Why Is It Important to Listen to Dan Ariely about Economics?

Posted October 2019 by John Sherk, B.S.W., B.S. Bible; MDiv.; 8 updates since. Reading time: 6 min. Reading level: Grade 7+. Questions on Dan Ariely? Email Toni at: editor@online-psychology-degrees.org.

How rational do you think your day-to-day decisions are? You might believe you purchase nothing without logically concluding it is the best choice you can make. And maybe you even think markets as a whole function this way. But is Adam Smith’s “invisible hand” really rational? Anyone who walks into Target without a shopping list can quickly discover how impulsive they can be. Dan Ariely has done great work in behavioral economics to prove this very thing. People, and therefore markets, are not driven by rationality, but by forces much more fundamental and unconscious. He develops this claim further in his book Predictably Irrational: The Hidden Forces That Shape Our Decisions.  Insight from his book will show why his thought can be valuable, not only to behavioral economics but to life.

Dodge the Decoy

Suppose you are presented with three options for a honeymoon:  in Paris with breakfast included, in Rome with breakfast included, or in Rome without breakfast included. Which choice seems more appealing to you? This is the illustration Dan Ariely uses in the first chapter of Predictably Irrational to describe the decoy effect. Assuming someone does not have a particular affinity for Paris over Rome, one can predict which option most consumers will choose. Obviously, a honeymoon with breakfast stands as superior over a honeymoon without one. So the choice stands between either Paris or Rome. Because the third option presents itself, the average consumer makes the decision more about Rome and having breakfast included or not. This is due to the asymmetry it presents. One cannot easily decide between Paris and Rome, but deciding between Rome with breakfast or Rome without breakfast comes quite easily. Therefore, the “decoy” (Rome without breakfast) makes Rome with breakfast look even better than Paris with breakfast.

What does this have to do with you? Although we might never have to compare the choices above, we often compare ourselves to those around us. Especially with the advent of social media. People often present their best selves online. Although nothing rational tells us that Paris with breakfast looks inferior to Rome with breakfast, the decoy makes us think that way. We’re making a false comparison. Thus, we often do the same thing when comparing ourselves to others. How do we break this habit? Ariely suggests we focus on what we can control and on our own circles in life. He believes this can increase relative happiness and life satisfaction.

Free Behavioral Economics

Do you find yourself more inclined to take something or try something if it’s labeled “free”? Ariely uses the following example in Predictably Irrational:

  • First, he offered Lindt chocolate for 15 cents and Hershey’s for 1 cent.
  • Then, with a superior product, Lindt outsold Hershey: 73% chose Lindt while only 27% chose Hershey.
  • However, next Ariely knocked down the price for each by 1 cent so that Lindt cost 14 cents and Hershey became free.
  • Finally, 69% of people chose Hershey while 31% chose Lindt.

Since the relative price remained constant, one would expect the results to be the same. People spent 14 cents more for Lindt over Hershey before, so why not now? But the results reversed! Although consumers saw Hershey as an inferior product, and although the relative price didn’t change, the word “free” enticed them.

About this, Ariely writes, “Most transactions have an upside and a downside, but when something is FREE! we forget the downside. FREE! gives us such an emotional charge that we perceive what is being offered as immensely more valuable than it really is” (54). Ironically, the word “free” makes the value to us increase.

How can this insight into behavioral economics help you? As they say in business, “There’s no such thing as a free lunch.” It’s important to see things in terms of relative cost rather than getting tempted with “free.” What might you be sacrificing when you wait in line at a museum on a “free” day? Or when you buy something on Amazon just because it offers “free shipping”?

Use Emotional Decision-Making to Your Advantage

As any social worker or nurse knows, it can be impossible to reason with someone when they’re in a heightened emotional state. For example, have you ever been so frustrated at misplacing something in your house that you’ll waste an incredible amount of time just to find it? At that moment, the frustration takes over. You could use your time better elsewhere and look for it later, but it’s almost like you have to “win.”

Consequently, impulse buys work in similar ways. In his book Amusing Ourselves to Death, Neil Postman how marketing campaigns no longer present a rational argument for the superiority of their product. Rather, they present their product as having therapeutic value. Buy it, not because it does this or that, but because it’ll make you feel like a man. Or like a successful mother. Or like the smart person. Ariely builds on this with his own observations about people’s increased buying impulses while in states of arousal. For example, let’s say you’re desperately hungry. Suddenly what you eat and how much it might cost matters a lot less.

Applying these observations about our impulsivity to life, Ariely suggests we can take advantage of this to make the world a little better and a little safer. For instance, he suggests an OnStar system that calls someone’s parents if they exceed a certain speed could potentially lower car accidents among teenagers. But you can also take advantage of this in your own life. To illustrate, maybe you want to become a more avid reader, but you recognize your impulsivity to check your phone or go on social media. Try putting your phone and computer in another room, out of sight. Initially, your mind will feel strained, even bored. But as this becomes normal, your mind will adapt.

The Benefits of Being Predictably Irrational

Dan Ariely’s work in behavioral economics speaks to areas of life and study far beyond that field. In what ways might we be building our lives, or even national policy on impulsive choices? As the old saying goes, “What the heart wants, the will chooses, and the mind justifies.”

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