Ch. 1 - Relativity#

• Humans rarely choose things in absolute terms. We don’t have an internal value meter that tells us how much things are worth. Rather, we focus on the relative advantage of one thing over another, and estimate value accordingly.

• Most people don’t know what they want unless they see it in context and make comparison. Everything is relative. We are always looking at the things around us in relation to others

  

• Given $A$, $A'$, and $B$, people tend to put $B$ on the sideline and end up choosing between $A$ and $A'$

• Adding $200 dollar to a new vehicle bill to buy a wheel decoration is easy, but adding 25 cents to a$1 dollar bread is hard to decide

Ch. 2 - Anchoring Effect#

• Initial prices are largely “arbitrary” and can be influenced by responses to random questions; but once those prices are established in our minds, they shape not only what we are willing to pay for an item, but also how much we are willing to pay for related products (this makes them coherent).

• The consequence of the AE is that we base decisions on our fundamental values - our likes and dislikes. But suppose we are nothing more than the sum of our first, naive, random behaviors. What can we do to imporove our irrational behaviors?

  • Pay particular attention to the first decision we make in what is going to be a long stream of decisions

Ch. 3 - The Cost of Zero Cost#

In this chapter, Dan Ariely explores the irrational psychological power of the word “free.”

According to traditional economic theory, a price drop of one cent should only marginally affect consumer behavior, regardless of what the original price was. However, Ariely demonstrates that zero is not just another price. It is an emotional hot button that completely short-circuits our ability to perform a rational cost-benefit analysis.

To prove this, Ariely conducted an experiment using two types of chocolate: a high-quality Lindt truffle and a standard Hershey’s Kiss. Initially, he priced the Lindt truffle at 15 cents and the Hershey’s Kiss at 1 cent. Given the incredible value of the premium truffle at that price, nearly three-quarters of the participants chose the Lindt chocolate. Then, Ariely lowered the price of both items by exactly one penny. The truffle became 14 cents, and the Hershey’s Kiss became free. Even though the relative price difference remained exactly the same - 14 cents - the behavior of the participants completely flipped. More than two-thirds of people suddenly chose the free Hershey’s Kiss, irrationally walking away from a vastly superior deal simply because the other option cost nothing.

Ariely explains this phenomenon through the psychological concept of loss aversion. Whenever we make a purchase, there is a psychological burden - a perceived risk that we might make a bad decision and lose value. When an item is free, we perceive it as entirely risk-free. This absence of a financial downside makes us irrationally overvalue the free item, and as a result, we completely forget the hidden downsides of the transaction.

A prime real-world example of this is Amazon’s introduction of free shipping for orders over a certain dollar amount. Consumers who only needed a single book would routinely buy a second book they did not even want, spending more money overall just to avoid a small shipping fee. Interestingly, when Amazon rolled this out globally, sales jumped everywhere except in France. It turned out the French division had reduced the shipping cost to a mere one franc (about 20 cents) instead of making it completely free. Because it was incredibly cheap but not perfectly free, buyers still evaluated the purchase rationally. Once Amazon France dropped that final 20-cent charge and made shipping exactly zero, their sales skyrocketed to match the rest of the world.

The overarching lesson of the chapter is that zero cost often comes with a hidden price. Whether it is waiting in a seemingly endless line for a free promotional item, or cluttering our homes with complimentary junk we will never use, the emotional allure of “free” frequently leads us to make decisions that cost us disproportionately in time, effort, and actual money.

Ch. 4 - Social Norms v.s. Market Norms#

We live simultaneously in 2 different worlds

1. one where social norms prevail, and
2. the other where market norms make the rules.

• Social norms are wrapped up in our social nature and our need for community.

• When you are in the domain of market norms, you get what you pay for

• When social and market norms collide, trouble sets in

  • introducing market norms into social exchanges, as we have seen, violates the social norms and hurts the relationships. Once this type of mistake has been committed, recovering a social relationship is difficult

• People will work more for a cause than for cash. Why

  • Because when the market norms entered the lab, the social norms were pushed out. How do we keep being in the social norm then?
    • Gifts. Even small gifts keep us in the social exchange world and away from market norms
    • But do NOT throw the price of the gift onto the table, because by the mention of its cost, the gift had passed into the realm of market norms

• For market norms to emerge, it is sufficient to mention money

Ch. 5 - We are Easily Switched to Our Dark Side on Arousal#

• When people are in a cold, rational, superego-driven state, they behave rationally. Once aroused, however, they got lost of every rational behaviors and thoughts
• In Freudian terms, each of us houses a dark self that can be triggered by a “switch”.
• To make informed (life) decisions we need to somehow experience and understand the emotional state we will be in at the other side of the experience.
  • e.g. Read online review before deciding about watching a movie in theater.
• How do we keep ourselves integrated then? Using External Force. See Ch. 6

Ch. 6 - Overcoming The Dark Side of Procrastination#

• Tightly restricting the freedom (e.g equally spaced deadlines) is the best cure for procrastination.
• Although almost everyone has problems with procrastination, those who recognize and admit their weakness are in a better position to utilize available tools for precommitment and by doing so, help themselves overcome it.

