Behavioral economics, relative and absolute value, decoy, imprinting, anchor, second price auction, zero – an emotional hot button, social norm, market norm, burning man, priming, Dr. Jekyll and Mr. Hyde, procrastination, the ice glass method, ownership bias, placebo, mummy paint, power of suggestion, royal touch, Jobst suit, superego, decision illusion
Dan Ariely, the author of this book is a professor of psychology and behavioral economics. In this book he explains that most of our decisions are irrational and biased. And this irrational behavior is systematic, not random. Most of the social, economical and governance policies are based on the idea that people take rational decisions. Hence should change.
This book is divided into 13 chapters, each focusing on one instance where majority of population acts irrationally. He follows this with explanation of behavioral tests conducted by him and his team on real people to show as evidence.
Some the core ideas that I have experienced in life are:
- People rely on relative value of things than absolute values. Comparison drives decisions like purchase. Example: If one can get A for Rs.5, B for Rs.8 and both for Rs.10, most people will buy both even though they may never need B.
- The initial price of something is arbitrary, if nothing comparable is available. But once the price is established it will hardly be challenged. Example: Gold is precious because someone thought it was. We can no longer go back to gold being valueless.
- Free/zero is an emotional hot button. Most people ignore rational options in favor of getting something for free. Example: We end up buying things on offer (one free on two) than focusing on what we actually like.
- We consider what we have more valuable than it actually is. Or in other words it grows on us. Example: Difference is price expectation between buyer and seller.
- We tend to think that expensive means better, which is not true always. Example: Without knowing the real price, very few people can distinguish cheap wine from expensive one.
Conclusion & rating:
This was a very interesting read. The author suggests in the beginning of the book to retrospect some of our recent decisions in the line of every chapter as we go on reading this book. And that is the best way to learn from this book. Would recommend it to anyone willing to understand the behavioral side of finance and economics.