Book Cover
Predictably Irrational: The Hidden Forces That Shape Our Decisions


★ ★ ★ ★

TL;DR: The human mind sucks. A lot. And it sucks the same way very awesome. Try to get ahead of that suckiness and (just maybe) take advantage of it.

Notes

Ch 0: Introduction

  • The contents of this book should help you re-think what makes people go and which systemic mistakes they make
  • Behavioral economics constrasts standard economic theory. Standard economic theory assumes people behave rationally, which is just not true. So behavioral economics takes their systemic irrational behaviors and attempts to apply them to the market

Ch 1: The Truth about 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 similar thing, and estimate value accordingly (1)
    • Most people don’t know what they want unless they see it in context (3). Example: TV sizes. Hard to compare unless given a range of sizes and prices.
  • 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. (7). Introducing “decoy Brad Pitt” (slightly uglier Brad Pitt) makes real Brad Pitt look much more attractive. People try to find small differences and use those as points of comparison even though they might be meaningless in the grand scheme of things
    • The Economist: when $125 for online subscription and also $125 for online PLUS print subscription, it makes you ignore the print only subscription and just compare those two
  • The more we have, the more we want. And the only cure is to break the cycle of relativity. (20)

Ch 2: The Fallacy of Supply and Demand

  • As Mark Twain once noted about Tom Sawyer, “Tom had discovered a great law of human action, namely, that in order to make a man covet a thing, it is only necessary to make the thing difficult to attain. (26)
  • The basic idea of arbitrary coherence is this: although initial prices are “arbitrary”, once those prices are established in our minds they will shape not only present prices but also future prices (this makes them “coherent”). (27)
    • Example: people think about last two digits of social security number. This anchors them, and is very close to what they subsequently say they would pay for a certain bottle of wine.
  • Our first decisions resonate over a long sequence of decisions. First impressions are important, whether they involve remembering that our first DVD player cost much more than such players cost today (and realizing that, in comparison, the current prices are a steal) or remembering that gas was once a dollar a gallon, which makes every trip to the gas station a painful experience. (38)
  • So you stand behind these people. Another person walks by. He sees three people standing in line and thinks, “This must be a fantastic restaurant,” and joins the line. Others join. We call this type of behavior herding. (38)
  • Break anchoring by creating a totally different, non-comparable experience. E.g. Starbucks did everything it could to distance itself in consumers’ minds from Dunkin’ Donuts.
  • 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. (48)
  • Even knowing all this stuff isn’t enough to keep you safe! In our attempts to make sure that we end up with decisions that seem well-reasoned and thoughtful, we commonly undergo a lot of unnecessary mental gymnastics and justifications, particularly when the choices are large and significant. (52)

Ch 3: The Cost of Zero Cost

  • 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 intrinsivally afraid of loss. The real allure of FREE! is tied to this fear. There’s no visible possibility of loss when we choose a FREE! item (it’s free). But suppose we choose the item that’s not free. Uh-oh, now there’s a risk of having made a poor decision–the possibility of a loss. And so, given the choice, we go for what is free. (60)
  • Examples include people choosing free options that are markedly worse than even 1c or 5c options. E.g. Hershey’s kiss free and truffle 5c. Truffle is economically a much much better deal.
  • Free should be taken advantage of more in business, society, and politics by savvy folks.

Ch 4: The Cost of Social Norms

  • When we keep social norms and market norms on their separate paths, life hums along pretty well. (76)
  • Social norms exist outside of money.
    • When money was mentioned, the lawyers used market norms and found the offer lacking, relative to their market salary. When no money was mentioned they used social norms and were willing to volunteer their time. Why didn’t they just accept the $30, thinking of themselves as volunteers who received $30? Because once market norms enter our considerations, the social norms depart. (78)
    • The conclusion: no one is offended by a small gift, because even small gifts keep us in the social exchange world and away from market norms. (80)
      • Offering people a gift, even a small one, is sufficient to get them to help; but mention what the gift cost you, and you will see the back of them faster than you can say market norms. (81)
  • Must be very very careful around the edges. Decide which side you want to play on and stick with it.
    • 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. (85)
  • Can take advantage of social norms being cheap and effective
    • Money, as it turns out, is very often the most expensive way to motivate people. Social norms are not only cheaper, but often more effective as well. (93)
    • The point is that while gifts are financially inefficient, they are an important social lubricant. They help us make friends and create long-term relationships that can sustain us through the ups and downs of life. Sometimes, it turns out, a waste of money can be worth a lot. (97)
  • When price is not a part of the exchange, we become less selfish maximizers and start caring more about the welfare of others. (109)
    • Experiment: free starburst vs. 1 cent starburst. Free starburst had a 50% decrease in total demand
    • Not mentioning prices ushers in social norms, and with these social norms, we start caring more about others. (112)

Ch 6: The Influence of Arousal

  • Experiment: ask Berkeley students to answer a set of questions like “would you have sex with a married woman?”. Ask first to “imagine they are aroused” and then asked same questions when they are actually aroused.
    • We all systematically underpredict the degree to which arousal completely negates our superego, and the way emotions can take control of our behavior. (129)
    • Honestly, best strategy to avoid making mistakes is to try not to get into these situations in the first place (lol who would do that tho)
    • Applies to all other intense emotions as well (anger, etc.)
  • Obvious issue: completely ignores women. How much should that affect perception of results?

