Predicting Irrational Behavior
The article “What Was I Thinking?” in The New Yorker presents the latest reasoning about humans’ irrational ways. The thesis is that people make bad decisions but they do it systematically and therefore it is possible to explain why they act like this. Some of the insights are extracted from the book Predictably Irrational: The Hidden Forces That Shape Our Decisions
Dan Ariely, a professor at M.I.T., offers a taxonomy of financial folly. His approach is empirical rather than historical or theoretical. In pursuit of his research, Ariely has served beer laced with vinegar, left plates full of dollar bills in dorm refrigerators, and asked undergraduates to fill out surveys while masturbating. He claims that his experiments, and others like them, reveal the underlying logic to our illogic. “Our irrational behaviors are neither random nor senseless—they are systematic,” he writes. “We all make the same types of mistakes over and over.” So attached are we to certain kinds of errors, he contends, that we are incapable even of recognizing them as errors.
When you walk into Starbucks, the prices on the board are supposed to have been determined by the supply of, say, Double Chocolaty Frappuccinos, on the one hand, and the demand for them, on the other. But what if the numbers on the board are influencing your sense of what a Double Chocolaty Frappuccino is worth? In that case, price is not being determined by the interplay of supply and demand; price is, in a sense, determining itself.
People aren’t just loss-averse; they are also effort-averse. They hate having to go to the benefits office, pick up a bunch of forms, fill them out, and bring them all the way back. As a consequence, many eligible employees fail to enroll in their companies’ retirement plans, or delay doing so for years. (This is the case, research has shown, even at companies where no employee contribution is required.) Thaler and Sunstein propose putting this sort of inertia to use by inverting the choice that’s presented. Instead of having to make the trip to the benefits office to opt in, employees should have to make that trip only if they want to opt out.
Why do I blog this? In order to understand the drivers of technology and service adoption it is necessary to have a deep understanding of consumers. Tapping into the field of behavioral economics and consumer behavior can be the basis for extraordinary services and consumer experiences.
Photo courtesy of Anne-Sophie Leens
