Business Book Club: Predictably Irrational
I've set myself a goal to read one self-development book per month. To make sure I really reflect on what I'm reading I'm going to extract the wisdom from the best business and personal development books and share it with you.
This month I’ve been reading Predictably Irrational: The Hidden Forces That Shape Our Decisions By Dan Ariely
I remember the first time someone told me that EVERY decision we make is an emotional one. To say that I was resistant to the idea was an understatement. I was sat in a seminar and I was only too happy to explain to the facilitator that of course, I understand that we make emotional decisions from time to time but on the whole, I was a logical, rational human being. Needless to say, the facilitator quickly proved me wrong and I’ve been fascinated by the forces that shape our decisions ever since. Once you begin to delve into just how malleable our decision-making processes are you can’t help but feel a little unnerved. The good news is that this book offers suggestions for how we can use awareness of what shapes our decisions to our advantage.
The book:
- Why does having more options make life harder, not easier?
- Why do most people cheat when given the chance? (yes even YOU)
- How are humans are like baby geese?
- Why do we lose good judgement when things are ‘free’?
- How do our expectations influence our opinions and decisions?
These are just a few of the questions answered in this book. When it comes to making decisions in our lives we think we’re in control. But are we? Economists will tell you that people will always act in their best interests. Dan Ariely explains why this is often not the case.
Nonsense! I’m a rational human being. How am I ‘predictably irrational’?
There are loads of fascinating insights in the book. Below is a summary of just a few of them. You can discover some additional learnings from the book in the video above.
1. Our decision-making is more malleable than we think
Imagine you want to buy a new TV and you spot these three offers on a sale sign:
Which one are you drawn to?
You’d be forgiven for thinking that we make sensible decisions based on market prices and the difference in specifications. You might think that once you know what TV is worth to you that this price stays fixed regardless of the situation. It turns out that our perception of value is more flimsy than we think. Unfortunately, we don’t have an internal value meter that tells us what things are worth. What we are willing to pay is always based on a comparison to something else and what we are comparing to has a huge impact on the value we place on something. This means it is really easy for businesses to shape our willingness to pay by carefully choosing what we compare products to.
In the TV buying scenario, most people go for the second option. Why? Because when presented with a range of options most people don’t go for the most expensive they for the second most expensive or something priced in the mid-range. The purpose of the lowest and highest priced TVs in this list are solely to serve as reference points for the cost of the TV they really want to sell.
And it’s not just the top and bottom reference points that make our decisions malleable. The ease of choice is also a factor. Imagine you are considering subscribing to a magazine and you are presented with the following costs:
- Internet Only £59
- Print Only £125
- Print and Internet £125
Which one would you go for?
Now, you probably don’t know if £59 is good value for an internet subscription but you do know that getting the print and internet subscription is better than the print only subscription so guess which one most people pick? Guess which one the publisher wants you to pick?
Unsurprisingly most people go for the print and internet option. We tend to dismiss the internet only option and narrow down our decision to the two options which are easier to get our heads around.
How do I make better choices?
Write down what is important to you in a new purchase before you shop. Research prices for items with that specification in mind so you are using relevant reference points and reduce the chances of being swayed by irrelevant comparisons.
2. We lose our heads when things are free!
Here’s another scenario. I’d like you to make a split second decision, go with your instincts and decide immediately. You can either have:
A £10 Amazon gift voucher for FREE OR a £20 Amazon voucher for £7.
Which one were you instinctively drawn to? For most people, it’s the free one. If you take time to do the maths it becomes pretty obvious that it’s better to pay £7 for a £20 voucher, a gain of £13 instead of a gain of £10, which given you buy almost anything on Amazon is almost as good as cash. So why do most of us go for the free option?
We are a risk-averse species. We are hard-wired to avoid loss. Most transactions have an upside and a downside so we usually weigh up any advantages against any downsides. However, when something is free we only focus what we will gain. Therefore 'free' causes us to make decisions very differently. Even a nominal cost doesn’t have the same power over our thinking as free things do.
We associate 'free' with no loss. Whenever there is a cost this introduces the possibility of loss, no matter how small and changes our decision making. Of course, free things can be good but when the prospect of 'free' causes us to give up a better deal then it is often not really free at all.
How do I make better decisions?
Slow down and take time to calculate the cost of 'free'. Compare the gain to what you are losing, even if that’s time, quality or a better experience.
3. The dangers of mixing business with pleasure
Think back to the last time you went to a friend or relatives house for a home-cooked meal. Did you offer your host payment for the food they prepared for you, the service they gave you or the entertainment they provided?
Why not? What would have happened if you did? Would it have caused offence?
We operate in two worlds:
- One where social norms prevail
- One where market norms prevail
Social norms are in effect when we offer to give someone a lift or a neighbour helps us move a sofa. We do these things to create goodwill and build a connection with others. They demonstrate our values and say something about the kind of people we are. We do it for the warm feeling, we don’t expect to be paid. We don’t necessarily expect the other person to reciprocate, even if we hope they might.
