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I just finished reading the new book Predictably Irrational, which was recommended to me by Andreas Weigend. It looks like it will be a big hit for this year.

The book is a fun read, mostly Dan experiments on MIT students and shows how people make decisions that are different from what standard economic theory assumes. The experiments are interesting and seem well designed — the main problem I have with the book is that Dan takes these tightly controlled, very focused results and suggests that they are generalizable enough for him to recommend sweeping policy changes that would fix our healthcare system, consumer debt and teen pregnancy. After a while I took to reading the experiments and skipping over his rather broad interpretations of what they mean.

Anyway, I read a lot of this sort of soft-non-fiction and usually end up forgetting all the experiments described, so I’ve taken to making notes. The ways in which people behave irrationally may be useful reference material for me in the future I thought I’d share my completely unedited notes here:

• People choose things on the basis of comparisons. Given multiple choices they will gravitate towards those where an easy comparison is available. Companies exploit this by offering several options of a heretofore unseen product so people can see what a good deal the cheaper option is.
• People are anchored to prices, usually the first price they encounter for a specific item. This holds true even when the first price they encounter is negative meaning that something can be perceived as a punishment or a reward depending on how it was framed initially.
• People strongly overweight the value of items that are free because of loss-aversion, making them forgo options that are a fantastic deal if a free alternative is available
• Introducing payment for a service shifts people from social norms to market norms. People are much more likely to do something for free than they are to do it for a payment that they regard as too low. Gifts are social norms and do not count as money unless the price is explicitly stated.
• Even thinking about money where non is involved can shift people from social to market norms. Further, once market norms are established it’s very difficult to get rid of them.
• Sexual arousal changes people’s tolerance of what they deem acceptable, to a degree that they were not able to predict beforehand
• Students given periodic deadlines will perform better than those with no deadlines. Given the chance, most students will set their own evenly-spaced deadlines and perform well.
• People value things that they already have much more highly. Duke students were willing to pay only $170 for a ticket that a holder would sell for no less than $2400, even though tickets were distributed randomly (combination of loss-aversion and endowment effect)
• Bidders in auctions become attached to items, proportional to the amount of time that they believed they were winning
• Most people will attempt to keep their options open, even at the expense of choosing the best option. Often a better strategy would be to close off bad options entirely. The consequences of delaying commitment are often worse than than making the wrong choice.
• Coffee tastes better when the condiment containers are expensive
• Given a blind choice between beer and beer laced with Balsamic, more people chose the tainted beer. When they were told ahead of time that the second beer was tainted, they acted disgusted when they tried it
• Generally, expectation of an experience strongly affects actual feelings about an experience. Learning about the vinegar after tasting the beer did not prevent people from saying they liked it.
• Most people are inclined to be honest about big things even if they won’t get caught but are happy to cheat on small things even if there’s a chance they will get caught
• Ostensibly honest people are less likely to steal cash directly than they are to steal the equivalent amount in goods

March 11th, 2008 | Category: Books | Subscribe to comments | Leave a comment | Trackback URL