PREDICTABLY IRRATIONAL


As I particularly enjoy being pointed out my own irrational decisions - this book was fun. It provided new frameworks I think will help with my view of the world and my own thought processes: anchors (in my feelings towards prices and preferences); herding ourselves and others (kind of like habit reinforcing); the power of 0 (irrational bias towards 0-priced goods); markets vs social norms (perhaps one of the most valuable for me) and refreshed older concepts: decoys, cycles of relativity, stereotypes and placebo.

Actionable Takeaways From This Book:

  • Removing multiple bandages slowly is less painful than fast

  • Use decoys (similar enough but slightly worse) to make options (or yourself) more attractive

  • The more we have, the more we want, and the only cure is to break the cycle of relativity

  • You might be herding yourself (or others) in your actions and creating habits - question this

  • Pay attention to your own anchors to rid yourself of them

  • Rules break down at £0, you are probably acting irrationally when something is offered free: ask yourself if you would pay a small amount for it

  • You can either exist in market norms or social norms, not both. Switching between the two is dangerous and damaging

  • You work most efficiently by having strict imposed deadlines (not sure about the creativity there though). The second best thing is to self-impose strict deadlines

  • We are terrible at letting go of inviable options - being aware of this would help with decision making

  • We are all tempted to be dishonest, even where there is no chance of being caught, however, we don't become wildly so. Having monetary gain be one step away from cheating greatly increases the chances of dishonesty (white collar crime): a way to minimise this is oaths beforehand

  • Always order first at a restaurant, otherwise you may avoid your favourite option to pick something different and end up less satisfied

  • It is easier to sacrifice consumption in the future for a reward in the future, so make future plans with consequences to stick to seeing them through (pay fro gym classes beforehand)

*On questioning the rationality of our decisions*

Given these kinds of responses, I am often left scratching my head, wondering why so many smart people are convinced that irrationality disappears when it comes to important decisions about money. Why do they assume that institutions, competition, and market mechanisms can inoculate us against mistakes? If competition was sufficient to overcome irrationality, wouldn't that eliminate brawls in sporting competitions, or the irrational self-destructive behaviours of professional athletes? What is it about circumstances involving money and competition that might make people more rational? Do the defenders of rationality believe that we have different brain mechanisms for making small versus large decisions and yet another yet another for dealing with the stock market? Or do they simply have a bone-deep belief that the invisible hand and the wisdom of the markets guarantee optimal behaviour under all conditions?

*On removing bandages*

It turns out, I told the nurses and physicians, 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. In other words, I would have suffered less if they had pulled the bandages off slowly rather than with their quick-pull method.

*On why to study irrationality*

My further observation is that we are not only irrational, but predictably irrational—that our irrationality happens the same way, again and again. Whether we are acting as consumers, businesspeople, or policy makers, understanding how we are predictably irrational provides a starting point for improving our decision making and changing the way we live for the better.

*On how we assign monetary value*

Humans rarely choose things in absolute terms. 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 accordingly. (For instance, we don't know how much a six-cylinder car is worth, but we can assume it's more expensive than the four-cylinder model.)In the case of the Economist, I may not have known whether the Internetonly subscription at $59 was a better deal than the print-only option at $125. But I certainly knew that the print-and-Internet option for $125 was better than the print-only option at $125.

*On everything being relative*

Most people don't know what they want unless they see it in context. We don't even know what we want to do with our lives—until we find a relative or a friend who is doing just what we think we should be doing. Everything is relative, and that's the point.

*How decoys determine our decision-making*

Relativity is (relatively) easy to understand. But there's one aspect of relativity that consistently trips us up. It's this: we not only tend to compare things with one another but also tend to focus on comparing things that are easily comparable—and avoid comparing things that cannot be compared easily. That may be a confusing thought, so let me give you an example.

Suppose you're shopping for a house in a new town. Your real estate agent guides you to three houses, all of which interest you. One of them is a contemporary, and two are colonials. All three cost about the same; they are all equally desirable; and the only difference is that one of the colonials (the “decoy”) needs a new roof and the owner has knocked a few thousand dollars off the price to cover the additional expense. So which one will you choose?

The chances are good that you will not choose the contemporary and you will not choose the colonial that needs the new roof, but you will choose the other colonial. Why? Here's the rationale (which is actually quite irrational).

We like to make decisions based on comparisons. In the case of the three houses, we don't know much about the contemporary (we don't have another house to compare it with), so that house goes on the sidelines. But we do know that one of the colonials is better than the other one. That is, the colonial with the good roof is better than the one with the bad roof.

