Predictably Irrational | Dan Ariely
A friend of mine in his 50s tells me that, being used to the low prices of Bata shoes when he was in his 20s, he finds it difficult to fork out a couple of thousand rupees for those shoes today. So, when he wants to buy shoes, he invariably spends some time looking at expensive shoes in the more upmarket stores. After that, he happily goes to the Bata shop and buys that Rs2,000 pair, without any qualms of conscience.
A behavioural economist could draw quite a few conclusions from that little story. It illustrates the importance of first impressions—my friend has difficulty buying shoes today because he compares the price with what he used to pay when he first started buying shoes. People also compare relative prices. Once my friend goes to the expensive store and looks at the price tags of shoes there, the Rs2,000 Bata pair becomes reasonably priced. The third lesson is that people are irrational. Proportionate to his income, shoes may actually cost far less today for my friend, but he still thinks they are expensive.
Most successful ad campaigns play on the irrational nature of human beings (Photo by: Rajeev Dabral / Mint)
There are plenty of similar stories in Dan Ariely’s book Predictably Irrational, in which the professor of behavioural economics at the Massachusetts Institute of Technology’s Media Laboratory explains his subject to the lay reader. Unlike mainstream economics’ assumption that we all behave like Homo Economicus, a mythical super-rational individual whose aim, at all times, is to maximize his self-interest, behavioural economics studies how men and women actually make decisions. Its conclusion: We are woefully irrational, taken in by the tricks our minds play on us.
For example, Ariely mentions an experiment in which he asked a group of marketing students to list, on a sheet of paper, the prices they would pay for four products, after writing down the last two digits of their social security number on the top of their sheets. He found that students with the highest-ending social security digits (from 80 to 99) consistently bid the highest for the items and those with the lowest-ending digits (1-20) bid the lowest.
How does he account for this intriguing result? Ariely says the social security numbers served as “anchors” for the participants in this particular experiment. There could be other anchors, such as the maximum retail price printed on a product—the point is that once the mind settles on an anchor, it influences what you pay. In other words, rather than being rational consumers weighing up exactly how much a product is worth, what we are willing to pay is often arbitrarily determined. Ariely also ex plains how social norms are very different from market norms. One example is the faux pas you would cause if, after a hearty dinner at your mother-in-law’s house, you offered your hosts money to convey your appreciation. While offerin g money causes offence, a bottle of wine as a gift is more than welcome.
When the American Association of Retired Persons asked lawyers if they would consider offering their services at a discounted rate to needy retirees, they said “No”. But, when asked if they would provide free services to the retirees, the answer was “Yes”. When money was mentioned, the lawyers used market norms to respond to the request but, when no money was mentioned, they used social norms instead.
People are often influenced by expectations. In an experiment asking Asian women to take a math exam, women in one group were asked questions related to their race. These did very well in the exam, because they internalized the stereotype that Asians are bright students. Another group of women was asked questions related to their gender. They didn’t fare well because women are stereotyped as being less proficient in math. Another experiment showed that people were unlikely to cheat after being asked to write down the Ten Commandments.
The book is full of such anecdotes, and the reader could be surprised at how far we deviate from our rational ideal. Descartes’ “Cogito, ergo sum” seems completely off the mark. Of course, many of us have instinctively known it all along: Marketing and advertising men have always used a variety of techniques to push sales and most of them assume people to be completely irrational.
Ariely’s book is an amusing and enthralling read, but there are no grounds for believing, as he does, that it will “help improve your decision-making”. Being irrational sometimes is the same thing as being human.
Manas Chakravarty writes the weekly column, Capital Account, in Mint on Saturday.