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Ariely, Dan. Predictably Irrational: The Hidden Forces that Shape Our Decisions

Posted on January 1, 2010

Customer Product Choice Drivers

Social Proof

You’re walking past a restaurant, and you see two people standing in line, waiting to get in. “This must be a good restaurant,” you think to yourself. “People are standing in line.” So you stand behind these people. Another person walks by. He sees three people standing in line and thinks, “This must be fantastic restaurant,” and joins the line. Others join. We call this type of behavior herding. It happens when we assume that something is good (or bad) on the basis of other people’s previous behavior, and our own actions follow suit. 

(Ariely, 2010, Chapter 2)

Reputation versus Utility

… people are sometimes willing to sacrifice the pleasure they get from a particular consumption experience in order to project a certain image to others.

(Ariely, 2010, Chapter 13)

When people order food and drinks, they seem to have two goals: to order what they will enjoy most and to portray themselves in a positive light in the eyes of their friends.

(Ariely, 2010, Chapter 13)

In essence, people, particularly those with a high need for uniqueness, may sacrifice personal utility in order to gain reputational utility.

(Ariely, 2010, Chapter 13)

… we are all far less rational in our decision making than standard economic theory assumes. Our irrational behaviors are neither random nor senseless—they are systematic and predictable. We all make the same types of mistakes over and over, because of the basic wiring of our brains.

(Ariely, 2010, Chapter 13)

Wouldn’t economics make a lot more sense if it were based on how people actually behave, instead of how they should behave?

(Ariely, 2010, Chapter 13)

Consumer Loyalty

Social Norms versus Market Norms

A similar lesson was learned by Nachum Sicherman, an economics professor at Columbia, who was taking martial arts lessons in Japan. The sensei (the master teacher) was not charging the group for the training. The students, feeling that this was unfair, approached the master one day and suggested that they pay him for his time and effort. Setting down his bamboo shinai, the master calmly replied that if he charged them, they would not be able to afford him.

(Ariely, 2010, Chapter 4)

People are willing to work free, and they are willing to work for a reasonable wage; but offer them just a small payment and they will walk away.

(Ariely, 2010, Chapter 4)

… for market norms to emerge, it is sufficient to mention money (even when no money changes hands).

(Ariely, 2010, Chapter 4)

Just thinking about money makes us behave as most economists believe we behave—and less like the social animals we are in our daily lives.

(Ariely, 2010, Chapter 4)

… so we live in two worlds: one characterized by social exchanges and the other characterized by market exchanges.

(Ariely, 2010, Chapter 4)

…when a social norm collides with a market norm, the social norm goes away for a long time. In other words, social relationships are not easy to reestablish. Once the bloom is off the rose—once a social norm is trumped by a market norm—it will rarely return.

(Ariely, 2010, Chapter 4)

The delicate balance between social and market norms is also evident in the business world. In the last few decades companies have tried to market themselves as social companions—that is, they’d like us to think that they and we are family, or at least are friends who live on the same cul-de-sac. “Like a good neighbor, State Farm is there” is one familiar slogan. Another is Home Depot’s gentle urging: “You can do it. We can help.” Whoever started the movement to treat customers socially had a great idea. If customers and a company are family, then the company gets several benefits. Loyalty is paramount. Minor infractions—screwing up your bill and even imposing a modest hike in your insurance rates—are accommodated. Relationships of course have ups and downs, but overall they’re a pretty good thing.

(Ariely, 2010, Chapter 4)

if you think you may have to play tough from time to time—charging extra for additional services or rapping knuckles swiftly to keep the consumers in line—you might not want to waste money in the first place on making your company the fuzzy feel-good choice.

(Ariely, 2010, Chapter 4)

If corporations started thinking in terms of social norms, they would realize that these norms build loyalty and—more important—make people want to extend themselves to the degree that corporations need today: to be flexible, concerned, and willing to pitch in. That’s what a social relationship delivers.

(Ariely, 2010, Chapter 4)

Money, as it turns out, is very often the most expensive way to motivate people.

(Ariely, 2010, Chapter 4)

Social norms are not only cheaper, but often more effective as well.

(Ariely, 2010, Chapter 4)

Burning Man has many extraordinary aspects, but for me one of the most remarkable is its rejection of market norms. Money is not accepted at Burning Man. Rather, the whole place works as a gift exchange economy—you give things to other people, with the understanding that they will give something back to you (or to someone else) at some point in the future.

