Dan Ariely—Predictably Irrational Behaviour

Wednesday, June 12, 2019
Christopher Sirk
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So you think you’re generally rational—a great weigher of options?

Behavioral economist Dan Ariely would beg to differ.

Ariely thinks we’re all pliable to suggestion, filled with delusions about our mental autonomy and prone to flimsy self-justification. His research looks at the irrational choices we make every day, over and over, and why.

But don’t worry, he doesn’t just want to criticize. He wants to help too.

He’s quite the mensch, with six TED talks having racked up over 10 million views. Three of his self-help-ish books—Predictably Irrational, The Upside of Irrationality, and The Honest Truth about Dishonesty—have been on the New York Times bestseller list.

He firmly believes that if we’re able to gain awareness of our systematic mistakes, we can learn to avoid repeating them over and over again.

Seems like a good idea, right?

Ariely’s rational path to studying irrationality

“What a piece of work is man!”

  – William Shakespeare

Ariely has an origin story befitting of a superhero. He grew up on the coast of Israel, not far from Tel Aviv. When he was 18 years old, he experienced burns over 70% of his body preparing for a traditional Jewish fire inscription ceremony.

While recovering over a period of three years, he found himself a social outsider. In the process, he became an astute observer of human behavior.

That piqued his interest in psychology, and upon healing up he went on to complete a degree in the subject at Tel Aviv University. Afterwards, he went stateside to University of North Carolina, Chapel Hill to take an M.A. and Ph.D. in Cognitive Psychology. Then he did another Ph.D., this time in business, from Duke University.

He went on to teach at MIT for some years, before settling into his current posting as a Professor of Economics and Behavioral Psychology at Duke University.

While on sabbatical from teaching one year, he decided to write a book, as so many academics are want to do. Apparently, he wanted to write a cookbook about ‘eating over the sink’ originally but was told he’d have to author something tied to his personal research first.

So he wrote Predictably Irrational: The Hidden Forces That Shape Our Decisions.

After its release in 2008, Ariely quickly became a much-in-demand public speaker.

The book found its broad appeal by revealing how and why we repeat behaviors that may or may not be to our personal benefit. Post-Freud and post-Jung, it turns out we’re even less in control than we’d thought.

While the terrain of ‘free will’ analysis is fairly well-trodden, Ariely’s insights are uniquely accessible and profound, grounded in anecdotal examples that demystify many complex psychological concepts.

His notion of the ‘irrational self’ also flies in the face of standard economic theory, which supposes that we are fundamentally rational beings with a unified psyche. Supposedly, when it comes to important decisions, we the people weigh our options carefully and seek the best value.  

The reality, however, is that there are other versions of us hiding behind our unified sense of self. These wackier, at times foreign-seeming selves emerge when we’re faced with specific conditions, resulting in us making decisions we wouldn’t otherwise.

Relativity, context, and the fickleness of our decision making

“Thinking is difficult and sometimes unpleasant.”

                                   – Dan Ariely

We wake up and feel that we decide what to wear and what to eat.

Yet our decisions, Ariely suggests, don’t necessarily reside within us. Design has a huge influence on what we end up doing.

And often, we really have no idea what we want until we see it presented in context. And even then we overpay, underestimate, and procrastinate.

In Predictably Irrational, Ariely notes how the notion of menu dependence influences our perception and choices.

Say you’re living in London and want to jet off for a quick holiday. You go on a travel website and find three options: 1. a weekend in Rome, everything paid, 2. a weekend in Rome, everything paid (except coffee in the morning—that’s gonna cost you 2.50 Euros), and 3. a weekend in Paris, everything paid.

Ariely observes that, given these three options, the vast majority of people will choose Rome, everything paid versus the other two.

The reasoning? People have a context for the all-inclusive Rome trip, with a second option for comparison, while Paris has no comparable option and thus appears more ‘risky’ and undefined.

Our hankering for contextual clues can be further manipulated by adding a patently undesirable option, directing us to buy the most expensive version of something while perceiving it as being ‘the best deal.’ That’s called the decoy effect.

Ariely notes a truly bizarre version of The Economist subscription page (from a decade-plus ago) that had three annual subscription options: $59 online-version only, $125 print-version only, or $125 online and print.

Curious about the results of this two real choice, one bogus choice menu, Ariely tested the subscription form on his students at MIT.

When this menu of three options was given to them, most went for the online+print combo deal. Nobody wanted the middle option (smart students!).

However, when Ariely changed the form to only two options—online or print subscription—the most popular option became the least popular and vice versa. People chose online because it was cheaper, by a ratio of about ⅔.

The useless ‘print only’ option was useless insofar that nobody wanted it, but it was useful in that it showed people what they wanted instead.  

In a similar (and stinging) fashion, Ariely quips that you if you’re trying to get someone’s number at the bar, you’d be best served by going with someone who looks like a slightly uglier version of yourself.

Turns out people really do love comparison shopping.

Other times, decisions are so hard to make that we default to whatever the path of least resistance is.

Ariely gives the example of organ donation rates.

He notes the enormously varied organ donation across different countries. Some countries, like Austria and France, manage impressive 90%+ donation rates; others like the United Kingdom and Germany hovered in the minuscule 10-20% range.

Why such discrepancies between countries? Is it cultural difference in action?

Nope. Turns out the form at the DMV in the countries with high donation rates says ‘check here if you don’t want to donate organs.’ Countries with low donation rates have a form at the DMV that says ‘check here if you want to donate organs.’

When you’ve set something as the default, it has a huge impact on what people end up doing in general.

Experts get hung up on this ‘path of least resistance’ phenomenon too. Ariely notes one example: doctors who have already referred a patient out for a procedure, then realize they forgot to try one last, less invasive remedy. Many are unlikely to recall the patient and try the last remedy.

