Transcription
Why did you buy that telephone and not a different one? Why did you choose that dish at the restaurant and not a different one? If you had to sell your house, what price would you place on it? We tend to think that we make all these decisions in a very rational way, but the majority of the time, it's not the case. We are highly irrational and easy to manipulate.
In this video, I'll explain the reasons by summarizing the book called "Predictably Irrational" written by Dan Ariely. If you are an entrepreneur and plan to sell products or services, I highly recommend this book. It has so many valuable lessons for business owners as well as for consumers.
Lesson number one: The truth about relativity. Ariely explains that all things are relative, even when they shouldn't be, and that relativity plays an essential role in decision-making in everyday life. For example, look at these figures for a moment. Which of the two black circles is larger? Actually, both circles are the same size, but when it is surrounded by other larger circles, it appears smaller, and when it is surrounded by smaller circles, it appears larger. This is also used by marketers when pricing their products and services.
The author uses as an example the subscription prices of The Economist Journal. The promotion featured three subscription options: Online subscription, $59; Subscription print version, $125; Online subscription plus printed version, $125. Which of the three would you choose? The author said he presented these options to 100 of his students at the Massachusetts Institute of Technology. 16 students chose the first option, none chose the second, while 84 chose the third, which I am sure was also the one you would choose.
The author tried another experiment. Presented the same offer but eliminated the second option, which was the one that no one chose. What could change, after all? No one chose the second option. Well, actually, this time the result was different. 68 students chose the first, and 32 chose the third option, the combined option. What caused this change? The author explains that the cause of the majority choosing the combined option in the first experiment was the presence of the second option. This option suggested that choosing the combined subscription was a great price. However, in the second experiment, when removing the lure, the majority chose the first. As you can see, our brain is programmed to look for comparisons to make decisions. We do it in the laziest way possible.
Another example: When Williams Sonoma introduced bread machines, sales were slow. When he added a deluxe version that was 50% more expensive, the first version started flying off the shelves. Why? Because it appeared to be much cheaper compared to the deluxe version. I'm sure you're saying, "Okay, these experiments and examples sound interesting, but how can I apply them to my life?" Here are a few examples from different areas of our lives.
Number one: Comparing how successful you are. You always compare yourself to people you are surrounded with, such as your classmates, colleagues, friends, etc. If you are surrounded by people who barely earn a living, then you're less likely to try to improve your income because you will compare your salary to them and feel good about yourself as long as you are on the same level. That is why surrounding yourself with more successful people works really well.
Number two: Pricing your product or services. Customers typically do not know the actual real value of the product or service they wish to purchase and instead rely on the prices listed by a shop or suggested by a salesperson. We don't have an internal value meter that tells us how much things are worth. I mean, seriously, how would you value the computer or the phone you are using right now? So, as an entrepreneur, next time when you are setting your prices, try to provide some way of giving the customers an easy method to make a meaningful comparison. Even if your product is something new in the market, you should still provide some way of comparison. For example, "You can buy this book for five dollars. It is just the cost of one Starbucks coffee. By simply not drinking one coffee, you can learn the fundamentals of dividend investing." This might not be the perfect example, but it still provides some way of comparison.
Number three: Shopping. If you are buying expensive items, be careful if you are also offered extra items. For example, after buying a $300 suit, items such as a belt and tie priced at $10 will seem quite cheap to you, and you will be less likely to negotiate their price.
4. Dieting. Eating on a small plate can make you feel like you have actually eaten a lot.
Before moving to another chapter, I would like to talk about one more experiment that is mind-blowing. To be honest, I'm a little worried that this information I'm about to share is freely available because it is very powerful and can be quite dangerous in the hands of people who have bad intentions. Now, in all those experiments that we just discussed, we had to make decisions based on visual information. We use our visual senses every day, so we're quite good at using them. But as you saw, despite that, it was still very easy to manipulate you because we humans make decisions in a very lazy way. Now, how about if you have to make a decision in your head and there is no visual? Do you realize how much easier it would be to manipulate you?
