Predictably Irrational: The Hidden Forces That Shape our Decisions

Nonfiction | Book | Adult | Published in 2008

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Summary

Chapter Summaries & Analyses

Introduction-Chapter 2

Chapters 3-4

Chapters 5-6

Chapters 7-9

Chapters 10-11

Chapters 12-15

Key Figures

Themes

Index of Terms

Important Quotes

Essay Topics

Tools

Beta

Discussion Questions

Chapters 3-4Chapter Summaries & Analyses

Chapter 3 Summary: “The Cost of Zero Cost: Why We Often Pay Too Much When We Pay Nothing”

Chapter 3 looks at how “FREE!” (56) items are “an emotional hot button—a source of irrational excitement” (56). To better understand how FREE! influences human behavior, Ariely and his colleagues conducted an experiment with Lindt truffles and Hershey’s Kisses. They first set the price of the Lindt truffle and Kiss at 15 cents and one cent, respectively. Customers chose a truffle over a Kiss, likely because they compared the quality and price of the chocolates. The researchers then wanted to see whether FREE! would change consumer choice. They altered the price, with truffles at 14 cents and the Kisses FREE! In this situation, more consumers chose Kisses than truffles.

These results suggest that conventional economic theory does not accurately explain human behavior regarding free products. According to conventional economics, the price reduction should not change consumer choice. However, marking the Kisses as FREE! did so. In fact, the commodity gained value. Behavioral economics calls this phenomenon the zero-cost effect. Ariely notes, “How strange (but predictable) we humans are!” (59).

Ariely believes the concept of FREE! entices humans to forget the downside of a purchase because FREE! entails an imagined mitigation of loss—and humans fear loss. If someone were to choose the item that is not free, they would risk a poor decision, possibly resulting in loss. By getting something for FREE!, people believe they avoid loss—yet, Ariely claims, this belief is often mistaken. For example, individuals might choose to open a FREE! checking account with no benefits attached over one that costs five dollars each month. If the five-dollar checking account includes free checks, online billing, and other benefits, the individual may end up paying more for the FREE! account to get these same benefits. Thus, FREE! may still entail loss.

Chapter 4 Summary: “The Cost of Social Norms: Why We Are Happy to Do Things, but Not When We Are Paid to Do Them”

Chapter 4 begins with a short hypothetical story about a Thanksgiving Dinner. Ariely describes a setting familiar to many readers:

You are at your mother-in-law’s house for Thanksgiving dinner, and what a sumptuous spread that she has put on the table for you! The turkey is roasted to a golden brown; the stuffing is homemade and exactly the way you like it. Your kids are delighted: the sweet potatoes are crowned with marshmallows. And your wife is flattered: her favorite recipe for pumpkin pie has been chosen for dessert (75).

All family members are enjoying the festivities. After everyone has eaten, you pull out your wallet and offer your mother-in-law money for the dinner. The day is immediately ruined, and you have damaged your relationship with your mother-in-law. Ariely uses this example to highlight how people live in two different worlds: one ruled by social norms and the other ruled by market norms. People must keep these two worlds separate so “life hums along pretty well” (76). When these two worlds clash, however, discord reigns, as the Thanksgiving story highlights.

To investigate whether people are more motivated by social or market norms—i.e., a cause versus cash—Ariely and a colleague set-up an experiment. Participants dragged as many circles as they could from the left-hand side to the right-hand side of a computer screen. There were three groups. Ariely and his colleague paid the first and second groups five dollars and 50 cents (or 10 cents, depending on the study), respectively. Ariely expected these groups to apply market norms to the experience since they were paid for their efforts. The third group was not offered cash, and thus Ariely assumed they would apply social norms to the situation. The third group worked the hardest, followed by the first and second groups, supporting the notion that individuals can work harder under social norms than market norms.

Ariely and his colleague expanded this experiment to see whether replacing the cash payment with gifts would change the results. Participants in the five-dollar group and 50-cents group respectively received a box of Godiva chocolates and a Snickers bar. The third group was offered no gift. In this situation, all three groups worked equally hard, suggesting that small gifts keep people within social norms and not market norms.

Chapters 3-4 Analysis

Chapters 3 and 4 focus on how the zero-cost effect plays into irrational behavior. In Chapter 3, Ariely explores how FREE! influences decision-making. As one example, he uses Amazon’s introduction of free shipping with orders over a certain amount; rather than consumers buying only what they needed and paying $3.95 in shipping, they bought more items to get free shipping. Amazon sales increased except in France. After investigating the situation, Amazon’s marketing team realized that the French division of Amazon offered shipping at one franc (about 20 cents) rather than free. Once they corrected the cost, French sales also increased. Consumer behavior was irrational: By overreacting to FREE!, individuals spend more to get free shipping.

Chapter 4 extends the concept of FREE! to see what happens when individuals add money to situations that operate under social norms. Mixing social and market norms results in “strange and undesirable things” (96). From a market norms (or traditional economic) perspective, gifts are an irrational waste of money; the individual might not like the gift and would have instead preferred cash. In contrast, from a social norms perspective, giving cash over a gift is irrational. People often intuitively know in which situations a gift or cash is rational, enabling us to avoid accidentally mixing the two worlds.

The force of zero-cost and the delicate balance of market and social norms have real-world consequences. To better serve students and society, the American education system needs change. Ariely does not believe that focusing on salaries, competition, and test scores can adequately motivate students; the circle-dragging study suggests that market norms are a limited incentive. As these two chapters illuminate, “cash will take you only so far” (93). Ariely argues that curricula need to better link to social, technological, and medical goals that society cares about. These new goals are on the path of social norms, which will hopefully better impassion people about education.

Ariely introduces another key theme in this section: Cash makes humans behave strangely. One experiment asked participants to rearrange sets of words to form sentences, known as the “scrambled-sentence task” (82). There were two groups: one where participants unscrambled money-related words, and one where participants unscrambled neutral words. Compared to participants who handled neutral words, participants who unscrambled money-related words were less likely to ask for help or offer help to others. Individuals in the money-words group also spent more time alone and chose seats farther away from fellow group members. Humans are social creatures, until they think about money. Money makes us act more selfishly and individualistically.