Predictably Irrational

Last week I talked some about the “mental models” we carry around to simplify the world.  One of the most powerful, underlying mental models we carry around is about rationality – that people are predominately rational, and that behave (by and large) in a rational fashion.

While I’m incredibly interested in the field of behavioral economics, I must admit that I still cling to the vestiges of beliefs held earlier in my life, that people are primarily rational with a hint of irrationality thrown in every now and again.

But what if people are primarily irrational and, even more powerful, what if they’re predictably irrational?  That’s the question MIT economist Dan Ariely asks in his book Predictably Irrational: The Hidden Forces that Shape Our Decisions. What’s so fun about this book is that Prof Ariely  takes a simple, objective, experimental approach to see how people really act instead of believing in how they’re supposed to ask.  Here’s an example from early in the book that floored me (my summary, not his):

A few years ago, Dan Ariely received an email from The Economist magazine offering three subscription options:

  1. A year of access to The Economist website for $59
  2. A year of receiving the print edition of The Economist for $125
  3. A year of receiving the print edition of The Economist plus free access to the website for $125

You’ll notice immediately that options two and three both cost $125. Prof. Airely figured the clever folks at the Economist had their reasons, and he wanted to understand them.  So he tested this offer by offering it to 100 of his students.  The result? 16 of his students selected the web access and 84 selected the print + online option.  No one chose option 2 (print only).

Hard to know what to make of that result on its own; maybe option 3 really is so appealing that a rational, value-maximizing decision maker should choose it more than 4 out of 5 times.

To test this theory, Prof. Airely ran the experiment a second time, but with only two options:

  1. A year of access to The Economist website for $59
  2. A year of receiving the print edition of The Economist plus free access to the website for $125

If the students were essentially rational actors, the removal of the option that no one chose (option 2) would have no impact.  How could it matter to remove an irrelevant option?  But it mattered a lot.  68 students now chose the web-only access, and 32 chose print+web.  Removing an irrelevant option shifted the preference for web-only access from 16% to 68% of the students. That’s a powerful result.

Put simply, we’re terrible at ascertaining the absolute value of things; we only seem to be able to hone in on relative value.  So the impact of the irrelevant option was to communicate that the original 3rd option (print + web) was a “great deal.”

Depending on where you sit and what you’re hoping to accomplish, you can use this one insight in lots of different ways.  The first step is to realize that when you’re helping someone make a decision, the available options and what people don’t choose may be as or more important than what people do choose.