, may not always be feasible or desirable. What's a good compromise? It seems that the best course might be to give people an opportunity to commit up front to their preferred path of action. This approach might not be as effective as the dictatorial treatment, but it can help push us in the right direction (perhaps even more so if we train people to do it, and give them experience in setting their own deadlines). Procrastination in health care can lead to serious problems. Procrastination in vehicle maintenance is avoided by having clear mileage/time based goals for service. Should we not use this method in health care as well?"Simplify! Simplify!" And, indeed, simplification is one mark of real genius.

The High Price of Ownership

Why We Overvalue What We Have

There's an old saying, "One man's ceiling is another man's floor." Well, when you're the owner, you're at the ceiling; and when you're the buyer, you're at the floor.OWNERSHIP PERVADES OUR lives and, in a strange way, shapes many of the things we do. Adam Smith wrote, "Every man [and woman] . . . lives by exchanging, or becomes in some measure a merchant, and the society itself grows to be what is properly a commercial society."Three irrational quirks in our human nature - we fall in love with what we already have (it is natural to get attached to what we have), we focus on what we may lose-rather than what we may gain, we assume other people will see the transaction from the same perspective as we do. Sense of ownership is propotional to the efforts put in to acquire that asset.In Online auctions, a top bidder for some time starts to feel like the owner, from there on he will fight very hard to resist any outbidders. Similar effect is seen in trial offers. Once you use the trial offer - you are likely to get hooked. It is hard to let go that ownership feelings. Same effect is seen on non-tangibles like Ideas. Suddenly, moving backward to our preownership state is a loss, one that we cannot abide.One approach is to try to view all transactions (particularly large ones) as if I were a nonowner, putting some distance between myself and the item of interest.

Keeping Doors Open

Why Options Distract Us from Our Main Objective

Normally, we cannot stand the idea of closing the doors on our alternatives.we work just as feverishly to keep all our options open. How CAN WE unshackle ourselves from this irrational impulse to chase worthless options? We end up buying things that we really do not need but because it is on sale! In a modern democracy, he said, people are beset not by a lack of opportunity, but by a dizzying abundance of it. A couple would typically spend less time with each other if they lived together but if they lived in different cities and met only say during weekends - they would dedicate the weekends to themseleves. It is not advised you live in different cities, just realise this. Running helter-skelter to keep doors from closing is a fool's game. What we need is to consciously start closing some of our doors. Small doors, of course, are rather easy to close.We have an irrational compulsion to keep doors open. It's just the way we're wired. But that doesn't mean we shouldn't try to close them. Selecting between two options can also be taxing, be wary of indecision. Recall Buridan's donkey - Breaking minor stalemates in life by randomness (flipping a coin).

The Effect of Expectations

Why the Mind Gets What It Expects

Many a times two people have exactly opposite views of the same thing. Like sports fans on a particular point, like politicans, like a fighting couple.If you tell people up front that something might be distasteful, the odds are good that they will end up agreeing with you—not because their experience tells them so but because of their expectations. WHEN WE BELIEVE beforehand that something will be good, therefore, it generally will be good—and when we think it will be bad, it will bad. Which type of input is more important—knowledge before the experience, or an input of information after an experience has taken place? If the input is merely information - then it does not matter - experience followed by information or vice-versa. Coke tastes better because it is coke, Coke is a better brand than it is a better drink than others. EXPECTATIONS ALSO SHAPE stereotypes. A stereotype provides us with spécifie expectations about members of a group, it can also unfavorably influence both our perceptions and our behavior. Even our own behavior can be influenced by our stereotypes, and that activation of stereotypes can depend on our current state of mind and how we view ourselves at the moment. When stripping away our preconceptions and our previous knowledge is not possible, perhaps we can at least acknowledge that we are all biased. If we acknowledge that we are trapped within our perspective, which partially blinds us to the truth, we may be able to accept the idea that conflicts generally require a neutral third party—who has not been tainted with our expectations—to set down the rules and regulations. Of course, accepting the word of a third party is not easy and not always possible; but when it is possible, it can yield substantial benefits. And for that reason alone, we must continue to try.

The Power of Price

Why a 50-Cent Aspirin Can Do What a Penny Aspirin Can't

Procedures done on real patients and Placebo patients (Dummy Procedures) have yielded similar results. Knee operations, Chest operations. TWO mechanisms shape the expectations that make placebos work. One is belief—our confidence or faith in the drug, the procedure, or the caregiver. The second mechanism is conditioning. We tend to assume that high price means higher quality, and our expectations translate into the objective efficacy of the product. Esp with health we do not want to take chances. Price can change the experience. If we see a discounted item, we will instinctively assume that its quality is less than that of a full-price item. What's the remedy? If we stop and rationally consider the product versus the price, will we be able to break free of the unconscious urge to discount quality along with price? Royal touch - touching of kings healed. This was just psychological. In reality, it represents the amazing way our mind controls our body. The more we understand the connection between brain and body, the more things that once seemed clear-cut become ambiguous.

