BOOK DETAILS

Predictably Irrational, Revised and Expanded Edition: The Hidden Forces That Shape Our Decisions

Predictably Irrational, Revised and Expanded Edition: The Hidden Forces That Shape Our Decisions

by Dr. Dan Ariely

ISBN: 9780061353246

Publisher Harper Perennial

Published in Business & Investing/Economics, Reference

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Sample Chapter

The Truth about Relativity

Why Everything Is Relative—Even When It Shouldn't Be

One day while browsing the World Wide Web (obviously for work—not just wasting time), I stumbled on the fol- lowing ad, on the Web site of a magazine, the Economist.

I read these offers one at a time. The fi rst offer—the Inter- net subscription for $59—seemed reasonable. The second option—the $125 print subscription—seemed a bit expen- sive, but still reasonable.

But then I read the third option: a print and Internet sub- scription for $125. I read it twice before my eye ran back to the previous options. Who would want to buy the print option alone, I wondered, when both the Internet and the print sub- scriptions were offered for the same price? Now, the print- only option may have been a typographical error, but I suspect that the clever people at the Economist's London offi ces (and they are clever—and quite mischievous in a British sort of way) were actually manipulating me. I am pretty certain that they wanted me to skip the Internet- only option (which they assumed would be my choice, since I was reading the advertisement on the Web) and jump to the more expensive option: Internet and print.

But how could they manipulate me? I suspect it's because the Economist's marketing wizards (and I could just picture them in their school ties and blazers) knew something impor- tant about human behavior: humans rarely choose things in absolute terms. We don't have an internal value meter that tells us how much things are worth. Rather, we focus on the relative advantage of one thing over another, and estimate value accordingly. (For instance, we don't know how much a six- cylinder car is worth, but we can assume it's more expen- sive than the four- cylinder model.)

In the case of the Economist, I may not have known whether the Internet- only subscription at $59 was a better deal than the print- only option at $125. But I certainly knew that the print- and- Internet option for $125 was better than the print- only option at $125. In fact, you could reasonably deduce that in the combination package, the Internet subscription is free! “It's a bloody steal—go for it, governor!” I could almost hear them shout from the riverbanks of the Thames. And I have to admit, if I had been inclined to subscribe I probably would have taken the package deal myself. (Later, when I tested the offer on a large number of participants, the vast majority preferred the Internet- and- print deal.)

So what was going on here? Let me start with a funda- mental observation: most people don't know what they want unless they see it in context. We don't know what kind of racing bike we want—until we see a champ in the Tour de France ratcheting the gears on a par tic u lar model. We don't know what kind of speaker system we like—until we hear a set of speakers that sounds better than the previous one. We don't even know what we want to do with our lives—until we fi nd a relative or a friend who is doing just what we think we should be doing. Everything is relative, and that's the point. Like an airplane pi lot landing in the dark, we want runway lights on either side of us, guiding us to the place where we can touch down our wheels.

In the case of the Economist, the decision between the Internet- only and print- only options would take a bit of thinking. Think- ing is diffi cult and sometimes unpleasant. So the Economist's marketers offered us a no- brainer: relative to the print-only op- tion, the print- and- Internet option looks clearly superior.

The geniuses at the Economist aren't the only ones who un- derstand the importance of relativity. Take Sam, the tele vi sion salesman. He plays the same general type of trick on us when he decides which tele vi sions to put together on display:

36-inch Panasonic for $690

42- inch Toshiba for $850

50-inch Philips for $1,480

Which one would you choose? In this case, Sam knows that customers find it difficult to compute the value of differ- ent options. (Who really knows if the Panasonic at $690 is a better deal than the Philips at $1,480?) But Sam also knows that given three choices, most people will take the middle choice (as in landing your plane between the runway lights).

So guess which television Sam prices as the middle option?

That's right—the one he wants to sell!

Of course, Sam is not alone in his cleverness. The New York Times ran a story recently about Gregg Rapp, a restau- rant con sul tant, who gets paid to work out the pricing for menus. He knows, for instance, how lamb sold this year as opposed to last year; whether lamb did better paired with squash or with risotto; and whether orders decreased when the price of the main course was hiked from $39 to $41.

One thing Rapp has learned is that high- priced entrées on the menu boost revenue for the restaurant—even if no one buys them. Why? Because even though people generally won't buy the most expensive dish on the menu, they will order the second most expensive dish. Thus, by creating an expensive dish, a restaurateur can lure customers into ordering the sec- ond most expensive choice (which can be cleverly engineered to deliver a higher profit margin).

So let's run through the Economist's sleight of hand in slow motion.

(Continues…)

Excerpted from "Predictably Irrational, Revised and Expanded Edition: The Hidden Forces That Shape Our Decisions" by Dr. Dan Ariely. Copyright © 2010 by Dr. Dan Ariely. Excerpted by permission. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher. Excerpts are provided solely for the personal use of visitors to this web site.
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