Predictably Irrational

Authors: Dan Ariely (Duke University)

Publication: (Book) HarperCollins Publishers

Year: 2009

Focus Area: Decision Making, Consumer Behavior

Relevance: Effective financial fraud prevention depends on an accurate understanding of the repetitive, predictable, and often irrational financial mistakes in consumer decision making.

Summary: This book outlines systematic, irrational tendencies of consumers and highlights ways in which we might account for, and protect against, these unconscious vulnerabilities.  Weaknesses include:

1. Relative value— Comparative mechanisms such as anchoring price can dramatically change “market value”.
2. Scarcity— We value something more because of its perceived rarity.
3. Zero’s cost— There is a marked cost to getting something “free”, and why its psychological effects are so strong.
4. Social vs. Market relationships— These two are starkly divided, mentally, and can be used for better business and civic relationships.
5. Emotions— We not only make entirely different decisions when influenced by emotions, but are incapable of predicting these changes when not under their influence.
6. Procrastination—The immediate value of gratification supersedes the delayed potential value of acts such as financial saving, regardless of pre-determined plans.
7. Ownership—We overvalue what we have.
8. Irresistible options—The desire to maintain “options” overwhelms basic priorities.
9. Confirmation bias—We tend to perceive whatever we expect to perceive.
10. Price as Placebo—Not only do we correlate increased cost with increased value, but the increase in perceived value can have an impact on actual value (e.g., 50-cent aspirin can provide greater pain relief than 5-cent aspirin).

On the positive side, these inefficiencies suggest that significant advances can be made by accounting for these mental weaknesses.  For example, making the option to “opt out of” instead of “opt into” organ donor programs drastically increases participation.  Similarly, one might take advantage of a person’s procrastination tendency by asking for a savings commitment tied to a future promotion.  (Both of these options have been implemented to great success.)  Behavioral economics, then, may provide to the fraud prevention world with, ironically, a free lunch: improved consumer behavior at limited or no extra cost.

First Paragraph: I have been told by many people that I have an unusual way of looking at the world.  Over the last 20 years or so of my research career, it’s enabled me to have a lot of fun figuring out what really influences our decisions in daily life (as opposed to what we think, often with great confidence, influences them).

Full Text: Hard Copy Only