The Psychology of Decision-making

01Jun09

When we make decisions we think we’re in control, making rational choices. But are we? Behavioral economist Dan Ariely, the author of Predictably Irrational, has some interesting examples of irrational decision making.

We are always looking at the things around us in relation to others. We don’t just compare things but we actually compare things that are more easily comparable. If given the following options for a honeymoon – Paris (with free breakfast), Rome (with free breakfast), and Rome (no breakfast included), most people would choose Rome with the free breakfast. The rationale is that it is easier to compare the two options for Rome than it is to compare Paris and Rome. Ariely also explains the role of the decoy effect in the decision process. The decoy effect is the phenomenon whereby consumers will tend to have a specific change in preference between two options when also presented with a third option that is asymmetrically dominated. This effect is the secret agent in more decisions than we can imagine. Back to the example with the honeymoon options, Rome without free breakfast is the decoy. It makes Paris look inferior when compared to Rome with the free breakfast.

In another example from the economist.com you have the following three subscription options :

When Ariely did a little test with this ad, these where the results:

As you can see, most people would choose the ‘combo’ deal. And nobody would choose the inferior option. But when we remove the second options the results were quite different:

Thanks to the useless option in the middle the combo deal looked like a fantastic deal and most people choosed it. But in fact it wasn’t the option we really wanted. The general idea is that we don’t know our preferences that well. And because we don’t know our prefereces that well we are easily manipulated by external forces.

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