Predictably Irrational Essay

Rationality means the mental state of a rational person having principles that are coherent and well-matched with the individual's experience within a given framework. Irrationality on another side means not using intelligence or clear thinking. Ariely explains that humans are not only making mistakes repeatedly but do the same types of mistakes which he refers to being predictably irrational. There are those examples he shows the simple mistakes which are predictable and systematic. From purchasing a vehicle to choosing a romantic partner is two systematic activities that are almost predictable. The happenings are the ones which Ariely refers to predictably irrational because every time one makes this mistake in the very same way. An individual who buys a car, the next probable thing to do is finding a romantic partner which is a mistake one can make a better decision in this case.

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In 1993, federal securities regulators forced firms to reveal information about the pay of their top executives not knowing it was a mistake; the aim was to reduce the chances of increasing their salaries. It was unfortunate because the vice versa happened, the CEOs' salaries raised and was 369 times that of an average worker when the salaries became public information. The salaries increased three times before the information was made public. According to Ariely, the result was because once the pays were announced everybody including the CEOs themselves knew the salaries of their fellow business leaders. Some executive officers were paid lower than others according to the companies that resulted in competition among the chief executive officers. The heads of companies that were lowly compensated demanded higher salaries to even out with the others. The tendency was facilitated by compensation consulting institutions that advised their CEO clients to stress for extreme raises.

Relativity is the state of determining worth, personality or quality about something. Relativeness brings us to comparison where one wants to compare two items or individuals to get into the better one. Relativity in some ways makes us feel unhappy especially when we are comparing ourselves to others. In his book, Ariely shows how the publicity of the pays led to competition among the executive officers. A CEO was satisfied being paid $1m, but once the salaries were publicized, the individual found another was paid $1.1m. The CEO felt unhappy and demanded a rise in his pay.The problem of relativity can be combated by moving into smaller circles that will bring happiness. If you want to buy a house, you go to the houses that you can afford skipping those that are expensive. Change of focus from narrow to broader a broader perspective.

Imprinting is a phenomenon where a decision according to the surrounding is made and once it is made that is what is to be followed. The phenomenon was derived from the goslings where after hatching they follow the first moving object.

Anchoring is sticking to the decision or the impression that appear first. An example is in marketing where a new product's price determines the willingness of the customers buying it in the whole of that products life. Anchoring leads to arbitrary coherence wherein the same case of a product; individuals want to buy a good the same price they did last time.

Anchoring makes the same experience painful to a group of people and pleasurable to another group, Ariely gives an example when he went to a group of students. He told them to take the last two digits of their security numbers and pay this amount for some products, including a bottle of wine.

Free is considered attractive because at the moment it incurs no costs or there is no noticeable loss. Free gives us such a touching charge that we take in what is being offered as more valuable than it is.

A social norm is a request to a friend for help and no need for instant payment needed while market norms have an instant exchange, wages, price or rent. Social norms are social and help the community while market norms are characterized by self-reliance and individualism, but have the element of similar benefits and timely payment.

Social norms are different from what we learn from basic economics. On value, the social norms values are determined on how related or close you are. In economics, prices are controlled by a balance between two influences, production at each price and the want of those with purchasing power at each price.

People are not always cool and rational as assumed in economics instead people always make mistakes again and again. There is always a Jekyll and Hyde quality to how we behave at times we become unrecognizable to ourselves. Every individual, irrespective of how "good" we are, under-predicts the power of passion for our behavior. Ariely compares a smart guy, Roy, but when he is sexually aroused, he forgets himself and can contract sexually transmitted diseases in that state.