To understand it better, let me tell you about an experiment. In this experiment, they asked people across many countries if they would be willing to donate their organs after they die. In some countries, a huge amount of people said yes, and in some countries, huge amounts said no. For example, over 98% in Austria said yes, but in Germany, it was only 12%. Now, some people would say that culture, religion, or politics are different in different countries, and because of that, the results are so different. It's not the case here. We're talking about Germany and Austria. They are neighboring countries, have very similar cultures, similar history, similar religions, and similar people. So, what is going on here, and why are the survey outcomes so different?
Well, it turns out it's because of the way the question was asked in the survey form. In Germany, the form said, "Check the box below if you want to participate in the organ donor program." In Austria, the form said, "Check the box below if you don't want to participate in the organ donor program." So, what is happening here? It's basically the same question, framed a little differently. In both countries, the majority of people did not check the box. But in Germany, when you don't check the box, you don't participate. In Austria, when you don't check the box, you automatically participate. In both countries, when people were reading the form, they didn't know what to choose. After all, donating or not donating your organ is quite a hard decision to make. And when we don't know what to choose, we usually don't touch anything and simply go with the default option that is given to us. It's because we are afraid of messing things up or making mistakes, or simply we get paralyzed by the choices and do nothing. That is why if the form says that you are automatically enrolled in an organ donor program, we think that they must know more than we do, so better not mess things up.
Now, imagine your company wants to enroll you in a retirement program that is not in your best interest, but is in the interest of the company. So here you are, joining the company. The first day, in the form, it says, "You are automatically enrolled in the employee retirement plan. If you don't want to participate, check the box below." You're already nervous since it's the first day, plus you probably don't understand well what the employee retirement plan is. Because of that, you are highly unlikely to check the box and cancel your enrollment. You'll simply think that this is the best option and the company has considered your interests. But what if they haven't? What if they benefit from enrolling you into the plan in some way? When I said that I'm afraid this information is available, this is what I meant. By simply reframing the question, they can decide in which direction the money flows and impact the decisions of millions of people in their favor. My hope with this video is to help you to be aware of such tactics and our weaknesses.
Lesson number two: The cost of social norms. According to Dan Ariely, we live in two different worlds: one governed by social norms and the other by commercial norms. For example, how would you react if your boss, instead of paying you your salary, decides to hug you and simply congratulate you on your work? I'm sure you wouldn't be happy at all. If your mother-in-law invited you to a family dinner, how would she react if, when you finished eating, you offered to pay her $100 for her delicious food? You probably won't be very welcome in that house. Again, social norms dictate how we handle requests, favors, and friendly events. In these situations, nothing is expected in return, and altruism awakens in us. In contrast, market rules pose a context in which everything is coldly calculated, and each party seeks its own benefit. The values of each of those worlds are not bad by themselves; they are correct as long as they appear in the proper context. Introducing market norms into your social relationships violates social norms and deteriorates those relationships. Each world is capable of invoking totally different behaviors in the same individual. The moment you put money on the table, social norms disappear. It is important not to mix them.
For example, imagine I ask you if you can help me change the tire of my car. You would do it without any problem. But now imagine I ask if you can change it for $1. You would probably reject it. You might say, "Give me $20, and then we can talk about it." $1 is more than $0, so how is it that you were willing to change the tire when you get $0 but would not do it when you get $1? Well, because now I mixed two norms, and as I said, they don't work well together. Personally, I have seen people many times making the mistake of mixing these two norms. For example, I have seen a hard-working employee feeling insulted for getting a raise of $39. He said he would feel happier if his manager simply told him a few nice words in front of his colleagues rather than giving him just a $39 raise. Many managers make this mistake. Instead of showing genuine appreciation, they just give the equivalent of $1, as in the tire example. They think that $1 is more than $0, so they did a good thing. So, as an entrepreneur or manager, if you decide to apply economic norms, then make sure that person is paid properly. If you can't pay properly, then see if you can apply social norms for now, until you get enough funds.
Lesson number three: The fallacy of supply and demand. Why do some products cost more than others? Why is coffee at Starbucks several times more expensive than at any other popular coffee shop? Many of you probably attribute the high price to production costs, such as using fine ingredients, or the classic supply and demand rule. Even though these mentioned factors influence prices, the author explains that the final price that you are able to pay at a given moment is something much more complex and even irrational.
