Consumer theory forms an integral part of microeconomic analysis. There are certain assumptions that we use while analyzing consumer behavior. Any theorem that we can think of in this context is considered incomplete without the assumption that consumers act rationally in order to maximize their utilities. But every day we come across people whose spending patterns cannot be described as anything but absurd. Are these people truly unique in their choices or is this the way that normal consumers behave?
Dan Ariely’s book seeks to answer these questions through a series of experiments. The author’s first tryst with absurd behavior came about when he was in a hospital in Tel Aviv, getting treated for severe burns on his body. The behavior of the nurses especially puzzled him because all their care and the methods used, could not save the patients from pain. The prolonged exercise of removing bandages caused as much pain to the patient as they would have experienced had the bandages been quickly removed. So, why did they insist on doing it slowly?
The experience at the hospital led him to study behavioral economics and, years later, to the experiments described in the book.
Chapter 1: The Truth about Relativity
The basic lesson to be drawn from this chapter is that, while making decisions, people do not know what they want. Their choices can be easily manipulated by adding a proxy choice to the mix. This proxy choice has to be comparable with the choice that we want people to make. In the book, the author uses the example of the subscription offerings of The Economist. In the first experiment, two choices are offered:
- Online subscription for $ 59
- Print only subscription for $125
Given these choices, a majority of the people chose the online subscription over the print subscription.
In the second part of the subscription, the following choices are offered:
- Online subscription for $ 59
- Print and online subscription for $125
- Print only subscription for $125
Given these choices, a majority of the people chose the print and online subscription.
It is evident that in the first case, the consumers have no way to evaluate the offered choices. But, in the second case, they know for a fact that the second option is better than the third one, and it is evident that the benefits of the first choice can be provided for free.
This is an easy way to manipulate the choices of the consumers and make them choose a particular option. A great marketing tip!
Chapter 2: The Fallacy of Demand and Supply
Most microeconomic analysis is based on the assumption that the proportion of resources that we allocate to an alternative, reflects our valuation of that alternative. This means that the higher we spend on a particular commodity, the higher we value it. The same goes for production theory. But the author feels that this notion or assumption is incomplete.
He believes that the amount of resources we allocate to a commodity depend on multiple factors. He then introduces two interesting concepts:
- Arbitrary Coherence: This boils down to the fact that the value that we place on an object will be arbitrary but the decisions following that would be logical. For example, given a list of objects, the valuation of the first object will be entirely random and the valuation of the objects following that would be based on the valuation of the first object.
To illustrate this, the author then describes an experiment in which he asked the students to write down the last two digits of their social security numbers and then asked to write down the prices that they would pay for three objects. The correlations of prices and the security numbers came out to be positive for a majority of the students.
He also states other examples such as moving to a city with cheaper rentals but still paying the same amount in rent, etc.
- Self-herding: Another concept about the anchors. They aren’t permanent. They can be changed. Visiting an establishment of a different kind or experiencing something out of the ordinary can lead people to change their expectations and hence, their spending habits. The author states the example of switching from Dunkin’ Donuts to Starbucks. The former, a run of the mill café and the latter offering an entirely different ambiance.
Again, these offer entirely new insights into consumer theory.
Chapter 3: The Cost of Zero Cost
This is one of my favorite chapters in the book. After all which one of us hasn’t waited for the Buy 2 Get 1 free or Buy 2 Get 3 free schemes at our favorite stores. Also, we have this habit of looking for free products when buying groceries. If offered such schemes, most of us tend to buy things we wouldn’t need otherwise. The author illustrates his point by conducting an experiment selling chocolates at a discount. He offers a choice between an expensive chocolate and a cheaper one. When the students have to pay for both of the options, they choose the expensive chocolate (offered at a very large discount). But when they are given a choice between a heavily discounted expensive chocolate and a cheap chocolate given out for free, a majority choose the free chocolate. A product given out for free along with another product appeals to the irrationality of the consumers, they fail to compare the costs and benefits.
This is “why we often pay too much when we pay nothing”.
Chapter 4: The Cost of Social Norms
This is an interesting chapter on incentives. It examines why people might undertake tasks that may seem tedious or utterly useless or why people work very hard for a cause or do favour. It also answers why it might be a bad idea to disclose the price of a gift.
To answer the questions, the author conducted a set of experiments in which the people involved were asked to do a simple computer task. In the first part, the participants were paid varying amounts. In the second, the participants were asked to do the task as a favour to the experimenter. The results revealed that the group doing the task as a favour performed better than the highest paid group. But the mere mention of money, like what other participants had been paid, reduced the performance.
It has interesting implications, especially for HR managers who are responsible for creating incentive programs.
Chapter 5: The Influence of Arousal
This chapter, one of the funniest in the book, describes the effect of the state of mind on decision making. Using an experiment, the author assesses the effect of arousal on decision making and comes to the conclusion that decisions made in the heat of the moment are generally not that good. He also concludes that our preferences differ significantly when we’re in a calm state of mind from what they would be in the heat of the moment.
Chapter 6: The Problem of Procrastination and Self-Control
The message of this chapter is simple. Having no deadlines on tasks can be detrimental. However, clear cut deadlines which are known in advance, whether self-imposed or not, work very well in terms of productivity. This is illustrated through an experiment involving three different classes, each with a different kind of deadline. These deadlines, associated incentives and disincentives would motivate people to get important tasks done, tasks which they would ignore otherwise.
Chapter 7: The High Price of Ownership
This is a pretty common thing. Anyone who has ever rented a house would know how highly owners of a property measure the value of their place, go to great lengths to highlight the positives while the prospective tenant can only see the negatives.
The author does not add much to this particular thing but the way he comes to this conclusion is pretty interesting. He describes a ticket pricing system followed at Duke University. Tickets are sold on a lottery basis. He tries to broker deals between people who’ve procured tickets but don’t want them and those who don’t have them. He then sees that there is large difference in the prices for each group.
Chapter 8: Keeping Doors Open
In this day and age, we believe in making the most of everything. We want to experience everything that we possibly can, we want to learn all that we can and so forth. But what we don’t realize is that this belief is detrimental. It does not allow us to experience things fully, or do things as well as we could have done otherwise.
He believes that it is better to close certain doors, let go of certain opportunities to make the most in life.
As always, there is an experiment. The author along with some colleagues designs a game which allows people 100 clicks to open doors, once a door is opened, the player receives a payoff. After this, the doors close.
In another version of the game, doors do not close immediately after they are opened but it takes some time for them to close. A player can open them again to delay the closure. It is shown that the participants try to keep open as many doors as possible even if that means a loss in their earnings.
Chapter 9: The Effect of Expectations
We know that expectations affect our experiences. If we expect something to be good, it just might be. The opposite turns out to be true as well. This relatively well known theory was tested in an experiment involving the beer preferences of people. People were served two kinds of beer, regular and laced with vinegar. Some people were told and some people weren’t.
Among the people who were told, the vinegar laced beer tasted different to them. However, the people who weren’t told felt that the two types tasted the same. Some people actually changed their ratings after being told.
In a similar Pepsi vs. Coke experiment, the scans of the people involved in blind tasting revealed that they couldn’t differentiate between the two. However, the scans of people who were told showed that they had strong preferences between the two drinks.
He proved once again how important expectations are for experiences.
Chapter 10: The Power of Price
A chapter about the seemingly simple placebo effect of medication but it has implications deeper than that. First, the author examines the placebo effect of medication by inflicting minor pain and then offering Vitamin C pills as pain relievers. However, he gives the pills disguised as new, expensive pain medication or cheap pain killers and then repeats the shocks.
Most people given the Vitamin C as the new and expensive drug report that it has helped with pain. The people given the vitamin as a cheap pain killer do not report any changes in the pain.
It has far reaching implications with regards to consumer theory:
- It essentially means that the notion of quality that we derive from the price is completely false.
- Anybody can manipulate our choices by offering a higher priced product which may turn out to be the same as a cheaper counterpart.
Chapter 11: The Context of Your Character, Part 1
In this chapter, Professor Ariely comes to an interesting conclusion about humanity. He goes on to show that people cannot be segregated into honest or dishonest category. People are generally honest, but will commit small acts of dishonesty if they get a chance.
Using two experiments he comes across another result. If people are reminded of morals or ethics, they will cheat much less than usual.
Chapter 12: The Context of Your Character, Part 2
This chapter further explores the general dishonesty of people. The study finds that people tend to be dishonest when it comes to small things like stealing stationery from work. But somehow, people are more honest when it comes to cash, especially when small amounts are involved.
These two chapters on character offer insight into how people generally behave.
Chapter 13: Beer and Free Lunches
The last chapter just features one experiment based on ordering patterns in restaurants. Generally when people visit restaurants in large groups, their choices may be affected by others in the group. Sometimes this can be bad thing, especially if people are influenced into choosing a thing they don’t enjoy. So in such scenarios, it is best to make up your mind. If you order something enjoyable, the extra enjoyment counts as a free lunch!
All in all, this book makes for an interesting read. It can be easily comprehended by people who might not have any knowledge of the subject. It is difficult to sum it up in its totality because of the variety of theories and experiments involved, it helps in clarifying the absurd choices that we, as consumers, make on a daily basis. All the experiments involved may not seem believable but they are intriguing, to say the least. Finally, the book gives useful tips in overcoming our irrationality and making the best possible decisions.0