The Context of Our Character,

Part I

Why We Are Dishonest, and What We Can Do about It
Two types of dishonesty - one by thiefs etc and other by honest people cheating on taxes etc When given the opportunity, many honest people will cheat. When we have no chance of getting caught, we still don't become wildly dishonest. "Nature, when she formed man for society, endowed him with an original desire to please, and an original aversion to offend his bretheren. She taught him to feel pleasure in their favourable, and pain in their unfavourable regard" - Adam Smith, Smith added - "The success of most people . . . almost always depends upon the favour and good opinion of their neighbours and equals; and without a tolerably regular conduct these can very seldom be obtained. The good old proverb, therefore, that honesty is always the best policy, holds, in such situations, almost always perfectly true."Individuals are honest only to the extent that suits them (including their desire to please others). Sigmund Freud explained it this way. He said that as we grow up in society, we internalize the social virtues. This internalization leads to the development of the superego. In general, the superego is pleased when we comply with society's ethics, and unhappy when we don't. Honesty can be brought about if people read religous books (bible), Professional oaths (like doctors) but look at lawyers and doctors, they are not very honest. Doctors - unnecessary tests, gifts from medical companies, kickbacks. This decline in professionalism is everywhere in all professions. People cheat when they have a chance to do so, but they don't cheat as much as they could. Moreover, once they begin thinking about honesty—whether byrecalling the Ten Commandments or by signing a simple statement—they stop cheating completely.

The Context of Our Character,

Part II

Why Dealing with Cash Makes Us More Honest

what permits us to cheat when cheating involves nonmonetary objects, and what restrains us when we are dealing with money? How does that irrational impulse work?BECAUSE WE ARE SO adept at rationalizing our petty dishonesty, it's often hard to get a clear picture of how nonmonetary objects influence our cheating. Like stealing a pencil from office but not stealing money from office. Even good people are not immune to being partially blinded by their own minds. This blindness allows them to take actions that bypass their own moral standards on the road to financial rewards. In essence, motivation can play tricks on us whether or not we are good, moral people."It is difficult to get a man to understand something when his salary depends upon his not understanding it."Corporate dishonesty - Airmiles, Credit card interests. We can be dishonest without thinking of ourselves as dishonest.

Beer and Free Lunches

What Is Behavioral Economics, and Where Are the Free Lunches?

People ordering for beer or dishes in a restuarnt. The general tendency is choose different from others to prove that each has a mind of his own. In the bargain the one that chooses first is most happy with his beer/food while others are not as much. What this shows is that people are sometimes willing to sacrifice the pleasure they get from a particular consumption experience in order to project a certain image to others. In other cultures—where the need for uniqueness is not considered a positive trait—people who ordered aloud in public would try to portray a sense of belonging to the group and express more conformity in their choices.

Lesson learnt: Never get swayed by others while deciding for yourself. Standard economics assumes we are rational and take logical decisions, even if we did take wrong decision we learn from them and course correct - this is not true. 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. It can be rather depressing to realize that we all continually make irrational decisions in our personal, professional, and social lives. ONE OF THE main differences between standard and behavioral economics involves this concept of "free lunches." Standard economics - all human decisions are rational and informed. Behavioral economics - people are susceptible to irrelevant influences from their immediate environment, irrelevant emotions, shortsightedness, and other forms of irrationality. Free lunches are tools, methods, and policies that can help all of us make better decisions and as a consequence achieve what we desire. eg: Saving for retirement, normally people do not do it, we can use free lunches like "save more tomorrow" to improve savings. we are pawns in a game whose forces we largely fail to comprehend. We usually think of ourselves as sitting in the driver's seat, with ultimate control over the decisions we make and the direction our life takes; but, alas, this perception has more to do with our desires— with how we want to view ourselves—than with reality. Each of the chapters in this book describes a force (emotions, relativity, social norms, etc.) that influences our behavior. And while these influences exert a lot of power over our behavior, our natural tendency is to vastly underestimate or completely ignore this power. These influences have an effect on us not because we lack knowledge, lack practice, or are weak-minded. On the contrary, they repeatedly affect experts as well as novices in systematic and predictable ways. The resulting mistakes are simply how we go about our lives, how we "do business." They are a part of us.