Predictably Irrational — Summary

Learn how to think effectively from one of the best books on the topic

Relative value

Our mind always tries to compare one thing with another one to try to estimate its value, attractiveness or whatever it tries to identify. This is the relativeness of everything. What’s more, often our brain picks the laziest option possible, something from the immediate surroundings.

When you go out with a friend, people will likely compare your attractiveness relative to your friend. The same is true with prices in the supermarket. When we see that the old price was more expensive, we are attracted to the lower, new price.

Supermarkets, of course, know the flaws in our reasoning and take advantage of it. The same is true for restaurants. Restaurants often have a decoy menu which is very expensive. The decoy product brings more profit not because people buy it, but due to the fact that people tend to buy the second most expensive menu. That menu can still be overpriced, but the customer will only compare the most expensive with the second most expensive menu and decide that the second one is a good option.

Anchoring or priming prices

We may think that we can estimate the price of something fairly precise. But how do we really estimate the value of something? What in fact happens is that our estimation process is far more irrational than it seems. When we hear the price of a completely new item for the first time, our brain uses that price as an anchor.

This process is called arbitrary coherence. We don’t know how much something completely new is because we have no point of reference, so we just take the first price that we heard as the anchor and expect new prices to be coherent with the anchor.

This seems unlikely but has been demonstrated over and over again by experiments. In one experiment participants had to write down the last two digits of their social security number before bidding for a product on an auction. The people with higher digits tended to pay a higher price for items, whereas individuals with lower numbers offered less money.

Zero Cost screws our reasoning

Even more powerful than relativeness is zero cost. Whenever we get something for free, we act entirely different than we would have otherwise. For example, in one study researchers arranged two kinds of sweets, the first one was a Lindt truffle for 15 cents apiece and the second one a less tasty Hershey’s Kiss for once cent apiece.

73% of people picked the tasty and more expensive Lindt truffles. Now comes the interesting part, when the researchers reduced both sweets by 1 cent, suddenly 69% of people chose the Hershey’s Kisses. Why the sudden change? Because now they were free, while the Lindt truffles were 14 cents. The relation of the price stayed the same thought. The only difference was the FREE product.

The industry takes advantage of the attractiveness of FREE and uses it in products, for example, “Buy one and get another for free.” Or “Order for $30 and get free shipping.”

Social and market norms influence how we behave

How would your mother react if you offer to pay her for the lovely dinner? Likely not very friendly. But when you instead gave her a gift, a bottle of wine, for example, she would gladly accept it. Why? Because we operate under social norms and market norms. People don’t like it if you mix market norms into social norms.

In the example of the dinner, and in most instances of a family, you behave under social norms. They are friendly requests and favors, without the need for immediate repayment or money.

Market norms, in contrast, operate under tit for tat. If I give you something you give me money or something else in exchange, you get the idea.

In general, market norms make people more selfish. For example, when lawyers were asked to provide cheaper services to needy retirees, most of them refused. But when they were asked to do it for free as a charity act, most of them accepted the proposal.

Other experiments showed that when people were asked to perform in an experiment, they tended to perform similarly for a high payment and under social norms. Whereas they performed noticeably worse under little pay. The lesson is that when you ask someone for something either do it under social norms (ask him for a favor) or pay him the full price of what he would get on the market.

Procrastination and Self-Control

Research shows that when we acknowledge our procrastination, we can set up deadlines and restrictions to remedy it. In one study the professor arranged three groups of students. The first group could space out the deadlines for each essay on their own but weren’t forced to do so. They could just submit all essays at the end of the semester.

The second group was given hard deadlines at certain intervals and the third group no deadlines at all. They just had to submit their essays at the end of the semester but had no possibility to set their own deadlines like the first group. Which group do you think did the best and the worst?

It turns out that the group with the hard deadlines got the best grades. They had no other choice but to start working earlier so that they could submit their work on each deadline. The second best group was the group who could set their own deadlines. Not all of the participants of that group set their deadlines, some procrastinated and just waited until the end of the semester.

But the worst performed the last group who had no deadlines and no possibility to set deadlines. They procrastinated until the end of the semester and then did a rushed work, resulting in poor quality papers.

We Overvalue What We Have

We tend to put more value on things we own, while we underestimate things we don’t own. This was demonstrated by an experiment with students at Duke University. Students tend to camp out for days in front of the stadium just to win an entry for the basketball games.

Before the lottery takes place, the students seem to value the tickets with equally. But once the lottery is over, the students are divided into two groups, those who won and those who did not. When asked how much they’d pay for a ticket, those who didn’t win answered with $170. Those who did win a ticket said that they’d at least want $2.400 to sell their tickets.

Those students who owned a ticket estimated its value more than 14 times higher than those who didn’t. This experiment perfectly demonstrates our tendency to love things we own.

But this tendency not only applies to prices. It applies to many other things, opinions for example. We tend to value more opinions in which we invested a lot of effort in.

Keeping Doors Open

People like to keep options open, even if that impacts performance and achievements negatively. In 210 BC, the Chinese commander Xiang Yu remedied this behavior by destroying all options but one. After ferrying his army across the Yangtze River, he set fire to his own ships and destroyed all cooking jars so that his troops had no other choice but to smash the enemy or die. The result was, they fought ferociously and won nine battles consecutively.

We often keep options open whether it is in education, our careers or romance. One study showed that people are so obsessed with keeping options open, that in a video game they will happily perform poorly in the game just to keep their options open.

The lesson is that sometimes deliberatively closing options is a good thing, as it forces us to focus on the one thing we keep open.

The Effect of Expectations: Why the Mind Gets What It Expects

Do our expectations shape our experience? Research shows that indeed our beliefs and expectations shape how we perceive things. In one experiment, researchers made subjects try Coke and Pepsi. In the first test subjects preferred Coke over Pepsi.

But in the blind test, people preferred the taste of Pepsi to Coke. Why the sudden change? Because once they couldn’t know which one they were trying, their expectations didn’t influence their perception. In other words, their mental image influenced their tastes.

The same effect is known as placebo in medicine. People tend to have a bigger improvement in their condition if the medicine is more expensive. The expectation effect can even be triggered trough priming. In the Florida experiment participants had to form phrases from words. The words were arranged with specific words in different groups. When the group worked with words related to elderly people, for example, “ancient” and “slow,” they tended to walk slower after the experiment, just as elderly people would.
Short Summary: Knowing how we think can help us greatly in decision making. It is important to know that our reasoning is often flawed so that we don’t fall prey to it.
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Karl Niebuhr

Karl Niebuhr

I'm Karl! I like to read, learn and self-improve.
Karl Niebuhr

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