Predictably Irrational made economics entertaining in much the same way as Freakonomics. The fact that I enjoyed both of these books probably indicates my appreciation of behavioral economics in general. In Predictably Irrational, author Dan Ariely presents counter-intuitive theories and backs them up with very interesting experiments. He seems to have one of those jobs that appears more fun than what most of us do for a living.
What follows are quick overviews of each of the chapters. These overviews are not meant to trivialize the work presented but rather whet your appetite for a more thorough explanation.
The Truth About Relativity - We aren’t good at making comparisons unless things are very similar. As a result, given three choices we put more value in the one that is noticeably better than one of the alternatives versus performing an accurate comparison with the third option.
The Fallacy of Supply and Demand - Our perceived value of an item, and the price we are willing to pay for it, is heavily influenced by the initial price associated with it. What would you pay for a innovative new product like an IPhone? If Apple had offered them at $100, or $1000 versus the original $399 price, we’d probably be in those ranges of what we thought an IPhone is worth versus our current valuations.
The Cost of Zero Cost - Free is a price just like any other, but we often overvalue items at that price. As a result, we tend to overlook better deals.
The Cost of Social Norms - Loyalty seems to be best built in societal relationships versus market ones. Introducing money into social situations often sours the relationship.
The Influence of Arousal - We significantly underestimate the effect that charged situations have on our decision making. As a result, the best intentions, planned in a calm uncharged environment, are ineffective when the situation changes. Creating a budget for shoes (or electronics, or whatever you like) might be most accurate if made in the shoe store rather than from the non tempting comfort of home.
The Problem of Procrastination and Self-Control - We tend to defer things which we expect to be a hassle or unpleasant. Many of those things never get done. Committing to a deadlines, even an arbitrary one, may make us more likely to accomplish a task.
The High Price of Ownership - We tend to overvalue things which we own or in which we have a vested interest. This causes us to irrationally price things we are looking to sell or overspend on items that we have spent time trying to obtain.
Keeping Doors Open - Having an abundance of choices, which sounds like a good thing, may actually hinder our success. Rather than make a decision and move on, we may instead over-evaluate each option to the point where we end up wasting time and making a poor decision.
The Effect of Expectations - Our expectations influence our ultimate enjoyment of a situation. Differing desires lead multiple observers of the same situation to perceive the event differently.
The Power of Price - The effectiveness of products and services may be tied to the price we pay. Since we unconsciously get what we pay for, a discounted drug may actually be less effective and seeing the Coke logo on our bottle of Cola may actually make us enjoy the drink more.
The Context of our Character, Part 1 - Given the opportunity to cheat, we tend to do it. The average seems to be driven not by a few people cheating a lot, but most people cheating a little.
The Context of our Character, Part 2 - We are more apt to be dishonest when cash is removed, if only slightly, from a transaction. We might be tempted to take home an office supply, but would be much less likely to take an equivalent amount from the petty cash box.
Beer and Free Lunches - Our choices are often influenced by those around us. In a social setting, stating desires publicly may cause us to choose things that make us look a certain way, rather than those that we most desire. The mistakes that we all make, through our predictably irrational behavior, present opportunities as well. Awareness of our behavior can help us to capitalize on those opportunities.
I really enjoyed this book and believe that anyone looking to better understand their rational and irrational motivations for the behavior with money would benefit from reading it.
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