Book Review: Predictably Irrational

Predictably Irrational: The Hidden Forces That Shape Our Decisions

by Dan ArielyNarrated by: Simon Jones
Publisher: Harper Audio
Total Length: 7 Hours, 24 Minutes
Date Published: April 2, 2009


I first heard about Predictably Irrational on NPR while listening to the show Marketplace by American Public Media.  Dan Ariely had a segment each week where he would discuss something from one of his experiments and how the results defy the general assumptions held by most people.  I found Dan to be very entertaining to listen to, especially amid the context of the Great Recession.  So, I decided to download Predictably Irrational to see if I was missing out on any other great insights in the world of Behavioral Economics.

The Decoy Effect

Relativity is all about how we compare things.  The example of the subscription to the Economist shows how most people don't really know what anything is worth, but when comparing two similar items it is easier to see the relative value of each.  I love how it points out that, "Thinking is difficult and sometimes unpleasant."  This is a vulnerability just waiting to be exploited.

The take away here is when you want to persuade someone towards a particular choice, one effective way to do so is by adding a similar, but less attractive option. When given this situation, Option A, Option B, and Option -B, most people will choose Option B.


"Free" 

Here's a less than obvious calculation (well it wasn't obvious to me anyway).  When given the choice between two products, I should compare the perceived value of each to the stated price and if the benefit of the higher priced product is worth the higher price to me, then I should choose that product.  The difference in the price should be the difference in value (to me) of the two products.  But, when one of the products is "free", the difference in value becomes much harder to justify.  Ariely provides several examples of experiments where they offer a premium chocolate for $0.25 and an average chocolate for $0.01.  If I value the premium chocolate by $0.24 more, then I should still be willing to pay the $0.24 for the premium chocolate even if the average chocolate is priced at "free".

Social Norms vs Market Norms

I found the topic of comparing social norms and market norms very interesting.  It seems to me that there are many untapped solutions to everyday problems that are obfuscated by the fact that we are looking at the problem through only one of the possible lenses (social or market norms).  Based on the research presented in Predictably Irrational, it can often be difficult to make the shift from one point of view to the other, or difficult to return to a particular point of view once that shift has been made.

Price of Placebo

"Before recent times, almost all medicines were placebos.  Eye of the toad, wing of the bat, dried fox lungs, mercury, mineral water, cocaine, an electric current: these were all touted as suitable cures for various aliments.  When Lincoln lay dying across the street from Ford's Theater, it is said that his physician applied a bit of 'mummy paint' to the wounds.  Egyptian mummy, ground to powder, was believed to be a remedy for epilepsy, abscesses, rashes, fractures, paralysis, migraine, ulcers, and many other things.  As late as 1908, 'genuine Egyptian mummy' could be ordered through the E. Merck catalog... We may think we're different now.  But we're not.  Placebos still work their magic on us."

Chapter 10 was one of my favorite chapters.  The Placebo Effect has long been a fascination of mine, and Ariely's research puts some hard data to this question.  The results show that when people pay more, they claim to receive greater benefits.  This bias is extremely unfortunate, given that alternative solutions may actually be more effective and more holistic, but are excluded because they don't fall within popular opinion.

Reflections

Overall, I really enjoyed this audio book.  It is chock-full of great examples and data from experiments on behavioral economics (many, many more than the ones I mentioned here).  I have gone back and listened to several of the chapters over again in the past couple of years, as it provides some interesting alternate view points and topics of debate to insert into other research projects I've been working on.  My only disappointment with it, I might have preferred the audio book more if it was read by the author.