The train has already left the station, so to speak, making it tough to put on the brakes.

The point of all these mind melting examples, Ariely notes, is that we really don’t know our preferences that well after all, which means we’re susceptible to influences from external sources.

Anchor pricing and the fallacy of supply and demand

Humans are susceptible to visual illusions, despite the fact the majority of us have a lot of experience using our vision all day, every day.

But the cognitive illusion is a much greater problem, Ariely says. We also don’t have a good way of easily verifying our action as being a mistake. Cognitive illusions can subsequently persist over for a long, long time.

When it comes to financial decision making, we’re even worse off. We don’t have evolutionary thinking and we don’t do it nearly as often as other tasks. Our intuition fools us in a repeatable, consistent way.

Consequently, market economics prey on our insecurities and unrecognized blind spots.

One obvious way is the placebo effect, manifested in pricing. The more expensive something is, the more we expect it to fulfill our desire.

This behavioral foible explains why so many people go into a buying frenzy as a stock is skyrocketing in value, but largely ignore it when it’s flatlining or going through a downturn—those moments when one stands to gain the greatest return.

Anchor pricing, similarly, has a strong impact on our perception of costs. When we fix a price in our mind or see an initial price for an item, that price sticks in our brains and dictates what we’re prepared to pay afterwards.

When something is ‘free,’ on the other hand, those rules are thrown out the window.

The item in question is not governed by normal standards of value consideration.

We’re often willing to stand in line for hours or tolerate any number of indignities to get something cost-free. Ironically, in the process, we’re often using up non-monetary resources like time, emotions, and attention.

Other times, market mores act on us in tandem with social mores. Ariely also uses the social phenomenon of the ‘friendly favor’ to illustrate this division and what it means for value consideration.

If our true blue, dyed in the wool friend asks us to help them change a tire, we are generally inclined to do it, because it’s the ‘nice’ thing to do and we like them.

However, if they ask us to help them in exchange for a pitiful sum of money, we’re likely going to get kind of pissed off. We’ll think the wad of crumpled bills they offer is a negative reflection on their personality—their pinch-penny Scrooge-ness.

If they were, on the other hand, willing to offer us a reasonable or generous amount of money for performing the service, we’d probably gladly do it.

Why?

Ariely suggests our reaction to the first scenario is based on social norms (we want to be a good friend), while the mention of money in the second and third scenarios invokes the logic of market norms.

Consequently, our brains switch from social justice to the “selfish and unfair” reptile brain of economics.

What this example illustrates is that social norms are powerful. As a result, they can be a cheap, powerful motivator, building trust and confidence.

Ariely suggests “life with fewer market norms and more social norms would be more satisfying, creative, fulfilling and fun.”

The effects of expectation, ownership, and ‘putting in work’

As we gain materially in life—getting a bigger, better apartment, a new TV, or a new car—we’ve upped the ante of expectation. If we have to downsize in some way, shape, or form, we’ll perceive it as a loss.

The burden of expectation impacts our life decisions in a profound way. Ariely’s research indicates that knowledge after an experience does not have an impact on our sensory perception, but knowledge beforehand does.

Expectation informs our motivation as well.

As Ariely explains at his TEDxMidwest talk, people’s motivations are not linearly directed towards maximizing leisure and minimizing work.

For example, some people think that self-preservation threatening hobbies like mountaineering are a good idea. A significant number bear cold, challenging circumstances to get to the top of a big pile of rocks. Then, rather than come to their senses after struggling through the experience once, people who start doing this often do it over and over again.

People do seemingly ill-advised, irrational things like this because they provide a deep sense of accomplishment.

This sense of accomplishment also manifests in what Ariely calls the ‘Ikea effect’, where you have to put in work to gain use of something. He notes how those who make origami figures value them higher than those who evaluate them as an outsider, or how Betty Crocker cake mixes became more popular than ready-made mixes by forcing people to do just a bit more work.

For Ariely, this is Karl Marx’s principle of the ‘alienation of labor’ in action. In our knowledge economy, we’re once again keen to find the pre-industrial experiences of caring, motivation, and meaning.

We’ve moved on from economist Adam Smith’s principle of the division of labor, where a task is divided piecemeal for efficiency. We want to feel connected to our decisions and our work in a deeper way.

Emotion, self-control, and seeing the forest through the trees

Ariely notes that we often assume other people will see things the way we do. Our mental monologue is projected externally.

As you might expect, this can result in some fairly inaccurate observations.

When it comes to building the physical world, we understand the limitations and build around it. We know we can only lift so much weight, run so far, function on so few hours of sleep. But in the mental world, we don’t often understand how far we can go.

Consequently, Ariely suggests, it’s very difficult for us to look “from on emotional state to another.” When we’re in a state of anger, grief, frustration, or arousal, our decision-making process is impacted and we do things we normally wouldn’t.

It’s important for us to consider what our decision will mean outside of our immediate situation, weeks and years down the line on the other side of the experience. That can be tough with big emotions at play, but it’s an essential skill for making the right life decisions.

The fine art of ‘sort of’ conquering irrationality, and the possible big gains

“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.”

Turns out our environment and mental state exercise outsized influences on us, and that the tiny voice inside our heads that we call intuition, honed over days and years of life on earth, is often strangely…irrational.

But thankfully there’s some measure of hope in self-reflection and self-control, according to Ariely. Technological aids like automation and machine learning might help with some of the factors we can control. Meanwhile, a baseline awareness of our limitations can reign in some of the worst excesses of our decision-making.

Indeed, with a little (or a lot) of training, you may just end up being...unpredictably rational!

Ahem, or something like that.

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