“Every year, employee´s theft and fraud at the workplace are estimated at about $600 billion” according to Dan Ariely.
Predictably Irrational is the bestselling book on irrational consumer behaviour by psychologist and MIT professor Dan Ariely.
The main thrust of the book is that consumers are systematically irrational in their behaviour – at best making sub-optimal choices, and at worst engaging in self-punishing behaviour.
Why do our headaches persist after we take a one-cent aspirin but disappear when we take a fifty-cent aspirin? Why do we splurge on a lavish meal but cut coupons to save twenty-five cents on a can of soup?
When it comes to making decisions in our lives, we think we’re making smart, rational choices. But are we?
Ariely explains, “My goal, by the end of this book, is to help you fundamentally rethink what makes you and the people around you tick. I hope to lead you there by presenting a wide range of scientific experiments, findings, and anecdotes that are in many cases quite amusing. Once you see how systematic certain mistakes are—how we repeat them again and again—I think you will begin to learn how to avoid some of them”.
Insurance services prices: value for services
In chapter 2, consumers purchase items based on value, quality or availability – often on all three. The methods of appointing a value to an object with no previous value, like the Tahitian black pearl, is susceptible to irrational pricing. A value can be as easily (arbitrarily) assigned as by having a fancy ad with “equally” precious items and a high price tag in a window of a store on Fifth Avenue. When consumers buy a product at a certain price, they become “anchored” to that price, i.e. they associate the initial price with the same product over a period of time.
A person’s self value for services rendered can also be affected by anchor prices; one can irrationally price his/her abilities or services based on an anchor price proposed. Using the concepts of anchor price and arbitrary coherence, Ariely challenges the theory of supply and demand. He states that demand, the determinant of market prices, can be easily manipulated. Furthermore, supply and demand are dependent on each other (manufacturer’s suggested retail prices affect consumers’ willingness to pay). Finally, the author claims that the relationships between supply and demand are based on memory rather than on preferences.
Insurance services for free: promotions
In chapter 3, Ariely explains how humans react to the words “free” and “zero”. Humans make decisions without rationalizing the outcomes of their choices. To illustrate this point, Ariely conducted multiple experiments. The outcome was consistent: when faced with multiple choices, the free option was commonly chosen. With the opportunity to receive something for free, the actual value of the product or service is no longer considered. Ariely claims, “Most transactions have an upside and a downside, but when something is FREE! we forget the downside. FREE! gives us such an emotional charge that we perceive what is being offered as immensely more valuable than it really is.”
Ariely’s concept of “FREE!” applies not only to monetary and quantitative costs, but also to time. We forgo some of our time when we wait in line for free popcorn or to enter a museum on a free-entrance day. We could have been doing something else at that time. Ultimately, he demonstrates how such a simple concept can be used to drive business and social policy. For example, to reduce health cost, companies could offer free regular checks. Employees would be more willing to get them at zero cost rather than paying some amount of money. Ariely recommends the consideration of the net benefits of the choices we make regarding both preference and money. Perhaps we would get the better deal and even save money if we did not react to free the way we do.
Sources: Book, Predictably Irrational by Dan Ariely, Duke University Courses taken by David Roig, Dan Ariely blog and wikipedia
David Roig, Managing Director at iNLIP, independent Network of Latam Insurance Professionals.