Based on empirical evidence and ideas from experimental and behavioural economics, economist Dan Ariely describes common tendencies that lead individuals and groups towards patterns of irrationality and decision making traps, in his book Predictably Irrational: The Hidden Forces That Shape Our Decisions.
Predictable Sources of Irrationality
- Anchors & relativity: Valuations of and utility derived
from decisions are often measured in relation to competing options or
benchmarks. We have tendencies to make easy comparisons (over objective
comparisons) and to focus on comparisons in relative terms than absolute
terms.
- Self herding and arbitrary coherence: We have a tendency to
make decisions and arrive at conclusions using consistent patterns and
heuristics. This is particularly so if an anchor and source of relativity is
already in place, and because we are generally poor in questioning our own
repeated behaviour (until true costs are eventually realised or revealed).
- Zero-costs and emotions: The concept of ‘free’ goods and
services can trigger irrational excitement in consumers. This can lead to
over- or incomplete valuations of decisions, opportunities and purchases.
Likewise (and perhaps unsurprisingly), individuals are more likely to
experience selective bias and/or make decisions with a very short-term view
when emotionally charged (e.g. anger, arousal, etc.).
- Market and social norms: When people perceive an
interaction as a social transaction (as opposed to an economic transaction),
they are less likely to rely on market-like / rational decision making
processes and more so on cultural and societal rules-of-thumb and
expectations.
- Virtual ownership and options: We have a tendency to
overvalue assets we own, whether due to sentimentalism or other social
factors. This also increases our tendency to overvalue assets we almost but
never actually owned. We also demonstrate tendencies to overvalue the
benefit of having options due to imperfect foresight and crude calculation
of probabilities and expected returns.
- Dishonesty: Individuals often struggle with dishonesty. The
tendency for dishonest behaviours increases when the actions and/or
environments are ‘one-step-removed’ from the act of cheating itself. Such
behaviours are particularly common in non-monetary contexts.
- Preconceptions: The timing of information, preconceived expectations and stereotypes, and the relative price of goods or actions have been shown to influence our tendencies and responses as well. The effectiveness of placebos in healthcare and indifferences from blind taste-testing in beverage industries are common examples of such factors in play.
References
Ariely, D. (2008). Predictably Irrational: The Hidden Forces That Shape Our Decisions.
Further Reading
- Myth of the Rational Voter
- Psychology of Human Misjudgement
- Bad Blood of Theranos