Predictably Irrational: The Hidden Forces That Shape our Decisions

“In conventional economics, the assumption that we are all rational implies that, in everyday life, we compute the value of all the options we face and then follow the best possible path of action. What if we make a mistake and do something irrational? Here, too, traditional economics has an answer: ‘market forces’ will sweep down on us and swiftly set us back on the path of righteousness and rationality.”

This is the basic tenet of conventional economics: Humans are rational and always make choices that maximize their economic wellbeing. In stark contrast, Ariely argues that humans are “predictably irrational” (xx). To Ariely, humans often act imperfectly, repeating irrational behaviors. Irrationality is the crux of behavioral economics, a field that Ariely fully endorses.

“Humans rarely choose things in absolute terms. We don’t have an internal value meter that tells us how much things are worth. Rather, we focus on the relative advantage of one thing over another, and estimate value accordingly.”

In Chapter 1, Ariely introduces the first irrational influence on human behavior: relativity. People estimate value by examining an item in relation to others. Moreover, people focus on the items that are easily comparable and avoid those that are not. To Ariely, relativity helps people make numerous decisions, including which purchases to make, which home to buy, and whom to date and marry.

“If you stopped to think about this, it would not be clear whether you should be spending all this money on coffee at Starbucks instead of getting cheaper coffee at Dunkin’ Donuts or even free coffee at the office. But you don’t think about these trade-offs anymore. You’ve already made this decision many times in the past, so you now assume that this is the way you want to spend your money.”

Once a person makes a first decision, they use it as input for subsequent decisions. Switching from Dunkin’ Donuts to Starbucks is an example. While consumers initially found the price difference between the two retailers shocking, once they bought their first coffees at Starbucks, most created a habit. After several Starbucks purchases, they no longer thought about the price. In fact, they often started to purchase larger or fancier coffees at higher prices. Part of the success behind Starbucks is that its ambience is so different from Dunkin’ Donuts.