Predictably Irrational: The Hidden Forces That Shape Our Decisions

Citation

Vander Schee, B.A. (2009), "Predictably Irrational: The Hidden Forces That Shape Our Decisions", Journal of Consumer Marketing, Vol. 26 No. 1, pp. 57-58. https://doi.org/10.1108/07363760910927064

Dan Ariely, author of Predictably Irrational, asked some very interesting questions in setting out on his research regarding consumer behavior. For example, “Do you know why we sometimes find ourselves excitedly buying things we don't really need?” (p. xi). He uses empirical research and personal experience to answer his questions by deciphering why it is that when it comes to life choices and purchase decisions people do not act in rational ways. His book is based on behavioral economics, a field of study that examines why people do not always behave rationally and why they often make mistakes in their decisions.

In the opening chapter, “The Truth About Relativity”, Ariely explains that “we look at our decisions in a relative way and compare them locally to the available alternative” (p. 20). For example, we compare our salaries, cars and houses to those we most closely associate which creates a desire to upgrade competitively. He suggests that the more we have the more we want, and the only way to discontinue this practice is to break the cycle of relativity. Making comparisons on a broader scale Thinking more broadly thus will prevent a soup can coupon clipper from excitedly adding a $3,000 upgrade on a luxury automobile.

Chapter 2, “The Fallacy of Supply and Demand”, uses terms such as “imprint”, “anchor” and “arbitrary coherence” to explain the influence of the initial price listing on willingness to pay. For example, an initial impression, or “imprint”, becomes a solid foundation, or “anchor”, for future decision‐making. Further, an “arbitrary” initial list price becomes “coherent” as consumers use it as a long‐term point of comparison. Taking these two concepts together then suggests that people refer to an initial impression of pricing to form a basis of comparison for future purchases. This has practical application for new product pricing, sales promotion, and consumer behavior.

Chapters 3 and 4, “The Cost of Zero Cost” and “The Cost of Social Norms”, respectively, provide explanations for common occurrences in consumer behavior. This includes suggesting that people are attracted to free items (even over items priced at one cent) because there is no fear of loss associated with free items. Another example considers the lasting effect of replacing social norms (things done for free as a courtesy) with market norms (payments for products and services). Even though the current trend is for companies to embrace social norms in business practices and company operations, it might be best for businesses to stick with market norms if they want to avoid consumer and employee dissatisfaction due to social norm violations.

Chapter 5, “The Influence of Arousal”, provides suggestions to avoid making poor decisions (e.g. regarding unsafe sex or unsafe driving) as a result of compromised judgment due to anger, hunger, fright, or sexual arousal. Chapter 6, “The Problem of Procrastination and Self‐Control”, discusses the improved performance of those who use available precommitment tools (e.g. self‐selected deadlines) and makes application to health care, car maintenance, and financial planning.

Chapter 7, “The High Price of Ownership”, focuses on the three irrational quirks in human nature as to why we overvalue what we already have. They include, “(1) we fall in love with what we already have, (2) we focus on what we may lose rather than what we may gain, and (3) we assume other people will see the transaction from the same perspective as we do” (p. 134). This list of quirks is followed by a discussion of peculiarities, such as the more work you put into something, the more ownership you begin to feel for it and you can begin to feel ownership even before you own something. These suppositions help to explain why people overbid in online auctions as well as the effectiveness of virtual ownership in advertising and free return policies in trial promotions.

In Chapter 8, titled “Keeping Our Options Open”, Ariely suggests that people often fail to commit to one choice for fear of losing out on another option and that focusing on the differences between two things ignores the consequences of actually not deciding. Then in Chapter 9, “The Effect of Expectations”, he goes on to discuss how information can influence physiology (i.e. the placebo effect) and how expectations can influence responses and shape stereotypes.

Chapter 10, “The Power of Price”, further discusses the placebo effect by suggesting that placebos run on the power of suggestion based on belief, “our confidence or faith in the drug, the procedure, or the caregiver” (p. 179) and conditioning. The specific application in this chapter is to pricing of consumer products and how in the absence of knowledge, people tend to use price to assess experience and perceive marketing to add psychic value.

In Chapter 11, “The Context of Our Character, Part I”, Ariely offers an explanation as to why people are so frequently dishonest. He suggests that external forces are not necessarily helpful in reducing dishonesty; rather his experiments show that contemplating a moral benchmark is more effective. He continues his discussion of dishonesty in Chapter 12, “The Context of Our Character, Part II”. Here he comes to the conclusion that cheating is a lot easier when it is a step removed from money. The idea is that consumers would not readily steal money from stores or employers, but they are comfortable with wardrobing (returning an article of clothing for a refund after wearing it such that cannot be resold), exaggerating insurance loss claims, and charging questionable items to a company expense account. As a result, he suggests that it is possible for the propensity to cheat or steal, individually and at the corporate level, to increase as more financial transactions take place electronically.

The closing chapter, “Beer and Free Lunches”, summarizes the experiments refuting the common assumption that we are all fundamentally rational. It goes on to describe two lessons derived from the research. The first is that “by the time we comprehend and digest information, it is not necessarily a true reflection of reality. Instead, it is our representation of reality, and this is the input we base our decisions on” (p. 243). The second is that “although irrationality is commonplace, it does not necessarily mean that we are helpless. Once we understand when and where we may make erroneous decisions, we can try to be more vigilant, force ourselves to think differently about these decisions, or use technology to overcome our inherent shortcomings” (p. 244).

Reminiscent of Steven Levitt and Stephen Dubner's Freakonomics, Predictably Irrational provides a way of looking at things differently with interesting stories supported by empirical studies. This work relies more on human subjects research rather than manipulation of quantitative data to explain observed patterns of behavior. Thus Dan Ariely's book is appropriate for marketing scholars, practitioners, and individuals who have an interest in trends in human consumption and decision‐making. The book is easy to read and is the kind that can be taken in chapter by chapter over time without losing context or continuity. Thus, it makes for a good read on a relaxing vacation, a long flight, or simply for entertainment with a purpose.