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BooksMay 3, 20215 min read

Notes: Predictably Irrational

Reading notes from Dan Ariely’s Predictably Irrational.

The Truth About Relativity

tl;dr

  • Humans can’t decide on absolute terms and need to know the relative advantage of one over the other to make a choice. In other words, we are good at eliminating.
  • We do not just compare, but we do compare things which are more easily comparable, thus by planting a decoy1 it is easy to let one pick what we want them to pick.
  • The more we have, the more we want. And the only cure is to break the cycle of relativity.

This chapter begins with describing how The Economic Times offered different membership choices which tricks a reader to spend more money than one would actually do by planting a decoy1. The membership as follows:

Membership Type Description Price
Internet Only For 1 Year Only web access + all old archives 59 $
Print Only For 1 Year Print Only Access 125 $
Internet + Print For 1 Year Print + Web + all old archives 125 $

Guess what most of the people do pick? of course the 3rd option.

Web only$59 Print only$125the decoy Web + Print$125most pick this
The middle option exists only to make the third look like a deal

The author explains the above behavior how humans can’t choose on absolute terms. They need to compare, they need to evaluate. They need to know the relative advantage of one over the other to make a choice. As we do not know whether 59$ for Internet only subscription is worth or not, but we do definitely know that 125$ subscription for Internet + Print subscription is much better than 125$ for Print only subscription.

That’s how the author introduces us to Relativity, he further explains the important aspect of the Relativity that 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.

He describes the above by running an experiment on students to choose the beautiful faces out of 3 choices that are presented. A which is actual and as beautiful as B and -A which is the decoy1, a modified version of A. As you might have guessed by now, most people tend to pick A as it is easily comparable to -A.

He further explains that one’s happiness is not dependent on how much they earn, but by how relatively superior they are to the closely comparable decoy.

The author describes the above by adding we look at our decisions in a relative way and compare them locally to the available alternative. The easy way to understand this is how we justify how much we are getting paid at work by comparing it to the equally qualified person and find our happiness at how much more we are making in our circles.

The author further makes us understand this behavior directly by shooting us a question -

Question

Would you like to travel about 2kms to save around Rs. 50/- to buy exactly same pen which would otherwise cost you about Rs. 70/- ?

Well, the answer to it depends on lot of factors, but if I have to simplify this, yes definitely I would travel 2kms to buy the pen for 20/-.

Yes, I would. Wait a second, do you mind traveling about 2kms to save around Rs. 50/- to buy a suit which would otherwise cost you about Rs. 1550/- ?

The Fallacy of Supply and Demand

tl;dr

  • Great Law of Human Action: In order to make a man covet2 a thing, it is only necessary to make the thing difficult to attain.

  • Arbitrary Coherence: It’s how we relatively find the value of something regardless of the absolute value of it not just in present, but also in future; once we are anchored3 to arbitrary value in the first place due to the phenomenon called Imprinting4.

In this chapter, author introduces us to Anchors3 about anchors an Italian diamond dealer and how he earned his name the Pearl King.

The diamond dealer had taken black pearls of dubious worth and made it fabulously fine by using the great law of human action, namely, that in order to make a man covet2 a thing which affects the decision we make. He further explains that the Pearl King anchored3 his black pearls to the finest gems in the world which caused the prices to be followed forever after.

Further the author explains how he achieved it talking about an experiment ran by Konrad Lorenz few decades ago about how goslings follows the first moving object they see upon breaking out of their eggs based on what’s available in their environment and not just that how they stick with the decision irrespective of the changes introduced later once the decision is made. This natural phenomenon is called as Imprinting4.

The author introduces us to the behavior called Arbitrary Coherence, which can be described as how our minds shape not just the present price of something, but also future prices based on the arbitrary anchors introduced us in the first place.

Author explains arbitrary coherence with an example of purchasing TVs.

Take a moment to answer this before continuing further…

Given 52“ TV is about Rs. 48000/-, will you be paying

  1. Rs. 38000/- for 32“ TV or
  2. Rs. 50000/- for 52“ TV?

Regardless of whichever the TV you decided to purchase, see how you have always referred back to the original anchor3.

Footnotes

  1. Decoy refers to a less potential equivalent member. ↩ ↩2 ↩3

  2. Envy is a feeling of discontent and resentment based on someone else’s possessions, abilities, or status, while covet is wishing, longing, or craving for something that belongs to someone else. ↩ ↩2

  3. An arbitrary benchmark. ↩ ↩2 ↩3 ↩4

  4. It is defined as a process whereby, during a brief period of susceptibility, a focal entity or actor (such as an industry, organization, or an individual) develops characteristics that reflect prominent features of the environment, and these characteristics continue to persist despite significant environmental changes in subsequent periods. Source: Wikipedia ↩ ↩2