Predictably Irrational (English) Dan Ariely

Introduction

Do you want to know Starbucks’ secret to success? Or business tips straight from Steve Jobs?  Are you curious to know how much emotions influence your decisions? If so, then you have to read this book.We often ignore our behavior in every-day situations, but author Dan Ariely looks precisely at our behavior in his book, Predictably Irrational, and asks ‘why do we behave this way?’We regularly make irrational decisions, but probably don’t notice them. For example, we are attracted to offers such as “Buy One, Get One”, or why are there always leftovers after a large group dinner? In this book, you will see patterns that you have never seen before and become more aware of your own behavior and that of the people around you. With this knowledge, you will make more conscious and rational decisions.This class is about How to behave and How to operate. Hello!, everyone this is {speaker name}.I’m an Entrepreneur, podcaster, and public speaker.This class will be a fun and intresting class for you. I made this class in a way that it is so easy to understand. See you there thanks for being here.

The Fallacy of Supply and Demand

There was a time in America that if you wanted a coffee you would probably go to Dunkin’ Donuts. There, you could have a cup of brewed coffee for a fair price in sizes small, medium or large.  Extras included cream or sugar, but that was it. But then, Howard Schultz founded Starbucks Coffee Company, and created a whole new meaning for coffee.

Schultz intricately planned  how he could differentiate Starbucks from all the other coffee shops out there. He succeeded, and therefore was able to sell his product for a more expensive price.Schultz began with  ambience. He wanted Starbucks to be like the coffee shops in Europe. Then, he sold high quality coffee beans. They can be smelled from the sidewalk. Schultz also displayed delicious treats such as croissants, pastries and cakes.
 
Schultz did not just label his coffee small, medium or large, but gave them fancy names reminiscent of European roots, such as tall, grande or venti. He made sure to offer specialty brews such as Macchiato, Frappuccino, Café Americano and Cappuccino.The customers liked the whole new experience. Suddenly, it didn’t matter for them to pay a higher price.

Even if there was free coffee in the office, loyal customers said that Starbucks’ coffee is different. It’s more than just a cup of coffee – and that’s exactly what Schultz wanted.Whenever we buy a new product, we become anchored on the price we paid for it. Business owners use this predictably irrational behavior of customers to their advantage. They set their products at a high price. If customers buy the product at that price once, they will be willing to buy again.
 
They will get used to the high price and buying will become a habit for them.That is the aim of business owners: they want their product to be part of the habit of the customers, so that they will always return to buy more.Are you an Apple fan? Do you own an iPhone or a Mac? By now, you should already know that Apple products are priced higher than all the other gadgets on the market. But you may be loyal to Apple anyway.Other brands have better specs and more high-tech phones or laptops, but Apple fans keep saying that Apple products are different. They are original.
 
They are innovative. They are user-friendly. Well, Steve Jobs wanted you to think that way!The Apple slogan has always been “Think Differently”. It is exclusive. Only Apple customers can use Apple software. When you buy an iPhone or Mac, you are a member of an elite group.Only you and people like you can have that privilege.And now you are now anchored on the higher Apple price. You spend more money on your gadgets and accessories, even though you can pay less and get more specs with other brands.This is why Howard Schultz and Steve Jobs are very successful entrepreneurs. They know about the fallacy of supply and demand.

The Truth about Relativity

Whenever we need to choose an option, we always need something to compare it to. We choose option A relative to option B. If we do not have an object of comparison, we will find it difficult to decide.For example, the Economist Magazine once had this advertisement for their monthly subscription: the first option was an online subscription for $59, and the second option was a print subscription for $125, with a third option for both print and online subscriptions for $125.If there was just the online subscription and print-only subscriptions, customers would find it hard to decide. Which is better? Online or print? They would need to make sure first what choice is really the right one for them.
 
But then, when there is a third option in which you can have both print and online subscription, even with a cost of $125, then it appears to be an amazing deal – the same as the subscriptions for print-only. So, why would you choose the second option, when you can have more for the same price? Marketing experts discovered this predictably irrational behavior of customers a long time ago.

