Business Today

Consumer follies

In Predictably Irrational, Dan Ariely shows that humans are easily manipulated and predisposed towards chasing worthless options, says Rajiv Rao.

     Print Edition: April 19, 2009

In 1776, Adam Smith wrote wealth of Nations, which hinged on the presumption that humans were essentially selfinterested, rational people. Behavioural economist Dan Ariely has imploded many of these assumptions that have formed the bulwark of modern, free market capitalism.

The one thing that sets us humans apart from the animal kingdom is our innate ability to make rational decisions. Nothing can be further from the truth, argues Ariely, who spends much of the book demonstrating— almost gleefully, through seemingly quirky but ultimately profound experiments—that we can be easily manipulated, time and time again.

Ariely reveals that humans essentially “focus on the relative advantage of one thing over another” and this has major implications on the choices that we make. In one experiment, the author picked a hundred students from MIT’s Sloan School of Management and asked them to choose amongst three separate options for a subscription to the Economist: An Internet-only subscription for $59; a $125 print-only one; and a $125 option for both print and online access. Eighty-four students chose the print and Internet combination and 16 picked the Internet-only option. None went for the print-only option. When the print-only option was taken out, however, 68 chose the Internet-only option while the Internet and print combo garnered only 32 votes. In essence, nothing had really changed.

The print-only option, however, proved to be a key decoy whose presence or absence steered people towards one or the other option. This has implications for how businesses lure customers. Restaurants, Ariely points out, routinely create a first-tier of expensive dishes that nobody orders—steering customers towards cunningly priced secondtier dishes that seem like reasonable buys. 

Restaurants create a first-tier of expensive dishes that nobody orders— steering customers towards cunningly priced second-tier dishes.


These consumer follies form only the tip of the iceberg in our inclination towards flawed decisions. ‘Anchoring’, for instance, explains why a $3,000 flat screen TV purchase becomes the base from which all future TV purchases will be valued. “The power of the first decision can have such a long-lasting effect that it will percolate into our future decisions for years to come,” says Ariely.

The power of pricing, through Ariely’s experiments, is a revelation. He points out that “zero is an emotional hot button—a source of irrational excitement.” When a far superior Lindt truffle chocolate was offered to people for 15 cents versus the more commonplace Hershey’s ‘Kisses’ for one cent, 73 per cent opted for Lindt and only 27 per cent for the Kisses. When Lindt was reduced to 14 cents and the Kisses offered for free, the change was remarkable: The free Kisses attracted 69 per cent of customers and only 31 per cent chose to pay for Lindt.

In one experiment, Ariely zapped participants with electricity and then offered them a placebo pill costing $2.50 each to alleviate their pain. Almost all the participants said they experienced pain relief. However, when Ariely dropped the price to 10 cents, only half the participants felt better. There are numerous other experiments that reveal the same bleak information— humans are malleable and prone to irrational impulses. Perhaps, this book more than any other, can best explain the last two economic bubbles and the current global meltdown. Understanding it might just prevent us from falling off another economic cliff.

 

Bookmarks

The Long Revolution
by Dinesh C. Sharma
HarperCollins
Pages: 488
Price: Rs 595
At a time when software firms are not the darling of the markets, here’s a comprehensive history of the Indian IT industry that argues that the government’s role in India’s software success isn’t as small as it is generally thought to be. The book captures battles between politicians, bureaucrats and technocrats.


The Talent Edge

by David S. Cohen
Wiley India
Pages: 212
Price: Rs 299
When productivity and profits have acquired a new meaning in this downturn, Cohen’s book peels, to the last detail, methods to bestfit candidates for your organisation. Discard the ‘gut’ instinct, and try this essentially North American practical guide to hiring and retaining top performers.

 


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