Predictable? Irrational? Predictably irrational?

This week I am writing about Dan Ariely's Predictably Irrational. In this issue we will see why is it weird to pay someone for favors, how your expectations dictate your decisions and more.

Mete Icenler

Feb 15, 2024

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Issue number 4. 🎉

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Last time we looked at how people influence us.

This week, we will be looking again into our decision making from another perspective with Predictably Irrational from Dan Ariely.

Dan Ariely, is a renowned professor on behavioral economics and psychology. He has conducted a wide range of research exploring human behavior, decision-making, and irrationality. His work often explores understanding why people make certain choices that may seem irrational or counterintuitive from a traditional economic perspective.

Predictably Irrational is not a new book (even though it pains me to claim a book that was published in 2008 as not new but ok I’ll get over it). Yet, it is still a great source of information because it explores a theme that is timeless. It discovers how our decision-making process often defy logic and how this irrationality is somehow predictable.

As always, I’ll be sharing the subjects that I found the most interesting and are must shares. These topics are;

Why do we make decisions easier when it is relative to something else?
Why is it weird to offer cash for favors?
How do expectations dictate our experience in life?

So, grab a cup of coffee and get ready. We are going for an exploration why our irrationality makes sense. If that sentence even makes sense…

Happy reading

Why do we make decisions easier when it is relative to something else?

Most people don’t know what they want unless they see it in context… …We don’t even know what we want to do with our lives–until we find a relative or a friend who is doing just what we think we should be doing. Everything is relative, that’s the point.

Most of us don’t wake up and say “Ok, I’m going to Paris tomorrow.”

We make every decision relative to something, one way or another. When we look for a new vacuum cleaner, for example, we compare them according to their price, quality or warranty options. When we look for a new job, we compare them with other offers or our current jobs. Even when we want to decide where we should travel, we compare cities, costs, weather or our possible experiences.

But are we affected by the available selection? How important is the context in our decision making process? Let’s check it out.

Internet only: $59
Print only: $125
Internet+Print: $125

Ariely encounters the subscription prices above for Economist magazine online. As you can see, buying print-only does not make sense at all. At here, he claims that print-only is a decoy selection. “The mere existence of this option is to distance you away from your potential selection (internet-only since you encounter this on web) and jump on the next option.” he says.

He then sets an experiment to test this hypothesis. He asks 100 students which one of these options they would select, and out of 100 students, 16 select internet-only, none select print-only and 84 students select internet+print option.

Then he asks another set of 100 students which one of the options (see below) they would select.

Internet only: $59
Internet+Print: $125

Since he took away the option that no one selected, the results should be similar right?

Not at all. When the “decoy” is taken out 68 students select internet-only and only 32 students select internet+print option. That is over 60% decrease for internet+print selection and for this example only almost $3500 loss in potential sales. All that loss (or gain) by only a decoy option.

According to Ariely, the reason why this happens, is because we rarely choose things in absolute terms. Rather we only are able to estimate the value of something by focusing on the relative advantage of one thing over another. So, the existence of decoy option has one goal only; simply to make internet+print option look better.

In fact, brands take advantage of our inability to compare things in absolute terms, more than we notice.

Another method they use is the ladder method. Variety of industries, from technology to automotive use this method. The biggest example that comes to my mind for this method is Apple. Here is how it works.

It starts with their marketing. They always do their marketing through their starting prices. In all the billboards, instagram ads, even through influencers lips the only price we see or hear is their entry level product price. However, that product generally has the worst specs and don’t cover much of the user needs. But it doesn’t have to, because as we learned it isn’t there to be sold. Their existence serves to one purpose only; to make other specs look good.

Even the checkout part of their website is built to take advantage of this behavior.

Let’s look at iPhone as an example. It has a starting price of €799. But when we come to storage selection, we think about our storage needs because our current phone is already full. We add some storage which makes it €899 and notice iPhone Pro is only €999 and it has now USB-C. We think that it makes total sense to get the Pro version since we are paying €899 already. But wait, we again need extra storage; so we are looking at a phone that costs €1099.

And just like that by comparing only two features at a time we have climbed the ladder for €300.

Relativity is (relatively) easy to understand. But there is one aspect of relativity that consistently trips us up. It’s this: we not only tend to compare things with one another but also tend to focus on comparing things that are easily comparable–and avoid comparing things that can not be compared easily.

So what can we do to use this behavior to our advantage?

Now that we are aware of this behavior, we can control our surroundings and the available selection in front of us accordingly. For example, if we are buying a car we can decide on the amount we would like to spend on it before we start looking. Or if we find ourselves making comparisons between us and people in social media, we can control our usage and the people we follow on social media.

