Predictably Irrational

Key takeaways

• We rarely know what something is worth; we judge by comparison to nearby options
• The first number you see anchors every price you accept afterwards
• Free is not just a low price; it switches off our rational comparison
• Mixing money into a friendly favour can quietly ruin the relationship
• Owning something makes you overvalue it, so set your price before you buy

Inside this bit

1. Irrational, but in predictable ways

   Standard economics assumes you weigh costs and benefits and pick the best option. Dan Ariely, a behavioural economist who spent years in hospital after a severe burn injury, became fascinated by how far real decisions drift from that picture.

2. Everything is relative

   We do not have an internal meter for value. We decide by comparing, and the comparison can be rigged.

3. The strange power of free

   Cut the price of a premium chocolate from fifteen cents to fourteen and the cheap one from one cent to zero, and buyers stampede to the cheap one, even though the gap has not changed. Ariely argues that free is an emotional trigger, not a price.

4. Why we cling to what we own

   Ariely and colleagues studied students who won scarce basketball tickets in a lottery. Those without tickets would pay about 170 dollars; those who held them refused to sell for less than about 2,400.

5. Expectations, deadlines and small cheats

   Tell people a beer has vinegar in it and they hate it; let them taste first and they enjoy it. Expectations shape experience so strongly that a painkiller works better when it is expensive.

6. Put it to work

   This week, before any purchase over a few thousand rupees, decide what you would pay before you see the listed price, so the anchor is yours and not the seller's. When a deal is labelled free, ask what it is costing you in time or extra spending.