Predictably Irrational: The Hidden Forces That Shape Our Decisions

“Everything is relative—even when it shouldn’t be.”

Humans rarely choose things in absolute terms. We don't have an internal value meter that tells us how much things are worth. Instead, we focus on the relative advantage of one thing over another and estimate the value accordingly. For example, we don't know how much a six-cylinder car is worth, but we can assume it's more expensive than the four-cylinder model.

Most people don't know what they want unless they see it in context. We don't know the speaker system we like until we hear a better one. We don't even know what we want to do with our lives until we see a friend doing just what we think we should be doing. Everything is relative, and that's the point. Like an airplane pilot landing in the dark, we want runway lights to guide us to the ground.

We can’t help always looking at the things around us in relation to others. This holds true for physical things, experiences, and ephemeral things: emotions, attitudes, and points of view. We not only tend to compare things with one another but also focus on comparing easily comparable things.

When Williams-Sonoma first introduced a home "bread bakery" machine (for $275), most consumers were not interested. The marketing team then introduced an additional larger, more expensive bread maker, and sales rose. Why? Simply because consumers now had two models of bread makers to choose from. They didn't have to decide in a vacuum because one was larger and more expensive.

Relativity helps us make decisions in life. But it can also make us downright miserable. Jealousy and envy, for example, spring from comparing our lot in life with that of others.

The more we have, the more we want. And the only cure is to break the cycle of relativity.

“[...] to make a man covet a thing, it is only necessary to make the thing difficult to attain.”

The basic idea of arbitrary coherence is this: although initial prices are "arbitrary," once those prices are established in our minds, they will shape not only present prices but also future prices (this makes them "coherent").

Responses to random questions can influence initial prices. But once those prices are established in our minds, they shape what we are willing to pay for an item and how much we are willing to pay for related products.

Prices are everywhere: cars, lawnmowers, and coffeemakers all have manufacturer's suggested retail price. The real estate agent talks about housing prices. But price tags alone are not necessarily anchors. They become anchors when we contemplate buying at that price. That's when the imprint is set. We are willing to accept a range of prices from then on, but as with the pull of a bungee cord, we always refer back to the original anchor. Thus, the first anchor influences the immediate buying decision and many others.

Our first decisions resonate over a long sequence of decisions. First impressions are important. The random and not so random anchors that we encounter along the way and are swayed by remain with us beyond the initial decision.

Herding happens when we assume that something is good (or bad) based on other people's previous behavior, and our actions follow suit. There’s also self-herding which happens when we believe something is good (or bad) based on our own previous behavior.

Descartes said, Cogito ergo sum—"I think, therefore I am." But suppose we are nothing more than the sum of our first, naive, random behaviors. What then? We can actively improve our irrational behaviors in our personal lives by first becoming aware of our vulnerabilities.

“Zero is an emotional hot button—a source of irrational excitement.”

Have you ever experienced planning to buy something – say, a pair of white, padded-heel, gold-toed socks – but ended up buying a cheaper one that you didn’t like at all? You just bought them since the store gave you a FREE second pair. This is how alluring FREE items are: we are willing to give up a better deal and settle for something we don’t want because it’s free. 

‘FREE!’ gives us such an emotional charge that we perceive what is being offered as much more valuable than it is. Humans are intrinsically afraid of loss, and the allure of ‘FREE!’ is tied to this fear. Free items have no evident risk of loss. When we choose a paid item, we risk having made a poor decision, and so to avoid the possibility of this loss, we go for what is free.

“[...] no one is offended by a small gift because even small gifts keep us in the social exchange world and away from market norms.”

We live simultaneously in two different worlds—one where social norms prevail and the other where market norms make the rules.

The social norms include the friendly requests that people make of one another. They are wrapped up in our social nature and need for community and are usually warm and fuzzy. Instant paybacks are not required: you may help move your neighbor's couch, but he doesn’t have to move yours immediately. It's like opening a door for someone: it pleasures both of you, but reciprocity isn’t expected. 

The second world – one governed by market norms, is very different. There's nothing warm and fuzzy about it. The exchanges are sharp-edged: wages, prices, rents, interest, and costs and benefits. Such market relationships aren’t inherently evil or mean — they also include self-reliance, inventiveness, and individualism, but they imply comparable benefits and prompt payments. In this domain, you get what you pay for. 

Introducing market norms into social exchanges violates the social norms and hurt relationships. Once this mistake is committed, recovering a social relationship is difficult.

