First published: 2008
Revised and Expanded: 2010
Recommended for: People whose bosses have just told them they need to give a presentation on Behavioral Economics to some senior marketing leaders
Stars: 4. I debated giving it 3 because you can get the same info from TED talks, but walking into my presentation with a hardcover book with pages tagged earned me some points for initiative, so I’m sharing the love.
Ok so I didn’t pick this book up by choice, exactly. I work in marketing communications, and the director of my department was asked to give a presentation on behavioral economics, and I was elected to work with him on it. By work with him, I of course mean I was elected to give the presentation. But hey, here was an opportunity to learn something new and knock out another book for CBR, so everybody wins, right?
Author Dan Ariely is the James B. Duke Professor of Psychology and Behavioral Economics at Duke University and holds Ph.D.s in cognitive psychology and business administration. While he always had an inquisitive mind, he became interested in studying human behavior when he was 18, after a horrific accident left him with third-degree burns on 70% of his body and years of medical treatment. He started questioning why certain treatments were administered a certain way and came to realize that the decision was based more on emotion than science. The tension between rational behavior and how people actually react drove him to pursue the study of behavioral economics.
Simply put, behavioral economics is the study of how psychology and emotion influence people’s decisions. Traditional economics assumes that everyone is rational and all decisions are made according to the individual’s best interests. You don’t need to look much further than the housing bubble or, say, certain national elections to understand that that’s not always true. People make decisions for a variety of reasons that have little to nothing to do with rationality. This may seem obvious, yet Ariely recounts how, prior to the housing market crash, fellow economists would approach him and insist that while behavioral economics may explain why people buy a certain brand of yogurt, it couldn’t account for the really big decisions that people make. When big money is at stake, they insisted, people are rational.
That said, this book is filled with examples of the little things: how marketers can manipulate people by taking advantage of their irrationality. For example, have you ever looked at a menu in an expensive restaurant and thought, “No way am I going to spend $49 on a steak” only to decide that the $42 filet looked like a pretty good deal? Restauranteurs know that people don’t usually buy the most expensive item on the menu, but they will buy the 2nd most expensive item. That $49 entree primes you into thinking that $42 sounds reasonable.
The Caesar salad was $109!
Other examples demonstrate how putting a false value on something makes it more desirable. When black pearls were first introduced, people assumed they were worth less than white pearls. Only by displaying black pearls in an expensive jewelry store next to some highly-desirable gems did people’s perceptions, and their willingness to pay, change.
Perhaps my favorite principle that Ariely discusses is how people behave differently according to whether they are involved in a social or financial transaction. When you’re invited to a friend’s house for dinner, it’s not uncommon to bring a bottle of wine as a gift. But why spend $40 on a bottle of wine that your friend may not like? From a purely economic standpoint, it would make more sense to hand your friend $40 and suggest she go buy her own. You will know you haven’t thrown your money away, and your friend is sure to get something she enjoys. Try this, though, and you’ll be deemed socially inept at best. In a social situation, bringing up money (at least in most cultures) is the most crass move you can make.
Predictably Irrational is a fun, easy read, and shines a light on the irrationality that rules human behavior. I recommend it for anyone interested in marketing or cognitive behavior, whether you’re giving a presentation or not. And if you’re coming to my house for dinner, I prefer Zinfandel.