Chapter 2 Summary and Response for Predictably Irrational

In Dan Ariely’s 2008 book, Predictably Irrational, he explains how the first price we see for a good or experience affects how much we are willing to pay in the future. Ariely compares the human brain to that of a gosling which imprints on the first thing it sees after birth. Ariely claims consumers anchor to the first price they see and that arbitrary coherence, or when initial prices shape present and future prices we see, is very present in peoples minds. Both of these were shown in the class experiments Ariely and his colleagues did at MIT where they asked students to use the last two digits of their social security numbers to determine if they would pay that price for a given list of goods. They then asked them to indicate what the maximum amount they would pay for each object was. Their starting number affected their decisions in the future meaning, if they had a lower number at the start they were willing to pay less for items. The same thing happened to the people starting off with higher numbers- they were willing to pay higher prices for the exact same items. Ariely explains how price tags become anchors when the consumer considers buying something at the particular price it is offered at. This affects all future decisions.  Ariely also claims that humans participate in herding and self-herding which happens when the consumer thinks something is good or bad based not heir previous behavior. Ariely shows this in an example of someone who switches from buying Dunkin’ Donuts coffee to slowly becoming a committed Starbucks fan. This shows that anchors can switch over time. In all, Ariely claims that the first choices we make heavily influence the choices we make in the future.

In Dan Ariely’s book, Predictably Irrational, anchoring is described as the first price the consumer sees. Arbitrary coherence is described by Ariely as, “although initial prices are arbitrary, once those prices are established in our minds they will shape not only present prices but also future prices.” (p. 26) As Ariely and his colleagues class experiments show, if you start off paying a higher price, that determines how much you are willing to pay for things in the future (you’ll pay higher prices for items). If you start with lower prices, you will also pay lower prices for certain items. So if a person worked really hard to raise $3,000 for a used car, they would most likely be a more frugal consumer in the future, not only because that student worked hard for their money, but because $3,000 of a car isn’t very expensive. They would stick to their anchor price. Ariely also discusses how it is assumed that consumers willingness to pay is one of the two inputs that determine demand or market prices as they’re also known. But Ariely’s experiments shows that consumers can be easily manipulated which means they really don’t have a good control over what they want and how much they’re willing to pay for various goods and experiences. Also, supply and demand are dependent forces, not independent. Market prices influence how much consumers are wiling to pay for things showing how supply and demand are connected entities. This is the fallacy of supply and demand.