Predictably Irrational – by Dan Ariely

Predictably Irrational – by Dan Ariely

‘The hidden forces that shape our decisions’


Economists start with the assumption that all humans are fully informed, rational decision makers. They use this to form all of their economic theories and models. But, as Dan Ariely points out, we’re NOT rational. In many cases, we’re very IRRATIONAL: we make decisions that aren’t in our own best interest. More than that, Dan recognised that we are irrational in very PREDICTABLE ways – we all make the same kinds of mistakes. He shows how we are influenced by things like comparisons, arousal, price, ownership and our own expectations. This is an absolutely phenomenal book with wide-ranging applications.


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Here is a dot point summary of the book!


The hidden forces that shape our decisions


Dan Ariely – Behavioural Economist

  • Understanding irrationality is important for our every day actions and decisions, and for understanding how we design our environment and the choices it presents us


Ch1 – The Truth About Relativity

Why everything is relative – even when it shouldn’t be

Humans rarely choose things in absolute terms

Option 1 – Economist subscription online, 59$

Op2 – Economist Print subscription, 125$

Op3 – Print and web subscription, 125$


  • They put in option 2 so you would go to option 3
  • You think it is a steal, the online part is free!



  • 3 prices.. The middle one is the most chosen
  • High price entres boost revenue for the restaurant


Free Brekky:

Paris free brekky

Rome no brekky

Rome free brekky

Rome free brekky looks better


If you are single and hope to attract someone

  • Bring someone with similar characteristics but less attractive
  • If someone is ugly and looks like you, then you look hotter 


Top Executives

In 1976 the average CEO was paid 36 times the average worker, by 1993 paid 131 times the average worker

To fix this, regulators made them disclose the payments

In response, CEO’s salaries skyrocketed

The CEO’s demanded outrageous raises, and got to 369 times the average worker


General happiness?


  1. L Mencken says a man’s satisfaction with salary depends on:

“Whether he makes more than his wife’s sisters husband. This is a comparison that is salient and readily available”


Fixing it

  • Avoid people boasting about salary
  • Don’t look at houses above your means before you buy
  • Focus on cars you can afford


Ch 2 – Fallacy of supply and demand

Why the price of pearls and everything else is up in the air


“In order to make a man covet a thing, it is only necessary to make the thing difficult to attain”


Arbitrary Coherence (Proven by Dan)

  • Although initial prices are arbitrary. Once those prices are established in our minds they will shape not only present prices but also future prices


First Impressions are Important

  • Whether they involve remembering that our first DVD player cost much more than the ones today (and realizing today it is a steal in comparison)
  • Or remembering gas was once a dollar a gallon, which makes every trip to the gas station painful
  • have made the decision the easier it is to in the future


Starbucks also established a new anchor

  • They tried to make everything so different, that we would not use the prices of Dunkin Donuts as the anchor


Lessons from these experiments?

Were our original decisions wise and smart in the first place? (to be where we are)

Or were they partially random first imprints that have ran wild?


How about questioning the habit, how did it begin?

Should we pay particular attention to a first decision that will be a long stream of decisions? (About clothing etc)


Supply and demand

  • Suggests that prices in markets are determined by production at each price (supply) and the desire of those with purchasing power (demand)
  • The price at which these two meets determines the price in the market place
  • These experiments (like arbitrary coherence) challenges these assumptions


Traditionally, if price of milk goes up by 50%,  these new prices will definitely effect consumption (due to our anchor of what milk should be)

But if we had amnesia, the prices went up but lost the anchor. Experiments show there will be no change on demand


Ch3 – Cost of Zero Cost

  • It is no secret that getting something for free feels good
  • Zero is not a price it turns out, but is an emotional hot button – a source of irrational excitement


  • Most transactions have an upside and downside, but when something is free, we forget the downside
  • But when something is free, we forget the downside
  • Humans are intrinsically afraid of loss, the real allure of FREE is tied to this fear


Where we get screwed:

  • We might choose a mortgage with no closing costs, but with interest rates and fees that are off the wall
  • We might get a product we simply don’t want because it comes with a free gift


Can use ‘Free to drive social policy’

  • For example free registration for electric vehicles

Realise time spent on one activity is time taken away from another

  • If we spend an hour in line for a free ice-cream, there is something else we are not doing with our time


Ch4 – The cost of social norms


At your mother in laws for dinner, had an incredible meal making her signature dish

At the end you pull out the wallet ‘how much do I owe you for this experience’

Your wife cracks it


There are two worlds of markets

Social norms are wrapped up in their social nature and need for community. Instant paybacks are not required

Market norms is very different. There is nothing warm and fuzzy about it.  Exchanges are sharped edged. 


When social norms and market norms collide, trouble sets in


Study to see who works hardest, asked to draw circles

5$ reward – drew 159 circles

50cent reward – 101 circles

Condition with no money, social request as a favour – drew 168 circles


What if we replaced payments with a gift?

5$ gift 162 circles

50 cent gift – 169 circles

Social 168 circles

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


Social norms can be seen is more effective than market norms
On a date:

Do not mention the price of selections!

They are printed clearly on the menu. Yes it might be an opportunity to impress your date

But if you rub it in, you are likely to shift your relationship from the social norm to the market norm


Keep your social relationships in the social norm!

When they collide, the social norm goes away for a long time

Once it is trumped by a market norm, it rarely returns


If you want to develop social relationships with your customers, don’t charge them for the late fee!



