Rational vs. Irrational

I'm a big fan of economics, and one of the debates in the field right now are how "rational" people are. Now, economists have a pretty specific definition of what rational means. To them, a rational person is someone who makes decisions in their own best interests, and generally doesn't make mistakes in this. It makes intuitive sense, until you meet people in the real world. People can make decisions that can be wrong, self-destructive, or both. Behavioral economics is a relatively new branch of the field that looks at decision making in more of a real world fashion.

The dialog between both sides is interesting. The rationalists find that people are often very rational when they are making a decision. If there is a clearly better alternative, people reliably take it. But the behaviorists find our rationality isn't perfectly fallible. For instance, if someone is debating between two alternatives, with one being less expensive than the other, injecting a third inferior alternative can often get people to choose the most expensive option. An example of this is mentioned in Predictably Irrational, where The Economist magazine ran an online offer where potential subscribes could order the print magazine along for $70 a year, online only for $95 a year, or online and print for $100 a year. This resulted in more dual subscriptions for $100 than if online only $95 wasn't an option.

Think about that a minute: if you give people options A & B, say 50% of people pick A, and 50% pick B. The you add in option C, which people who like option A wouldn't pick, and people who like option B wouldn't pick. But when choice C is entered into the equation, people who picked A end up picking B! That doesn't make logical sense.

I think that "irrational" isn't the word for what is being seen here, and so do many experts in the field. Instead, what is happening is that people are discovering that our decision patterns are very dynamic. We make decisions based on the information in front of us. We don't, like the rationalists may have thought, keep objective, unchanging values in place with all of our decisions. We are always thinking in terms of relative options. There aren't always perfect objective choices to be made.

How does this help us? Well, for ourselves, we should know to keep our search window open wide enough to take in several options, but not so wide that we get overwhelmed. Secondly, we should consider what is driving us to make a decision. Drivers are necessary to life, and people aren't wrong to appeal to them. But we need to anticipate for ourselves what the actual fulfillment will be. Does this item fill a need, or will I be let down? Focusing on long-term value over short-term will help us make better decisions.

What about dealing with other people? First, know that people are usually pretty good decision makers. You need to be presenting something of value. Giving people something of value reinforces that their decision was a good one, and that returning to do business with you will likely lead to more positive transactions. Secondly, pay attention to the search window size. Create a dichotomy too early, and you may help them to eliminate an option that they really would have liked, but struggled with purchasing at that time (we all have limited resources, so engaging a person to make a decision isn't inherently wrong just because it causes some struggle). Make the choices you present allow them to find what they are most looking for. Lastly, try to learn what the person's individual decision process is. There are a lot of different motivators for a given transaction, and, as I said in a recent article, commerce is communication. What you're presenting needs to be tailored to what the person values. A logical argument that makes no appeal to someone's personality will leave them cold. Tying a message to their internal rationale for a decision will best serve them AND get the best benefit for yourself.