Predictably Irrational

The Hidden Forces that Shape Our Decisions

by Dan Ariely

Dan Ariely blows apart the myth that humans think rationally, blending anecdotes with behavioral economics theory to show the many flaws and shortcuts in our thinking. Many of these concepts — from the placebo affect to loss aversion and the power of “FREE!” — will prove useful when you’re trying to sell products to users or make your app go viral. Ariely uses these same tools to show you how to improve your personal life and career, such as avoiding temptation and not worrying about always keeping your options open.

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Key Insights

Key Insight #1

People get irrationally excited by the word “FREE!” because we’re afraid of loss and free products have no possibility of loss. To draw users to your product, offer something for free. Or you can even make your product free to start so people have no reason not to sign up — hence the “freemium” business model.

Key Insight #2

People irrationally overvalue things they already own. This means that the more work users put into a product, the more they value it. Once people start a product trial, they’re hesitant to give it up. And once people get used to a certain level of service, they hate downgrading.

Key Insight #3

People’s perception of a product is largely based on their expectations. If people read good reviews for a product ahead of time, they will actually enjoy using it more. If a product is marketed as premier and elite, people will think it’s better. This is what marketing and branding is all about.

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Key Quotes

“These irrational behaviors of ours are neither random nor senseless. They are systematic, and since we repeat them again and again, predictable.”

“Instead of consumers’ willingness to pay influencing market prices, the causality is somewhat reversed and it is market prices themselves that influence consumers’ willingness to pay… Demand is not, in fact, a completely separate force from supply.”

“Zero is not just another discount. Zero is a different place. The difference between two cents and one cent is small. But the difference between one cent and zero is huge!”

“In the absence of expertise or perfect information, we look for social cues to help us figure out how much we are, or should be, impressed, and our expectations take care of the rest.”

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I always advise PMs to read books on behavioral economics, and if you could only read one, I’d suggest Predictably Irrational. It’s an accessible, fun read that blends scientific depth with applied examples (many of which relate to product management) very well.

Once I read this book, I noticed myself referring to its teachings in a lot of my day-to-day decisions, from writing cold sales-pitch emails (using the power of “FREE!”) to constructing pricing tiers for premium products (using the decoy effect and anchoring). So much of a PM’s job is getting inside the heads of users and other stakeholders, and Predictably Irrational does a great job showing you the patterns in how people think and how you can make use of them. And a surprising number of the case studies, like how Starbucks created the vibe of a European coffee shop to make its coffee seem more worth the higher price tag, can be applied to your product. I really appreciated that, since few behavioral science books will venture anywhere near the world of business.

Like most popular press books, this book is not going to offer a detailed playbook of what your startup or product can do in the next few days. So it’s not a great book for interview prep. Instead, it teaches you powerful ways of thinking — as a PM and as a person — that will doubtless come in handy down the line.

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What You Will Learn

You’ll learn about some well-known behavioral economics concepts, including:

  • Anchoring: how the first price we see affects what we think things are worth
  • Decoy effect: how offering an extreme option makes everything else seem better
  • Loss aversion: why people are afraid of losing things, and how plays out
  • Social vs. market norms: two ways we can be motivated (by “fuzzy feelings” or by money) and the dangers of mixing them
  • Framing: how expectations and context affect how much we enjoy something

These concepts are mostly explained using case studies, many of which lead to fascinating and counterintuitive insights.

These concepts are then applied to shed new light on a variety of spheres, including how to avoid temptation, how to stop people from cheating, how to motivate employees, and (in the newer edition) how we should reshape public policy given our new knowledge of people’s shortcomings.

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Who Should Read This

Predictably Irrational teaches a lot of the foundational ideas behind marketing, sales, and branding, and thus it’s valuable for PMs looking to learn how to win over users and customers. The book is especially useful if you’re trying to develop a monetization plan — it goes deep into the ways that people irrationally make purchasing decisions. Ariely doesn’t tell you any of these things explicitly, but when reading the book you’ll pick up a toolkit of concepts that will inform your strategy.

Startup founders will also find Predictably Irrational useful, since it discusses ways to keep employees motivated, such as by focusing on mission over money.