Monday, December 26, 2011

Predictably Irrational: Chapter 7

Dan Ariely is a behavioural economist who refutes the idea that we are fundamentally rational. Through empirical data, experiments and anecdotes, he illustrates that our irrationality can actually be predicted. He then presents ways in which we can make more rational decisions, both as investors and as people.

We tend to overvalue what we already possess relative to what we don't. For whatever reason, we fall in love with what we own. This allows things like "free cable for a month" and products with a "30 day money back guarantee" to trick us into keeping things we thought we might be able to return.

When we enter a transaction, we tend to focus on what we will lose rather than what we will gain. When this is combined with how we overvalue our possessions, this results in asking prices that are far too high. This is especially true when it comes to possessions in which we put a lot of work (e.g. a house we fixed, furniture we assembled). More work on an object seems to result in a deeper attachment to it.

Unfortunately, this overvaluation doesn't just occur with objects but also with ideas. Once we have a certain viewpoint, we try to hold onto it. This can result in a closed, rigid mind.

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