In the book Predictably Irrational, Dan Ariely examines the underlying factors that truly drive how we make decisions, which are far less rational than we think, but which, if we understand them, may help us keep on top of our money, interact better with people, and live happier lives. How we value things, what shapes our perceptions of the world, and how we approach long-term goals are all shockingly unreasonable, and this book sheds some light on exactly how incoherent we are, so you can be more sensible in the future.
Make it easier for others to make comparisons with you, and they'll value you more. Our minds are wired to compare things, and they do it in the most efficient way imaginable. We compare what is right in front of us, not necessarily what we should be thinking about or looking at at the time. People will choose you more often if you provide them alternatives to compare yourself or your things to that are marginally poorer. Comparing things means marketing, and while experiments like the one above are entertaining, you shouldn't overdo it. Plus, for the sake of your own happiness, it's best to avoid comparing in the first place.
Free is just another type of price, but one that has a lot of clout. People go berserk when they hear something is free. Free, according to Dan Ariely, is a strong emotional trigger, but it's really just another price – the price of zero dollars. The gap between $0 and even $0.01, on the other hand, is enormous. When Dan conducted a study in which participants were given the option of purchasing a Lindt truffle for $0.26 or a Hershey's kiss for $0.01, the groups were evenly split (40 percent for each of the chocolates, with 20 percent of people buying nothing). However, when both costs were dropped by one cent, making the truffle $0.25 and the Hershey's kisses $0.00 (=free), 90% of people chose the Hershey's kisses, despite the fact that the price difference was the same. This has to do with our irrational desire to avoid losing money at any costs. We lose money if we buy anything that isn't good. However, if we acquire something for free, there is no risk. It's still possible that it's beneficial to us, so we place a higher value on freebies than we should.
The endowment effect makes you overvalue your possessions. This represents the economic notion of the endowment effect, which states that once we own something, we value it more highly. Baseball tickets were used to explore this phenomenon at Duke University. You had to enter a lottery to get one. As a result, all participants had an equal chance of receiving a ticket. Those who won the tickets, however, would not sell them for less than $2,400 once they were dispersed. Those who did not win anything would pay no more than $170. That is the work endowment effect, which is based on three factors:
1. We adore our possessions because of our recollections and imaginations about them
2. We despise losing items we possess yet are unconcerned about missing out on something
3. We expect people to value the same things we do.