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The science of decision making

Five reasons we make irrational decisions

Dan Ariely, Professor of Psychology and Behavioral Economics and author of Predictably Irrational.

Why do people make the choices they do? There is a science behind decision making, and if you can harness it, you can influence and predict the decisions people make. Dan Ariely, Professor of Psychology and Behavioral Economics and author of Predictably Irrational, has made a career of it and shared his expertise with attendees at The Premier Business Leadership Series in Amsterdam.

When an accident landed him in the hospital for an extended stay, Dan observed that “good, caring people can often make irrational decisions and they do so systematically – not because they don’t care, but because they are following accepted wisdom or their own belief that they are doing the right thing,” he said. It was his time in hospital that got him interested in why people make the choices they do, which led to his specialty in behavioral economics.

After extensive research, Dan has demonstrated these five principles:

  1. Humans are imperfect decision-makers, but our irrational behaviors can sometimes be predicted.
  2. When forced to make a decision, we will often seek the ‘do nothing’ or ‘default’ option.
  3. We don’t deal with complexity well and would much rather choose between similar options than different ones.
  4. The forces of ‘default’ and of ‘complexity’ are very powerful.
  5. It is often possible to predict the outcome of a decision and, with skill and insight, even influence it by framing the choice in a particular way.

To explain, Dan offered the analogy of the optical illusion:  “Not only can you ‘trick’ the brain into seeing something that isn’t there, you can predict that people will see it and, even after they know it is an illusion the brain still sees the illusion,” he said.

“We are evolved to be incredibly good at vision and we still get it wrong,” says Dan. “Imagine how hard it is to make rational decisions about things we are not so good at.”

How we decide
When we are trying to make a decision, we often make comparisons between things that are similar rather than markedly different.

“For example, if you’re going on a vacation and trying to decide between Paris or Rome, you’re facing a difficult decision,” said Dan. “Both are beautiful cities with much to offer, but  with different languages, cuisine, history and culture.”

“However, if we add a third option ‘Rome-minus’ (same Rome vacation but without free coffee), people start to compare Rome with Rome-minus, and are more likely to select Rome as a vacation destination than Paris.” Why?  Because it’s easier to compare the two Rome options, which are similar, than the Rome / Paris options which are dissimilar.

Opt in or opt out?
In another example, Dan talked about the power of opt-in, rather than opt-out, showing that the differences in organ donation rates in various countries is much more affected by whether the enrollment form is for ‘check the box to opt-in’ (typically low rates of enrollment), or ‘check the box to opt-out’ (high rates of enrolment) than the religion, culture or morality.

It is a big decision and the power of default is typically to do nothing – i.e. not check the box, regardless of the option.

As Dan says, your decision about whether to enroll in the organ donation program is much more likely to be driven by the way the form is designed, than by your own preferences.

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  1. Posted May 21, 2012 at 12:51 pm | Permalink

    Thanks Peter, this reminds me very much of the book “Nudge. Improving Decisions About Health, Wealth, and Happiness” by Richard Thaler and Cass Sunstein (Penguin, 2009) where they show ways to nudge people into different “defaults” – Astonishing how simple it is sometimes to change a “decision environment” – interesting is also the contrasting to the far end of this, called manipulation.

    • Peter Dorrington, Director of Marketing Strategy (EMEA), SAS
      Posted May 21, 2012 at 3:00 pm | Permalink

      Hi Frank and thanks for the comment.
      You raise an interesting point about the difference between a ‘nudge’ and manipulation. If we take another example – lobbying – we can see that it is possible to cross that line. Many lobbyists provide a useful service – they provide decision-makers with information that they need to help them make a decision in a complex environment; all well-and-good. The problem arises when counter-arguments are not considered or when a lobbyist pushes hard for a decision which is not in the best interests of the stakeholders.
      On the one hand, understanding how we make decisions and using that information can be a valid way of promoting a business or a societal goal, on the other hand it provides us with interesting tools to understand the ‘people’ in the process.
      Personally, I think that there are people who do this subconsiously anyway; who know how to frame a discussion to improve the odds of getting the outcome they want. The rest of us need a little help in understanding the data – ‘why do they do that – it’s not the logical choice!’.
      If you have read Dan’s first book ‘predictably Irrational’ I would definitely recommend reading his second ‘The Upside of Irrationality’ – as well as being very amusing, it does portray the more positive benefits of behavioural economics. To use the donor enrollment program again – knowing what we now know, would any government ever promote an ‘opt in’ program again (religious and cultural differences aside)?

