Predictably Irrational

PREDICTABLY
IRRATIONAL
PRESENTED BY
FAIZA SAEED
INTRODUCTION
What really influences our decisions in daily life (as
opposed to what we think, often with great confidence,
influences them).
By seeing how systematic certain mistakes arehow we
repeat them again and againit is possible to learn how
to avoid some of them.
In economics the assumptions about our ability for perfect
reasoning, called rationality, provides the foundation for
economic theories, predictions, and recommendations.
The discipline dealing with irrationality which this book is
all about is called behavioral economics, or judgment and
decision making (JDM).
THE TRUTH ABOUT RELATIVITY

Why Everything Is RelativeEven When It Shouldnt Be
Most people dont know what they want unless they see it in
context.
Example: Sam the television salesman, Rapp the
restaurateur, the Economist Subscription, real state,
Honeymoon Paris vs Rome, the bread maker.
The decoy: the reason for choosing what we choose.
Relativity helps us make decisions in life.
But it can also make us downright miserable.
THE FALLACY OF SUPPLY AND

DEMAND
Why the Price of Pearlsand Everything ElseIs Up in the Air
Example: Assael and the black pearls.

Arbitrary coherencealthough initial prices are arbitrary,
once those prices are established in our minds they will
shape not only present prices but also future prices.
Anchorthe first price that comes to us for a new product.
Herdingwe assume that something is good (or bad) on the
basis of other peoples previous behavior, and our own
actions follow suit
Example: Starbucks ,restaurant lines.
Experiment: the social security auction,the poetry recitation,
THE COST OF ZERO COST

Why We Often Pay Too Much When We Pay Nothing
Zero is an emotional hot buttona source of irrational

excitement.
Experiment: Hershey vs Lindt,
The critical issue arises when the presence of FREE! leads
us to make a bad decision (cost-benefit analysis)
Experiment: the Halloween trick, amazon,aol
When choosing between two products, we often overreact to
the free one.
Zero may also affect food purchases.
THE COST OF SOCIAL

NORMS
Why We Are Happy to Do Things, but Not When We Are Paid to Do Them
We live simultaneously in two different worldsone where

social norms prevail, and the other where market norms
make the rules.
There are many examples to show that people will work more
for a cause than for cash.
Examples : lawyers
Experiment: Circle drag.
Also gift are acceptable without the price tag
When a social norm collides with a market norm, the social
norm goes away for a long time.
THE INFLUENCE OF AROUSAL

Why Hot Is Much Hotter Than We Realize
Dr. Jekyll & Mr. Hyde

Understand the degree to which rational, intelligent people can
predict how their attitudes will change when they are in an
impassioned state. Cold vs Hot
Result of the study:
It was clear that the magnitude of underprediction by the
participants was substantial.
They were simply unable to predict the degree to which passion
would change them
THE PROBLEM OF
PROCRASTINATION AND SELFCONTROL
Why We Cant Make Ourselves Do What We Want to Do
Giving up on our long-term goals for immediate gratification is

procrastination.
Experiment: student term papers
Not everyone understands their tendency to procrastinate, and
those who do may not understand their problem completely.
Resisting temptation and instilling self-control are general human
goals, and repeatedly failing to achieve them is a source of much
of our misery.
Ice glass method for reducing credit card.
THE HIGH PRICE OF OWNERSHIP

Why We Overvalue What We Have
Experiment: The dukes game tickets

Three irrational quirks in human nature.
we fall in love with what we already have.
we focus on what we may lose, rather than what we may
gain.
we assume other people will see the transaction from the
same perspective as we do.
THE HIGH PRICE OF OWNERSHIP

Why We Overvalue What We Have
Ownership peculiarities
the more work you put into something, the more ownership
you begin to feel for it. The ikea effect
Partial ownership: Auctions
Virtual ownership: advertising industry
Trial promotions: offers you will never downgrade from.
OWNERSHIP IS NOT limited to material things. It can also
apply to points of view and results in ideologyrigid and
unyielding.
KEEPING DOORS OPEN

