We usually think of ourselves as sitting in the driver's seat, with ultimate control over the decisions we make and the direction our life takes; but, alas, this perception has more to do with our desires—with how we want to view ourselves—than with reality.

The Endowment Effect causes us to value what we own more highly than identical items we don't own. This occurs because:
<ul>
<li>Loss aversion makes giving up items painful</li>
<li>Ownership creates immediate emotional attachment</li>
<li>Psychological ownership begins even before formal possession</li>
<li>Partial ownership through touching or imagining ownership increases valuation</li>
<li>The gap persists even among experienced traders</li>
</ul>
This effect explains why homeowners overprice their houses, why trial offers work, and why sellers and buyers often can't agree on fair prices—each side is operating from fundamentally different value perceptions based solely on ownership status.

Endowment Effect

We don't always know why we do what we do, choose what we choose, or feel what we feel. But the obscurity of our real motivations doesn't stop us from creating perfectly logical-sounding reasons for our actions, decisions, and feelings.

Standard economics assumes that we are rational—that we know all the pertinent information about our decisions, that we can calculate the value of the different options we face, and that we are cognitively unhindered in weighing the ramifications of each potential choice.

Anchoring shows how initial values disproportionately influence subsequent judgments. This effect:
<ul>
<li>Persists even when the anchor is completely arbitrary</li>
<li>Affects professionals including real estate agents, judges, and car dealers</li>
<li>Works with any number, not just prices or bids</li>
<li>Can't be eliminated through awareness or expertise</li>
<li>Creates opportunities for deliberate manipulation in negotiations</li>
</ul>
The first number functions as a starting point that the mind adjusts away from (usually insufficiently). This explains why car dealers start with MSRP, stores use regular prices, and negotiations improve with aggressive first offers.

Anchoring Effect

The Cost of Zero reveals how free triggers irrational decision-making beyond the zero-price effect. Key insights:<ul><li>We neglect opportunity costs when facing free options</li><li>Rational cost-benefit analysis stops working when zero enters the equation</li><li>Fear of loss disappears completely with free offers</li><li>Accounting pain (the discomfort of spending) vanishes with free items</li><li>The effect works with time, effort, and other non-monetary costs</li></ul>This explains why we make financially irrational choices like choosing a free $10 gift card over paying $7 for a $20 gift card, or waiting in long lines to save small amounts on specific items while ignoring larger savings opportunities.

The Cost of "Free"

Social and market norms represent two fundamentally different relationship systems that operate by distinct rules:<ul><li>Social norms involve unwritten mutual obligations without immediate accounting</li><li>Market norms rely on explicit exchanges with precise payments for specific benefits</li><li>Mixing the two typically damages the relationship and reduces cooperation</li><li>Recovery from market-to-social transitions takes substantial time</li><li>Organizations often confuse these norms to their detriment</li></ul>Relationships can operate in either mode but struggle when both are activated simultaneously. This explains why monetary incentives sometimes backfire, why mixing friendship and business creates tension, and why we're a family companies create resentment when making market-based decisions.

Social vs. Market Norms

Relativity makes us evaluate options in comparison rather than absolute terms. This mental pattern:<ul><li>Creates vulnerability to decoy options designed to manipulate choices</li><li>Shifts preferences when irrelevant alternatives are introduced</li><li>Works in multiple domains including products, dating, and job selection</li><li>Operates unconsciously without our awareness or permission</li><li>Can be weaponized by marketers through strategic pricing and packaging</li></ul>We lack internal value meters that tell us what things are worth. Instead, we focus on the relative advantage of one thing over another, comparing similar available alternatives rather than evaluating each option independently.

Relativity Trap

The Zero Price Effect shows FREE! triggers an irrational positive response disproportionate to its actual value. This occurs because:<ul><li>FREE eliminates the risk of loss completely</li><li>Decisions involving FREE bypass rational cost-benefit analysis</li><li>Positive emotions are automatically activated by zero cost</li><li>We overreact to price reductions from small amounts to zero</li><li>We forget to consider opportunity costs when something is free</li></ul>This explains why we wait in long lines for free samples (ignoring time costs), collect worthless free items, and choose inferior products simply because they include something free.

The Zero Price Effect

Procrastination reflects our struggle between immediate gratification and long-term benefits. The research shows:<ul><li>We consistently prioritize present pleasure over future benefits</li><li>Self-awareness of our procrastination doesn't eliminate it</li><li>Commitment devices (self-imposed restrictions) significantly improve outcomes</li><li>External commitments work better than voluntary self-restrictions</li><li>Pre-commitment is most effective before temptation begins</li></ul>This explains why voluntary gym payments, deadline structures, and automatic savings plans work—they let our current selves restrict our future selves' freedom, bridging the gap between our long-term desires and short-term behavior.