In any promo or advertisement, they use what they call a “decoy”;  an option which they put so that customers will have something to compare to. In this case, it is the print-only subscription for $125. Marketing experts put the decoy so that the customers will be convinced to buy the option which the company really wanted to sell all along.Because of the decoy, customers will buy the print and online subscription for $125. The print-only subscription for $125 creates the illusion that for Option 3, they’re getting something for free.
 
When the truth is that they are paying more. Of course, The Economist wanted customers to pay $125 rather than $59 only.We can see this decoy effect in any product out there in the market. Another example is restaurant menus. Gregg Rapp is a restaurant consultant, and part of his job is to create the menus and pricing for high class restaurants in New York.He discovered a technique which helps the restaurant owners earn more: Gregg learned to put the highest priced meals on the bottom of the menu even if no one orders them. Why? These expensive meals serve as the decoy.

The customers will not order those meals, but they would certainly order the second-most expensive item on the menu. Because of the decoy, the customers will think that they are already getting the best value with the second-most expensive meal for a lesser price.Instead of just pasta at $100, the customers will choose steak at $180. Why? Because it’s already a great value as compared to lobster at $200. So in the end, the restaurant owner earns more.

The Cost of Zero Cost

Customers are attracted to anything free. When we see a product that has something additional for free, we are likely to buy it, even if we don’t need the product in the first place.This gives the illusion that we are saving, but the truth is that we are spending more.For example, you went to a sports store because you wanted to buy a specific kind of socks:tennis socks with a padded heel.But then, at the front of the store, you see a “Buy One, Get One” offer for socks. They aren’t the socks you wanted, but the free item is so enticing that you end up buying them, instead of what you originally came for.
 
Here’s another example:you went to Amazon.com to buy a book. You find the book for $16.95, with shipping for  $3.95.But then you see the free shipping offer of Amazon. If you buy two books, the shipping fee is free. How cool is that? So, you choose another book which you don’t really need to buy, and your total purchase is $31.90.You think that you got a great deal because you got free shipping. But did you save anything? Actually, no – you really spent $15 more.

But you’re happy anyway.Have you ever experienced this while grocery shopping? You need to buy basic necessities like rice, bread, toothpaste and bath soap. But then you see a pyramid of Coke in the middle of the store. If you buy six cans, you will get one can for free.You don’t really need Coke in the first place. But you will be attracted to the free offer, so. you will buy the six cans of Coke. Did you save? No. But you’ll be happily gulping Coke for the next couple of days. That is just how predictably irrational consumers are.

 The Cost of Social Norms

People will gladly do favors for a relative or a friend, but they will not be willing to do the same service for a price. This  is what we call social norms and market norms. They should be applied separately and problems will arise if they are mixed.Imagine that you spend a holiday at your mother-in-law’s house. She has prepared a very special dinner for your family with roasted chicken with homemade stuffing, sweet potatoes decorated with marshmallows for the kids.

For dessert, there is the pumpkin pie which is your spouse’s favorite.You all happily ate the dinner and shared many good stories over the meal. Later that night, you drink a bottle of wine with everyone  in the living room and you feel very grateful for the wonderful dishes that your mother-in-law has prepared. Suddenly, you stand up and pull out your wallet. 
You hand your mother-in-law a generous amount of money and say, “Mom, this is for the amazing holiday treat you’ve given us”.
 
The mood in the house would probably shift from happy to awkward or even angry at your actions.  Your mother-in-law would be offended and your family would be angry at you. Next year, you might spend the holiday alone in front of the TV eating pizza out of a box.What just happened? You made the mistake of mixing social norms with market norms. Social norms are the favors we make for the people we know. They foster good relationships. You don’t have to immediately return the favor. It just makes you feel good to help your family or friend.Someday, you know that they will also help you, too.
 
