Predictably Irrational
posted on: Mar 4, 2017

We may think we are being rational when we make decisions, but the factors and biases that affect our behavior are so subtle that we don’t even know we are being irrational. Not randomly, but “Predictably”. My notes on this wonderful book by Dan Ariely.

Main Takeaway

We are far less rational in our decision making. Our irrational behaviours are neither random nor senseless-they are systematic and predictable. Though this may sound depressing, we can improve our decisions once we become aware of our shortcomings.

Our visual and decision environments are filtered to us courtesy of our eyes and ears, and our brain. By the time we comprehend and understand information, it’s not necessarily a true reflection of reality. Instead, it is our representation of reality.

Relativity
  • Humans rarely choose things in absolute terms, as we don’t have an internal value meter that tells us how much things are worth. Rather, we focus on the relative advantage of one thing over another, and estimate value. Most people don’t know what they want unless they see it in context.
  • Link between the money and happiness is not as strong as you think. The more we have, the more we want. And the only cure is to break the cycle of relativity.
  • The sensitivity we show to price/circumstance changes might in fact be largely a result of our memory for the prices/circumstance in the past. (Not at all a reflection of our true preference or our level of demand).
  • Beware of: Mistakenly trading something that truly gives us a lot of pleasure(but had a low initial anchor) for something that gives us less pleasure(but had a high initial anchor). Most important to remember in relationships.
Expectations
  • Previously held impressions can cloud our point of view.
  • If you tell someone up front that something might be distasteful, the odds are good that they will end up agreeing, 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 be bad.
  • Expectations can influence nearly every aspect of our life.
  • Stereotypes: Way of categorizing information, in the hope of predicting experiences. This is because the brain cannot start from scratch at every new situation. It must build on what is has seen before. Not always bad.
  • Problem: It can unfavourably influence both our perceptions and our behavior.
  • Solution: Basing our decisions on facts, not biases and expectations. Acknowledging that we are all biased. Having a third, neutral opinion.
  • Takeway: Expectations change the way we perceive and appreciate experiences. Have low expectations to be more happy.
Ownership Bias
  • We fall in love with what we already 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
How marketers exploit us?
  • When companies give you something for free, or at a discounted rate, or 30-day return policy; they want to feel you like an owner of that thing, so that you will buy/keep it later.
  • Ownership of false ideas, narrow-mindedness.
  • Moving back to our pre-ownership state feels like a loss. So, while moving up in life, our desires and expectations increase.
  • Solution: Trying to view major transactions as if you were a non-owner, practicing negative visualization.
Paradox of Choice
  • We might not always be aware of it, but in keeping our options open, we give something up for those options.
  • We are continually reminded that we can do anything and be anything we want to be. The problem is in living up to this dream. We must develop ourselves in every way possible, must taste every aspect of our life, must make sure to see the 1000 things before dying. The problem: We are spreading ourselves too thin.
  • Chasing wrong doors;
  • Ignoring the really important doors while chasing wrong doors. Sometimes these doors close too slowly.
  • Failing to take into account the consequence of not deciding.
No Free Lunches
  • There is a cost associated with every zero cost
  • We pay too much when we pay nothing
  • Things that we would never consider purchasing become incredibly appealing as soon as they are FREE!
  • Problem: FREE! becomes a struggle between a free item and another iterm, which may not be free, but is actually useful/important.
  • Most transactions have an upside and downside, but we fail to take into account when it’s FREE!
  • FREE! makes us falsely perceive the item as immensely more important than it really is.
  • Fun Example: What would you choose?
    • a free $10 gift certificate, or
    • a $20 gift certificate for $7

    Though the first option seems more attractive becasue it’s FREE!, the second is actually more profitable, giving $13 profit.

  • Opportunity Cost: Time spent on one activity is time taken away from another.

Big Lesson: 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 this perception has more to do with our desires-with how we want to view ourselves-than with reality.