# Predictably Irrational by Dan Ariely

[This detailed, chapter-by-chapter précis of Dan Ariely’s Predictably Irrational: The Hidden Forces That Shape Our Decisions is a guest post by George Gibson, a colleague of mine at Xerox. George originally posted it on our internal blogs as a series, and I found it so much fun to read, I asked if I could repost it on ribbonfarm. So here you go.]

### Chapter 1: The Truth About Relativity

This was clearly the most interesting of the books from my summer reading list. Let me be clear that though I don’t buy all of the points Dan tries to make, I find them all interesting and worthy of thought. With any luck we can begin a real discussion of his ideas and observations in the commentary. That means I’ll attempt (not always successfully) to keep my opinion out of the body of this piece, and reserve that for any commentary that might develop. The real point here is to get you interested enough to read the book yourself.

“Most people don’t know what they want until they see it in context.” Control the context and you can change their decisions.

This chapter is about how our decision making as skewed from what we might think of as rational by the use of comparisons, anchor points and some about the magic of “FREE!”. The Economist offered three subscription options:

• Electronic alone: $59 • Print alone:$125

Huge components of our health care costs are the results of preventable diseases. What if your insurance company withdrew $200 dollars from your paycheck to cover the expense of a regular and complete physical with the understanding that you would get that money back IFF you kept your appointment for all of the required testing? Maybe out on the lunatic fringe of health care thinking but interesting. In this and other similar situations Dan suggests both these voluntary pre-commitment models and the alternative of a Leviathan. One of the most amusing suggestions he makes regards spending control, especially credit card use. You may have heard the ice method. Some people, to counter their impulsive use of consumer credit, put their card(s) in a glass of water in the freezer. Thawing it (them) out to use takes time allowing that arousal that we talked about last chapter to fade. Of course there are simpler ways. Dan actually took one of these suggestions to the executives of a major NY bank. Why, he said, can’t a credit card record and automatically react in accordance with pre-committed spending patterns. When you exceed your chosen limit (which might be spending category specific) for instance, it would decline more charges, or generate an email reporting your errant ways to your spouse. He reports that the executives listened and thought it was a good idea but never called him back. I would pay cash for a recording of the conversation they had after he left. There are lots of other approaches to controlling procrastination of course. We’ll talk more about these later in the year. I confess that this is a trait I personally fight. Let me just make two recommendations other than pre-commitment. One is the time management tool suite called “Getting Things Done” popularized by David Allen, or alternately an approach which you can find described in a book called “Making Work Work.” Julie Morgenstern. ### Chapter 7: The High Price of Ownership Why We Overvalue What We Have Do you know of anyone whose house stays on the market not just for months but for years? How about somebody who’s been driving around with a “For Sale” sign in their car window long enough for you to think it might actually be an accessory? What these folks have in common is a valuation of what they are offering that does not match the value in among the people to whom they are making the offer. These are two quick examples but it turns out there are lots of other ways in which we tend to overestimate the market value of the things we own. It’s been called the investment effect. It might be because we price in the positive feelings we have derived from owning the object (we took such great family outings in that car) in ways that are irrelevant to potential buyers. It may be that we experience the parting with the object as a loss that prices in those good feelings and it is well demonstrated that we have a tendency to avoid loss that exceeds our desire for gains even at constant expected value. I’m not sure Dan adds a lot new on this topic, although it is certainly a way in which we evidence irrational consumer behavior, except an experiment based on a rather peculiar basketball ticketing process at Duke. None the less, this is useful stuff to be reminded of from time to time. I must admit that although one of my nephews is on faculty there, I had not heard of Duke’s peculiar way of rationing basketball tickets for important games. I won’t go through the whole thing hear – it’s a pleasure left for the reader – but suffice it to say that it’s a multi-day process that involves camping out and jumping through the odd hoop and that process just gets you into a lottery for a ticket. Dan, who did his Ph.D. there, and a colleague from INSEAD, contacted folks who had gotten tickets and those who hadn’t and tried to arrange sales. All had demonstrated the fervent desire to go to the game by participating in the ritual described but, while those that had gotten tickets said they would sell them for (on average)$2400, those who hadn’t gotten them would only agree to pay (on average) $175. This effect of ownership, even if it’s temporary (“FREE!! 10 day home trial”, “return it without charge if you’re not satisfied”) or virtual (how