Market norms are different. There is a direct exchange. You go to work and earn a salary. You buy an item and you pay its price. You get an apartment and you pay the rent. You borrow money from the bank and you pay interest. In market norms, you get exactly what you give. We accept social norms for social situations and market norms for market situations.

Going back to our example, it would have been better if you had just thanked your mother-in-law from the bottom of your heart or gave her a box of chocolates instead.Gifts are accepted in social norms, and they are usually seen as a gesture of good intent. The author, Dan Ariely once did an experiment at MIT: he created a test for students to drag circles from the left side of the computer screen inside a box on the right of the screen, using the computer mouse.
 
It was an easy task. But for every time a student dragged a circle, a new circle would appear.Dan told them they had five minutes to drag as many circles as they wanted, and then be finished.For the first group of students, Dan gave participants  $5 before doing the experiment. For the second group, he gave participants only $1.

For the third group, he gave nothing, stating it was  just a request for the student to be part of a research project.You may think that the first group dragged more circles than the others. But actually no; the first group successfully dragged an average of 159 circles. The second group did 101 circles and the third group did an average of 168 circles.It turns out that those who are not paid have more output.They just did it for the favor, but those who received $5 and $1 did the work which was only enough for the price they were paid.
 
After that, Dan tried a new strategy:he offered chocolates in return for the favor. For the first group, he gave a snickers bar worth $1. For the second group, he gave a box of Godiva chocolates worth $5. For the third group, he gave nothing again.Which group do you think dragged more circles?The results showed that the first group did 162 circles, the second group did 169, and the third group did 168 – the outcome when offered chocolates was almost similar for all the groups.Gifts are social gestures; because the research participants were given chocolates, the students gladly did what was asked of them. In social norms, we will give as much as we can, but in market norms, we will give according to the payment.
 
Let’s say your best friend owns a hotdog stand. One day, he gets into an accident and injures his arm. He asks you a favor to sell his hotdogs for a weekend. You’re the only person he can count on. So you agree and you do well on the job.But what if someday, you really work for a fast food chain? Would you give as much effort as you put into working for your friend’s hotdog stand? Or, would you put in only as much effort as you’re paid for? That is the difference between social norms and market norms.

The Power of a Free Cookie

When a group of friends finish sharing a meal there is always that one slice of pizza or one piece of doughnut or one piece of sushi left on the table. No one is willing to eat. A friend will say, “No, I’m full. You can have it.” Another friend says the same. You all continue your chit chat but no one will get that last piece.This is another one of our predictably irrational behaviors.

When we eat with a group, we are bound to follow social norms. We will exhibit politeness and generosity towards others. But when eating alone, you will have no second thoughts about finishing a whole tub of ice cream on your own.Consider this situation:  you have a colleague named Susan who sits right next to you at work. One day, she decides to bake 100 chocolate chip cookies and shares them with everyone. Since you sit beside her, you’re the first one to get the cookies.
 
Even if Susan’s chocolate chips are really delicious, social norms will compel you to take just one cookie. Of course, you’ll be thinking about your other colleagues who also want cookies.You will not take more for yourself.But what if Susan puts a price on her cookies? What if she says 5 cents for each cookie? Then social norms would not apply anymore. Market norms set in.

Since you’re the first customer and you love cookies, you will buy as much as you like. You will not think about what is left for others. You will happily munch on Susan’s cookies. You’ll probably buy 10 pieces or more. Here’s another situation: imagine that you go to a classmate’s birthday party.
 
She has prepared beer and snacks for everyone. So you go and have fun with your friends. Then you pass by the kitchen and see a three-layered Red Velvet cake. After seeing it, you crave it and can’t get the cake out of your mind.All you want is to sneak the entire cake in the laundry area and finish it all on your own. If anyone asks, you can say the dog ate it. But of course, you are in a social situation. You will act as a socially-acceptable person and will just take one normal slice. Maybe, you’ll ask your classmate later where she bought it so you can buy a cake for yourself.

