This book is all about the forces that influence our behavior and decision making. The author, Dan Ariely is a professor of psychology and behavioral economics at Duke University.
Standard economics is built on the premise that humans make decisions based on rational calculations and leave emotions out of it.
Behavioral economics, by contrast, explores what happens when those rational models run headlong into the complexity of life and the reality of human emotions.
Each chapter of this book describes a particular force that influences our behavior in irrational but predictable ways. Such forces include emotions, relativity, social norms, ownership and others.
Despite the power these forces have over us, we consistently underestimate and often ignore their influence. Hopefully, by being more aware of these forces we can see them for what they are and make more rational decisions.
I consumed this book on a new platform I recently discovered called LIT Videobooks. They turn popular books into documentary-like productions where the authors themselves explain the core concepts of their book accompanied by attractive and helpful visuals. Fantastic way to consume a lot of information in a short period of time.
NOTES
Force: Relativity
Relativity is about context. It’s difficult for us to assess the value of a given option if it is presented by itself without anything to compare it to. But the moment we have context or a point of reference, evaluating the options becomes much easier. We feel that we understand the value in a much clearer way, and therefore we’re much more willing to make decisions based on this value judgement.
One form this force takes is a phenomenon called the Decoy Effect. This is when you are presented with an obviously inferior option, which makes deciding between other options easier. One example of this is when real estate agents show you a house similar but inferior to the house you actually want, thereby making your decision easier.
This force also explains why, if you are surrounded by those who are rich, you’ll feel poor. And if you’re surrounded by those who are poor, you’ll feel rich. Everything is relative.
Interesting related point: It turns out that the actual salary you earn doesn’t determine your level of satisfaction. Rather, what matters is how much you earn compared to other employees. In other words, your relative salary.
Funny advice that illustrates the power of relativity: If your goal is to pick up a date at a bar, you should take someone who looks similar but is slightly less attractive.
Force: The Power of FREE
People are extremely attracted to free things. There’s a big difference between FREE and even 1 cent. For example, if people have a choice between an item that costs 1 cent but is actually worth $5 and item that is worth $1 but is labeled as free, people will often forgo the more valuable item in favor of the free item.
Force: Social norms vs market norms
Social norms provide people with an intrinsic motivation to do things. It makes them feel as thought they are doing something for the common good.
But the moment you move from a social norm to a financial/market norm, you move to a “gaming” situation. The mindset becomes: How do I get the most for doing the least? As opposed to doing it for the social capital or just intrinsic satisfaction of upholding the common good. As soon as money is introduced, it degrades the social relationship.
For example a school decided to fine parents $10.00 if they brought their kids to school late. Surprisingly, this resulted in more parents showing up later more often. Why? Because before money was introduced, parents felt socially obligated to show up on time and felt guilty when they were late. After the social norm was replaced with a market norm, their guilt was replaced by simply paying the fine.
Social psychologists call the impact of introducing money into an otherwise social situation “crowding out.” Like offering to pay for dinner at a friend's house. It crowds out the other, more prosocial motivations that drive us to do things. Basically, it cheapens the transaction.
We should encourage healthy social norms (observing handicap spaces, recycling, etc.) for their own sake, not incentivize them financially.
Force: Ownership
When we feel like we own something, the value we attach to it increases dramatically.
This force can manifest in different ways. The phenomenon of loss aversion is one example.
Loss aversion: This is a phenomenon where we are disproportionately affected by a loss as compared to an equivalent gain. For example, if we lose $5,000, it will affect us much more strongly and for a longer period of time than if we were to gain $5,000.
This is related to another phenomenon called the Endowment Effect, which is the tendency to value something more once we feel we own it.
Also, when something takes more time to create, we become more attached to it and have more of a sense of ownership toward it.
I recognize this in my own life. For instance, a few years ago, I made a bookcase by meticulously deconstructing an old wooden coffee table and repurposing all the planks and moldings. This took me an entire year and about 100 hours. You can read my full post about it here. Although this project only cost me a couple hundred dollars, the immense amount of time and care I spent on it made me very attached to it. I’d probably never sell it—which is a good thing because it’s worth far more to me than anyone would likely be willing to pay. Like $20,000 more.
But here’s the interesting thing: Ownership isn’t just limited to material things. As Dan Ariely puts it:
“[Ownership] can also apply to points of view. Once we take ownership of an idea—whether it’s about politics or sports—what do we do? We love it perhaps more than we should. We prize it more than it is worth. And most frequently, we have trouble letting go of it because we can’t stand the idea of its loss. What are we left with then? An ideology—rigid and unyielding.”
Like many things in social science, the effects of ownership are both good and bad. It’s a process that creates deep commitment and caring but also one that can cause an irrational attachment and unnecessary negative emotions. It’s not that we shouldn’t care about things. We just need to find the proper balance between apathy and overattachment.
Conclusion
Like it or not, our judgments and behaviors are often influenced in irrational ways by invisible but powerful forces. But if we can predict our irrational behavior, we’ll be better equipped to avoid it.
And although changing human nature is extremely difficult, there is another way to modify our behavior: change the environment in which that behavior takes place. If we are aware of the different forces that influence our actions, we can account for them when designing social systems and institutions.