  2. Brent Cohen
    Posted May 21, 2012 at 6:29 pm | Permalink

    Using some of these techniques, survey results can be deliberately manipulated. Or – lack of understanding of these factors can inadvertently lead to unreliable survey results. Business decisions, and sometimes, expensive new initiatives, are based on survey results that may or may not be aligned with the true underlying sentiment of the survey respondents. Kahneman (Nobel Prize, 2002) and Tversky are the forefathers of this line of research on cognitive fallacies.

    • Peter Dorrington, Director of Marketing Strategy (EMEA), SAS
      Posted May 22, 2012 at 8:50 am | Permalink

      Hello Brent and thanks for the insight.
      I agree, poorly (?) designed surveys can end up supporting our prejudices or not giving us the insights that we need – it is why I have tremendous respect for Market Researchers who spend a lot of their time and expertise designing non-leading questions. Of course, all surveys have to have some limits to the answer set – otherwise they would become unwieldy and not give us data that can be readily interpreted.
      I also think that motivation is key here; in the Paris vs. Rome example, a travel company with no vested interest in the outcome should prefer the simpler question over the ‘Paris vs. Rome vs. Rome-minus’ one. However, it I were the Italian Tourist Board I would quite legitimately want to promote Rome over Paris and hence prefer the second question. That said, how strong is the pull of the default (do nothing) option? Do more people buy a holiday overall when faced with the ‘easier’ decision of Paris vs. Rome vs. Rome-minus (more likely to be a comparison between Rome and Rome-minus) than the ‘tough’ decision between the strightforward ‘Paris vs. Rome’ one – it’s a big (expensive and complex) decision – the pull to go with a tried-and-trusted previous destination must be quite significant.
      For me, the most entertaining ‘survey results’ are those used to market beauty products; the respondees are often giving a subjective, non-expert opinion and we are not always told what the other options are. Is the default an opt in (‘tick the box if you think the product has not improved the way you look’) or opt-out (‘tick the box if you would not recommend the product to a friend’). If the study is a comparison, what were the other options? (‘would you prefer to use our product, or have a tooth extracted?’)
      Personally, I do not have the skill set to discuss motivation, but behaviour, if predictable (irrational or not) is a legitimate sphere of study. If I can predict that if I do X you will be more likely to do Y is interesting but neutral in value – the question is really should I then do / not do X? and that is an ethical and moral question that I believe the good businesses, those that are being built to last, are well able to answer.
      As with all things – gathering appropriate data and having the tools and skills to find meaningful insights from it, whether in the form of experiments or after-the-fact observation is key, but only if you and your organisation have the moral fortitude to ‘face the truth’ (a point Sir Terry Leahy made in his keynote presentation (also at the Premier Business Leadership Series in Amsterdam). The rest of it is up to us to think a little more about how we evaluate survey data.

      • Peter Dorrington, Director of Marketing Strategy (EMEA), SAS
        Posted May 22, 2012 at 9:29 am | Permalink

        And no sooner do I say how much I admire Researchers who design good questions when I come across this example of the opposite from McKinsey (classic management-consultant-speak):

        Q / Which of the following types of innovation will your organization primarily focus on in the next one to three years?

        Market adjacencies through the leveraging of our existing assets

        What the heck is this supposed to mean? (makes me ashamed that I used to be a consultant before I came to work somewhere sensible.)

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