Summary of Predictably Irrational Book by Dan Ariely

We don’t know what we want unless we see it “in context.” For example, our role models and our mentors inspire our life and career choices. Our minds take decisions within specific contexts, comparing and weighing the advantages of one thing or option over the other. This is “relativity.” It is how we “know” that a 6-cylinder car model is more expensive than the 4-cylinder version.

In a study, 100 respondents were asked to choose one of three kinds of subscriptions to The Economist magazine — Internet-only for $59 or Internet + print for $125. 68 respondents chose the Internet-only subscription, while the remaining 32 respondents chose the Internet + print subscription. The research question was asked again but in a different context. A third option — an annual print-only subscription for $125 — was added. Only 16 of the respondents now chose the Internet-only subscription, a 76% decrease from the initial 68 respondents. 84 respondents now preferred the Internet + print subscription, a 262% increase from the initial 32 respondents.

The presence of the third option-the “decoy”-“messed up” the seemingly rational decisions the respondents took in the first research scenario; as the print + Internet subscription became a steal and the Internet-only subscription became less attractive. In actual fact, the Internet-only subscription became free once you chose the Internet + print option.

Relativity is real and it colors our decision-making, as Gregg Rapp, a Restaurant Consultant, would find out. Most restaurant customers will default to the second most pricey dish on the menu — usually engineered to deliver high-profit margins — if the most pricey dish is made pricey enough as to be “unattractive.”

Research done on relativity shows that we compare things that are readily comparable and avoid those that cannot be easily compared. Also, given three choices for which we cannot compute their relative values, we will default to the middle choice most of the time.

Relativity helps us to arrive at decisions in life. But then, it breeds jealousy and envy in us as we compare our lives to those of others. It hurts society too. It's the reason, for instance, why there are not enough family practice doctors in the US. Most of them have gone on to Medical Investment Advisory roles in Wall Street firms. It's the reason CEO pay spiked from 36 to 369 times the average worker’s pay from 1976 to 2008.

So what can you do about the problem with relativity?

Start by making the “circles” around you smaller to boost your relative happiness. For instance, at the class reunion, don’t feel compelled to be part of the main conversation in the middle of the room. Find someone on the sidelines to have a quiet conversation with, you will have just as much fun. Shop for houses you can really afford to buy. The same goes for cars.

Also, change your focus from the narrow to the broad. Why splurge that $3,000 to upgrade your new car seats from fabric to leather when you can invest it in travel, books, or on a new wardrobe.