Jeffrey Saltzman's Blog

Enhancing Organizational Performance

One Irrational Decision at a Time

leave a comment »

“Harvard: Because not everyone can get into MIT”

Printed on a t-shirt at the MIT bookstore

I am irrational, how about you? I am a product, like you (well, most of you anyway) of human evolution and psychology which makes me susceptible to certain flaws of logic and manipulation. Dan Ariely in “Predictably Irrational” reviews a body of research that leads one to some interesting conclusions. Before you conclude that you are rational and it is everyone else who has issues, consider some of the following findings from his work and elsewhere.

  • It has been shown that putting higher price items on a restaurant menu leads to greater revenue, even if the higher priced items don’t sell. People tend to look at the higher priced items and then will order items that are more expensive than they would have, had the higher priced items not been there. This pattern holds true for general shopping behavior and not just in restaurants.
  • If you are purchasing a pen for $14 and just before your purchase find out that you can get the pen across town for $7, you will likely drive across town to save $7 or 50% of the purchase price. However if you are buying a more expensive item, say an article of clothing for $415 and find out it is selling for $408 dollars across town, you are not likely to travel across town to save the same amount of money, $7. Yet seven dollars is still seven dollars.
  • Suppose you were offered a $10 gift certificate for free or a $20 gift certificate for $7, which would you choose? Most people will choose the $10 certificate, giving them $10 in purchasing power, rather than spend $7 to get $20 in purchasing power or $13 for free. Rational?
  • Some luxury car manufacturers offer free maintenance for a number of years during your ownership of the car. If you calculate the cost of the premium charged for these luxury cars against the cost of the free maintenance your head will tell you that it is not free, not even close, but your heart is using that for a rationalization for buying a really sweet car – especially if the sales person can get you emotionally charged about the purchase.
  • Rationality dims even further when we are emotionally charged, or in the heat of the moment. Research has shown this to be true in areas as diverse as car purchases, sexual arousal, sports activities, including as a spectator, or even teenagers subjected to peer pressure, out having a good time with friends. It is actually possible to measure the decline of rational decision making judgments as arousal increases, demonstrating that people will undertake activities or behaviors that they would not normally do (i.e. we have not evolved for just say “no” to be a truly viable birth control option for teenagers as the hormones surge).
  • People tend to value their possessions as having more value than others are willing to place on it. For instance it is very rare for people to value their house significantly less than what others believe it is worth. In fact the opposite mentality comes into play. The current owner wants the prospective buyer to appreciate the way the light comes in through the windows and pay a premium for it, while the prospective owner only sees rooms that need painting or a kitchen that is dated. The tendency to overvalue your own possessions, and from your perspective, for others to undervalue them holds true for the skills, abilities and experience that you bring to a prospective employer. The employer typically will not see you as worth what you view yourself as worth. Market forces are the only true way of determining the worth of your skills, abilities and experience. And sometimes it is a seller’s market and sometimes a buyer’s market shifting the value that you can command.
  • When people expect something to taste bad or good they are more likely to report that the taste is bad or good, than when they have no expectation regarding the taste. For instance in one experiment when a beer is spiked with balsamic vinegar and people are unaware, other then they know it has an attractive name, they will report more positively regarding it’s taste then when they are aware of the spiking, even if it has the same attractive name.      

“An optimist sees the glass as half-full, the pessimist as half-empty, but the engineer sees the glass as being twice as large as necessary” – Thinking outside the box.

Written by Jeffrey M. Saltzman

November 8, 2009 at 11:06 am

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: