The Hidden Forces That Shape Our Decisions
book by Dan Ariely
Chapter 1: The Truth About Relativity
We always seek to draw comparisons, and we are often unaware as to how seemingly irrelevant factors such as the simple presentation of options, actually influence what we select.
Thus, given three choices, A, B (very distinct, but equally as attractive as A), and A- (similar to A, but inferior), we will almost always choose A, because it is clearly superior to A-. •Say we are trying to decide on a vacation between two choices: a Paris trip with free breakfast and a Rome trip with free breakfast. We cannot decide between the two because we love Paris and Rome equally. oSimply adding a third option - an "A minus" version of one of the options, will cause us to pick the A version, over the equally atractive B version. Thus, the simple addition of a third "A-" option, "Paris without a free breakfast", will cause us to choose "Paris with a free breakfast", the "A" option, over "Rome with a free breakfast", the equally attractive "B" option. Similarly, had the third option added been "B minus" - "Rome without a free breakfast", we would have selected that "B" option - "Rome with a free breakfast". oThis is irrational behavior because in the presence of two equal options, we couldn't decide between the two, and the presence of a third, inferior option, shouldn't cause us to suddenly prefer one of the two. •Ariely did an experiment where he used photos of undergrads to test this; 75% of research subjects chose choice A over choice B. •When Williams-Sonoma introduced bread machines, sales were slow. When they added a "deluxe" version that was 50% more expensive, they started flying off the shelves; the first bread machine now appeared to be a bargain •Tversky and Kahneman conducted the following experiment
oWhen contemplating the purchase of a $25 pen, the majority of subjects would drive to another store 15 minutes away to save $7 oWhen contemplating the purchase of a $455 suit, the majority of subjects would not drive to another store 15 minutes away to save $7 oThe amount saved and time involved are the same, but people make very different choices Watch out for relative thinking; it comes naturally to all of us.
Chapter 2: The Fallacy of Supply and Demand
Anchoring has a major long-term effect on our willingness to pay. •Savador Assael, the Pearl King, single-handedly created the market for black pearls, which were unknown in the industry before 1973. His first attempt to market the pearls was an utter failure; he didn't sell a single pearl. So he went to his friend Harry Winston, and had Winston put them in the window of his 5th Avenue store with an outrageous price tag attached. Then he ran full page ads in glossy magazines with black pearls next to diamonds, rubies, and emeralds. Soon, black pearls were considered precious. •Ariely, Prelec, and Loewenstein conducted an experiment in "arbitrary coherence" at the Sloan School. Students were asked to write down the last two digits of their SSN and consider whether or not they would pay that amount for certain items. Then they bid on those items. oFor every product, those with a 80-99 SSN were willing to pay more than those with a 00-19 SSN...by nearly 3X. •Simonsohn and Loewenstein found that people who move to a new city remain anchored to the prices they paid in their previous city. People who move from Lubbock to Pittsburgh squeeze their families into smaller houses to pay the same amount. People who move from LA to Pittsburgh don't save money, they just move into mansions. •In another set of experiments, even attempts to switch anchors failed; those who started off with higher anchors always demanded a higher price than those who started off with lower anchors, even after both groups had been exposed to exactly the same prices (albeit in a different order) •Herding:...