To explain it, the author talks about something called "arbitrary coherence." It refers to the fact that the first decision we make, although arbitrary, will be the basis for future related decisions. For example, if you usually pay $1 or even less for a coffee every day, it is very difficult for you to start paying $5 to another coffee shop for the same coffee because $1 coffee is the price you have as an anchor for future decisions. For example, if you want to buy a car, the first price you look at will act as an anchor point or benchmark when judging the cost of other vehicles. That is why car dealerships put their expensive cars at the entrance or to the front of the line so that after you pass by, the other cars look cheaper.
But going back to the case of coffee, how is it possible that with so many cheaper and even better options, Starbucks still succeeded to charge $5 for a coffee? Ariely explains that it is possible to manipulate people's anchor or reference price by changing experiences. This is what Starbucks did from the beginning. They focused on creating a European-style, refined-looking cafeteria concept, plus a totally differentiated experience from other popular coffee shops. With this, they managed to establish a new benchmark in the minds of buyers. Thus, for many people, there is no way that they relate what they pay at Starbucks with what they would pay at the corner coffee shop.
Now, let's look at how you can use this knowledge in real life. For example, imagine you are joining a new company and find out that the person who is doing your job before was one of the best in the company. Do you realize how difficult your job is going to be? That guy set the bar too high, and your performance will be compared to him. Even if it is unfair, you will still be compared, and if you think that there is no way you can beat his performance, then one way to avoid comparison is to do things differently than him. In other words, try to travel with another path so that comparing you to him would not make much sense.
Lesson number four: The context of our character. Although most of us think that honesty is important, the reality is that dishonesty is more common and prevalent than we are willing to accept. Ariely did a lot of experiments on cheating, and what he found out was that almost all people cheat. He did the same experiment across many countries, and the result was the same: people cheat regardless of culture, religion, and geography. And it's not just a few people who cheat a lot; it's many people who cheat a little bit. Another interesting finding was that when the reward for cheating goes up, cheating itself does not go up. Economically, you would expect that the higher the reward, the higher the cheating should be, but it was never the case. Ariely explains that the reason people cheat a little bit and not above a certain point is that they want to see themselves as honest people when they look in the mirror, but at the same time, they want to benefit from cheating. So they cheat a little bit.
Cheating and dishonesty are quite big problems for many businesses and governments and for society in general. For example, it is reported that the clothing industry loses billions of dollars every year because of dishonesty. People buy expensive clothes and wear them to a party once and then they ask for a refund. In most cases, the company can't sell it again because of the sweat and cigarette smell. I will share three important takeaways from dishonesty and cheating experiments that might help you in your life or in business.
Takeaway number one: People cheat more when money is not involved. For example, you are more likely to bring a pen home from work, but you are less likely to take 10 cents from work. Both are almost the same in value, but the pen feels different. You can justify a pen and still call yourself an honest person. You can say things such as, "I will use it for work purposes at home," or "Everyone takes a pen home, so it's fine," etc. Since we are moving to a cashless society, it will become easier and easier to cheat.
Takeaway number two: When people were asked to take an oath or sign a document that they will act honestly, they actually did act honestly, and cheating went down. Before the experiment, Ariely asked students to sign the honor code of their university, and as a result, nobody cheated. And here is the interesting part: the university did not have any document called the honor code. Ariely just made it up. So here is how you can apply this knowledge: If you want to reduce cheating, find some way of reminding people about honesty before they start doing whatever you want them to do. Maybe you can just add a few lines to the beginning of the contractor form and ask them to sign, or you can just mention a few words about honesty if you are meeting them face to face. Depending on the situation, I think you can come up with some creative way to apply this knowledge.
Takeaway number three: Ariely found out that when one person from the group cheats, then others cheat as well. This has huge implications for society. Imagine what is going to happen if the leader of a team is dishonest. Imagine what is going to happen if the CEO cheats. And the most dangerous one: think how government officials and people will behave if the president is corrupt.
