The Entrepreneur’s Book Guide #6: Predictably Irrational by Dan Ariely

Book Reviews from one entrepreneur to the others

Starting with my fourth review, I pushed the long intro about the Entrepreneur’s Book Guide to the very back of the article and dove straight into the book. I believe this makes the review more fun to read, especially for readers who have read some of the earlier editions of the Entrepreneur’s Book Guide.

So without further ado, let’s dig into this week’s book, Predictably Irrational, by Dan Ariely.

About the author

Dan Ariely is one of the leading researchers in the field of behavioral economics. In his work, he often explores “irrational” decisions that people exhibit in their behaviors — actions that contradict logic and standard economic theory.

What is particularly notewhorthy is how Ariely started doing this kind of research: During his youth in Isreal, Ariely suffered major 3rd degree burn injuries in an explosion. The treatments in the hospitals made him face a variety of irrational behaviors. These behaviors were extremely painful and led Ariely to try to understand how to better deliver painful and unavoidable treatments to patients. This was the starting point to a research career that centred around the puzzling fact that we as humans repeatedly and predictably make the wrong decisions in many aspects of our lives.

Beyond doing groundbreaking research, Dan Ariely has a knack for communicating complex research findings in simple terms, which is of course the key to his most famous book, Predictably Irrational.

About the book

This neat little book provides the reader with a very accessible jumpstart in the field of behavioral economics.

Behavioral economics […] studies the effects of psychological, social, cognitive, and emotional factors on the economic decisions of individuals and institutions and the consequences for market prices, returns, and resource allocation.
(Wikipedia)

Behavioral economics are a relatively new field in economics — its foundations were laid by the groundbreaking 1979 paper of Daniel Kahnemann and Amos Tversky about Prospect Theory. (I’ll cover Kahnemann in one of my next reviews.)

In general, behavioral economics aim to explain economic decision making and especially the various divergences of economic decision making from neo-classical theory. The cornerstone of neo-classical economics is the assumption of a rational economic agent, the Homo Oeconomicus. But, as our daily life often demonstrates, people are not always rational in their (economic) decision making. In many cases they are even systematically not rational — they are predictably irrational.

The book dives into these instances where humans again and again — predictably — make choices that a rational economic agent would never make.

Want some examples?

• Why do subjects subjects suddenly massively change their preference between two products if a third product is introduced, even if no one actually opts for the third product?
• Why would the last two digits of your social security number have an influence on your willingness to pay for products if you were reminded about them shortly before stating your price?
• Why would most people spontaneously choose a free $10 gift card over a $20 gift card sold for $7?

All these behaviors absolutely do not make sense if you follow standard economic theory!

Ariely’s book dives into these and many other examples in a light and highly entertaining fashion. All in all, the book provides an excellent, non-academic entry into behavioral economics. The book contains eye-opening and mindblowing examples en masse, and you often will catch yourself admitting that you would have behaved just as irrationally.

What do I think about the book?

As a result of reading this book, you will look at economic decision making differently. You will be able to spot many of the tricks with which modern marketers are trying to use behavioral psychology to affect our decisions. You will know about the cost of FREE! and the ugly brother effect. You will be aware of the effects of priming, anchoring and how to beat procrastination (sometimes).

All the while, Dan Ariely manages to tie his research findings to highly relevant, real world questions — like how we get people to save more money for retirement, take better care of their health or how to not get ripped off on unnecessary insurances.

All in all, a highly entertaining an insightful read. Some hours well spent!

My Rating

• Entertainment: 4 out of 5
  This book is a really good read. It is well written, easy to digest, without being too repetitive (except for the fact that time and again Ariely shows that we are not as rational and level-headed as we’d like ourselves to be). But tons of anecdotes and ironic comments on serious research are sure to keep you entertained all the way through.
• Novelty: 4 out of 5
  I guess by now many of the things Ariely describes have found their way into articles like this one. In fact many of these “X sales/pricing/marketing tactics backed by psychology” articles are probably directly derived from Ariely’s work. Still you have to look long and hard to find such a comprehensive popular science introduction into the field of behavioral economics.
• Usefulness: 4 out of 5
  This book is very useful for anyone who wants to sell stuff — there’s tons of great concepts and insights that can be applied to marketing, pricing and sales for startups and established companies alike.
  It is also very useful for those of us who want to understand a bit more about themselves and how you make decisions.
• Applicability: 3 out of 5
  This is not a “How to” guide. Many points will get you thinking and you will have tons of “Oh, we could do that!” moments and ideas while you read it. But you will have to draw the conclusions from your thoughts yourself. Some of these may be obvious, some others will need some exploring to not produce unintended consequences.
• Overall rating: 4 out of 5
  I really can’t come up with a good reason why you should not read this book. It is just too good, too insightful and too entertaining to not recommend it. Read it.
• Must-read factor: Definitely
  If you are not already an accomplished behavioral economist I assure you that you will learn something that you can apply to your business.

By the way: For those that really have gotten hooked on behavioral economics, Thinking Fast and Slow by Daniel Kahnemann is the logical follow-up read. I will cover that book in one of my next reviews.

About the Entrepreneurs Book Guide

As I am building my company, MinuteHero, I am trying to fill some of my vast knowledge gaps by reading lots of books. Over time I have recommended or given as a gift quite a few of these to friends or business partners.

Soon people started to ask me for book recommendations. This gave me the idea for the Entrepreneur’s Book Guide. I wanted to write book reviews specifically for those of you who want to start your own company or are already running a startup. In the reviews, I will try to explain what I liked or didn’t like, what was useful and actionable and how this book helped me in building MinuteHero.

The reviews are in no particular order, but I do plan on creating an index that is sorted by author and by topic once I have a few of these under my belt.

Over to you: What did you think about the book? Did you enjoy this review? Want me to change something? Let me know in the comments!