Will just provide you brief thoughts on the topics that the book covered, backed up by countless experiments. The findings he gathered may not necessarily hold true to all of us, but still I believe that it speaks at least a little grain of truth. And that if we acknowledge these, we can hopefully make better decisions. More rational decisions that is.
- His own “theory of relativity,” use of decoys, and how we decide based on previous experiences on costs, pain/ pleasure etc. That salesmen can actually trick us in choosing a more expensive product (that we won’t maximize but really looks like a bargain) if it’s displayed beside an inferior product/ offer. Or how to score on dates by bringing a wingman. 🙂
- That our willingness-to-pay is not always rational, that supply and demand can be altered, or that how much we want to pay for a product is benchmarked from a related / non-related item. His example of Dunkin’ Donuts coffee vs a Starbucks coffee. We don’t price things on a vaccum, or at the sole merit of the item, that’s for sure. But isn’t it the rational thing to do? Or how some products create a demand, as Steve Jobs said, people don’t know what they want until you hand it to them.
- Oh we lose our minds when we see FREE items! And if we think about it, we end up spending more. But if it’s offered at 1 cent, then we’re not as crazy.
- Social norms we don’t put costs, but if you put a price tag on a social norm or interaction, suddenly we shift our thinking into market norms, and we feel underpaid, even insulted. Not receiving any compensation for a favor (social norm) is okay (Php0), but if a friend unexpectedly pays us Php20 for such favor, we don’t like it. Are we that cheap? Or are we settling for Php0 than earning Php20?
- They say don’t make decisions when you’re on an emotional extreme: too happy or too sad. The book’s experiments on arousal support this advice. And when we’re aroused or on a high, we tend to do things we didn’t expect we will. We go against what we think is right when aroused, contrary to what we would have said when asked during unaroused states.
- Why we don’t want to save for retirement, why we procrastinate since we tend to expose ourselves to arousing circumstances, to the joy of immediate gratification: food, movies, shopping, etc whereas when in an unaroused cold state, we know that saving up for retirement is the right thing to do.
These are just some of the items covered in the book, yes just some, that I’d like to remember for my self. As usual, like notes in my notebook but is now online, below are some quotable quotes from the book Predictably Irrational. (Sorry there’s really just too many insights that I want to remember!)Why there is a higher cost of ownership, where he argues we put more subjective value on things we own, than when we asses a very similar item, but we don’t own. That’s why when we are sellers of personal items, we tend to price it at a premium whereas buyers will only offer as much.
- The costs we pay just to get the placebo effect which I’m sure you’ve already heard. The power of our expectations, or when others try to imbibe us with expectations beforehand (reviews, presentation, plating, ambience, etc) to make the experience more pleasurable than it actually is when experience it in a “vaccum”
- What my accounting prof used to call “spreading the peanut butter too thinly“, whereas instead of committing to one, we exhaust ourselves in keeping many options open, which if we think about it, is even more counterproductive
- Oh the dyahe piece! Why we hesitate to get the last piece of food from the plate when eating with a group (since it’s a common resource), whereas if we eat in private, we can finish the whole plate
- Loved the “tragedy of commons,” that when we as a community only use up a limited amount of common good (fish in the ocean, air, fossil fuels), all of us will benefit sustainably, But when only a few become selfish and take more than what is allowed, they will benefit in the near-term but all of us will suffer in the long-term. Tragic huh? Looking forward to also playing the Public Goods Game as a social experiment.
- Why do people cheat? Like we all do, especially if it’s in non-monetary terms but still valuable. Or the infectious distrust?
- Social conformity but sacrificing our personal wants or need for uniqueness?
This is a case in which you gave up a better deal and settled for something that was not what you wanted, just because you were lured by the FREE! Most transactions have an upside and a downside, but when something is FREE! we forget the downside. FREE! gives us such an emotional charge that we perceive what is being offered as immensely more valuable than it really is. Why? I 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! — Or is it?
Suppose I offered you a choice between a free $10 Amazon gift certificate and a $20 gift certificate for seven dollars. Think quickly. Which would you take? If you jumped for the FREE! certificate, you would have been like most of the people we tested at one of the malls in Boston. But look again: a $20 gift certificate for seven dollars delivers a $13 profit. That’s clearly better than getting a $10 certificate free (earning $10). Can you see the irrational behavior in action?
There are many examples to show that people will work more for a cause than for cash. A few years ago, for instance, the AARP asked some lawyers if they would offer less expensive services to needy retirees, at something like $30 an hour. The lawyers said no. Then the program manager from AARP had a brilliant idea: he asked the lawyers if they would offer free services to needy retirees. Overwhelmingly, the lawyers said yes. What was going on here? How could zero dollars be more attractive than $30? When money was mentioned, the lawyers used market norms and found the offer lacking, relative to their market salary. When no money was mentioned they used social norms and were willing to volunteer their time. Why didn’t they just accept the $30, thinking of themselves as volunteers who received $30? Because once market norms enter our considerations, the social norms depart. — Social norms vs market norms.
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.
We have problems with self-control, related to immediate and delayed gratification—no doubt there. But each of the problems we face has potential self-control mechanisms, as well. If we can’t save from our paycheck, we can take advantage of our employer’s automatic deduction option; if we don’t have the will to exercise regularly alone, we can make an appointment to exercise in the company of our friends. These are the tools that we can commit to in advance, and they may help us be the kind of people we want to be.
The “endowment effect,” we predicted that when we own something—whether it’s a car or a violin, a cat or a basketball ticket—we begin to value it more than other people do. In general the ownership of something increases its value in the owner’s eyes. We fall in love with what we already have. — Cost of Ownership
We need to wake up to the connection between nonmonetary currency and our tendency to cheat. We need to recognize that once cash is a step away, we will cheat by a factor bigger than we could ever imagine. We need to wake up to this—individually and as a nation, and do it soon.
We found that when people order out loud in sequence, they choose differently from when they order in private. When ordering sequentially (publicly), they order more types of beer per table—in essence opting for variety. A basic way to understand this is by thinking about the Summer Wheat Ale. This brew was not very attractive to most people. But when the other beers were “taken,” our participants felt that they had to choose something different—perhaps to show that they had a mind of their own and weren’t trying to copy the others—and so they chose a different beer, one that they may not have initially wanted, but one that conveyed their individuality. What these results show 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. When people order food and drinks, they seem to have two goals: to order what they will enjoy most and to portray themselves in a positive light in the eyes of their friends. The problem is that once they order, say, the food, they may be stuck with a dish they don’t like—a situation they often regret. In essence, people, particularly those with a high need for uniqueness, may sacrifice personal utility in order to gain reputational utility.
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.
Happy reading. Quotes are from the book, obviously.
My Rating of the book: ★ ★ ★ ★ ★ ★ ★ ★ ☆ ☆