Procrastination and Self-Control

Expectations don't just predict our experiences—they actually create them. This happens because:
<ul>
<li>Prior beliefs physically alter how we perceive taste, pain, and pleasure</li>
<li>Price signals directly influence product effectiveness and enjoyment</li>
<li>Brand names change the actual neurological experience of consumption</li>
<li>Expert opinions reshape our genuine perceptions, not just our statements</li>
<li>Blind testing reveals dramatically different preferences than known-brand testing</li>
</ul>
The brain doesn't simply process incoming sensory information—it actively constructs experience based on expectations. This explains the effectiveness of placebos, why wine tastes better from expensive bottles, and why brand-name drugs outperform chemically identical generics.

Expectation Effects

Dishonesty follows predictable patterns that challenge our self-image as moral beings. The research reveals:
<ul>
<li>Most people cheat a little when they can</li>
<li>Very few people cheat to the maximum possible extent</li>
<li>Moral reminders dramatically reduce or eliminate cheating</li>
<li>Distance from money increases dishonesty (e.g., taking pencils vs. cash)</li>
<li>Watching others cheat increases our own cheating, especially if they're part of our group</li>
</ul>
We maintain our self-image as honest people while still benefiting from dishonesty by creating just enough psychological flexibility to rationalize small transgressions. This fudge factor explains why conflicts of interest are so dangerous—they exploit this moral flexibility.

Dishonesty's Flexible Boundaries

Hot-cold empathy gaps reveal our inability to predict behavior across emotional states. The research shows:<ul><li>We cannot accurately predict decisions in emotional states while calm</li><li>Similarly, we cannot predict calm-state decisions while emotional</li><li>The effect applies to hunger, anger, fear, sexual arousal, and other visceral states</li><li>Advance preparation is critical, as in-the-moment rationality often fails</li><li>This explains protection avoidance, addiction relapses, and impulsive purchases</li></ul>This empathy gap means our multiple selves don't communicate well. The rational self makes plans, but the emotional self makes in-the-moment choices without consulting these plans. Each state genuinely cannot comprehend the other's decision-making process.

Hot and Cold States

Ever wonder why you buy things you don't need, procrastinate despite knowing better, or choose the medium popcorn when you wanted small? This eye-opening book reveals that our irrational behaviors aren't random mistakes—they're systematic and predictable. Behavioral economist Dan Ariely shows through clever experiments how our decisions are repeatedly and predictably irrational in ways we can anticipate. Best part? Once you understand these patterns, you can adjust for them and make better choices about money, relationships, and life.

<ul> <li>Why do our headaches persist after taking a one-cent aspirin but disappear when we take a 50-cent aspirin? </li> <li>Why does recalling the Ten Commandments reduce our tendency to lie, even when we couldn't possibly be caught? </li> <li>Why do we splurge on a lavish meal but cut coupons to save twenty-five cents on a can of soup?</li> <li>Why do we go back for second helpings at the unlimited buffet, even when our stomachs are already full?</li> <li>And how did we ever start spending $4.15 on a cup of coffee when, just a few years ago, we used to pay less than a dollar?</li> </ul> When it comes to making decisions in our lives, we think we're in control. We think we're making smart, rational choices. But are we? In a series of illuminating, often surprising experiments, MIT behavioral economist Dan Ariely refutes the common assumption that we behave in fundamentally rational ways. Blending everyday experience with groundbreaking research, Ariely explains how expectations, emotions, social norms, and other invisible, seemingly illogical forces skew our reasoning abilities. Not only do we make astonishingly simple mistakes every day, but we make the same types of mistakes, Ariely discovers. We consistently overpay, underestimate, and procrastinate. We fail to understand the profound effects of our emotions on what we want, and we overvalue what we already own. Yet these misguided behaviors are neither random nor senseless. They're systematic and predictable—making us predictably irrational. From drinking coffee to losing weight, from buying a car to choosing a romantic partner, Ariely explains how to break through these systematic patterns of thought to make better decisions. Predictably Irrational will change the way we interact with the world—one small decision at a time.

Dan Ariely is the James B. Duke Professor of Behavioral Economics at Duke University. He also holds an appointment at the MIT Media Lab where he is the head of the eRationality research group. He was formerly the Alfred P. Sloan Professor of Behavioral Economics at MIT Sloan School of Management.Dan Ariely grew up in Israel after birth in New York. He served in the Israeli army and when 18 suffered third-degree burns over 70 percent of his body from an accidental magnesium flare explosion during training.Ariely recovered and went on to graduate from Tel Aviv University and received a Ph.D. and M.A. in cognitive psychology from the University of North Carolina at Chapel Hill, and a Ph.D. in business from Duke University.

Anchoring Effect

Similar ideas to Anchoring Effect

Anchoring Effect

Anchoring Effect