Author: Dan Ariely Rating: 5/5
I have not read any works of Daniel Kahneman and Amos Tversky, the pioneers of behavioral economics. I am not sure how easy it would be to read them. But I must say that this book has certainly piqued my interest for behavioral economics. It is a very interesting and fascinating field. This is an insightful book about the human behavior.
Author has, through plenty of examples/experiments, showed how people, in the day to day life are irrational and predictably so, whereas the traditional economics works on the basis of rational behavior. Author has very articulately laid out different instances when we do not or are not able to think straight. Traditional economics is required, certainly, to understand the basics and the building blocks of economics. But we should incorporate the irrational human behavior more and more into the economic models while designing the public policies.
Idea for this book came about when the author was recovering from his burn injuries in a hospital. That is where it struck him that the way we think might be flawed. Nurses used to remove the old bandage and put a new one on him everyday. There are two ways of tackling this problem. First, is to remove the bandage slowly so as to inflict less pain but for a longer duration. Second, is to rip the bandages off quickly where the intensity of pain would be much higher but for a short while. The nurses used the second method. Apparently human brain favors less pain for a longer time as compared to severe pain for a short time.
Some of the experiments that stood out which I want to list out here are:
Decoy Pricing: Economist magazine introduced a dummy pricing for "print subscription only" as compared to "web only" and "web with print". Majority of the people chose "web with print". But when the decoy pricing for "print only" was taken out, the subscription for "web with print" went down significantly. Similar, behavior can be seen when we look for houses. We typically compare house which are very close to each other in term of design and aesthetics.
Price Anchoring: How we are pulled towards some products just because they have been anchored or perceived to be of higher value than a comparable product. Starbucks positioned itself as something more than coffee. Once we pay $3.50 for a latte as compared to $1.50 for a coffee at Dunkin and say we like Starbucks, from then on we are anchored to $3.50 and we do not care about it any more. Similarly, we are drawn towards product which are not precious but are made out to be so e.g Tahitian pearl, it is kept alongside Diamond, Platinum and other precious jewel or where an artificial shortage of supply is created e.g. Wii.
Free: An interesting experiment was conducted in a shopping mall where Lindt chocolates were being sold against Hershey's Kisses. Lindt was priced higher than Kisses. In another experiment, Kisses was free. The difference in the prices of the chocolates was the same in both experiments. In the second experiment, sale of kisses was significantly more than that of Lindt, unlike the first case where it was the reverse. Point of this experiment was that people think differently when things are free and when they are not. Since free has no hassles or strings attached, it turns out to be much convenient and a no-brainer than its competitive product.
Another interesting example was that of Amazon's free shipping offer for orders above a certain amount. This turned out to be a big sales pusher in US as people bought more to get free shipping. But it was not the case in France, but it turned out that they were responding to a different offer which had a shipping cost of 1 Franc. When the price in France was made free they also behaved the same way as the people in US.
Motivation: Money may not be a motivator in all the cases (as was also discussed by Daniel Pink in his interesting book called "Drive"). How many scientists or artists actually work for money ? We would not offer money for a friendly gesture or help shown towards us but rather would return the favor when that person is in need of some help.
Self Control: We think we have control over ourselves but how many times have we got into a debt trap or have not finished our school assignments on time. We keep postponing things till the very end and we are caught in a situation when we are not able to honor our commitments. Because of this reason, Honda made the servicing schedule easy and simpler for people to remember.
We See What We Want To See: Our beliefs muddle our thinking. How many time have two friends argued over a fowl in a game. Both of them would be watching the same game but would have different opinions about the fowl that was called, especially if they support different teams. This was also shown in the famous Japanese movie Roshomon by Akiro Kurosawa. Same incident is narrated by several different characters in different ways.
Placebo: Very often we feel that if something is expensive it must be good and it often satisfies us better. Somehow a branded aspirin which is much expensive than the generic one seems to work better. There is certainly some placebo effect which comes in to play. Many health care policy could be made better if only we could tap the potential of the placebo effect and study the human behavior caused by it.
Cheating: We cheat, given a chance, but only up to a certain level. We use the office supplies and services for our personal use. We return things after we have used it. Retailers lose billions of dollars every year just on customer returns. Probably to cover these costs the retailers increase the price of the materials. Corporate thefts like Enron and others account for much more than the actual theft that happens in the community. But we tend to be soft on corporate criminals. It is probably because the fraud is removed one or more steps from actual cash.
All the experiments discussed in this book go on to show that we are more often irrational than we would like to believe. Under different conditions, circumstances and mental state we make decisions which could hardly be called rational. In my opinion everyone should read this book.
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