Why Options Distract Us from Our Main Objective
Experiment : The door game

We have an irrational impulse to chase worthless options.
The other side of this tragedy develops when we fail to realize that some
things really are disappearing doors, and need our immediate attention.
We need to consciously start closing some of our doors. Small doors, of
course, are rather easy to close. But the bigger are harder to close.
Choosing between two things that are similarly attractive is one of the most
difficult decisions we can make.
Downsides the consequences of not deciding
THE EFFECT OF EXPECTATIONS

Why the Mind Gets What It Expects
When we believe beforehand that something will be good, therefore, it
generally will be goodand when we think it will be bad, it will bad.
Experiment: coffee
Example: caterers, coke vs pepsi
Expectations also shape stereotypes, a way of categorizing information, in
the hope of predicting experiences.
we react differently when we have a stereotype of a certain group of
people,
stereotyped people themselves react differently when they are aware of
the label
stereotypes can also affect the behavior of people who are not even part
of a stereotyped group.
Experiment Asian American Women. Rude/polite study, elderly
THE POWER OF
PRICE
Why a 50-Cent Aspirin Can Do What a Penny Aspirin Cant
The placebo effect

In general two mechanisms shape the expectations that make placebos
work.
One is beliefour confidence or faith in the drug, the procedure, or the
caregiver.
The second mechanism is conditioning,the body builds up expectancy after
repeated experiences and releases various chemicals to prepare us for the
future.
Experiment : Veladone-Rx $2.50 vs 10 cents
Do prices affect everyday consumer products as well? Yes very much so.
SoBe experiment
THE CONTEXT OF OUR CHARACTER, PART

I
Why We Are Dishonest, and What We Can Do about It
The honest dishonestwould you cheat if presented with the

opportunity?
Experiment: The test sheet
that when given the opportunity, many honest people will cheat
once tempted to cheat, the participants didnt seem to be as influenced by
the risk of being caught as one might think.
The ten commandments the mere contemplation of a moral benchmark of
some kind prevents dishonesty
THE CONTEXT OF OUR CHARACTER, PART

II
Why Dealing with Cash Makes Us More Honest
cheating is a lot easier when its a step removed from money.

Experiment: the test with the tokens added
given a chance, people cheat. But whats really odd is that
most of us dont see this coming.
when the medium of exchange is nonmonetary, our ability to
rationalize increases by leaps and bounds
BEER AND FREE LUNCHES

What Is Behavioral Economics, and Where Are the Free Lunches?
Experiment: Beer orders, food orders

Private choice vs public choice
Ordered just to convey uniqueness, prevalent in alcoholic
drinks.
Food ordered for social acceptance.
Free lunches: Thaler
It is difficult to sacrifice consumption today for saving in the
distant future, but it is psychologically easier to sacrifice
consumption in the future, and even easier to give up a
percentage of a salary increase that one does not yet have.

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PREDICTABLY

THE TRUTH ABOUT RELATIVITY

THE FALLACY OF SUPPLY AND

Example: Assael and the black pearls.

THE COST OF ZERO COST

Zero is an emotional hot buttona source of irrational

THE COST OF SOCIAL

We live simultaneously in two different worldsone where

THE INFLUENCE OF AROUSAL

Dr. Jekyll & Mr. Hyde

Giving up on our long-term goals for immediate gratification is

THE HIGH PRICE OF OWNERSHIP

Experiment: The dukes game tickets

THE HIGH PRICE OF OWNERSHIP

KEEPING DOORS OPEN

Experiment : The door game

THE EFFECT OF EXPECTATIONS

The placebo effect

THE CONTEXT OF OUR CHARACTER, PART

The honest dishonestwould you cheat if presented with the

THE CONTEXT OF OUR CHARACTER, PART

cheating is a lot easier when its a step removed from money.

BEER AND FREE LUNCHES

Experiment: Beer orders, food orders

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