Therefore, we will reason that it is better overall and go for the colonial with the good roof, spurning the contemporary and the colonial that needs a new roof.

*Why we all need a (-A) in our set*

As a consequence, the inclusion of (-A) in the set, even if no one ever selects it, makes people more likely to make (A) their final choice.

*How to look hotter at a party*

What if you are single, and hope to appeal to as many attractive potential dating partners as possible at an upcoming singles event? My advice would be to bring a friend who has your basic physical characteristics (similar coloring, body type, facial features), but is slightly less attractive (-you). Why? Because the folks you want to attract will have a hard time evaluating you with no comparables around. However, if you are compared with a “-you,” the decoy friend will do a lot to make you look better, not just in comparison with the decoy but also in general, and in comparison with all the other people around. It may sound irrational (and I can't guarantee this), but the chances are good that you will get some extra attention. Of course, don't just stop at looks.

*On man's satisfaction with his salary*

"I was hoping to be making about a hundred thousand.” The executive eyed him curiously.“And now you are making almost three hundred thousand, so how can you possibly complain?” he asked."Well,” the young man stammered, “it's just that a couple of the guys at the desks next to me, they're not any better than I am, and they are making three hundred ten.”

Mencken, the twentieth-century journalist, satirist, social critic, cynic, and freethinker noted, a man's satisfaction with his salary depends on (are you ready for this?) whether he makes more than his wife's sister's husband. Why the wife's sister's husband? Because (and I have a feeling that Mencken's wife kept him fully informed of her sister's husband's salary) this is a comparison that is salient and readily available.

*On why £7 is not £7*

At an office supply store, you find a nice pen for $25. You are set to buy it, when you remember that the same pen is on sale for $18 at another store 15 minutes away. What would you do? Do you decide to take the 15-minute trip to save the $7? Most people faced with this dilemma say that they would take the trip to save the $7. Now you are on your second task: you’re shopping for your suit. You find a luxurious gray pinstripe suit for $455 and decide to buy it, but then another customer whispers in your ear that the exact same suit is on sale for only $448 at another store, just 15 minutes away. Do you make this second 15-minute trip? In this case, most people say that they would not.

But what is going on here? Is 15 minutes of your time worth $7, or isn't it? In reality, of course, $7 is $7—no matter how you count it. The only question you should ask yourself in these cases is whether the trip across town, and the 15 extra minutes it would take, is worth the extra $7 you would save. Whether the amount from which this $7 will be saved is $10 or $10,000 should be irrelevant. This is the problem of relativity—we look at our decisions in a relative way and compare them locally to the available alternative.

We compare the relative advantage of the cheap pen with the expensive one, and this contrast makes it obvious to us that we should spend the extra time to save the $7. At the same time, the relative advantage of the cheaper suit is very small, so we spend the extra $7. This is also why it is so easy for a person to add $200 to a $5,000 catering bill for a soup entrée, when the same person will clip coupons to save 25 cents on a one-dollar can of condensed soup.

*On escaping the cycle of relativity*

In his case, he started by selling his Porsche Boxster and buying a Toyota Prius in its place. “I don't want to live the life of a Boxster,” he told the New York Times, "because when you get a Boxster you wish you had a 911, and you know what people who have 911s wish they had? They wish they had a Ferrari.”

The more we have, the more we want And the only cure is to break the cycle of relativity.

Or, as Mark Twain once noted about Tom Sawyer, “Tom had discovered a great law of human action, namely, that in order to make a man covet a thing, it is only necessary to make the thing difficult to attain.”

*On spending behaviours: ANCHORING*

Did the digits from the social security numbers serve as anchors? Remarkably, they did: the students with the highest-ending social security digits (from 80 to 99) bid highest, while those with the lowest-ending numbers (1 to 20) bid lowest. The top 20 percent, for instance, bid an average of $56 for the cordless keyboard; the bottom 20 percent bid an average of $16. In the end, we could see that students with social security numbers ending in the upper 20 percent placed bids that were 216 to 346 percent higher than those of the students with social security numbers ending in the lowest 20 percent.

The significance of this is that once the participants were willing to pay a certain price for one product, their willingness to pay for other items in the same product category was judged relative to that first price (the anchor). This, then, is what we call arbitrary coherence. Initial prices are largely "arbitrary” and can be influenced by responses to random questions; but once those prices are established in our minds, they shape not only what we are willing to pay for an item, but also how much we are willing to pay for related products.