Lesson number five: The cost of zero. In the complex world of prices, zero cost is king. A seductive king, capable of putting emotional influence on almost everyone who sees him. The difference between two cents and one cent is one cent, but the difference between one cent and zero is huge. Price zero has a special category in our minds.
To prove it, the author did some experiments with chocolate. In the experiment, subjects were given the opportunity to choose between an exquisite truffle from Lindt, a prestigious brand of chocolate, and ordinary chocolate. In the first case, the price of the Lindt truffle was 15 cents, and the ordinary chocolate was 1 cent. In this case, the clients acted with a good dose of rationality by relating the quality and price of both options. As a result, 73% of them bought high-quality truffles, while 27% bought ordinary chocolate. In the second case, 1 cent was deducted from the price of ordinary chocolate. As a result, the chocolates were free, and the truffles were 14 cents. The result was the following: 69% of customers got free chocolates, while truffle sales fell to 31%. The author explains that most transactions have advantages and disadvantages. Disadvantages represent barriers in the decision-making process during a transaction because we are afraid of losing. If the word "free" appears, those barriers disappear because there are no longer any disadvantages. When we see "free," the disadvantages disappear, and everything becomes profit.
Here's how you can use this knowledge in real life. Let's say you want to sell your product for $10. You have three options for marketing it: Number one, you can price it at $10 and make the shipping free. Number two, you can make the product $5 and shipping $5. Number three, you can make the product free and shipping $10. In all three options, customers pay $10. But it turns out that if you choose the third option (free product, $10 shipping), you will make many more sales since the free product sounds more appealing. Another example: Let's say you go to buy a Toyota car, which is the ideal car for you. But when you reach the dealer, you see that they are selling a BMW almost for the same price, plus the oil change is free for three years. You might be tempted to buy a BMW because of the free oil change. But if you look at it logically, you will see that oil change is not an expensive thing to do, but maintaining a BMW is. You might think that you are gaining something because of the free oil change, but oftentimes, free offers involve spending a lot of money in the long run.
One final note about free: Once you give something for free, it is very difficult to go back and start selling it. As an entrepreneur, if you have been giving out something for free and now if you decide to sell it, you will have a very hard time. So think carefully before promoting something as free.
Lesson number six: Keeping the doors open. You probably know the expression "burning the ships." It means going after only one goal and saying no to everything else. Ariely says that we humans hate burning the ships. We hate limiting alternatives. We don't want to choose one thing and sacrifice others. Just the idea of having to give something up makes us feel frustrated. We always prefer to keep various options present at all times, even if they distract us from the main objective. We prefer keeping them as long as they provide some benefit.
Ariely did an experiment to prove this. He asked students to play a computer game called "The Game of Doors." Three doors appeared in the game: red, blue, and green. Each time you clicked on one of them, you could get a variable amount of money. The maximum amount of money was obtained by clicking as many times as possible in one door. Every time you changed doors, you lost opportunities. The clicks that led to leaving one room and entering another did not count as income. Despite this, students continually changed doors. The author decided to change the rules of the game: if a door was not visited in 12 consecutive clicks, the door would disappear. This time, students went crazy trying to keep all the doors open, and they did not try hard to get the maximum amount of money possible. Their income was reduced by 15% compared to the first experiment.
As this experiment suggests, we can be more successful if we focus on one option and forget the others. To be honest with you, for me, this is very hard to do. For example, after my first YouTube channel became successful, I decided to translate all my videos into three other languages. I thought that it was going to be all right to maintain the progress with all three channels since I already had the scripts and animations ready, but I was wrong. It was much harder than I thought. Despite the hardship, I continued with all three channels, but then I realized that it is not going to work to move like that. I knew that I had to drop two of them and focus on one, but the idea of stopping progress was very painful. So, what did I do? Instead of stopping progress, I hired another member of my team so that I could continue with all three channels. But even with that, it did not work well. So finally, I was forced to drop one of them. Now we are focused on two, and I know that I will be more successful if I drop one more and focus on growing one channel at a time. But so far, I can't do it because I have quite a lot of progress, and the idea of losing that progress is very painful. And because of that, I have three channels in progress, and none of them have been successful. So, as you can see, I am not the right person to advise you to focus on one thing, but I have learned a very important lesson, and it is this: resist the temptation from the beginning to start more than one thing. Let me repeat: resist the temptation from the beginning, because once you get some progress, it is 10 times more difficult to stop and focus on one thing.