(Ariely, 2010, Chapter 4)

Customer Impaired Decision Making

Leaving Doors Open

In 1941 the philosopher Erich Fromm wrote a book called Escape from Freedom. In a modern democracy, he said, people are beset not by a lack of opportunity, but by a dizzying abundance of it. In our modern society this is emphatically so. We are continually reminded that we can do anything and be anything we want to be. The problem is in living up to this dream. We must develop ourselves in every way possible; must taste every aspect of life; must make sure that of the 1,000 things to see before dying, we have not stopped at number 999. But then comes a problem—are we spreading ourselves too thin?

(Ariely, 2010, Chapter 8)

We have an irrational compulsion to keep doors open. It’s just the way we’re wired. But that doesn’t mean we shouldn’t try to close them.

(Ariely, 2010, Chapter 8)

We need to drop out of committees that are a waste of our time and stop sending holiday cards to people who have moved on to other lives and friends.

(Ariely, 2010, Chapter 8)

In fact, choosing between two things that are similarly attractive is one of the most difficult decisions we can make. This is a situation not just of keeping options open for too long, but of being indecisive to the point of paying for our indecision in the end.

(Ariely, 2010, Chapter 8)

….a hungry donkey approaches a barn one day looking for hay and discovers two haystacks of identical size at the two opposite sides of the barn. The donkey stands in the middle of the barn between the two haystacks, not knowing which to select. Hours go by, but he still can’t make up his mind. Unable to decide, the donkey eventually dies of starvation.

(Ariely, 2010, Chapter 8)

Case Study: Chinese Commander

In 210 BC, a Chinese commander named Xiang Yu led his troops across the Yangtze River to attack the army of the Qin (Ch’in) dynasty. Pausing on the banks of the river for the night, his troops awakened in the morning to find, to their horror, that their ships were burning. They hurried to their feet to fight off their attackers, but soon discovered that it was Xiang Yu himself who had set their ships on fire, and that he had also ordered all the cooking pots crushed.

Xiang Yu explained to his troops that without the pots and the ships, they had no other choice but to fight their way to victory or perish. That did not earn Xiang Yu a place on the Chinese army’s list of favorite commanders, but it did have a tremendous focusing effect on his troops: grabbing their lances and bows, they charged ferociously against the enemy and won nine consecutive battles, completely obliterating the main-force units of the Qin dynasty. Xiang Yu’s story is remarkable because it is completely antithetical to normal human behavior.

(Ariely, 2010, Chapter 8)

Product Marketing

Expectations Influence on Perception

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.

(Ariely, 2010, Chapter 9)

… don’t underestimate the power of presentation. There’s a reason that learning to present food artfully on the plate is as important in culinary school as learning to grill and fry.

(Ariely, 2010, Chapter 9)

Endowment Effect

There’s an old saying, “One man’s ceiling is another man’s floor.” Well, when you’re the owner, you’re at the ceiling; and when you’re the buyer, you’re at the floor.

(Ariely, 2010, Chapter 7)

….we focus on what we may lose, rather than what we may gain.

(Ariely, 2010, Chapter 7)

Another example of the same hook [around the endowment effect] is the “30-day money-back guarantee.” If we are not sure whether or not we should get a new sofa, the guarantee of being able to change our mind later may push us over the hump so that we end up getting it. We fail to appreciate how our perspective will shift once we have it at home, and how we will start viewing the sofa—as ours—and consequently start viewing returning it as a loss.

(Ariely, 2010, Chapter 7)

Pricing & Value Proposition

Influence of Price in Placebo Effect

Before recent times, almost all medicines were placebos. Eye of the toad, wing of the bat, dried fox lungs, mercury, mineral water, cocaine, an electric current: these were all touted as suitable cures for various ailments.

(Ariely, 2010, Chapter 10)

[on an experiment] … at $2.50 almost all our participants experienced pain relief from the pill. But when the price was dropped to 10 cents, only half of them did.

(Ariely, 2010, Chapter 10)

When it comes to medicines … you get what you pay for. Price can change the experience [in reference to the placebo effect of expensive medicine].

