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The three chapters from Ariely’s book apply some of the concepts we’ve already read about, as well as some new ones, to economic or financial decision making. Ariely, along with Richard Thaler, is a leading researcher in the field of behavioral economics/behavioral finance, applying the cognitive sciences of decision making to business decisions. Think about a financial decision you’ve made, or your company has made.
- Consider whether it was a purely rational decision (did you or the company follow the rational decision-making process as you described it in week one) or did you let some of the influences described by Ariely sway you or your company’s decision?
- Describe the decision and what you think influenced it.
- Under what conditions might our business decisions be influenced by altruistic impulses?
Ask your colleagues a question about financial decision making and remember to post a source. You may use the Ariely book as your source if you did not use an outside source.
RESPONSE #1
Do credit cards make people spend more money than they would if they only used cash?
One thing that stood out to me while reading Ariels work was how people believe they are making logical financial decisions when emotions and psychology are actually influencing them. Credit cards seem like a perfect example of this. In theory, spending $100 should feel the same whether someone pays with cash or with a card since the same amount of money is leaving their account. In reality, though, many people seem more willing to spend when using a card because the payment feels less immediate and less personal than handing over physical cash.
This also connects to impulse spending and lifestyle habits. Credit cards can make expensive purchases feel smaller at the moment since people are not physically watching their money disappear. Businesses also encourage this through rewards points, financing offers, and easy tap payments. Ariel discusses how people are influenced by psychological factors even when they believe they are being rational. It makes me wonder whether modern payment systems are changing the way people think about money and self-control.
- Predictably Irrational, Revised and Expanded EditionWebsite |
RESPONSE #2
How do we solve the constant interference of social norms and cognitive errors in making rational decisions concerning money?
Recently, I decided to buy a relatively more expensive laptop than my current requirements and budget. Logically, I should have considered what I needed, compared different specs, then purchased the one closest in match to my needs vis–vis my budget. But in line with Ariely, multiple behavioral effects influenced my decision-making.
The anchoring effect was top on the list of influences. The first laptop I was shown was, in view of my budget, expensive, but it instantly set an anchor in my mind. Hence, the next model I saw appeared affordable even though it was still higher priced than my original budget and had more features than I practically needed. Secondly, the social norms versus market norms influenced my decision-making in associating an expensive laptop with competence and efficiency. In the real sense, this was/is just a social perception. In addition, was the influence of expectations. Popular brand reputation created expectations that a more expensive product would out-perform other lower-priced brands even as there was no other indication of this than the higher price. In retrospect, I admit that this decision was hardly a rational one. Although I did certain feature comparisons, there is no doubt that cognitive and psychological biases had influenced my decision-making.
In environments where social norms dominate market norms, business decisions can be influenced by altruism. Organizations are usually persuaded to make costly policies in a bid to conform to current environmental/social pressures. Such business decisions, as noted by Richard Thaler, have their basis in concepts such as fairness, reciprocity, and bounded rationality. Altruism is more likely when decisions are made from the perspective of relationships, trustworthiness, and long-standing reputation. Bottomline, organizations sometimes make less economically rational decisions in favor of taking more socially routes.
- Predictably Irrational, Revised and Expanded Edition The Hidden Forces That Shape Our DecisionsBook | Ariely, 2010 | ISBN Ariely, D., 2008. Predictably Irrational: The Hidden Forces that Shape Our Decisions, Harper Perennial, NY: NY. (ISBN: 978-0-06-135324-6)
- Altruism, fast and slow? Evidence from a meta-analysis and a new experiment – Experimental EconomicsWebsite | Nosenzo, Daniele et al., 2020 |
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