Summary: Why is it that we often don't bat an eye at spending an extra $200 on an expensive suit, or $5000 on a house purchase, but can then turn around and spend hours clipping PennySaver coupons to save 25 cents on our next soup purchase? Why are we comfortable spending $6 on a cup of coffee now, when only 5 years ago we would be loathe to spend more than $3 on a cup of coffee (corrected for inflation)? Why do we keep stuffing ourselves at the all-you-can buffet even after our stomachs begin groaning after the third helping? Full of startling insights delivered with author Dan Ariely’s characteristic wit, Predictably Irrational is Ariely's first attempt at chronicling the oddity of human thought and choice, particularly when it comes to their financial and consumptions habits. The study of economics relies on a key set of assumptions around the notion of rational consumer choice. Simply stated, the idea that consumers are able to use reason and logic to make the decisions that are best for them, with the aim of maximizing their personal happiness and satisfaction. In doing so, the rationale goes, society benefits as a whole. With oodles of experimental evidence, Ariely shows that not only is human behaviour surprisingly non-rational (irrational), it is predictably irrational, consistent across a variety of situations, and can therefore be predicted and corrected for – if only we knew how. Golden Egg Irrational Relativity “That’s a lesson we can all learn: the more we have, the more we want. And the only cure is to break the cycle of relativity.” Predictably Irrational, Page 21 In 1993, American securities regulators forced publicly trading companies to reveal pay and salary details for all of their top executives for the first time in history. Ostensibly, this was in a bid to build public awareness around the outrageous executive compensation schemes that were in place at the time. Newspapers regularly ran stories comparing CEO pay schemes implemented in different companies, and financial pundits spent hours on television and reams of print decrying the loss of America’s moral compass in the financial world. Which makes what happened next all the more curious. CEO compensation schemes skyrocketed. By 2008, CEOs were earning more than 369 times the salary of the average worker, up from 131 times in 1993, and 76 times in 1976. Why? Because now, all CEOs knew what other CEOs were earning and, since no-one likes to be left out, each demanded pay schemes that matched the salaries of their counterparts. Dollar for dollar, companies started keeping up with the Joneses, and executive compensation schemes steadily pushed themselves towards even more outrageous boundaries. But regular people behave irrationally too. Have you noticed how many people purchase a bigger, faster, shinier car, or a bigger, better and swankier house than before – even if they can’t afford to keep up with the payments? The allure of relativity is so strong that it clouds judgment. It’s no surprise that every religion and philosophy out there urges people to avoid coveting their neighbours’ possessions; it’s not because they fear for peoples’ neighbours, but rather it’s because they fear for what we could do to ourselves when we try to head for the greener grass of the neighbours’ lawn. GEM #1 Irrationality Comes with a Price "Initial prices [for products] 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).” Predictably Irrational, pages 29-30 How much would you pay for a necklace made of black pearls? It’s the 1970s: Soul Train is on the air, Nixon is in China and sideburns are all the rage. You’ve never seen a black pearl necklace before in your life but all of a sudden, there it is,