We can also use this behavior as a form of motivation. We can start interacting with people we aspire to and create an intrinsic motivation to reach their level.

Why we are happy to help out, but not when we are paid to do them

A few years ago, for instance, the AARP* asked some lawyers if they would offer less expensive services to needy retirees, at something like $30 an hour. The lawyers said no. Then the program manager from AARP had a brilliant idea; he asked the lawyers if they would offer free services to needy retirees. Overwhelmingly, the lawyers said yes.
*AARP: American Association of Retired Persons

Ariely states that we live in two different worlds, one is ruled by social norms and one is ruled by market norms.

In social world, there are social requests from friends and family. It is all warm, fuzzy and people are happy to help each other. The favors are made and reciprocity is not immediate; sometimes even not necessary. In market world, however, everything is individualistic, strict and defined. Contracts are made and followed through. And if they are not followed through, you can be sure that there will be consequences.

We live in both of these worlds simultaneously and there is nothing wrong with either of them. We act according to the norms of each world’s requirements and we have certain expectations from our interactions of each world. According to Ariely, the problem arises when we collide these two worlds. And since we encounter a lot of requests from both of these worlds every day, these collisions can happen quite frequently.

Think about the last time you did a friend a favor. Let’s say you helped them carry their new couch, how would you feel if your friend offered you 10€ and said thank you for the effort. Totally inappropriate. But if they bought a pizza, that would be alright. Even though the pizza would probably cost your friend 10€.

Why is that so? What is the difference between a payment and a gift? Does the size of the gift even matter? What happens to our relationships if we cross the line from each side?

In this chapter of the book, Ariely writes about many experiments and research that answer these questions. Here they are;

People work harder for social norms. And they are willing to work for free or for a reasonable wage but not for a small wage
To assess this, Ariely and James Heyman made an experiment where they asked some people to perform a really boring task. They asked the participants to drag circles into a square in a computer.
Some participants were paid 50 cents, some 5 dollars and some were just asked to do this as a favor.
What they found out is, people who earned 5 dollars dragged more circles (159) compared to the 50 cents group (101). But more importantly, the people who were asked to do this as a favor worked the most. They dragged 168 circles.
Gifts are useful to socially motivate people, even small ones. But if you mention the price of the gift, people think of them as payment and act accordingly.
They performed the same experiment two more times with slight changes. This time they gave participants Snickers bars or Godiva chocolate for their effort.
The people who got either of the gifts worked as if they did them as a favor. Snickers bars group dragged 162 circles and Godiva chocolate group dragged 169 circles.
The interesting part comes when they labeled these gifts as 50-cent-Snickers-bar and 5-dollars-Godiva-chocolate. Participants who got 50-cent-Snickers-bar moved as less as the ones who were paid 50 cents. Which means the moment price was mentioned they got into market norm mentality rather than social norm mentality for the same product.
When social norm collides with a market norm, social norm go away for a long time. In other words, social relationships are hard to re-establish.
In another experiment, a kindergarten decided to fine parents who pick up their kids late, in order to reduce the number of late pick ups. Before this system change, when parents were late to pick-up the kids, they felt guilty and this guilt prompted them to be early next times. However, once the fine was introduced, parents started to pick the kids up even later, thinking they can pay the price for it. Even more interestingly, when kindergarten realised this and removed the fine, parents came even later. They thought, they didn’t even have to pay for being late. Even though the kindergarten returned back to social norms, parents did not.

Another place where we often have problems with social and market norms is so called “family-like-companies.”

These companies spend thousands even millions to construct social relationships with their employees/customers. And for a legitimate reason. According to the book, social exchanges make employees or customers loyal, passionate, flexible and concerned.

It’s remarkable how much work companies (particularly start-ups) can get out of people when social norms (such as building something together) are stronger than market norms (such as salaries stepping up with each promotion).
Money as it turns out, is very often the most expensive way to motivate people. Social norms are only cheaper, but often more effective as well.

However, he also criticises these companies of not understanding these social norms at all.

As you read above, any relationship type is ok, but colliding these two worlds creates problems. If these companies want to interact with us socially, they have to understand the long term commitment and fragile nature of this exchange.

If employees are sacrificing their personal time, they must get something similar in return; like support when they are sick, a chance to hold on to their jobs when the market threatens to take their jobs away.

Ariely explains this collision with the following example.

Let’s say someone, whose relationship with their bank is quite social, has a check that bounced. However, when the customer gets an automatic late fee instead of a friendly call from the manager, it is not only a relationship killer; it is a stab in the back. Customer will take personal offence and they will spend hours complaining to their friends about this awful bank.