dare that idiot outbid me for my watch) is quite general. Merchandisers use it to their advantage all the time. As with many of these chapters, Dan’s point is, knowing that this effect is real, examine your behavior when you get in these situations. So doing you can avoid much frustration and avoid being manipulated into making decisions that are not really in your best interest. ### Chapter 8. Keeping Doors Open Why Options Distract Us from Our Main Objective I’m a big options fan. I like real options thinking and have seen it used to generate real value in R&T environments. I was, therefore, not wild when I read this title. Was there something fundamentally wrong with my attachment to options? Well, let’s take a couple of famous examples. The oldest comes from Sun Tsu in the world’s oldest job application, “The Art of War,” written in the 6th century BC. I know I’ve talked about this book before and I assure you I will talk about it again. If you haven’t read it yet make it next on your list. Master Tsu advises generals: “do not attack an enemy that has his back to a hill,” and further “do not thwart an enemy retreating home. If you surround the enemy, leave an outlet; do not press an enemy that is cornered. Such cornered foes are too formidable. Exploiting this same dynamic he advises: Throw your soldiers into positions whence there is no escape, and they will prefer death to flight. If they will face death, there is nothing they may not achieve. Officers and men alike will put forth their uttermost strength. Soldiers when in desperate straits lose the sense of fear. If there is no place of refuge, they will stand firm. If they are in hostile country, they will show a stubborn front. If there is no help for it, they will fight hard.” Indeed, Xiang Yu, in 210 BC, exploited this in Cortez and, doubtless, many more. Having crossed the Yangtze, he burned his boats and had all the cooking pots destroyed. Win or die; a clear message for the troops and one that cleared their minds and free up assets from having to protect those assets. As always, Dan and some colleagues run some experiments on students. They design several computer games in which players had 100 “clicks” which they could use to choose one of three rooms and once in a room click to get cash. Different rooms give different pay-offs and generally people figured out pretty quickly which room paid the most per click and then spent their time in that room. However, when the game was changed such that rooms that hadn’t been visited in some prescribed number of clicks disappeared, players would go back and click on those rooms to keep them available even though it cost (on average) 15% of their earnings. This chapter makes the point that options can serve as distraction as well as valuable alternatives. Olympic athletes are seldom concert violinists. Mastery and focus often turn in better results than trying to be all things to all people. My undergraduate honors advisor was, and likely is still, a complete success as a chemist. When, as a graduate student, I took his advanced organic synthesis course, I felt like I was taken to the top of a tall mountain and shown the vast landscape of chemical synthesis. He achieved that mastery as the result of considerable focus. “George,” he said to me at one point, “you should be spending 80% of your waking hours at the bench.” This sort of behavior is contrary to much of what our culture offers us today. Our environment bombards us with variety. You can know more and more about more with just a few clicks of a mouse. Failure to be well-rounded is viewed as a significant deficit. On the other hand, the person who tries to do too many things can end up never doing any one of them well enough to have impact. Like most things, of course, there are two ways to get this wrong. Being monomaniacal may have its benefits but it comes at a price. Having strong family relationships, for example, can buffer you from the occasional bad days you may experience at work. There is another interesting aspect of the sometimes bewildering array of choices that confronts us; a retreat to systems in which less choice is allowed. The power and even ascendancy of authoritarian regimes and rigid philosophical systems are sometimes viewed as reactions to the world’s increasing complexity. Hardly a new idea, “Escape from Freedom,” by the philosopher Eric Fromm is probably the best treatment on the topic. However Dan has an interesting slant, pointing out that increasing the complexity of a decision makes it more likely that decision makers will rely on external (hence manipulable) cues. While it would be a mistake for us to fail to exploit options thinking and the development of options for our business and personal lives, trying to do too many things at once is a clear route to failure. ### Chapter 9: The Effect of Expectations Why The Mind Gets What It Expects We all know that our expectations affect our experiences. Generally however, since we are aware of this tendency we “smart people” think we set that aside for the most part. In this chapter Dan describes a number of experiments that he performed as well as a number of experiments by others that point out just how subtle and persuasive our expectations are. Setting up shop in the “Muddy Charles,” the pub in MIT’s Walker Memorial Building, he and collaborators started handing out free samples of beer. Students were given samples of two types and then asked to choose which of these they’d like a larger glass. The beers started with the same brew but a few drops of balsamic vinegar were added to one. (They