Social norms can be seen is more effective than market norms for employees
–  Employees will be more passionate

  • Work harder, flexible and concerned
  • If they make a deadline or fly out at a moments notice – they must get something similar in return


Some have applied social norms well

But.. Focus on short term profits, outsourcing and draconian cost cutting threatens to undermine it all

  • As companies replace social norms with market norms (cutting back on benefits and insurance) don’t be surprised if they jump ship


Should you give a 1000$ in gift or cash?

Most employees will ask for cash, but you will get more out of them if it is a personal gift


Google – are offering free gourmet lunches


Burning Man Festival

Money is not accepted at burning man

  • Most social and caring place on Earth
  • Experience told Dan that fewer market norms would make society more satisfying, creative and fun


Ch5 – Influence of Arousal

Why hot is much hotter than we realise

  • Study of how arousal influences our decision making


The Study

  • 25 students

Roy (what the study involved)

A student every mother would be proud of

Kind, intelligent and accomplished. Plays piano. Captain of the volleyball team, steady girlfriend.


 Series of questions when not horny

Could you enjoy sex with someone you hate?

Would you slip a drug to increase likelihood of sex>

Would you always use a condom?

Could you have sex with a fatty? A 50 year old woman?


Needs to get into an aroused state masturbating but not ejaculating (but there is wrap just in case he does)

. Roy adjusts the arousal meter as naked girls pop up and questions come on the screen

Could you enjoy sex with someone you hate?

Would you slip a drug to increase likelihood of sex>

Would you always use a condom?

Could you have sex with a fatty? A 50 year old woman?


All questions were answered very differently from cold and hot states

In all cases, they failed to predict the influence of arousal on their sexual preferences, morality and approach to safe sex


Roy is a smart, decent, reasonable kind and trustworthy boy. His frontal lobes are fully functioning, and he is in control of his behaviour

But when he is in a state of arousal, and the reptilian brain takes over, he becomes unrecognizable to himself

  • When gripped in passion, his emotions blur the boundary of what is right and wrong


Ch6 – The problem of procrastination and self-control 

Americans (or westerners) have succumbed to rampant consumerism

Big cars, big homes, big screens but the biggest decline in personal savings since the great depression


  • The average American family now has 6 credit cards with an average debt of 9000$
  • 7 / 10 households borrow to cover basic living expenses


  • Giving up on long term goals for immediate gratification, is procrastination


Set up systems for your shitty self control



Ch 7 – High price of ownership

‘Endowment effect’ when we own something, we value it more than what other people do


University students waiting in line for a ticket for months (camping as part of the tradition) just to go in the balad


Ones who got the ticket would sell it for 3000$ justifying on life experience and importance


The ones without one, would buy for maximum 175$ saying that for more they rather watch it at a pub and have free drinks


30 day money back guarantee – you are unlikely to give it back once it feels like you own it


Ch 8 Keeping doors open


In 210 BC, Chinese commander Xiang Yu led troops across the Yangtze River to attack the enemy

The troops awoke in the morning to find to their horror their ships burning

It turns out Xiang burnt the boats

This created a tremendous focusing effect, as they charged ferociously against their enemies and won 9 consecutive battles


We naturally try and keep as many doors open as possible – but to an expense

We need to move on from some relationships, drop a few sports,  or all the things we don’t need as they take away our commitment and energy from the doors that should be left open


Ch9 Effect of expectations


When we expect something to be good, it will be good

When expect it to be bad, it will be bad

Kind of like a self fulfilling prophecy


Ch 10 – The power of price


Surgery to release pressure on the artery

One group got surgery

One group didn’t but had scalpel marks on the chest

Both had the same results


1 billion annually is spent on the surgery, maybe it can be put to better use?


Ch11 Context of our character part 1

Why we are dishonest and what we can do about it


In 2004 the cost of all robberies in USA was 525 million$

The cost of theft and fraud in the work place was around 600 billion$

It is much more than what all career criminals steal in their lifetimes


  • People add a bogus 24 billion to their property loss
  • Retail loses 16 billion a year to those who wear clothes and return them


Why are some crimes, particularly white collar crimes judged differently?


Two types of dishonesty

  1. Type that invokes pair of crooks circling a gas station. They think about robbing on a cost benefit analysis calculation
  2. The kind and committed people who consider themselves honest – but have “borrowed” a pen from a conference site, taken an extra splash of soda at the soft drink dispenser, exaggerated the cost of the TV to property loss report, or falsely reported a meal as a business expense


We care about honesty and we want to be honest. Our internal honesty monitor is only active when we contemplate big transgressions, like grabbing an entire box of pens from a conference hall. For little transgressions, we don’t consider how these actions would reflect our honesty and our superego stays asleep.


Studies where everyone was dishonest

But if they were reminded of the 10 commandments or moral benchmark just before – then less likely


Ch12 – Context of our character part 2

Why dealing with cash makes us more honest

E.g if your daughter called and said can you bring home a red pen from work.. You could probably do it

If she called and asked to grab 2$ from petty cash box.. It is probably a bit harder


  • People don’t normally cheat with cold cash. It is much easier when it’s a step removed from money


Tested students, where self reported results and money was the reward

  • The students were cheating by an average of 2.7 questions


When money was removed but another non money currency

  • Students cheated by 5.9


E.g Insurance Companies TV Size

  • Most people will say their 27 inch tv is a 32 inch set when reporting to insurance companies
  • These same people would unlikely steal straight from the insurance companies
  • By reporting what they no longer have, and increasing the size by a little bit – makes the moral burden much more easier to bear




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