Home » Blog » Book of The Month ‘Predictably Irrational’ by Dan Ariely

‘Predictably Irrational’ by Dan Ariely

Dan Ariely Book Cover Predictably IrrationalAfter reading chapter 3 of this book on ‘The Cost of Zero Cost’(covered later in this review) I suggested that a client of mine changed the wording of their service offer on their website to highlight an included service to be ‘free’ rather than just to describe it as an included extra. This alone tripled the sales conversions on their website for the next month!  The reason I love reading books like this is, it enables me to have more insights about what makes people and businesses tick, then the fun is to test it out in practice and ultimately when there are results to pass it on to my clients.

I am a huge fan of Dan Ariely’s work.  This book illustrates some of his most important insights around how we think and behave socially, economically and in the context of business.

An entrepreneur recently asked me if Thought Leadership coaching was about helping leaders change how they think?  I replied, “Yes, it is but it is not just about ‘changing’ how people and leaders think, it is about ‘transforming’ or ‘progressing’ how they think and to do this I help them to expand their understanding and awareness of thought itself and how thought works.”

In this context, Dan Ariely’s book is a must read as it examines ‘the underlying structures of our thoughts’ that determine so many of our choices and behaviours.

I particularly love Dan Ariely’s research conclusions from a series of experiments conducted in the early 2000’s at Princeton University.  8 out of 9 of these experiments conclusively proved that “Once people’s basic human needs (food, clothing and shelter etc) are taken care of, increasing financial reward for ‘non-mechanical tasks’ has a negative impact on performance!”these findings fly in the face of the approach of most businesses who typically incentivise higher levels of performance by increased financial incentives such as large bonuses.

Dan Ariely’s extensive research and experiments demonstrate the reality is that people executing cognitive tasks within the thought structure and context of ‘social norms’ will more often match or even better the performance levels of people doing the same tasks within the thought structures of ‘market norms’ where they are being paid a financial reward.

In the context of ‘market norms, v social norms’ what I have discovered in my work concurs with Dan Ariely’s conclusions. When I have had clients wanting to improve their team performance levels using financial incentives (market norms) they have usually experienced either a short-term improvement or indeed a negative improvement. When we have taken a different approach and replaced these ‘social norms’ in terms of a ‘why’ (a purpose) beyond money.

Dan Ariely is an academic who describes himself as a ‘Behavioural Economist’ who has conducted numerous ‘social economic’ experiments and spent much of his life researching all aspects of psychology in the world of economics that have uncovered many surprising results that demonstrate that many of our everyday choices about what we buy and what we are prepared to pay.

‘The Cost of Zero Cost’
In Chapter 3 Dan Ariely begins to expose the generally massively underestimated power of the concept ‘free’ and ‘zero cost’.

As a senior university lecturer and respected business consultant Dan Ariely has a knack of being able to rope many hundreds of students and various business groups into participating in his experiments. In one experiment at a gathering of hundreds of people Dan Ariely set up a chocolate stand offering subsidised chocolates where you could only purchase a limited number of chocolates per person and where initially the choice was either to choose a low-cost chocolate candy ‘Hershey’s Kisses’ for 1 cent each or a much higher quality chocolate candy at the still low price of 15 cents each. People predominantly chose the 15 cent chocolates over the 1 cent chocolates, however, halfway through the experiment they dropped the cost of the 1 cent ‘Hershey’s Kisses’ to ‘FREE’ the previous split in demand was flipped on its head and nearly everyone started to choose the Hershey’s Kisses over the much higher quality chocolates. When you read the full experiment in the book you will appreciate was not the 1 cent saving that motivated people to chose differently – IT WAS THE WORD “FREE”!

“Whether it’s products or money we just cannot resist the pull of ‘free’!”. This often completely irrational choice of something because it is ‘free’ can be found in every marketplace. Ariely runs through a series of real-life examples where this concept has been central to the growth of multi-million dollar businesses.

Anchoring
Dan Ariely Book Cover version 2 Predictably IrrationalJust as a gosling on hatching follows what it first sees when it is born and is anchored to it, there is a part of the human thought system that causes a similar behaviour with the prices of goods and services.

In an experiment called ‘The Social security number experiment’. Dan Ariely got his volunteers in a classroom to unveil a whole host of mystery items that most people would not know the exact price of because they are not everyday purchases such as a luxury box of chocolates and a whole range of computer accessories such as a plug-in keyboard that most people would not know an accurate price of the top of their head.

BEFORE unveiling the items Ariely asked the participants to write their name and the last 2 digits of their social security number on a piece of paper provided.

After this Ariely would reveal each item and ask them to write down what they what they would be prepared to pay for each item. He did this with many hundreds of people with the strangest results. People who wrote down the higher 2 digits (based on their social security number) were prepared to pay over 200% more.

The conclusion of this experiment and the many other ‘anchoring experiments’ is that we are all susceptible to ‘price anchoring’.

Herding
Ariely explores why when there is a visible queue for a restaurant it attracts more people who were not even intending to go to the restaurant or had never even heard of the restaurant before.

Self-herding
Ariely explores why you tend to go back to the same place because you had a previous good experience

The power of social norms v market forces
Ariely examines why social norms are often a greater motivator to change behaviour than financial rewards or penalties.

He gives a real-life example to where a school relied on social norms to encourage parents to bring their children on time to school. Then one day they decided to improve punctuality by imposing automatic financial penalties for tardiness. The impact was the opposite of what they intended because rather than being driven by guilt to get their children to school on time many parents would feel ok to be late as they were happy to pay a fine. Without intending it the school had changed the parent’s mindset that getting their children to school on time was a ‘social norm’ to instead making it a ‘market force’. The other interesting conclusion is that once you have created this change in mindset, you cannot reverse it.

In the book, Dan Ariely explores the impact that Market Forces v Social Norms has on performance levels.

One over-riding and not totally surprising conclusion from Ariely’s research is that ‘Social Norms’ instill passion, loyalty, and commitment to the team, whereas ‘Market Forces’ do not!

Other important subjects covered in the book include:

  • The impact of passion on rationality
    When we are gripped with passion we don’t operate rationally. Ariely reports on some very edgy experiments he conducted with university students involving their choices whilst sexually aroused aka the ‘Dr. Jackal and Mr. Hyde’ story where Mr. Hyde has a 25% higher chance to choose to not use a condom.
  • Giving up on long-term goals for short-term gratification
    Our lack of awareness when we are procrastinating and how putting structures in place to remind us and hold us to account to take consistent actions.  Such structures will nearly always trump our reliance on will-power and motivation.

For anyone interested in ‘how we think and how our thoughts impact our reality’ I cannot recommend this book highly enough.

 

 

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