Predictably Irrational: The Hidden Forces That Shape our Decisions

Nonfiction | Book | Adult | Published in 2008

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Summary

Chapter Summaries & Analyses

Introduction-Chapter 2

Chapters 3-4

Chapters 5-6

Chapters 7-9

Chapters 10-11

Chapters 12-15

Key Figures

Themes

Index of Terms

Important Quotes

Essay Topics

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Discussion Questions

Introduction-Chapter 2Chapter Summaries & Analyses

Introduction Summary: “How an Injury Led Me to Irrationality and to the Research Described Here”

Predictably Irrational opens with two experiences that inspired the author, Dan Ariely, to spend his entire career studying human behavior. The first experience occurred when Ariely was 18 years old: A horrific accident left 70% of his body covered with third-degree burns. Ariely spent the next three years “wrapped in bandages in a hospital” (xiii) or in a tight synthetic suit and mask during rare public outings, which he likens to a “crooked version” (xiii) of Spider Man’s suit. During these three years, Ariely couldn’t participate in normal daily activities, making him feel socially alienated. He began observing these activities from an outside perspective as if he were from another culture or planet.

The second experience was a college class on brain physiology. Ariely routinely proposed alternate interpretations and rival hypotheses in this class, and rather than being dismissive, the professor encouraged Ariely to pursue empirically testing his ideas. For example, Ariely spent three months implanting catheters in the spinal cords of several dozen rats. He then gave them different substances to test how a certain stage of epilepsy developed. While his hypothesis turned out to be invalid, he realized “that science provides the tools and opportunities to examine anything I found interesting” (xvi), which set him on his path to empirically studying what makes humans tick.

Ariely chose to study behavioral economics, which uses experiments to test the effects of cultural, emotional, social, and cognitive factors on human decision-making processes. Behavioral economics is a newer field and differs from conventional economics in its assertion that humans are irrational rather than rational. Irrationality means humans do not always make logical decisions. Ariely firmly believes that people are not just irrational, but “predictably irrational—that our irrationality happens the same way, again and again” (xx). Because of the predictability aspect, Ariely believes that once people better understand their own nature, they can improve both their decision making and the way they live.

Chapter 1 Summary: “The Truth about Relativity: Why Everything Is Relative—Even When It Shouldn’t Be”

The chapter opens with an anecdote about the Economist’s online advertisement. While browsing online, Ariely came across an Economist ad that offered a digital subscription for the cost of $59, a print subscription for $125, and a combined print and digital subscription for $125. The “Economist’s marketing wizards” (2) intentionally set these prices, wanting a viewer to skip the digital-only option—which these wizards assumed would be a consumer’s preference since they found the ad while online—and instead consider the more expensive combined digital and print option.

These marketing wizards know something about human behavior: Humans dislike thinking critically. Instead, they judge an item’s superiority based on its comparison to other, similar items. Despite the higher cost of the print and digital subscription, most people would agree it is the superior choice since they believe they are getting two items for the price of one. Unbeknownst to them, the Economist is manipulating customers to select the costliest subscription.

Ariely hypothesizes that the print-only option is a decoy. Because humans make decisions based on easy comparisons, they are only comparing the print-only option with the combined print and digital option rather than considering the pros and cons of all three subscriptions. To test his hypothesis, Ariely conducted an experiment with his MBA students at the Massachusetts Institute of Technology (MIT). He asked students to select which offer they preferred: print-only, digital-only, or combination. The majority chose combination. Ariely then removed the print-only option and asked his students the same question. This time, the majority opted for digital-only. By removing print-only, the combination option no longer seemed superior to digital-only.

While relativity helps people make decisions, Ariely cautions that “it can also make us downright miserable” (15). Comparisons, especially between what you and someone else has, cause jealousy and can damage society. Ariely believes that there are several ways to combat the problem of relativity, including by comparing things that are similar; for example, if someone shops for a new car, they should compare models they can afford rather than models outside their price-point.

Chapter 2 Summary: “The Fallacy of Supply and Demand: Why the Price of Pearls—and Everything Else—Is Up in the Air”

Ariely introduces the concept of arbitrary coherence, which is when a randomly chosen initial price influences the amount consumers are thereafter willing to pay for the item. One example is the price of Tahitian black pearls. Salvador Assael, the son of an Italian diamond dealer who became known as the “pearl king” (25) first introduced these pearls to the market after World War II. People initially found these pearls, which are “gunmental gray, about the size of musket balls” (26), unattractive. Assael convinced a friend to put the pearls in his Fifth Avenue jewelry store window and price them outrageously high. He then took out an ad featuring the Tahitian black pearls among other rare and expensive gems. The elite immediately flocked to buy these pearls. Ariely underscores that “Assael had taken something of dubious worth and made it fabulously fine” (26). By anchoring the pearls to expensive gems, Assael forever influenced the pearls’ price.

