Psychology of Decision-Making

Dan Ariely, in his book “Predictably Irrational” shares nine tips on the psychology behind making a decision.

To appraise things, we compare them to others

Are you single? Here’s an unexpected tip for attracting potential dates at a club: bring a friend who looks like you, but is just a bit less attractive. This surprisingly boosts your chances. Our brains are wired to compare things, and we do it in the simplest way possible—by using the nearest comparisons. So, if you show up with someone who’s similar but slightly less attractive, you become the obvious better choice. People won’t bother comparing everyone—they’ll just pick you as the winner in an easy contest. Marketers use this same comparison trick by adding a very expensive decoy item to make other products look like a bargain. For instance, restaurants will sometimes put an overpriced dish on the menu simply so the second-priciest option feels like a deal. While comparing helps us make decisions, it also can make us unhappy; constantly comparing salaries, clothes, or cars leads to envy and dissatisfaction. As James Hong, co-founder of HotOrNot.com, put it after selling his Porsche Boxster: once you have something nice, you want something nicer, and so on.

When things are free, we stop thinking rationally

Few things make us act as irrationally as the word “free.” People will gladly carry home junky free keychains or buy unnecessary products for the sake of a freebie. Free isn’t just a price—it’s an emotional trigger. In one study, people chose between tasty Lindt truffles for 15 cents and less tasty Hershey’s Kisses for 1 cent; 73% picked the truffles. But when the prices dropped to 14 cents for truffles and 0 cents (free) for Kisses, nearly 70% picked the free Kisses—even though the price difference was still 14 cents. This is the zero-price effect: if there’s no risk of loss, an item suddenly seems much more valuable. Companies use this to their advantage; for example, Amazon’s free shipping offer above a minimum order gets people to buy more. Policymakers can harness “free” too—if the goal is more cholesterol checks, making them free is far more effective than simply lowering the price.

The first price we hear sets the tone for what we’ll pay later

How much would you pay for wine or Swiss chocolate? If you were asked to write down your social security number first, your answer would likely change. Instead of carefully analyzing value, we latch onto the first number we see—a phenomenon called arbitrary coherence. That first number (the anchor) influences what seems reasonable afterward. For example, if a new TV is first listed at $1,200, then $1,000 sounds like a deal and $1,400 feels like too much. Even unrelated numbers can anchor us: at auctions, people with higher social security numbers bid more than those with lower numbers. We’ll cling to almost any recent number when evaluating value.

We overvalue what we own

At Duke University, students camp out for basketball tickets and enter a lottery for a chance to buy them. Before the lottery, everyone values the tickets about the same. Afterward, those who win won’t sell for less than $2,400, while those who lost won’t pay more than $170. Why? Once we own something, we become emotionally attached and focus on what we’d lose by giving it up—while buyers focus on what else they could do with their money. Both sides think their side is worth more. This overvaluation also applies to opinions; if you’ve invested time into an idea, you’re less willing to let it go.

Our expectations shape our experiences

Both Pepsi and Coke have claimed people prefer their taste—but how? Blind taste tests favored Pepsi, but when people knew which brand they were drinking, Coke was preferred. Our expectations and prior experiences alter our perceptions—if you expect a movie to be great, you’ll likely enjoy it more. Even medicine works this way: patients find expensive pills more effective than cheap ones (even when they’re identical placebos). In experiments, people paid more for an energy drink performed better on puzzles than those who paid less. Stereotypes can have subtle effects too; being exposed to words associated with old age made people walk slower.

Social and market norms change how people respond to requests

Why would your mother be offended if you paid her for Sunday dinner? Why won’t employees accept hugs instead of cash? We operate under two sets of rules: social norms (friendly favors without immediate repayment) and market norms (calculated exchanges of resources). Using the wrong norm can backfire; mentioning money can instantly shift a situation into market-norm territory and make people less generous and more transactional. For example, when lawyers were asked to help retirees cheaply, most refused—but when asked to do it for free, most agreed. Once market norms are triggered by money talk, it’s hard to return to warm social norms.

Most people cheat—a little—but not a lot

Most people see themselves as honest but will bend the rules slightly if they can justify it. In studies where people self-graded quizzes with small cash rewards, most cheated just a little—even when there was no chance of being caught. People are even more comfortable with non-cash dishonesty; few would steal cash from work but many will take office supplies and rationalize it as part of their compensation. However, reminders of moral codes can curb this behavior; in one study, recalling the Ten Commandments before a quiz stopped cheating altogether.

Our rational plans are undermined by our impulsive side

We all have long-term goals—save money, eat healthier—but struggle with self-control when tempted by immediate pleasures. This internal battle is like Dr. Jekyll vs Mr. Hyde: our logical side knows what’s best but our impulsive side often wins out. Procrastination is a classic example—students who set small, regular deadlines did much better than those with just one big deadline at the end of term because they countered their own tendency to delay tasks. Pre-committing to deadlines or pairing unpleasant tasks with short-term rewards (like watching movies during medical treatments) can help us stick to our goals.

We obsess over keeping options open—even if it hurts us

After crossing China’s Yangtze River in 210 B.C., General Qiang Yu burned his army’s ships so there was no retreat—his soldiers fought harder and won nine battles straight. This story stands out because closing options goes against our instincts; people naturally want to keep as many options open as possible in life and work—even when it costs them. In one experiment involving real money prizes in a computer game, participants were willing to lose money just to maintain unnecessary options. Not making a choice also has consequences: splitting focus between two career paths might mean excelling at neither. Sometimes shutting doors is helpful because it forces us to commit and excel at what truly matters.

You’ve just read the key ideas from Predictably Irrational by Dan Ariely. The main takeaway is that our decisions in daily life are often deeply irrational—from what we buy to how we behave—yet by recognizing these patterns and staying alert, we can make better long-term choices instead of falling victim to our own mental habits.