While these habits are sometimes helpful, it is also a common cause of misery and bitterness. Teenagers compare themselves to friends and influencers on social media. Workers compare their salaries to their friends and colleagues. Parents compare their children to their cousins and classmates. What’s more, our sampling choices are usually born out of convenience. We compare everything, from jobs and salaries to homes and cars. Like a subscription with The Economist, Williams-Sonoma used relative prices to make customers feel as though the original model was within their price range and budget. Rather, “consumers now had two models of bread makers to choose from”, Ariely explains. But sales climbed not because the new machine was of superior make or value to customers. In response, a marketing consultancy advised Williams-Sonoma to introduce a second, larger bread maker model at a 50 percent price premium. Bread machines were rather novel for its time and people were uncertain of its value to them. Similarly, Ariely describes the time when Williams-Sonoma launched their bread bakery machine at a $275 price tag. By removing the inferior decoy, more students purchased the cheaper subscription. Under this new menu, 68% of students bought the internet-only package, while 32% opted for the print-and-internet bundle. However, when Ariely ran the same price-lists, but without the second inferior option on display, purchasing habits changed. Being the rational graduates that they are, they selected accordingly. That’s good news, right? MIT’s graduates realized that the second option was inferior to the third. When Ariely ran these options by MIT’s Sloan School of Management, 16% of students went for the first package, zero for the second, and 84% for the third. Which subscription do you prefer? Which one offers the best value? Ariely noticed, for example, that The Economist magazine once offered readers one of three annual subscription packages: (1) Internet-only for $59 (2) Print-only for $125 and (3) Print-and-Internet for $125. If we’re not careful, businesses will exploit our bias for relative thinking. Figure 1: Ebbinghaus illusion Source: Ebbinghaus Illusion (Wikimedia Commons) Decoy prices Now imagine how difficult it must be to perceive real life problems correctly when the values and alternatives we face are more complex and ambiguous. To draw correct conclusions, we have to override our first impressions with careful analysis. But our intuitive brain cannot help but see them differently when they are surrounded by smaller and larger grey circles. Our rational brain tells us that the two black circles are identical in size. “Everything is relative.” Take, for example, the Ebbinghaus illusion below (Figure 1). “Most people don’t know what they want unless they see it in context”, Ariely reminds. In contrast to standard economic theory, people rarely make decisions on absolute terms. And if we’re lucky, we might find new ways to think and decide more effectively. But if we can understand how and why this is so, then we may learn something about ourselves. Our behaviors “are neither random nor senseless.” We tend to do the same things in the same way. The reality is, however, “that we are not only irrational, but predictably irrational”, writes economist Dan Ariely. We like to believe that we possess agency-that we are rational, in control, and able to make good decisions.
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