The Tahitian black pearls illustrate how humans “anchor ourselves to initial prices” (33). Ariely suspected that “we hop from one anchor to another (flip-flopping, if you will), continually changing our willingness to pay” (33). To test this hypothesis, he conducted an experiment with undergraduate and graduate students and investment bankers who were recruiting new employees for their firms. The experiment consisted of three phases. Each phase included three sounds, with each subsequent sound at a more annoying frequency than the last. Ariely chose annoying sounds for two reasons, the first being that there is no market for such sounds, so participants could not use an already known price to contemplate the sounds’ value. The second reason is that no one likes such sounds, and this removed the bias of some individuals preferring the sounds over others.

For the first phase, Ariely split the participants into two groups. After playing the initial sound, Ariely asked groups 1 and 2 whether they would be willing to be paid to hear that sound again for 10 cents and 90 cents respectively. The participants then indicated how much money they would need to hear the sound again. Ariely confirmed that the first price he suggested to participants (10 cents or 90 cents) served as the anchor: In comparison to participants who were offered 90 cents, those who were initially offered 10 cents needed much less money to listen to the other sounds.

For the second phase, participants listened to another sound, and Ariely asked them whether they would be willing to listen again for 50 cents. He then asked how much they would need to be paid. Despite both groups’ exposure to a new anchor price (50 cents), they based their price on their first anchors. The results of this experimental phase indicated that initial anchors influence subsequent perceptions of value.

In the final phase, Ariely flipped the anchors. He asked the 90-cents group whether they would accept 10 cents to hear a particular sound and vice versa for the 10-cents group. Ariely then asked both groups what price they would accept to hear the sound again. The initial anchor continued to influence participants’ price bids. These three phases’ results suggest that first impressions impact future decisions.

These experiments suggest that people build their lives based on arbitrary past decisions. Ariely believes that, by understanding this reality, people can change their irrational behaviors. Since readers now know that first decisions have long-term consequences, Ariely argues that they should give those decisions more consideration. People can also reexamine old choices and determine if those choices are still reasonable.

Introduction-Chapter 2 Analysis

As Ariely lays the groundwork for his primary goal, which is to help readers avoid predictably irrational behavior, he uses a combination of scientific experiments and anecdotes to support his claims. The combination of these elements creates a narrative that is accessible for readers from diverse backgrounds. Ariely’s personal stories also fortify his argument, because he shows that even someone like himself—who has extensively studied human behavior—still makes irrational decisions. Most chapters end with reflections on overcoming the influences on decision-making, which allows readers to think about how these influences impact their own lives and how to change this.

These early chapters foreground the repetitive—or predictable—nature of this irrational behavior and the human slowness to learn from it. One of the most powerful examples draws from Ariely’s own life. He spent several years in a hospital with third-degree burns, and nurses vigorously tugged at his bandages during his daily bath, causing sharp spikes of pain, rather than slowly removing the bandages. Nurses did not use this method to be cruel; they thought the sharp bursts of pain were preferable to pain being lengthily drawn out. However, Ariely later conducted studies and found “that people feel less pain if treatments (such as removing bandages in a bath) are carried out with lower intensity and longer duration than if the same goal is achieved through high intensity and a shorter duration” (xvii). Despite their medical experience and deep care for their patients, nurses continued to err in their pain management approach.

Chapters 1 and 2 explore humans’ “lack of an internal value meter that tells us how much things are worth” (2). Ariely demonstrates in Chapter 1 how this lack repeatedly allows people to fall for decoys. People are unable to evaluate items without comparisons, an inability that companies recognize and exploit. For example, when Williams-Sonoma first introduced a bread-baking machine, sales were poor. Consumers were unsure what the machine even was and had no basis for comparison. The company then strategically introduced another machine that was larger and priced higher. The effect was immediate: Sales rose for the smaller, cheaper machine. This is because consumers now had two models to compare and no longer had to make their decision in a vacuum. This behavior is irrational; rather than purchasing the bread-making machine based on its inherent worth, consumers only purchased the machines when they realized they could buy one that was smaller and cheaper.

Chapter 2 expands on this force (the human lack of an inner evaluative faculty) to show how a person’s first decision impacts subsequent decisions. Ariely compares humans to goslings: Upon hatching, goslings become attached to the first thing they see—which, in nature, is their mother. A study demonstrated that a gosling can also attach to a human if that is a gosling’s first encounter. Goslings make decisions based on what is initially in their environment, and this phenomenon is known as imprinting. Humans do the same, anchoring themselves to initial prices, which influences subsequent decisions. While people believe these decisions are rational, the decision-making is an irrational process.

To Ariely, arbitrary coherence more accurately explains consumer preferences than the traditional economic theory of supply and demand, a theory assuming that market prices are determined by two forces: “production at each price (supply) and the desires of those with purchasing power at each price (demand). The price at which these two forces meet determines the prices in the marketplace” (47). Under this theory, consumer preference (or level of demand) influences price—but Ariely’s experiments suggest otherwise. What a person is willing to pay stems from their past decisions.

Arbitrary coherence has real-world policy implications. By failing to account for humans’ irrational behavior, policies will fail. For example, Ariely argues that if taxes just double gasoline prices, it will not curb gasoline demand in the long-term; consumers will simply readjust to this new anchor price. However, if a policy includes a tax hike on gasoline but offers a new, less expensive type of fuel that is better for the environment, humans might be more inclined to switch to the new fuel.