actually started with Budweiser but some folks “objected to calling Budweiser beer” so they switched to Sam Adams.) They measured how many people ordered each of the samples and then asked people to describe what they thought about the new beer. Some of these folks were not told what the difference between the two beers was, some were told about the vinegar before they tried it and some were told after. Guess what happened. When they got the information actually changed their rating of the experimental suds. Knowing it contained vinegar beforehand changed their described experience when doing the taste test. There’s actually a lot more to this experiment and Dan presents a number of other experiments including some employing functional MRI. Here in a version of the classic Coke-v-Pepsi challenge it can be demonstrated that at a brain activity level the experience of drinking one as opposed to the other id modified by knowledge of which they were drinking By far the most interesting examples – and I really can’t bring myself to spoil the fun you’ll have reading them – have to do with stereotypes. Especially interesting are those dealing with groups to whom several “conflicting” stereotypes can be applied. In these case preconditioning the subjects with certain words chosen to “remind” them of one or the other of these produced behavior that reflected the provoked stereotype. You’ve just got to read this stuff trust me. ### Chapter 10. The Power of Price Why a 50 Cent Aspirin Can Do What a Penny Aspirin Can’t We all know about the placebo effect; that wild and wonderful way in which our mind affects our perception of, and in some cases our real experience of the healing effects of one medication or the other. It’s sort of an extension of the last chapter’s theme; the mind gets what it expects. You’ll remember that Dan spent a long time in a hospital burn unit recovering from a serious accident he’d had while training for the IDF, well you won’t be surprised that he had a lot of time to think about the placebo effect. As part of his investigations into the perception of pain, as a newly minted asst prof, he bought a vice and would crush people’s fingers in it and ask them things like: “How much did that hurt?” “How much would I have to pay you to let me do that to you again?” (You just can’t make this stuff up!) In this chapter he explores some aspects of the economic side of the placebo effect. He has experimenters pose as representatives from a drug company. They gave people a series of electrical shocks of varying magnitude, asked them about the pain they experienced. Next they were given a pain reliever, well vitamin C actually, but they were told either that it was a new and expensive one or a cheap one. When the shocks were repeated guess what? Those who thought they were getting the high-priced stuff reported that it worked pretty well, and much better than the folks who got the cheap stuff. (Now let’s review what this means for the spiraling costs of US health care.) By the way, the more recently the folks had had experience with significant pain the better it worked. As usual he did a number of experiments like this and I won’t spoil you fun. There are two sorts of implications he explores that are worth our thought. First, how general is this phenomenon? It certainly applies to food and drink, to cars to a whole lot of things. Does that mean that we are manipulated into paying higher prices for goods that are essentially equivalent to lower price alternatives? Would we be better off if we brought this into our conscious mind as we decide whether the most recent genes are worth it? The next thing he brings up is really an ethical question. He cites several examples where surgical procedures were found to produce no better results than sham operations. A patient who thinks he or she received one of these surgical procedure reports just as much benefit as someone who actually had the procedure. While the medical community wasn’t actually intending the procedures benefits to derive from the placebo effect it turns out that’s exactly what happened. There is also the less dramatic exploitation of the effect that many doctors practice when they prescribe antibiotics for colds and sore throats, the vast majority of which are viral. They prescribe, patients get better and the offending microbe was not at all affected by the active ingredient. It, of course, turns out, that in some instances at least, people treated with placebos actually do get better faster than those untreated. There will be some Nobels given out for figuring out exactly how that works. So, the interesting ethical questions Dan brings up are, knowing the placebo effect is real, should doctors use in intentionally and if so how and when? Also if we want to protect people from unnecessary surgery do we have an obligation to test surgical procedures against sham surgery in humans? Like I have said all along, this book is worth the time, even more for the questions than for the answers. ### Chapter 11: The Context of Our Character, Part 1 Why We Are Dishonest, and What We Can Do About It Dan starts this chapter with some interesting observations. I haven’t independently confirmed them but I’m willing to give him the benefit of the doubt and assume they’re right. 2004  Total loss due to robbery$525M Average loss per robbery $1,300 Total loss to robbery, burglary, larceny-theft and auto theft$16B Workplace loss to theft and fraud $600B Loss from fraudulent insurance claims$24B Underpayment of income tax (per IRS) $350B Fraudulent clothing returns to retail outlets$16B