Ch 7: The Problem of Procrastination and Self-Control

  • Procrastination: giving up on long-term goals for immediate gratification
    • Three classes:
      • No deadlines had worst grades
      • “Set your own deadline” had middle grades
      • Strict deadline had best grades
    • But don’t necessarily want to be dictatorial
    • Commitment in advance helps to prevent procrastination and help with self-control
      • Especially if you publicize it
    • Can also combat by simplification, reducing cognitive overhead to perform tasks
      • Ford had 18,000 different parts that need maintenance at different intervals. Honda has same number of parts, but buckets them all into 3 service periods, which is much easier for owners to remember. Honda got way more cars in for service
      • Simplification is one mark of real genius (151)
  • Immediate gratification
    • Variable schedule of reinforcement also works wonders for motivating people. It is the magic that underlies gambling and playing the lottery. How much fun would it be to play a slot machine if you knew in advance that you would always lose nine times before winning once, and that this sequence would continue for as long as you played? It would probably be no fun at all! (159)
  • Self-control and discipline
    • In order to overcome many types of human fallibility, I believe it’s useful to look for tricks that match immediate, powerful, and positive reinforcements with the not-so-pleasant steps we have to take toward our long-term objectivs. For me, beginning a movie–before I felt any side effects–helped me to sustain the unpleasantness of the treatment. (164)

Ch 8: The High Price of Ownership

  • Ownership bias
  • Three irrational quirks
    • We fall in love with that we already have
    • We focus on what we may lose, rather than what we may gain
    • We assume other people will see the tranasaction from the same perspective we do
  • Once we change our possessions we have a very hard time going back down. As I noted earlier, ownership simply changes our perspective. Suddenly, moving backward to our pre-ownership state is a loss, one that we cannot abide. And so, while moving up in life, we indulge ourselves with the fantasy that we can always ratchet ourselves back if need be; but in reality, we can’t. Downgrading to a smaller home, for instance, is experienced as a loss, it is psychologically painful, and we are willing to make all kinds of sacrifices in order to avoid such losses– even if, in this case, the monthly mortgage sinks the ship. (177)
    • Very applicable to you Tiger!

Ch 9: Keeping Doors Open

  • 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 (183)
    • Spoiler alert: they did
  • 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. (194)
    • Experiment: multi-armed bandit experiment with three arms.
    • When all three options were available all the time, students made optimal choices and just spammed the highest-return bandit
    • But when doors had the chance of closing, they impulsively fought to keep doors open even though it’s a suboptimal strategy
  • Deciding between two similar things is super difficult
    • What my friend failed to do when focusing on the similarities and minor differences between two things was to take into account the consequences of not deciding. (195)
    • We don’t take these consequences into account because we just can’t close doors

Ch 10: The Effect of Expectations

  • When we believe beforehand that something will be good, therefore, it generally will be good–and when we think it wil be bad, it will be bad. (204)
    • Example: two opposing teams’ fans are watching the same play, one fan clearly sees a foul, the other clearly sees a clean play
    • We can add small things that sound exotic and fashionable to our cooking. These ingredients might not make the dish any better in a blind taste test; but by changing our expectations, they can effectively influence the taste when we have this pre-knowledge. (208)
    • Coke vs. Pepsi: Pepsi wins in blind taste test, but when people are informed which is which Coke wins because of superior branding and marketing
    • This creates conflicts
      • Conflicts generally require a neutral third party–who has not been tainted with our expectatinos–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. (216)
  • We don’t really understand the role expectations play in the way we experience and evaluate art, literature, drama, architecture, food, wine–anything, really. (220)
    • Famous violinist “sounds better” in a concert hall because that’s what we’re expecting. If they were just bussing on the street we wouldn’t really notice.