(Ariely, 2010, Chapter 10)

Price does make a difference, and in this case the difference was a gap of about 28 percent in performance on the word puzzles. [in reference to an expensive placebo medicine that supposedly increases cognitive ability]

(Ariely, 2010, Chapter 10)

When people think about a placebo such as the royal touch, they usually dismiss it as “just psychology.” But, there is nothing “just” about the power of a placebo, and in reality it represents the amazing way our mind controls our body. How the mind achieves these amazing outcomes is not always very clear. Some of the effect, to be sure, has to do with reducing the level of stress, changing hormonal secretions, changing the immune system, etc. The more we understand the connection between brain and body, the more things that once seemed clear-cut become ambiguous. Nowhere is this as apparent as with the placebo.

(Ariely, 2010, Chapter 10)

Cash vs Psuedo-Cash Devices

We need to recognize that once cash is a step away, we will cheat by a factor bigger than we could ever imagine. We need to wake up to this—individually and as a nation, and do it soon.

(Ariely, 2010, Chapter 12)

The power of Free and Zero Pricing

It’s no secret that getting something free feels very good. Zero is not just another price, it turns out. Zero is an emotional hot button—a source of irrational excitement.

(Ariely, 2010, Chapter 3)

The critical issue arises when FREE! becomes a struggle between a free item and another item—a struggle in which the presence of FREE! leads us to make a bad decision.

(Ariely, 2010, Chapter 3)

Most transactions have an upside and a downside, but when something is FREE! we forget the downside, FREE! gives us such an emotional charge that we perceive what is being offered as immensely more valuable than it really is. Why? I think it’s because humans are intrinsically afraid of loss. The real allure of FREE! is tied to this fear.

(Ariely, 2010, Chapter 3)

in the land of pricing, zero is not just another price. Sure, 10 cents can make a huge difference in demand (suppose you were selling millions of barrels of oil), but nothing beats the emotional surge of FREE! This, the zero price effect, is in a category all its own.

(Ariely, 2010, Chapter 3)

OK. Here’s a quiz. Suppose I offered you a choice between a free $10 Amazon gift certificate and a $20 gift certificate for seven dollars. Think quickly. Which would you take?

(Ariely, 2010, Chapter 3)

Time spent on one activity, after all, is time taken away from another. So if we spend 45 minutes in a line waiting for our turn to get a FREE! taste of ice cream, or if we spend half an hour filling out a long form for a tiny rebate, there is something else that we are not doing with our time.

(Ariely, 2010, Chapter 3)

Suppose you are at a bar, enjoying a conversation with some friends. With one brand you get a calorie-free beer, and with another you get a three-calorie beer. Which brand will make you feel that you are drinking a really light beer? Even though the difference between the two beers is negligible, the zero-calorie beer will increase the feeling that you’re doing the right thing, healthwise. You might even feel so good that you go ahead and order a plate of fries.

(Ariely, 2010, Chapter 3)

Zero is not just another discount. Zero is a different place. The difference between two cents and one cent is small. But the difference between one cent and zero is huge!

(Ariely, 2010, Chapter 3)

If you are in business, and understand that, you can do some marvelous things. Want to draw a crowd? Make something FREE! Want to sell more products? Make part of the purchase FREE!

(Ariely, 2010, Chapter 3)

Case Study: Amazon

A few years ago, Amazon.com started offering free shipping of orders over a certain amount. Someone who purchased a single book for $16.95 might pay an additional $3.95 for shipping, for instance. But if the customer bought another book, for a total of $31.90, they would get their shipping FREE! Some of the purchasers probably didn’t want the second book (and I am talking here from personal experience) but the FREE! shipping was so tempting that to get it, they were willing to pay the cost of the extra book. The people at Amazon were very happy with this offer, but they noticed that in one place—France—there was no increase in sales. Is the French consumer more rational than the rest of us? Unlikely. Rather, it turned out, the French customers were reacting to a different deal.

Here’s what happened. Instead of offering FREE! shipping on orders over a certain amount, the French division priced the shipping for those orders at one franc. Just one franc—about 20 cents. This doesn’t seem very different from FREE! but it was. In fact, when Amazon changed the promotion in France to include free shipping, France joined all the other countries in a dramatic sales increase. In other words, whereas shipping for one franc—a real bargain—was virtually ignored by the French, FREE! shipping caused an enthusiastic response.

