Oftentimes when we think we’re behaving rationally, we really aren’t.For example, paying $2.59 for a cup of coffee doesn’t make sense when there’s cheaper, equally-good coffee across the street.
behavioural economist Dan Ariely explores this side of human nature in his book “Predictably Irrational: The Hidden Forces That Shape Our Decisions
We’ve compiled some of the best theories in his book that explain why we act the way we do.
We are OK with waiting for something when other people are doing the same thing because 'we assume that something is good (or bad) on the basis of other people's previous behaviour, and our own actions follow suit.'
This happens when people peer inside restaurant windows and decide to try the food just because they see other people inside. However, when a restaurant is empty, it'll rarely attract new customers.
Once a price is established in our minds, we will compare other similar items to this 'anchor' price
This explains why pearls and diamonds are so expensive. It's called 'imprinting' and it occurs when our psyche puts a price on something and everything else that we encounter in the future is affected by this price.
'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').'
And 'once the participants were willing to pay a certain price for one product, their willingness to pay for other items in the same product category was judged relative to that first price (the anchor).'
This will explain Starbucks' success. Before the coffee behemoth appeared on every street corner, everyone was used to paying for cheaper coffee.
So how did Starbucks get people to forget about their former anchor prices? By making the experience so vastly different, customers weren't comparing this Starbucks coffee to coffee they've been drinking their entire lives.
'Starbucks did everything in its power to make the experience feel different -- so different that we would not use the prices at Dunkin doughnuts as an anchor, but instead would be open to the new anchor that Starbucks was preparing for us.'
Before you know it, you have 'bumped yourself into another curve of consumption' and you've established a new anchor price from your experience.
We will never be able to predict what we actually would or wouldn't do when we're sexually aroused— even though we think we can
'Our inability to understand ourselves in a different emotional state does not seem to improve with experience; when that happens, when our irrational self comes alive in an emotional place that we think is familiar but in fact, is unfamiliar?'
This is why our decisions are always different depending on the emotional state that we're in, and we can never predict these actions ahead of time.
'People will work more when they have to work for a cause than for cash' and Ariely explains this is because when money is mentioned, people immediately revert back to market norms and they will critique the situation, the offer, how much money is involved and if it's a good deal or worth their time.
However, when no money is involved, people apply social norms to the situation and will work harder.
Furthermore, if money is involved, but the participants deemed the money too little, they will actually work less than normal because they feel as if they're not getting paid enough.
In other words, if you don't have the money to pay someone what they think their time is worth, it's better not to pay them at all.
'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 or irrational excitement.'
This is why people will buy products they don't need just because they get something for free with the transaction.
'Most transactions have an upside and a downside, but when something is FREE! we forget the downside.'
It's fine to get some things for free, but Ariely says that this 'zero price effect' actually causes us to accumulate items we don't need and sometimes, we forgo things we actually need just to get those free items.
'When price is not a part of the exchange, we become less selfish maximizers and start caring more about the welfare of others.'
In other words, when money isn't involved, people were more willing to share and they also think about others' needs more. This is exactly the reason why when you're dining with friends, it's a big deal to consume the last thing on the plate.
'As it turns out, we are caring social animals, but when the rules of the game involve money, this tendency is muted.'
If you asked someone to do something for you, it doesn't matter if you give them an expensive or inexpensive gift, they will still work the same amount for you.
Why? Because 'no one is offended by a small gift, because even small gifts keep us in the social exchange world and away from market norms.'
However, when we mention the value of a gift, those social norms disappear and people will react to the gift like they would react to cash. In this case, they will start judging the gift based on its value.
This is because we feel as if we've already compensated for our bad deeds.
For example, Areily mentions in his book that a daycare centre decided to start fining parents when they arrive late to pick up their kids. However, this involvement of money actually resulted in parents picking up their kids even later than normal because they feel justified since they've paid.
But if they didn't have to pay a fine, parents would feel guilty about their late arrivals and this 'guilt compelled them to be more prompt in picking up their kids in the future.'
The interesting part is that even when the daycare centre removed the fines, the parents' behaviours did not change -- they continued to pick up their kids late. This proves that once something is crossed over to market norms, it's difficult to re-establish the relationship in a social environment.
This is called 'partial ownership' and we start to feel this connection even before the item is actually ours, and this is why the 30-day money back guarantee works so well.
'We might think we are taking it home only to try it out for a few days, but in fact, we are becoming owners of it and are unaware of the emotions the sofa can ignite in us.'
At the end of this period, most people will not return the item because they focus more on what they may lose rather than what they have.
For example, when you're selling your car, you're thinking about the experience you lose when you sell that item rather the money that you'll gain from the transaction.
Ariely says this is also true of ideas and this is why it's so difficult for people to yield from their rigid ideas about politics or sports -- even when it no longer makes sense.
And we can't focus on the most important things because we're 'running back and forth among the things that might be important.'
Areily says we need to start closing some of our own doors, instead of keeping them all open even though that's against our human nature.
'Physicians provide placebos all the time, For instance, a study done in 2003 found that more than one-third of patients who received antibiotics for a sore throat were later found to have viral infections, for which an antibiotic does absolutely no good.
'Even when doctors know that a cold is viral rather than bacterial, they still know very well that the patient wants some sort of relief; most commonly, the patient expects to walk out with a prescription.'
And this situation -- combined with the physician's enthusiasm -- will often help the patient in their healing process.
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