No matter how many tokens of friendship bank provides, one violation of social exchange means that customer is back on market norms.

It can happen that quickly.

Why does the mind get what it expects?

The moral, as you might expect, is that if you tell people up front that something might be distasteful, the odds are good that they will end up agreeing with you–not because their experience tells them so but because of their expectations.

If we believe beforehand something will be good or bad, will we experience it according to our expectations?

That is THE question of this chapter. If we are influenced by our expectations, how deep do these influences go? Can they alter your physiologic experiences; for example, if you expect something to taste good or bad will it taste like that? In this chapter Ariely delves into these questions and answers them with experiments.

In order to answer this question, they created a preference test using Budweiser and a beer they called MIT Beer (Budweiser with 2 drops of balsamic vinegar per ounce) in an MIT pub. They also created two scenarios that differs slightly for two groups of random people. The scenarios go like this:

They approach some people in the pub and asked if they would like to try some free samples which were labeled as A and B.

Participants in Group 1 are given these samples and after they try them, they are asked “Which one would you like a large glass of?”
Participants in Group 2 are informed about what samples consist of before they try them. Then again, they are asked “Which one would you like a large glass of?”

As it turns out, most of the people from Group 1, who had no idea what they were drinking, selected the MIT Beer. However, most people from Group 2, who knew that they were drinking beer with vinegar, selected the regular beer.

According to Ariely, people in Group 2 were victims of their expectations. They expected MIT Beer to be bad and that is the reason why it was bad for them. Whereas participants of Group 1 just tasted two different beers and selected what tasted good for them.

At this point, Ariely asks another question. “Would it matter if knowledge comes before or after the experience?” After all Group 1 did not know the ingredients of the beer they tasted.

To assess this, they set another experience made a Group 3 try the samples blind, just like Group 1 and informed Group 4 beforehand just like Group 2.

However, this time after tasting, instead of asking them “Which one would you like a large glass of?”, they informed participants how to recreate MIT Beer and provided them a dropper and some balsamic vinegar.

Then they waited and observed.

The saw, the number of participants who tried vinegar in Group 3 were 2 times higher than Group 4. Which means after their taste was established, their expectations were late to affect the sensory perceptions.

It is just amazing how only our expectations can affect our experiences.

Our expectations are not limited to food of course. We can increase our enjoyment of a movie, book, a brand (virtually anything) if we learn that it has great reviews. In fact, in the book Ariely talks about another amazing experiment involving the Pepsi Challenge and an fMRI machine:

A group of neuroscientists* decide to conduct a blind taste test between Pepsi and Coca-Cola while viewing participants’ brains. They set the experiment up in a way that test group, taste the drink without knowing which brand they consume and the control group taste them knowing which drink is what.

The key finding of this experiment, is not to know whether Pepsi is tastier than Coca-Cola. Rather they what they found out in the participants’ brains.

Apparently, when a person tastes Coke or Pepsi, the center of the brain associated with strong feelings of emotional connection is stimulated. This was an expected result and apparently same would happen with any sugary drink. However, when participants knew which brand they were getting, the frontal area of the brain, an area involved in brain functions like working memory, associations and higher-order cognitions and ideas, were also activated. It happened with both Coke and Pepsi, but more frequently with Coke.

What this means is, brain responds similarly to any sugary drink, but Coke has an advantage in branding part. Their brand only activated the higher-order brain mechanisms rather than its recipe.

I think this is a great example why marketing is so important to distinguish your brand from your competitors.

Overall, as we can see that we are bound to our expectations and perceptions but, this doesn’t have to be a bad thing. I believe with the following quote Ariely sums this part perfectly.

When stripping away our preconceptions and our previous knowledge is not possible, perhaps we can at least acknowledge that we are all biased. If we acknowledge that we are trapped within our perspective, which partially blinds us to the truth, we may be able to accept the idea that conflicts generally require a neutral third party-who has not been tainted with our expectations—to set down the rules and regulations. Of course, accepting the word of a third party is not easy and not always possible; but when it is possible, it can yield substantial benefits. And for that reason alone, we must continue to try.

* Names of neuroscientists from fMRI experiment: Sam McClure, Jian Li, Damon Tomlin, Kim Cypert, Latané Montague and Read Montague

To sum up…

It was yet another great book that I feel, I only scratched the surface of. I definitely enjoyed reading this book and writing about it. Even though, sometimes it was challenging to shorten some of the ideas. I would definitely recommend you to read the book. It has great lessons and it is an easy read.

As always if you know any books in these subjects feel free to recommend them to me. You can write them as a comment if you like.