Do we think about the people who perpetrate these crimes differently? In our most fundamentalist moments we’d say no. A theft is a theft. But do we actually act that way as a society? Let’s change tacks. Does the self concept of the guy or gal walking out of work with a package of Post-It™ notes differ fundamentally from the folks speeding away from the convenience store they’ve just knocked over? How about the person who keeps the extra cash when they’ve been given too much change? If we judge by how much attention and cash we pay to catch the perpetrators and the answer seems clear. Does the amount of loss due to the actions of people we do not generally think of as criminals mean that many “honest” people cheat? Bring on the experiments!

Dan and a number of collaborators do a number of varieties of one experimental theme using his favorite subjects, college students from around the country. The basic outline of the experiment is as follows. A control group is established by giving a group of students some timed test (50 general information questions, 15 math problems,…) and, allowing them no way to cheat, grade their papers paying them $0.10 per correct answer. The next group has to transfer their answers from their work sheet to a grid on which the correct answers are highlighted and they are to write at the top of the grid sheet how many answers they got correct. The worksheet and the grid are handed to the experimenter who them pays the student$0.10 for every correct answer he or she claimed. Another group was treated the same as the previous but then told to shred their worksheet and grid and then simply tell the experimenter how many answers they had gotten right at which point the experimenter paid them as before. A final group tested as before, was told to shred their worksheet and grid and simply take the correct amount of money from a jar containing about $100. Guess what happened and write down your guess. No really don’t look, guess first. The second experimental group, which had handed in their work sheet and grid sheet, cheated by about 10%.How about the other groups? Have you got your guess recorded? They cheated by about the same amount. Even when they could have simply taken all the money the students cheated just a little. And it wasn’t the case that there were a few bad apples that drove the results. The means for the group shifted but the distribution remained the same. Apparently we are pretty good at rationalizing small amounts of dishonesty. Now, same experiment (including the shredding of the work sheet and the grid) but now the experimental groups are asked to do a little memory test or given a verbal reminder before the test. One group was asked to write down a list of 10 books they had read in high school, another was asked to write down as many of the 10 commandments as they could remember, a group at Princeton was told that this test was governed by Princeton’s storied honor code, yet another was told that the tests were governed by MIT’s honor code (there is, by the way, no such thing). Have you guessed what happened? In all of the groups asked to remember something that reminded them of an ethical benchmark no one cheated. Now these are successful college students at some of the best schools in the country so you’d hope they’d had some underpinning in ethics, and of course there was little at stake so we could expect different results in different groups and among these groups in different contexts, nonetheless this experiment is striking. Simply being recently reminded that there is a difference between ethical and unethical conduct changed their behavior. Dan draws the comparison with the codes of conduct to which professions of varying sorts used to ascribe. He asserts that as the professional societies and identities have become weaker forces in the practice of their respective crafts, we have passed that boundary he talked about earlier from the arena of social norms to that of market norms with a concomitant cost to society. Unsurprisingly there’s a lot more to this chapter and, as always, I do not want to spoil the fun you’ll have when you read the book yourself. But I think that there’s enough here to provoke discussion. If most “good, honest” people cheat a little what does that say about society as a whole and how might we actually promote a turn to more ethical behavior, or has that die been cast? ### Chapter 12: The Context of Our Character, Part 2 Why Dealing With Cash Makes Us More Honest The fundamental finding Dan reports here is encapsulated in the title. He finds that, in his experiments, people are less likely to steal cash than they are to run off with non-monetary instruments. Again, he cites a number of experiments, but the sense of the lot can be summed up in just one. When he put 6 packs of Coke in MIT dorms they all disappeared in 72 hours. When instead, he put 6 one dollar bills in the same refrigerators they all survived. In his usual fashion he explored just how close to case you had to be to see this effect. If they were given tokens that you nearly instantly exchanged for cash would it increase cheating (yes it turns out)? This is one of his most broadly provocative points. If tokens increase cheating, how about even more abstract instruments? • How about credit cards – lots of cheating there • How about the anonymity granted by the net – lots of cheating there • How about stock options – lots of back dating there • How about cooking the books – lots of cheating there It seems really likely that Jeff Skilling and Ken Lay would likely never simply have mugged folks and taken their cash, but somehow cooking the books was OK. There is clearly, at least for some folks, a mechanism which allows the incremental dishonesty to creep in without triggering our “If I do this I’ll be a bad person,” alarm. On the whole I find this chapter a little depressing. It certainly points out some things that, if they are truly extensible, should make us have significant reservations about the increasing abstraction of vessels of monetary exchange, a trend likely to continue. So I am left at the end of this chapter with a dilemma I seldom faced in this book, disquiet with no obvious remedy. I can more carefully examine my own behavior and I can become more protective in my use of non-cash instruments but the entire chapter begs for broader experimentation. I’ll leave you with a quotation from HL Mencken. If you don’t know his work, dabble some in it. It’s an excellent source for uncomfortable laughter. “The difference between a moral man and a man of honor is that the latter regrets a discreditable act, even when it has worked and he has not been caught. “ — H. L. Mencken, ‘Prejudices: Fourth Series,’ 1924 ### Chapter 13: Beer and free lunches What Is Behavioral Economics, And Where Are The Free Lunches? There’s an old joke in economics – two economists are walking down the street and they see a$20 bill on the ground. One begins to bend over to reach for it, the other stops him saying, “If that were a real \$20 bill someone would have already picked it up.”