Market norms are transactional. We complete a task and get something in return. It’s a cold, unfeeling quid pro quo arrangement. The payback should be more or less instant. There are clear guidelines for the transaction and we expect to get what we pay for.
Both are perfectly great ways of getting things done when used appropriately. The problem comes when we blur the boundaries between the two.
Think back to the dinner question I asked a moment ago. Did you pay for dinner at your friend's house? Or did you take a gift, like a bottle of wine or dessert? Small gifts keep social norms in effect. If you offer your friend £10 for dinner they would probably be insulted, but if you took a £10 bottle of wine they would most likely be grateful.
But be careful even with gifts. The minute you introduce the cost of gifting you are introducing market norms. So if you tell your friend it’s a £10 bottle of wine you have still shifted to market norms. People respond in the same way to a gift with a price attached as they do an offer of cash. Once market norms are introduced, it takes a long time to get social norms back.
How can I make better choices?
On a date? Don’t mention how much you spent on the other person (or expect anything in return). Using your professional skills to help a friend? Think carefully about whether you want to work according to social norms or market norms. You can’t have both.
4. Why you can’t order something in a restaurant when someone else has already ordered it?
Have you ever eaten at a restaurant with friends and intended to order something, only to change your mind when someone else orders it first? Or maybe you change your mind and order the same as other people?
This is because we are usually required to tell the server what we want in front of our dining companions. Research has shown that we order very differently in front of other people than we do when ordering in private (by writing our choice down or emailing in advance for example).
Let's say there are four people at a table and there are four items on the menu. What tends to happen is that the table will order all four items between them when they tell the server what they want. When diners are asked to fill in a slip highlighting their choice and hand it to the server some items prove popular and others don't get ordered at all. Why?
It seems that we are willing to forgo the pleasure we might get from ordering our first choice to maintain our image in front of others. In western society being an independent thinker is a valued trait. We often order something different to show our fellow diners that we have a mind of our own. In societies where harmony and togetherness are more highly valued traits a similar thing happens but instead of people ordering differently, they tend to order the same when making orders publically to show people they are in tune with them.
How can I make better choices?
Have a look at the menu before you go to the restaurant and decide what you want in advance so you are less likely to be swayed. Of course, you could always get your order in first so that you can have what you want without looking like you are following other people.
5. The mind gets what it expects
Would you like beer with balsamic vinegar in it? You might be surprised. Patrons of a bar were offered a sample of two beers. A Budweiser and a local brew with a drop of balsamic vinegar in it. They were to try each beer and decide which one they would like a free pint of.
In the first experiment, the drinkers didn’t know about the vinegar. In this experiment, most drinkers preferred the local brew with vinegar in it. I’m guessing the local brew was better than Budweiser and the vinegar probably didn't affect the taste much anyway.
In a second experiment, drinkers were told about the vinegar in advance. Perhaps unsurprisingly they wrinkled up their noses when trying the vinegary beer and hated it. They chose the Budweiser.
Interestingly in a third experiment, the drinkers who did not know about the vinegar before choosing the local ale were told about it afterwards. They were then offered an additional local beer without the vinegar but had the option to add the vinegar for themselves. Would they add it?
Yes, they did. They most likely figured, "I had the vinegar before and liked it, I’ll like it again". Expectations are powerful. Not only do they shape our beliefs of an experience but they even change the physiology of an experience itself.
How can I make better choices?
- Buying your party food from a discount store? Serve it in expensive crockery and it will taste better to your guests. Even if you tell them where the food was from afterwards.
- Dress for the job you want not the one you have. People’s perception of your competence will rise to match the expectation.
- Lacking confidence when doing something for others? Talk up the experience they can expect and never talk yourself down.
- Whether you think someone is useless or you think they are talented, you will probably prove yourself right about them regardless of their ability. Be careful making your judgements.
Conclusion
Reflecting on what I learnt from this book I couldn't help but wonder how many times I've been duped by shops into buying more than I wanted to. It also made me think about the reference points we create for ourselves. In business am I pitching myself with the best or am I am unconsciously associating myself with the bargain basement? Is the expectation I'm creating doing my skills justice? I've always been equally annoyed and amazed by the success of people who aren't the most talented but set such fantastic expectations for their services people rave about them. Perhaps they have something right.
The book also got me thinking about prejudging people and experiences. If we tell ourselves an encounter will be unpleasant or exciting we usually prove ourselves right. Perhaps a positive or a negative experience lies less in other people and more in the eye of the beholder.
All of the quirks in the book are designed to serve us, they are inbuilt mechanisms designed to keep us physically and psychologically safe. They aren't problematic in themselves, it is up to us to be aware of how we are making decisions and decide if we are using thinking that works for us.
What should I read next?
Have you read the book? Have you read any other books on behavioural economics?
What shall I read next? If you have any recommendations let me know below or via Twitter, Facebook or LinkedIn
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