But price tags by themselves are not necessarily anchors. They become anchors when we contemplate buying a product or service at that particular price. That's when the imprint is set. From then on, we are willing to accept a range of prices—but as with the pull of a bungee cord, we always refer back to the original anchor. Thus the first anchor influences not only the immediate buying decision but many others that follow.

Annoying sound plays - financial anchors are placed 10c vs 90c to listen to the sound again with the questions - how much (minimum) would you need to get paid to hear it again. The amount is more than double for those anchored at 90c. Even after being both suggested to accept 50c, and then have the 90c and 10c flipped, they stick to their initial anchor

What did we show? That our first decisions resonate over a long sequence of decisions. First impressions are important, whether they involve remembering that our first DVD player cost much more than such players cost today (and realizing that, in comparison, the current prices are a steal) or remembering that gas was once a dollar a gallon, which makes every trip to the gas station a painful experience. In all these cases the random, and not so random, anchors that we encountered along the way and were swayed by remain with us long after the initial decision itself.

*On spending behaviours: HERDING*

We call this type of behavior herding. It happens when we assume that something is good (or bad) on the basis of other people's previous behavior, and our own actions follow suit. But there's also another kind of herding, one that we call self-herding. This happens when we believe something is good (or bad) on the basis of our own previous behavior. Essentially, once we become the first person in line at the restaurant, we begin to line up behind ourself in subsequent experiences.

*How Starbucks created it's new category of coffee prices by removing its anchors*

How to remove anchors to get people to move up price brackets the Starbucks way: The showcases presented alluring snacks—almond croissants, biscotti, raspberry custard pastries, and others. Whereas Dunkin' Donuts had small, medium, and large coffees, Starbucks offered Short, Tall, Grande, and Venti, as well as drinks with high-pedigree names like Caffè Americano, Caffè Misto, Macchiato, and Frappuccino. Starbucks did everything in its power, in other words, to make the experience feel different—so different that we would not use the prices at Dunkin' Donuts as an anchor, but instead would be open to the new anchor that Starbucks was preparing for us. And that, to a great extent, is how Starbucks succeeded.

You can convince people to pay for or be paid for the same thing (reading poetry) based on what you ask for in the first place (anchor).

There are wealthy gentlemen in England who drive four horse passenger-coaches twenty or thirty miles on a daily line in the summer because the privilege costs them considerable money; but if they were offered wages for the service, that would turn it into work, and then they would resign.”

*Paying attention and ridding ourselves of bad anchors*

You might begin by questioning that habit. How did it begin? Second, ask yourself what amount of pleasure you will be getting out of it. Is the pleasure as much as you thought you would get? Could you cut back a little and better spend the remaining money on something else? With everything you do, in fact, you should train yourself to question your repeated behaviors. In the case of the cell phone, could you take a step back from the cutting edge, reduce your outlay, and use some of the money for something else? And as for the coffee - rather than asking which blend of coffee you will have today, ask yourself whether you should even be having that habitual cup of expensive coffee at all.

"We should also pay particular attention to the first decision we make in what is going to be a long stream of decisions (about clothing, food, etc.). When we face such a decision, it might seem to us that this is just one decision, without large consequences; but in fact the power of the first decision can have such a long-lasting effect that it will percolate into our future decisions for years to come. Given this effect, the first decision is crucial, and we should give it an appropriate amount of attention. Socrates said that the unexamined life is not worth living. Perhaps it's time to inventory the imprints and anchors in our own life. Even if they once were completely reasonable, are they still reasonable? Once the old choices are reconsidered, we can open ourselves to new decisions—and the new opportunities of a new day. That seems to make sense.

It seems then that instead of consumers' willingness to pay influencing market prices, the causality is somewhat reversed and it is market prices themselves that influence consumers' willingness to pay. What this means is that demand is not, in fact, a completely separate force from supply.

*How anchors may be limiting our happiness:*

For example, because of some unfortunate initial anchors we might mistakenly trade something that truly gives us a lot of pleasure (but regrettably had a low initial anchor) for something that gives us less pleasure (but owing to some random circumstances had a high initial anchor). If anchors and memories of these anchors—but not preferences determine our behavior, why would trading be hailed as the key to maximizing personal happiness (utility)?

*On why rules break down at £0*

There's no visible possibility of loss when we choose a FREE! item (it's free). But suppose we choose the item that's not free. Uh-oh, now there's a risk of having made a poor decision—the possibility of a loss. And so, given the choice, we go for what is free. For this reason, in the land of pricing, zero is not just another price.

Think how powerful that idea is! Zero is not just another discount. Zero is a different place. The difference between t