Lesson number seven: The high price of ownership. Ariely explains that once we own something, we don't want to let it go. We start to value it more than others do. It also explains why trial promotions and money-back guarantees work so well. Once we have it, we don't want to lose it.
Imagine that you decide to sell your house. The first thing you will do is remember what you have experienced in it. Those memories will influence the price you set. The second thing about ownership is that we pay more attention to what we can lose than what we can gain. Consequently, before putting a price on our house full of fond memories, we think more about what we will lose than what we can do with the money from the sale. This is loss aversion. Many people regret selling their houses due to the fear of losing what they value most.
Let us see how you can use this knowledge in real life. For example, I have seen people who visit the flat they want to buy. As soon as they enter the flat, they start saying things such as, "This thing is old, kitchen furniture is broken, paint color needs to change," etc. Basically, they point out every small thing that is wrong with the flat. The reason they do it is that they prepared the owner for the low price they are going to offer at the end of the visit. In their mind, they are winning, but in reality, they have already lost because the things they called old and broken are very valuable for the seller. Each has a nice memory. For you, it might be an old shelf that needs to be thrown away, but for the seller, it is a shelf that he built with his father who just passed away a few months ago. So, instead of pointing out the bad things, if you point out good things and say a few compliments about the flat, the seller will be much more willing to sell it to you and even reduce the price because you respected and valued the things he is about to lose.
Lesson number eight: The problem of procrastination and self-control. One of the greatest obstacles people have in achieving goals is procrastination and laziness. To verify the existence of this human weakness and its possible solutions, the author carried out an experiment with his students with the assignment. The first group was given the opportunity to choose deadlines to complete the assignment during the semester, taking into account that each day of delay would lower the grade and the possibility of delivering it earlier would not provide any advantage. The second group was allowed to turn in assignments until the last day of the semester. The third group was given strict deadlines by the teachers. Finally, the results of the three classes were compared, showing that the most effective option was the third, and the worst was the second. This shows that restricting freedom and setting strict deadlines improves laziness and procrastination. Few are procrastinating doing certain things or achieving certain goals, then see how you can create strict deadlines or limitations for yourself. For example, I am lazy and procrastinate a lot. I used to plan the day, but at the end of the day, when I look back, I would find out that I have not accomplished much. That is why I started using the Pomodoro Technique. In case you don't know, Pomodoro is a time management technique. Using this method, you work on a task for 25 minutes, take a five-minute break, and work again for 25 minutes. After completing four mini-sessions, you take a longer break for 20 to 30 minutes, and then you repeat again. The reason this technique is so effective is that it provides small deadlines and forces you to finish the task by the end of those deadlines. Soon, I will have a separate video explaining the Pomodoro Technique.
Lesson number nine: The power of price. I am sure you know about the placebo effect, commonly used in medicine. You give an empty capsule to a patient and say that it should reduce his pain, and the patient actually reports improvement in his condition. Ariely did a similar experiment but with prices. Students were brought into a room where they were hooked to a machine that would send tiny shocks into their bodies while they estimated the level of pain. After a while, the students were given a painkiller costing $2.50, and then the process was repeated. Almost all students reported feeling less pain, which is interesting because the painkiller was only a vitamin C tablet. Ariely then repeated the experiment with one change: he told the students that the tablet now costs 10 cents. This time, students reported less pain relief, even though it was the same pill. Students reported more pain relief when the price was higher and vice versa.
There is a famous saying: "You get what you pay for." This saying is true because we actually expect to get more value from an expensive product and less value from the cheap one. That expectation is a very important factor. If you eat a meal from a fancy plate, you will feel it was more delicious than the one you eat from a normal plate, even though it is the same meal. So, when you are shopping, always be aware of the effects of prices on you. Whether you are aware of it or not, it will impact your decision.
Thanks for watching and have a great day.