OK – so there’s a lot of the standard model in a nutshell. It’s sort of like that classic statement of the second law of thermodynamics, “you can never win, you can, at best, break even.” There are several more sets of experiments described in this chapter of course. These focus on restaurants, people’s behavior in ordering food and beer (a recurring theme) and their satisfaction with the outcomes. It turns out that people order different things if they are the first or last in a group to order. The orders previously given by group members influence what the remaining members order. You can easily imagine at least two ways that might happen, a drive toward conformity or a drive toward displaying uniqueness, I’m not going to spoil your fun by describing the experiments and the details of the results. Generally, however, it turns out that you are likely to enjoy your selection more if you make up your own mind and stick to it. This is, then, a source of a free lunch. Having information about largely subliminal process that influence your decision making can allow you to escape the traps such processes help us fall into. So, order what you like and enjoy it more. The extra enjoyment is free.

Indeed the real point of the majority of this fun book is just that: don’t blindly believe that economic rationality prevails at all times. Study real behavior, make the invisible processes visible to you and stop being the tool of others – this is the real free lunch.

Felix qui potuit rerum cognoscere causas!

This closes this series and I must say it’s been a lot of fun. Thanks for lending me an eye.

Venkat is the founder and editor-in-chief of ribbonfarm. Follow him on Twitter

1. Uma says:
2. Uma says:

Oops…my tags went bad in my earlier comment

Thanks for the post !

I stumbled on your blog after having heard Dan Ariely comment on NPR’s Marketplace show earlier today. See http://marketplace.publicradio.org/display/web/2008/10/01/pm_road_q/

With the whole bailout mess, Ariely’s viewpoint on the show was fascinating from a Game Theory standpoint!

3. In this blog I expose something similar, though my idea is less brilliant than Dan Ariely’s approaches. The Spanish university is very bad, I am sorry.