Predictably Irrational: The Hidden Forces That Shape our Decisions

The basic idea of arbitrary coherence is that once initial prices, which are often set arbitrarily or randomly, become anchored in a person’s mind, those prices shape what that person is thereafter willing to pay for such products or services. For example, someone sees a laptop on sale for $1200. The price tag is not yet the anchor, but it becomes so when that person contemplates buying the laptop at that price. They will compare all other laptops relative to this price.

Behavioral economics is a relatively new field in economics that draws on aspects of psychology and economics to understand human behavior. In contrast to standard economic theory, behavioral economics focuses “on the (quite intuitive) idea that people do not always behave rationally and that they often make mistakes in their decisions” (317). This field presents a more pessimistic view of human nature by acknowledging human weaknesses. Ariely believes this viewpoint has a silver lining: The fact that humans make predictable mistakes means there are ways to improve their decision-making processes (a concept known as “free lunches”). Ariely is a strong proponent of behavioral economics.