Predictably Irrational

by Dan Ariely, 2008

• Relativity: People are bad at determining the absolute value of a thing.
• Decoy Effect: We're much better at comparing similar things, and we can get thrown off by this. Suppose someone offers a choice between two very different things, A and B, and people tend to choose either one with equal probability. If the presenter then introduces a third thing, A-, that is very similar to but inferior to A, people will overwhelmingly choose A over B (and never A-).
• Relative Happiness: Our happiness about our current possessions, status, etc, tends to be determined by comparing ours to that of the people around us. Sometimes happiness can be increased significantly by moving to a more humble neighborhood, workplace, or social circle.
• Imprinting: Our estimate of something's value is determined by when we first think seriously about buying that thing. So if I bought a computer in 1998 for $4000, I will happily buy a computer in 2008 for $2000. Starbucks succeeded in charging a lot more for coffee by radically altering the product and its presentation so that people could form a new imprint. Now they are buying gourmet coffee and ambiance instead of just coffee.
• Self-Herding: Just as people are much more likely to do something that they see other people doing, they are also much more likely to repeat something that they have done before.
• Zero-Cost: People are disproportionately motivated by FREE! Watch out for this.
• Social vs Market Norms: Relationships are characterized by social norms or market norms. Under social norms, people do favors for each other and focus on building long-term human relationships. Any exchange of money is strongly de-emphasized. Under market norms, people demand equal exchange and tend to be individualistic and isolated. Once a social relationship is marred by market norms, it has a hard time moving back to social norms.
• Reptilian Brain: We have multiple personalities that don't really understand each other. When influenced by fear, lust, anger, alcohol, hunger, pain or other aspects of the reptilian brain, we behave in ways that our rational self doesn't understand and can't even predict. We need to be conscious of this and plan ahead for these states. Simple strategies: before buying something to which we've become emotionally attached, enforce a cooling off period to rethink the situation. Make condoms available to teenagers. Keep snacks handy to stave off hunger-induced depression.
• Procrastination and Self-Control: We have aspirations to save money, lose weight, exercise, and finish projects in a timely fashion. In the moment, though, we give way to distracting impulses. We need to develop strategies to help us make the right decisions. Enforce savings by siphoning off a fix percent of each paycheck. Set a sensible budget and stick to it. Ask a spouse or fried to help us keep our food and exercise ambitions in focus, or even share them. Set meaningful deadlines for projects and review them regularly.
• Ownership: Once we own something, we tend to overvalue it and fear its loss. This effect increases with the time and effort we put into ownership. We can own opinions and associations as well as things. Attachment leads to suffering.
• Keeping doors open: We like to have lots of options, but this makes it harder to get things done. Better to make a reasonable, but potentially suboptimal, decision and get on with life.
• Expectations: When we expect something to be good or bad, our expectations are magically fulfilled. The placebo effect can be very powerful.
• Honesty: People have a tendency to cheat a little when they are unlikely to be found out. Reminding them of some code of ethics can counteract this tendency.