Pardon me for my opening example, I have just come back from a feisty publishing conference.
“Amazon has gotten people used to low eBook prices.”
“People know what they want to pay!”
If you are someone who has used such a refrain, you need to stop and rethink. Although Economics 101 starts with demand and supply curve, which assumes that people know exactly how much value they can derive from a product or service, in reality people are highly unaware of it. How they decide how much they are willing to pay is not by weighing some intrinsic value of the object in question, but by what they have been anchored to believe they should pay.
If you have ever been thrown into a negotiation situation where you do not know what the ‘prevailing prices’ are, and hence have been hesitant to put a number on the table, you know that you don’t really know how much to pay for something.
In an experiment described in a book people were asked to write down last two digits of their social security numbers before answering how much would they be willing to pay for certain products. When the data was analyzed, people with their social security numbers ending in higher digits were willing to pay significantly more for the products than those who numbers ended in lower digits. There can’t possibly be any correlation between those two digits and the value of any product, say a bottle of wine. But when there is no other anchor, even something as arbitrary as last two digits of SSN becomes an anchor.
The idea that human beings are not really rational the way classical economists would want them to be surprises nobody other than those economists. So, a task like cataloging human irrationalities would hardly ever run its course, and would still be quite futile an exercise. What would they prove that we don’t already believe in? What makes this book – and several behavioral economics studies – interesting is that we aren’t just irrational, but we are irrational in very systematic ways. In many situations, therefore, the way we’d behave irrationally is predictable.
Why care? It helps in better decision-making, in understanding other people’s baffling decisions, and in avoiding the traps set up by sales and marketing professionals who have from experience or training have learned to exploit our predictable irrationalities.
The book is conversational and easy to read, although it does sometimes meanders into stories too much, as popular business and psychology books are wont to doing. But unless you are someone who already knows everything Daniel Kahneman has done, you should read this book. If you like what you see, you might then want to venture into Thinking Fast and Slow by Kahneman himself, which is a much more content-packed book.
Below is the book description from the publisher’s website:
Why do our headaches persist after we take a one-cent aspirin but disappear when we take a fifty-cent aspirin?
Why do we splurge on a lavish meal but cut coupons to save twenty-five cents on a can of soup?
When it comes to making decisions in our lives, we think we’re making smart, rational choices. But are we?
In this newly revised and expanded edition of the groundbreaking New York Times bestseller, Dan Ariely refutes the common assumption that we behave in fundamentally rational ways. From drinking coffee to losing weight, from buying a car to choosing a romantic partner, we consistently overpay, underestimate, and procrastinate. Yet these misguided behaviors are neither random nor senseless. They’re systematic and predictable—making us predictably irrational.