Why do so many people live beyond their means? Or why do people plan to diet and exercise, but fail to do so? Or why can't we resist the "Buy One Get One Free" deals when we don't really want what is being offered? These and other questions are explored by Dan Ariely, a behavioral economist and professor at the Massachusetts Institute of Technology. In his new book, Predictably Irrational, he examines the irrationality of human behavior and how it affects every aspect of our lives. The book details a number of experiments conducted by Ariely and his MIT students to explore what influences our decision-making processes.
Ariely writes that most people don't know what they want unless they see it in context. For instance, buyers often make decisions based on how a product is priced relative to others. A television salesperson will put together a display such as this:36-inch Panasonic for $69042-inch Toshiba for $85050-inch Philips for $1,480
Most customers find it difficult to compute the value of different options. "But given three choices, most people will take the middle choice," writes Ariely, noting the middle choice is most likely the one that the salesperson most wants to sell.
In our quest for the best, most consumers are now programmed to purchase $4 cups of coffee at Starbucks and to always have the cutting edge cell phone. And are buyers getting their money's worth? Ariely writes that by becoming aware of irrational behavior, readers can train themselves to question repeated behaviors. "In the case of the cell phone, could you take a step back from the cutting edge, reduce your outlay and use some of the money for something else? And as for the coffee...ask yourself whether you should even be having that habitual cup of expensive coffee at all."
Ariely presents a different experiment in each chapter of the book. For instance, he discusses "The Cost of Zero: Why We Often Pay Too Much When We Pay Nothing." Zero, he points out, is not just a price, but an emotional hot button. "It's no secret that getting something free feels very good," he writes. Yet, there are other costs involved.
In one experiment, Ariely and a colleague set up a large table at MIT and offered two kinds of chocolate -- Lindt truffles and Hershey's Kisses. They offered the superior truffle for 15 cents and the Kiss for one cent. "We were not surprised to find that our customers acted with a good deal of rationality...about 73 percent chose the truffle and 27 percent chose a Kiss." Then they offered the truffle for 14 cents and the Kiss for free. In this instance, the Kiss became the favorite, with 69 percent of their customers bypassing the superior truffle at 14 cents for the free Kiss. The participants hadn't made a reasoned cost-benefit analysis, but chose the latter simply because the Kisses were free. Ariely writes that a similar attitude leads us to pass on a nice pair of padded socks in lieu of an inferior pair that come in a package with a free second pair. "This is a case in which you settled for something that was not what you wanted, just because you were lured by FREE."
Ariely writes that we are enticed by free goods, even when it's not something we want. Why? "Most transactions have an upside and a downside, but when something is free, we forget the downside. Free gives us such an emotional charge that we perceive what is being offered as immensely more valuable than it really is," he writes. So getting something for free provokes people to wait in line for minutes, even hours, for a free ice cream cone, or fill their drawers with things they don't really need or want.
These are just a few of the experiments Ariely presents in Predictably Irrational. The book can teach you and your clients just how irrational many of our spending patterns are, and how they can be changed. For clients who would like to focus more on saving for retirement than spending needlessly today, Ariely's book provides an eye-opening look into the copious ways we fritter needlessly.
Mary Scott is the co-author of Companies with a Conscience and can be reached at email@example.com.