Ch 11: The Power of Price

  • Placebo comes from the Latin for “I shall please.” The term was used in the fourteenth century to refer to sham mourners who were hired to wail and sob for the deceased at funerals. (228)
  • In general, two mechanisms shape the expectations that make placebos work. One is belief–our confidence or faith in the drug, the procedure, or the caregiver. Sometimes just the fact that a doctor or nurse is paying attention to us and reassuring us not only makes us feel better but also triggers our internal healing processes. Even a doctor’s enthusiasm for a particular treatment or procedure may predispose us toward a positive outcome. (230)
  • The second mechanism is conditioning. Like Pavlov’s famous dogs, the body builds up expectancy after repeated experiences and releases various chemicals to prepare us for the future. Suppose you’ve ordered pizza night after night. When the deliveryman presses the doorbell, your digestive juices start flowing even before you can smell the pie. Or suppose that you are snuggled up on the couch with your loved one. As you’re sitting there staring into a crackling fire, the prospect of sex releases endorphins, preparing you for what is to come next, and sending your sense of well-being into the stratosphere. (230)
    • Experiment: dummy pain numbing drug “Veladone”. Indeed, that’s what most of our participants found. Almost all of them reported less pain when they experienced the electrical shocks under the influence of Veladone. Very interesting–considering that Veladone was just a capsule of vitamin C. (234)
  • Price also influences the placebo effect. A $2.50/dose every patient felt better. At $0.10/dose only half did.

Ch 12: The Cycle of Distrust

  • The Public Goods Game (e.g. fishing)
    • Example: four people get $10 each. Whatever they put into the pot is doubled and then split evenly; if everyone puts in $10, everyone gets $20 back. But selfish strategy is to not put any money in yourself and just reap the rewards. But if everyone does this everyone loses.
    • When we all cooperate, trust is high and the total value to society is maximal. But distrust is infectious. When we see people defect by lying in their advertisements, proposing scams, etc. we start acting similarly; trust deteriorates, and everybody loses, including the individuals who initially gained from their selfish act. (256)
  • Most people and companies miss or ignore the fact that trust is an important public resource and that losing it can have long-term negative consequences for everyone involved. (256)
  • You slip into bad habits of lying slowly over time
  • The Boy Who Cried Wolf: The second, more important moral–one that we are just beginning to understand–is that trust, once eroded, is very hard to restore. (264)

Ch 13: The Context of Our Character, Part I

  • Annual losses:
    • $525 million from robbery
    • $600 billion from employee theft and fraud
    • $24 billion bogus property insurance losses
    • $350 billion in unpaid taxes
  • Experiment: if given answers, will students cheat on test? Get 10 cents for each correct answer on a test of 50 questions
    • Control (no answer key): 32.6
    • Self-check: 36
    • Self-check + shred originals: 36
    • Self-check + shred originals + take money yourself instead of being given: 36
    • Yes, we cheat. But we do not take risk into account very well
  • We care about honesty and we want to be honest. The problem is that our internal honesty monitory is only active when we contemplate big transgressions, like grabbing an entire box of pens from the conference hall. For the little transgressions, like taking a single pen or two pens, we don’t even consider how these actions would reflect on our honesty and so our superego stays asleep. (276)
  • External controls don’t work…see Congress trying to police things. Always a loophole.
  • Students try to remember 10 Commandments before taking the same test as before: It was not the Commandments themselves that encouraged honesty, but the mere contemplation of a moral benchmark of some kind. (281)
  • So we learned that people cheat when they have a chance to do so, but they don’t cheat as much as they could. Moreover, once they begin thinking about honesty–whether by recalling the Ten Commandments or by signing a simple statement–they stop cheating completely. In other words, when we are removed from any benchmarks of ethical thought, we tend to stray into dishonesty. Buf if we are reminded of morality at the moment we are tempted, then wwe are much more likely to be honest. (286)

Ch 14: The Context of Our Character, Part II

  • Market/social norms again: people think less about stealing when it is indirect
    • When we look at the world around us, much of the dishonesty we see involves cheating that is one step removed from cash. Companies cheat with their accounting practices; executives cheat by using backdated stock options; lobbyists cheat by underwriting parties for politicians; drug companies cheat by sending doctors and their wives off on posh vacations. To be sure, these people don’t cheat with cold cash. And that’s my point: cheating is a lot easier when it’s a step removed from money. (295)
  • Same experiment as Ch 13 with the test that students could cheat on. But now, instead of directly getting cash, they get tokens, which they go to a different table to exchange for cash
    • More than double the amount of cheating
  • This experiment was on MIT students. The scary thought is that if we did the experiments with nonmonetary currencies that were not as immediately convertible into money as tokens, or with individuals who cared less about their honesty, or with behavior that was not so publicly observable, we would most likely have found even higher levels of dishonesty. (303)

Ch 15: Beer and Free Lunches

  • See if order in which people place orders at a restaurant affects their eventual happiness with the food
    • Overall, those who made their choices out loud, in the standard way that food is ordered at restaurants, were not as happy with their selections as those who made their choices privately, without taking others’ opinions into consideration. (309)
      • Except the first person to place the order–he/she was equally as happy as the asynchronous order-placers
  • Standard economics assumes that we are rational–that we know all the pertinent information about our decisions, that we can calculate the value of the different options we face, and that we are cognitively unhindered in weighing the ramifications of each potential choice […] the fact that we make mistakes also means that there are ways to improve our decisions–and therefore that there are opportunities for “free lunches”. (314)