Ch. 7 - The Irrationality of Ownership#

• While selling something, we focus on what we may lose (the things to be sold), rather than what we may gain (the money which we can use to purchase something else new)
• Buyers do not share the same experience & feeling with Sellers toward an object and thus sees different prices between them
• What we mean by “ownership” irratioanlly?
  • The more work you put into something, the more ownership you begin to feel for it.
  • The pride of ownership is proportional to the difficulty of making it happen
  • Once they thought of themselves as owners, they were compelled to prevent losing their position by bidding higher and higher. Examples include
    • Virtual ownership
    • Product trial
  • The consequence of injecting a sense of ownership into one’s mind is that we love it perhaps more than we should. We prize it more than it is worth. And most frequently, we have trouble letting go of it because we can’t stand the idea of its loss. What are we left with then? An ideology—rigid and unyielding. This tactic has been exploited a lot in business world - They make it hard for you to gain; and once you own it, you keep paying to keep it (e. g. gaming)

Ch. 8 - The Problems of Many Options#

• People are beset not by a lack of opportunity, but by a dizzying abundance of it. People today are continually reminded that we can do anything and be anything we want to be. We spread ourselves too much.

Ch.9 - The Effect of Expectations#

• Observation: Two people favoring separate American football team had a polarized view on a touchdown.
• Inconsistency: Two friends sees one event in two different ways
• Conclusion: When we believe beforehand that something will be good, therefore, it generally will be good - and when we think it will be bad, it will bad.
• Deductions:
  • don’t underestimate the power of presentation

Ch. 10 - How Product Price Blindly Affect Expectations#

• Observation & Inconsistency: Two groups of people, in which one group had a real surgical operation while other other had a fake operation, reported the same post-operation feedback - they all getting better
• Conclusion: Following Ch.9, not only be­liefs and expectations affect how we perceive and interpret sights, tastes, and other sensory phenomena, but also that our expectations can affect us by altering our subjective and even objective experiences - sometimes profoundly so.

Ch. 11 - Honesty#

• Observations
  • Yearly theft in workplace is $600 billion, much higher than yearly rubbery-loss of$525 millions
  • People dishonestly pay less taxes
  • Over reported business reimbursement
• Conclusions
  • Given the opportunity, many honest people will cheat
  • and that they cheated just a little bit
  • even when we have no chance of getting caught, we still don’t become wildly dishonest. Why?
    • individuals are honest only to the extent that suits them
    • (Sigmund Freud) As we grow up in society, we internalize the social virtues. This in­ ternalization leads to the development of the superego. In general, the superego is pleased when we comply with soci­ ety’s ethics, and unhappy when we don’t
      • e.g. we stop our car at four AM when we see a red light, even if we know that no one is around;
    • Without the superego’s help, we engage in cost-benefit analysis - little dishonesty
• Deductions
  • What could we do to reduce the dishonesty?
    • (Approach used in Experiment of 10 Commandments)

Ch. 12 - Honesty in the Context of Money#

• Observations
  • Coke left unattended in the fridge was taken away while money is not
• Conclusions
  • Must of dishonesty doesn’t involve money

Key Takeaways#

This book teaches me what a real rational person is like:

• Those who keeps their superego in whatever emotional, situational, or environmental state
• Those who can stand on the psychology of losing their precious ownership on something they value and keep moving on
• Those who live by principles and not by feelings (which is why people ought to study Philosophy, History, and Science to train the skill of being rational)

In addition, the author’s “extra” curiosity is what opens up the world of human’s irrationalities. A tiny detail in life ignorable by almost anyone is often picked up by Dan as the starting point of a rather astonishing discovery about irrationality of minds. Surely, human’s irrational world has just been explored by just a less than 1% in this book. What should be taken away, in addition, is the methodology Dan employed:

1. Start with observation
2. Conduct scientific experiments (or, for us, searching materials online for answers)
3. Make conclusion
4. Make deduction