‘Predictably Irrational‘ by Dan Ariely is a must-read for all startup entrepreneurs and public relations professionals. Mastery of psychology is at the heart of the PR process and essential to successfully marketing your business.
The better you understand the depths of the human mind, the better you will be at creating products and services that feed our desires, and shaping public relations messages that get people to take action.
Rational economics is the study of how we “achieve more rather than less good,” and it’s the idea that we carefully weigh our options to maximize the benefit of decision we make. Whether we complete a major purchase or act in the spur of the moment, we do so for our long-term gain, right? Wrong.
Humans aren’t rational decision-makers. We’re highly irrational–predictably so–hence the title of the book.
As a teenager Ariely learned first-hand about psychology of choice after being burnt in an explosion and living in a hospital for three years.
“I became engrossed with the idea that we repeatedly and predictably make the wrong decisions in many aspects of our lives and that research could help change some of these patterns,” Ariely says. He came to this realization through his interactions with the burn unit nurses were trained to rip patient’s bandages off quickly, a process he was told was to minimize his pain. But when he asked the nurses why they didn’t use other methods to minimize the damage, he was told that the “rip and run” technique was to minimize their discomfort. They knew they had to inflict pain on their patient, and it was hard for them to stomach.
And so things are not as they seem, especially when it comes to our behavior.
If we were purely rational creatures we would take the time to figure out what product offering or services were the best for our needs; which car was right for our families and how much was too much for a bottle of wine.
Instead, we do none of these things, which hurts us in the long run. We buy expensive, dangerous motorcycles, overpay for housing, and we readily make a host of other choices.
Although the reasoning may be flawed, there are very clear emotional triggers that cause us to make decisions that feel right in the moment, but do not live up to the “more rather than less good,” mantra
Listed below are a few of my favorite real-life instances of of rational economics that should be familiar to most startup entrepreneurs:
“Loss aversion” and the high cost of free
Perhaps Ariely’s most famous rational economics experiment is also his simplest. Would you prefer a premium Lindt chocolate truffle or a pedestrian Hershey’s Kiss? Ariely and his research team adjusted the prices of both chocolates and found that people prefer a free Hershey’s Kiss to an artificially cheap truffle because it “hurts” to give up something free. The risk of losing out on something of value offered free, versus passing up something of superior value with a price tag is too much to bear.
SaaS companies use this principle all the time to get you to sign up for free software trials. You’re unlikely to demo a product that has no value, and a free trial means no obligation. But once you start using the tool you’ll realize how much you need it, and you become hooked.
And if this weren’t sticky enough, the company offering the free trial will often dangle expiring discounts to nudge you to become a paid user. “Act now and save,” they scream in your ear. They’re very effectively pressing levers that activate my natural loss aversion.
Relativity and decoy pricing
Marketers routinely set “decoy” prices so that we have a way to assess a product’s value relative to something else.
Ariely cites a great trick by The Economist newspaper subscription department, which sells an annual web-only subscription for $59.00, a one-year print subscription for $125, or a print AND web subscription for $125.
Of course you’re going to take the print and web subscription because it seems like a much better deal when you compare it to the print-only option at the same price. We need comparisons in order to make a decision what is or isn’t a good price. Unfortunately the prices we get for comparisons are often decoys.
Have you ever visited a website where you were presented a list of three subscription packages and one price was so high it took your breath away? The budget offering was so cheap it made you suspicious? Naturally you picked the middle tier, like Goldilocks and her porridge. If so, you followed the decoy pricing script because the different rates were meant to guide you to a pre-determined action. You just thought it was your choice to make.
Pricing is often arbitrary, and we can only relate value to something that can be compared.
Ariely writes about baby geese that bond with the first moving object they see when they crack through their shell. In the wild this would be their mother, but on a farm or in a lab setting, a human research assistant does just as well.
The gosling makes his or her decision based on the best information available at the time, but then sticks with it.
Humans are no different. When we encounter a new product or service we’re “anchored” to the price and features because that critical first exposure is “imprinted” on us.
Loyalty has no rational basis, but this trick of psychology explains why we remain loyal to our first shaving cream, a down-and-out sports team. (For more on check out Exit, Voice, and Loyalty by Albert O. Hirschman) The first person to offer us a product or service has the chance to make us a customer for life.
Acting on the best information we have, we associate first with best, in spite of any evidence to the contrary. Think first-mover advantage.
I call Predictably Irrational a gateway drug, because once you have an awareness of how rational economics shapes our behavior, it’s impossible to miss it in effect everywhere. Behavioral economics is powerful stuff. I highly recommend that you incorporate it into your business–but only to make people’s lives better. Sometimes we need a little help making tough decisions.
Psychology is at the heart of public relations, business and product creation. We kid ourselves when underestimate the power and persuasiveness of the “lizard brain“ in shaping important aspects of our lives. Our conscious state is a constant battle between psychology and rational thought.
As an entrepreneur you’re not only responsible for creating a product, you must persuade your customer to buy, even when she wants to do so. There’s nothing nefarious about it, but the sooner you understand how the game works, the better your customer experience can become.
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