From time to time, we all need someone to help us move something, watch our kids for a few hours, or to getting our mail when we're out of town. How can we get our neighbors to help us? Is it through gift, cash, or nothing at all? This social dance isn't easy to figure out, especially when there's a risk of pushing a relationship into the realm of market exchange.

“[...] in the heat of passion, suddenly, with the flip of some interior switch, everything changes.”

We tend to underestimate how passion affects our behavior. Even the most brilliant and rational person seems to be completely divorced from themselves in the heat of passion.

Most of the time we are smart, decent, reasonable, kind, and trustworthy. Our frontal lobes are fully functioning, and we are in control of our behavior. But when we are in sexual arousal, and the reptilian brain takes over, we become unrecognizable. When gripped by passion, emotions may blur the boundary between what’s right and wrong.

We all underpredict how much arousal completely negates our superego and how emotions dictate our behavior. When the boss criticizes us publicly, we might be tempted to respond with a vehement e-mail. But wouldn't we be better off putting our reply in the "draft" folder for a few days?

Looking from one emotional state to another is difficult. It's not always possible. But to make informed decisions, we need to somehow experience and understand the emotional state we will be in on the other side of the experience. Learning how to bridge this gap is essential to making important life decisions.

“We can’t make ourselves do what we want to do.”

When we promise to save our money, exercise, or watch or diet, we are in a cool state. But when we see tempting things like a pair of shoes, television, or a slice of chocolate – the lava flow of hot emotion comes rushing in, making us forget our promises. Giving up on our long-term goals for immediate gratification is procrastination.

Tightly restricting freedom (with equally spaced deadlines for a project, for example) is the best cure for procrastination.

Resisting temptation and instilling self-control are general human goals, and repeatedly failing to achieve them is a source of our misery. Again and again, we repeatedly fail to reach our long-term goals. Why? Because without precommitments, we keep on falling for temptation.

When an authoritative "external voice" gives orders, most of us will pay attention. It seems that the best course might be to give people an opportunity to commit upfront to their preferred path of action. What's the bottom line? We have problems with self-control related to immediate and delayed gratification.

“We overvalue what we have.”

Ownership permeates and shapes our lives in odd ways. Much of our life story can be told by describing what we gain and lose. We buy clothes and food, automobiles and homes, for instance. And we sell things as well— houses and cars, and in the course of our careers, our time.

We are mostly fumbling around in the darkness of being dedicated to ownership. It’s because of three irrational quirks in our human nature.

The first quirk is that we fall in love with what we already have.

The second quirk is that we focus on what we may lose rather than gain. Our aversion to loss is a strong emotion that sometimes causes us to make bad decisions.

The third quirk is that we assume other people will see the transaction from the same perspective as we do. It is just difficult for us to imagine that the person on the other side of the transaction, buyer or seller, is not seeing the world as we see it.

Ownership also has "peculiarities." For one, the more work you put into something, the more ownership you begin to feel for it. Think about the last time you assembled some furniture. Figuring out which piece goes where and which screw fits into which hole boosts the feeling of ownership. This is called the “Ikea effect.”

Another peculiarity is that we can begin to feel ownership even before we own something. Think about the last time you entered an online auction. You only placed a bid but already started to feel the thing is yours.

But ownership is not limited to material things. It can also apply to points of view. For example, when we take ownership of an idea, we love it more, perhaps more than we should. We prize it more than it is worth. And often can’t let it go because we can't bear its loss. In the end, we are left with an ideology—which is rigid and unyielding.

“Options distract us from our main objective.”

We work feverishly to keep all our options open. We buy the expandable computer system, just in case we need all those high-tech bells and whistles. We keep our children in all activities open—just in case one sparks their interest in gymnastics, piano, French, organic gardening, or tae kwon do.

We might not always be aware of it, but we give something up for those options in every case. We end up with a computer with more functions than we need. In the case of our kids, we give up their time and ours—and the chance that they could excel at one activity—to provide them with a wider range of experiences in various activities. We forget to spend enough time on what really is important.

We are continually reminded that we can do or be anything we want to be. The problem is in living up to this dream. We must develop ourselves in every way possible; must taste every aspect of life; just make sure that of the 1,000 things to see before dying, we have not stopped at number 999. But then comes a problem—are we spreading ourselves too thin?

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 may work more hours at our jobs, for instance, without realizing that the childhood of our sons and daughters is slipping away. Sometimes these doors close too slowly for us to see them vanishing.

Giving up work and staying home to spend all your time with your children or moving to a different city just to improve your weekends with your spouse isn’t the optimal solution (although it might provide some benefits). But wouldn't it be nice to have a built-in alarm to warn us when the doors are closing on our most important options?

