Saturday, July 11, 2009

Predictably Irrational - My Top 10

Just finished a good book, Predictably Irrational by Dan Ariely, a behavioral economists.

The main premise is that most economists make predictions based on how people are expected to behave, instead of how they actually behave and very often people bahave irrationally.

A couple of things I picked up (in order of what I liked best):

  1. Market vs. Social Norms
  2. Most of us live by two sets of norms: one having to do with tough business choices related to money and the other by generous, sharing with those in our social circles. I'm doing a poor job of summarizing here, but this point has helped me understand a lot of the past conflict I've experienced in my life.

  3. Moral Standards
  4. Simply recalling The Ten Commandments makes someone less likely to cheat, even if they can only recall one of the Commandments. This also worked when telling students a test was being administered according to the MIT Honor Code, which doesn't even exist.

  5. The power of money
  6. We rationalize our dishonesty more when it is less associated with money. For example, which makes you feel more guilty: accidentally taking the store clerks pen or taking the equivalent value of the pen in coins out of the tip jar. The theft is equal, yet the guilt isn't. The main point here is the enormous cost to our economy in the cumulative cost of all these little crimes (there are many other examples in the book).

  7. The Influence of Arousal
  8. I know I shouldn't shop when I'm hungry, but the book pushes this idea further. Dan makes the point that the debate over teenage sex shouldn't be whether to teach abstinence or provide condoms. We should teach teenagers to avoid putting themselves in aroused situations, where they are guaranteed to make irrational or compromised choices.

  9. Decoys
  10. Given multiple choices, we find two things that are alike and pick the better one. The irrational part is that we ignore a potentially much better choice or we allow marketers to provide "decoys" making us think our choice is a good one.

  11. Anchors
  12. We get used to paying a certain price, such as $3 for a gallon of gasoline, however a suggestion of a higher or lower price for a new product can "anchor" our minds to what is a reasonable price. The example was how a black pearl, basically worthless was turned into a priceless item.

  13. The High Price of Ownership
  14. We place an unrealistic value on things we own. Another book I read (Logic Of Life) points out that good businessmen, traders, etc. have overcome this weakness.

  15. The Cost of Zero
  16. We are suckers for the word "Free!" and make compromised decisions when faced with "free stuff". (I actually sent the author an email on this point because I think some of his assumptions were faulty).

  17. Closed Doors
  18. We will compromise in our decisions for fear of closing doors of opportunity (you need to read the book to better understand this one)

  19. Procrastination
  20. I'll put more detail here, just not right now ;-)


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