(Ariely, 2010, Chapter 3)

Price Anchoring

What consumers are willing to pay can easily be manipulated, and this means that consumers don’t in fact have a good handle on their own preferences and the prices they are willing to pay for different goods and experiences. Second, whereas the standard economic framework assumes that the forces of supply and demand are independent, the type of anchoring manipulations we have shown here suggest that they are, in fact, dependent. In the real world, anchoring comes from manufacturer’s suggested retail prices (MSRPs), advertised prices, promotions, product introductions, etc.—all of which are supply-side variables.

(Ariely, 2010, Chapter 2)

… market prices themselves that influence consumers’ willingness to pay. What this means is that demand is not, in fact, a completely separate force from supply.

(Ariely, 2010, Chapter 2)

In other words, the sensitivity we show to price changes might in fact be largely a result of our memory for the prices we have paid in the past and our desire for coherence with our past decisions—not at all a reflection of our true preferences or our level of demand.

(Ariely, 2010, Chapter 2)

The price the highest bidder paid for an item was based not on his own bid, but on that of the second highest bidder. This is called a second price auction.

Relativity

Humans rarely choose things in absolute terms. We don’t have an internal value meter that tells us how much things are worth. Rather, we focus on the relative advantage of one thing over another, and estimate value accordingly.

(Ariely, 2010, Chapter 1)

Most people don’t know what they want unless they see it in context.

(Ariely, 2010, Chapter 1)

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, and that’s the point. Like an airplane pilot landing in the dark, we want runway lights on either side of us, guiding us to the place where we can touch down our wheels.

(Ariely, 2010, Chapter 1)

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 cannot be compared easily.

(Ariely, 2010, Chapter 1)

That’s a lesson we can all learn: the more we have, the more we want. And the only cure is to break the cycle of relativity.

(Ariely, 2010, Chapter 1)

Case Studies

Ford

Several years ago, Ford Motor Company struggled to find the best way to get car owners back into the dealerships for routine automobile maintenance. The problem was that the standard Ford automobile had something like 18,000 parts that might need servicing, and unfortunately they didn’t all need servicing at the same time (one Ford engineer determined that a particular axle bolt needed inspection every 3,602 miles). And this was just part of the problem: since Ford had more than 20 vehicle types, plus various model years, the servicing of them all was nearly impossible to ponder.

All that consumers, as well as service advisers, could do was page through volumes of thick manuals in order to determine what services were needed. But Ford began to notice something over at the Honda dealerships. Even though the 18,000 or so parts in Honda cars had the same ideal maintenance schedules as the Ford cars, Honda had lumped them all into three “engineering intervals” (for instance, every six months or 5,000 miles, every year or 10,000 miles, and every two years or 25,000 miles). This list was displayed on the wall of the reception room in the service department. All the hundreds of service activities were boiled down to simple, mileage-based service events that were common across all vehicles and model years. The board had every maintenance service activity bundled, sequenced, and priced.

Anyone could see when service was due and how much it would cost. But the bundle board was more than convenient information: It was a true procrastination-buster, as it instructed customers to get their service done at specific times and mileages. It guided them along. And it was so simple that any customer could understand it. Customers were no longer confused. They no longer procrastinated. Servicing their Hondas on time was easy. Some people at Ford thought this was a great idea, but at first the Ford engineers fought it. They had to be convinced that, yes, drivers could go 9,000 miles without an oil change—but that 5,000 miles would align the oil change with everything else that needed to be done. They had to be convinced that a Mustang and a F-250 Super Duty truck, despite their technological differences, could be put on the same maintenance schedule. They had to be convinced that rebundling their 18,000 maintenance options into three easily scheduled service events—making maintenance as easy as ordering a Value Meal at McDonald’s—was not bad engineering, but good customer service (not to mention good business).

The winning argument, in fact, was that it is better to have consumers service their vehicles at somewhat compromised intervals than not to service them at all! In the end, it happened: Ford joined Honda in bundling its services. Procrastination stopped. Ford’s service bay, which had been 40 percent vacant, filled up. The dealers made money, and in just three years Ford matched Honda’s success in the service bay.

(Ariely, 2010, Chapter 6)

BibTeX

@book{ariely2010,
title={{Predictably Irrational, Revised and Expanded Edition: The Hidden Forces That Shape Our Decisions}},
author={Ariely, D.},
isbn={9780061353246},
lccn={2008273863},
series={Business \\& economics},
year={2010},
publisher={HarperCollins}
}

Ariely, D., 2010. Predictably Irrational, Revised and Expanded Edition: The Hidden Forces That Shape Our Decisions, Business & economics. HarperCollins.