As a long-term patient in a burns unit, Dan Ariely frequently had to endure the painful process of having his bandages removed. Already endowed with a highly inquisitive mind, he conducted research on ways of making the process less painful and proudly presented his findings to the nurses.
However, he observed that even when the nurses were presented with clear evidence that they could reduce the pain felt by patients during bandage removal, they continued to administer the more familiar – and more painful – method.
As Ariely says in Predictably Irrational: The hidden forces that shape our decisions, his epiphany came when he realised that if nurses, who have an interest in helping and caring for patients, manage to misunderstand what constitutes reality for their patients, perhaps other people similarly misunderstand the consequences of their behaviours.
Ariely embarked on a quest to explore what makes people tick, and why individuals make repeated mistakes without being able to learn much from their experience. This field of enquiry is known as judgment and decision making (JDM) or behavioural economics.
Wired to make mistakes
Unlike what standard economic theory assumes, JDM economists believe that we are far less rational in our decision making. The basic wiring of our brains makes us return to the same mistakes again and again. We are susceptible to irrelevant influences, irrelevant emotions, short-sightedness and other forms of irrationality.
Market norms trump social norms
Ariely’s contention that humans make irrational decisions is hardly breaking news. But his claim that we are predictably irrational seems counter-intuitive. Surely, by its very nature, irrational behaviour cannot be predicted. Ariely’s book contains dozens of often amusing experiments – and conclusions – in support of his hypothesis that irrationality can be predicted. Take pricing, for example. Rationally, we may believe that the price being asked for an item is too high. But if the same item is offered in a luxury version at a considerably higher price, we will often flock to buy the cheaper version that we had already dismissed as too expensive. Why? Because we tend to judge price relatively.
According to Ariely, such win-win solutions owe much to the fact that while social norms dictate that we are willing to volunteer our services, once market norms enter the equation, the social norms depart. Market norms trump social norms.
We are prepared to volunteer our time if it makes us feel good, but we’re not prepared to sell our time cheaply. Ariely also enters Chris (Free: The Future of a Radical Price) Anderson territory with a chapter called The cost of zero cost: why we often pay too much when we pay nothing. Free feels good, says Ariely. Zero is an emotional hot button – a source of irrational excitement – like picking up useless but free merchandising at a trade fair.
Often, the availability of a free item can be a good thing. But when free involves a struggle between a free item and another item, the presence of a free item can lead to a bad decision. Most transactions have an upside and a downside, but when something is free, it seems that we tend to forget the downside. Why? Because we’re afraid of loss – and when something is free, we tell ourselves that there can be no loss.
Free is powerful
Despite his warnings, Ariely concludes that while it might be counterintuitive, especially in times of budget cutbacks, to offer stuff free, it can have a great deal of power. It makes a lot of sense because the price of zero plays a unique role in our decisions.