Predictably Irrational and relative value

ABC Radio National’s All in the Mind just broadcast an interesting interview with behavioural economist Dan Ariely, where he discusses some of his fascinating work on our cognitive biases and why we find it so difficult to judge what will benefit us most.

I’m pretty sure it’s a repeat, but I mention it as I’ve almost finished the unabridged audiobook of his recent bestseller Predictably Irrational which is thoroughly excellent.

The first thing that strikes me is ‘wow, you’ve done so much interesting research’, as the book is largely about studies he has personally been involved with.

The second thing is ‘damn, I wish I’d thought of that’ as the studies are often cleverly conceived and tackle real-world corners of our reasoning and judgement.

The chapters on anchoring and on decoy options are particularly fascinating and he gives a vivid example of how decoy options work.

He notes that the UK magazine The Economist was offering a web only subscription for $59, a print subscription for $125 dollars, and a print-and-internet subscription also for $125.

It seems no-one would choose the print-only subscription – it seems obsolete – but its mere presence affects our reasoning and boosts the sales the more expensive option.

In a study to test this, Ariely gave participants the choice between these three subscription options, and to another group of participants, the choice only between web-only and print-and-internet subscriptions.

in the three option condition 16 people chose the internet-only subscription, none the print-only subscription and the other 84 chose the print-and-internet option.

As the print-only is obselete, it should make no difference whether it is part of the choice or not, when it isn’t there, in the two choice condition, the reverse pattern emerged. The majority, 68 people, chose the cheaper online option, while only 32 took the print-and-internet option.

In other words, the print-only is a decoy and it makes us think that the print-and-internet option is a better deal because it has something ‘free’, when in reality, this impression is just created because we’ve just been presented with a decoy worse deal

This relates to one of Ariely’s main points that he returns to throughout the book, that we tend to make relative judgements, and manipulating the context can skew our perceptions of value.

It struck me that this is how most people experience pitch and musical notes. A few people have ‘perfect pitch‘ and can label tones without reference to other tones. I wonder if some people have ‘perfect pitch’ with regard to this sort of value judgements.

The Predictably Irrational website is also very good, where Ariely has a regularly updated blog and has created free video summaries of each of the chapters.

All come highly recommended.

Link to AITM interview with Dan Ariely.
Link to Predictably Irrational website.

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