I don’t intend this post to be full fledged review of Dan Ariely’s ‘Predictably Irrational’. There are plenty of reviews out there if you are interested. This post is more of a ‘highlights’ that I would like to remember. The book covers a range of topics that have applications in areas as diverse as Business, Marketing, Behavioural Economics, Self Help (Yes, it has a chapter on how you can improve your self control.), and Morality.

1. Relativity and the Decoy Effect: Our consumption (or more accurately, our buying) habits are influenced by the choices we are offered. The book has a couple of interesting case studies about this effect. Williams-Sonoma’s sales of home bread makers took off only after they introduced a higher priced model. Until the second model came on, buyers had nothing to compare the original model to. They were thus less inclined to buy one. Restaurants that purposely add a high priced item on their menu find that orders for their second highest priced items go up. Dan also gives an overview of an experiment in how price offerings for an online newspaper subscription influenced customers’ choice. The decoy technique is definitely something product managers should consider. Look at your product price list. Do you see any decoys? Would you benefit from having an intentionally higher priced offering? Would your customers then pick the second lower alternative?
2. Anchoring: James Assael, the diamond dealer, made black pearls desirable by having it introduced as an exclusive offering from the prestigious Harry Winston jewelers. Once people associated black pearls with Harry Winston (a brand they were already familiar with) they instinctively embraced the idea of paying big bucks for black pearls. This concept is probably very familiar to people in the advertising industry. If you are a technical product manager and you are not too keen on reading up a lot on marketing/advertising then this book would be useful.
3. Price Memory: Ariely makes an interesting case that if we had no memory of previous prices, we would not be affected by price increases. Do I feel that $3.50 for a gallon of gas is expensive only because I remember the days when it used to be $0.99? Probably true. But how do you make use of this idea in running your business?
4. Zero Cost: People’s behavior changes considerably when offered free products. This does depend a lot on where and what is offered for free. Dan recounts some of the experiments they did by offering free chocolates at MIT. I suspect the reactions would have been considerably different if such freebies were offered at poorer places. But that’s beside the point. Viral Marketing advocates using free material to get your product’s name out in to the market. One needs to be careful with how you use this idea. A case in point are the reports that claim that services like Groupon are actually hurting merchants because people are getting used to the idea of lower costs.
5. Losing Trust: Many of the techniques that Dan covers in the book are used by people in Marketing and Advertising. It would be prudent to keep the chapter on ‘The Cycle of Distrust’ in mind and not get carried away with dubious marketing plans. People have gotten ripped off by bad business people so often that they tend to be very wary of all offers. In today’s social media obsessed world, news of your company’s bad policies could spread virally and cause real damage. It is useful to understand the irrational behaviours of the human mind but there is line between marketing and cheating. Be careful that you do not overstep that line.