The Influence of Arousal

Every person has a Dr. Jekyll and Mr. Hyde inside. In normal situations, we act like Dr. Jekyll and are  rational, good-mannered and socially acceptable. But there are times when we are driven by our  emotions and extreme feelings of anger, sadness, fear or sexual arousal cause us to do things we would never have imagined.  In just a matter of seconds, we can transform into Mr.

Hyde. Any person can be violent, aggressive and dangerous. We may think that when a difficult situation comes that our  normal self (the Dr. Jekyll) will always win and control the dark self(Mr. Hyde). But we are terribly wrong: this is exactly how anger issues, road rage and crimes of passion occur.  A burst of emotions can bring out the worst in us.
 
Dan Ariely did an experiment once with the students of Berkeley University. He needed 25 participants for this study. He wanted to know how much our emotions influence our decisions, especially if we are highly aroused.Dan put ads up all around the Berkeley campus for research participants who are 18 year-old and above, heterosexual male.

The study was about sexual arousal and decision-making and would be held in two  separate sessions, one hour each. Participants would be paid $10 per session. A participant would be allowed to quit any time he wanted.The students of Berkeley are known to be achievers who get straight-As.They excel at academics, sports, arts and other activities. They have good conduct, as well.
 
Roy, one of the research participants, was a typical Berkeley student: the kind of guy that any mother would want to have as a son-in-law. Dan explained to him the mechanics of the experiment. First, Roy was given a consent form and informed that the experiment would be strictly confidential. Roy was supposed to answer three sets of questions: the first about sexual preferences; the .second regarding date rape; and the third about safe sex.

Roy answered the questions through an online test sheet.

For each question, he rated from 1-100 how likely he would say ‘yes’ or ‘no’ to the question asked. Roy should answer these questions alone in his room.So, Roy went to his dorm to answer the questions. He answered the questions normally as the way he would answer an exam paper.

Some questions under sexual preferences included, “If an attractive woman asked if you could have a threesome with her and another man, would you do it?” “Would you find it more exciting to spank your sexual partner?”Some questions under date rape included, “Would you encourage your date to drink more alcohol to increase the chance that she’ll have sex with you?” “Would you keep on trying to have sex even if the girl says no?”
 
Some questions under safe sex included, “Would you always use a condom if you’re having a new sexual partner?” and “Is birth control always the girl’s responsibility?”Roy answered these questions in his normal, non-aroused state. Then he met Dan again. For the second session, Roy would answer the same questions while in a highly aroused state. This time, he turned off the lights of his room, watched something arousing online and became excited.  Then he answered the same questions as previously asked.

Overall, Dan’s research findings were very clear and consistent:  Roy and the other 24 students answered very differently in their aroused state from their non-aroused state. It turns out that in their aroused state, all of them were more likely to engage in immoral behavior and unprotected sex. They were more likely to say ‘yes’ to behaviors that they would not think of doing if they were not  aroused.
 
This experiment shows how strong the influence of emotions are.  Therefore, we must put more effort to control ourselves or take precautionary measures so that we will not suffer negative consequences.If you are angry, try your best to calm down before you make any decisions. If you are extremely sad, take a rest or talk to a friend. Remember that if you stop for a minute and breathe deeply, you can save a relationship, an opportunity, or a life.

Conclusion

You learned about price anchors. You learned that entrepreneurs can set their products at a higher price and still make consumers buy again and again.You learned about decoys. In any store promos, there is always a decoy which makes the consumer more attracted to buy the product that the seller intends to promote.You learned about the illusion of free items. They are not really free, in fact, you pay more just to get them.You learned about social norms and market norms. To maintain good relationships, remember not to mix these norms up.
 
You learned about socially-acceptable behaviors. You learned that emotions can strongly influence our decisions and we have to be more mindful of ourselves in difficult situations. These are just some of the examples of predictably irrational behavior that humans have. We cannot help it, but now that you’ve read this book, you will be more conscious of yourself.The next time you’re in a grocery, use more self-control. The next time you’re in a shopping mall, practice more self-discipline. When you are driving or talking with your boss, bring more calmness, then you will not be so predictably irrational.

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