“The mind gets what it expects.”

When we believe beforehand that something will be good, it generally will be good—and when we think it will be bad, it will be bad. But how deep are these influences? Do they just change our beliefs, or do they also change the physiology of the experience itself?

Expectations can influence nearly every aspect of our life. They also shape stereotypes. A stereotype is a way of categorizing information in the hope of predicting experiences. The brain cannot start from scratch in every new situation. It must build on what it has seen before. For that reason, stereotypes are not intrinsically vicious. 

Stereotypes provide shortcuts in our never-ending attempt to make sense of complicated surroundings. This is why we expect that an elderly person will need help using a computer or that a student at Harvard will be intelligent. Because a stereotype provides us with specific expectations about group members, it can also unfavorably influence both our perceptions and our behavior.

Expectations enable us to make sense of a conversation in a noisy room, despite the loss of a word here and there, and likewise, to read text messages on our cell phones, even though some words are scrambled. And although expectations can make us look foolish from time to time, they are also very powerful and useful.

“When given the opportunity, many honest people will cheat.”

There might be two types of dishonesty. The first is the one that evokes the image of a pair of crooks circling a gas station. As they cruise by, they ponder how much money is in the till, who may stop them, and what punishment they may face if caught (including how much time off they might get for good behavior). Based on this cost-benefit calculation, they decide whether to rob the place or not.

Then there is the second type of dishonesty. This is committed by "honest" people who "borrow" a pen from a conference , take an extra drink from the dispenser, or falsely report a meal as a business expense.

We care about honesty, and we want to be honest. However, our internal honesty monitor is active only when we contemplate big transgressions, like grabbing an entire box of pens from the conference hall. We don’t how consider little transgressions, like taking one or two pens, reflect our honesty, so our superego stays asleep.

People cheat when they have a chance to do so, but they don't cheat as much as they can. Once they begin thinking about honesty, they stop cheating completely. In other words, when we are removed from any benchmarks of ethical thought, we tend to stray into dishonesty. But if we are reminded of morality when we are tempted, we are much more likely to be honest.

“Dealing with cash makes us more honest.”

When we look at the world around us, much of the dishonesty involves cheating that is one step removed from cash. Companies cheat with their accounting practices; lobbyists cheat by underwriting parties for politicians; drug companies cheat by sending doctors off on posh vacations. To be sure, these people don't cheat with cold cash as cheating is a lot easier when it's a step removed from money.

Because we are so adept at rationalizing our petty dishonesty, it's often hard to see how nonmonetary objects influence our cheating.

The dishonest view of human nature is worrisome. We can hope to surround ourselves with good, moral people, but we have to be realistic. Even good people are not immune to being partially blinded by their minds. This blindness allows them to take actions that bypass their own moral standards on the road to financial rewards. In essence, motivation can play tricks on us whether or not we are good, moral people.

The problems of dishonesty don't apply just to individuals. In recent years we have seen businesses, in general, succumb to a lower standard of honesty. There are companies out there that aren't stealing cash but are stealing things one step removed from cash.

When we deal with money, we are primed to think about our actions as if we had just signed an honor code.

Look at the latitude we have with nonmonetary exchanges. There's always a convenient rationale. We can take a pencil from work, a Coke from the fridge—we can even backdate our stock options—and find a story to explain it all. We can be dishonest without thinking of ourselves as dishonest. We can steal while our conscience is fast asleep.

We need to recognize that once cash is a step away, we will cheat by a factor bigger than we could ever imagine. We need to wake up to this—individually and as a nation, and do it soon.

“[...] we are pawns in a game whose forces we largely fail to comprehend.”

People are sometimes willing to sacrifice the pleasure they get from a particular consumption experience to project a certain image to others. When people order food and drinks, they seem to have two goals: to order what they will enjoy most and portray themselves in a positive light in the eyes of their friends. The problem is that once they order, say, the food, they may be stuck with a dish they don't like—which they often regret.

Standard economics assumes that we are rational—that we know all the pertinent information about our decisions, that we can calculate the value of the different options we face, and that we are cognitively unhindered in weighing the ramifications of each potential choice.

But we are all far less rational in our decision-making than standard economic theory assumes. Our irrational behaviors are neither random nor senseless—they are systematic and predictable. We all make the same types of mistakes repeatedly because of the basic wiring of our brains.

We usually think of ourselves as sitting in the driver's seat, with ultimate control over the decisions we make and the direction our life takes, but this perception has more to do with our desires— how we want to view ourselves—than with reality.

But the fact that we make mistakes also means that there are ways to improve our decisions.