Jun 01

Predictably Irrational, The Hidden Forces That Shape Our Decisions, was published in 2008, but somehow just came to my attention recently. As with any good book, I’m sorry I hadn’t heard of it sooner, but sometimes the forces that be come together in my favor, as the author Dan Ariely has written a sequel titled The Upside of Irrationality which by coincidence, is due in stores today.

If I haven’t made it clear, I found this book to be a fascinating read. In a genre similar to Freakonomics, Dan offers a series of anecdotes and experiments which he weaves into his central premise, that people act in an irrational,  yet predictable way. I could share a number of those with you, and suggest you read the book for a more thorough analysis, but instead, allow me to share with you examples from my own life that reflect the exact phenomenon Dan described.

A few weeks back, I found myself in a store called Lush, purveyors of bath and body items and home of the $7.95 for 3.5oz bar of soap. Yes, that’s $36.34 per pound, and about 25 times my benchmark price for soap spending. This was with my 11 year old daughter, and the total, $46, was a month’s allowance or about 8 hours of time spent babysitting. The cashier looks at us and says “you get a free bar with a $50 purchase.” So, like an idiot, I tell her to grab two bars she’d like and I paid the difference. Spending $7.95 for two bars of soap made no sense, really, but as Dan described, a similar situation took place when Amazon started offering free shipping for orders over $25. You buy a $19.95 book, and see that just $5.05 more will get you free shipping, so of course, you buy another book, one you may not have really wanted or could have gotten from the library.

Next, my daughter’s aunt and grandmother had given her Starbucks gift cards during our last visit. I then observed how she used the cards over the next few weeks, treating friends to drinks, or asking if I wanted to go, offering to pick up the tab. She’s generous by nature, but it was clear to me that she was more so when it was not with her own cash. Holding a gift card in her hand made a difference in how she treated the $50 of value locked in that plastic. Dan shared similar stories of controlled experiments determining how people treat a gift card or credit card differently than cash.

Last, Dan offers an interesting discussion of social norms vs market norms. You wouldn’t approach your mother-in-law after a fine Thanksgiving meal and offer her the perceived value of the meal, that’s not quite socially acceptable. Yet, there are times when the social and business collide. I’ll offer a recent example from my family. Last year, our daughter expressed an interest in babysitting/mother’s helping. At 10, we felt she was mature enough to help out a mom so she could study for an upcoming exam while my daughter watched her little one in the next room. Worked out great. Skip ahead to this year. A mom who happens to be a close friend of ours drops her 4 year old off and we all kind of hang around the house. When she picked her up, somehow my wife tells her to keep her money. Of course, my daughter waits until our guests are gone and asks what just happened. So my wife pays her, and in turn, I ask what just happened. How did I just get stuck paying my own daughter to watch someone else’s child and more important, how do we spell out when payment is expected (by my daughter)?

After reading Predictably Irrational, I gained new insight into situations that I ran into as well as a different perspective on some just passed. I hope my own stories helped illustrate just how easily the lessons of this book can be applied you own life. In some cases, you might just understand better how you just paid $8 for a dollar’s worth of soap, other times, it might help you change the direction you might take in the decision process.

If you read it, please share your own thoughts on this great book. Are you or your friends predictably irrational too?

Joe

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7 Responses to “Predictably Irrational”

  1. Saving Money Today Says:

    Amazon gets me everytime with that free shipping on orders over $25. But I have a rather large wish list so I usually just add enough to get me over the $25 hump. If you order $26 worth of stuff with free shipping it’s like getting a paperback for free.

  2. FinEngr Says:

    This has been on my never-ending “to read” list…

    I like the soap example – the breakdown of cost was hilarious. I think I wrote about this a while back in an early post – Your Brain is Your Own Worse Enemy.

    The book reference there was “whatever happened to thrift” and they had a section on the mental psychology/justification of expenses. May want to add it to your own list.

  3. JOE Says:

    This book really lent itself to a “my experience” post instead of a book summary. A risk I took, glad you enjoyed it. I’ll look for the book you suggested. Thanks!

  4. Roshawn @ Watson Inc Says:

    I love that you chose the Amazon example because I found myself going through the same though process last week. I purchased a TV on DVD series, and the total came to $23.46. Then, Amazon indicated that if I just spent $1.54 more I would get free shipping. I looked for about 10 minutes to see if there was anything that I wanted that would be reasonable, & I finally came to the conclusion that since I couldn’t find something that I already wanted for a reasonable price, I should just pay the shipping. This was the exact opposite decision I made just 1 month prior when I found a book for $2.99 that I really wanted (it was on a major sale) and ended up spending over $30 more on other purchases that I really didn’t need right then just for free shipping.

  5. JOE Says:

    Our behavior may now change, but these examples alert us to what we do all the time. Glad you enjoyed it, thanks for stopping by and writing.

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