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Behavioral Economics for Entrepreneurs





Predictably Irrational by Dan ArielyThere’s a wonderful new book out called Predictably Irrational by Dan Ariely that points out many interesting findings from behavioral economics that help to explain why people behave the way that they do.

The book offers a lot of useful insights for anyone who runs their own business.

Here are three things that the book explains, and the implications of that point for entrepreneurs.

1. People overvalue what they have. Ariely points out that people who have something consider it to be much more valuable than people who don’t have it. This point explains why it’s so hard to get a business buyer to offer you a price for your company that you think reflects its worth and why it is difficult to get an investor to value your business at what you think it is worth.

2. Options distract us from our objectives. Ariely explains that we have an irrational desire to keep our options open, which hinders our performance. This point explains why companies that fail to focus often do worse than those that focus on one product or market.

3. The power of price. Ariely points out that we believe that things that cost more are of greater quality than things that cost less. This point explains how entrepreneurs can use pricing strategy to make money from the irrationality in human behavior.

The book is a great read for anyone, and certainly worth its cost for entrepreneurs.

Check out his blog, too.

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About the Author: Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of eight books, including Illusions of Entrepreneurship: The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By; Finding Fertile Ground: Identifying Extraordinary Opportunities for New Ventures; Technology Strategy for Managers and Entrepreneurs; and From Ice Cream to the Internet: Using Franchising to Drive the Growth and Profits of Your Company.

9 Comments ▼

Scott Shane


Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

9 Reactions

  1. The third point is really interesting and I can see lot’s of truth to that. Strange how the human mind works isn’t it? Sounds like an interesting read, too. I always love books on subjects such as this. Bet there’s all kind of juicy information in there.

  2. I know first hand that the 3rd point is too true. My husband is one of these irrational consumers. He is always more attracted to higher priced name brand products. I’ve tried for years to change his mind but he’s too stubborn.

    Dan’s blog, http://www.predictablyirrational.com/ has some really interesting topics on there too.

  3. Amanda, that’s funny because I know far too many men with this affliction. I have one male friend in particular that does this with food products. If that box of cereal doesn’t have a brand name attached to it – forget it. Same goes with everything else edible – no brand name – no touch. Can be the same product from the same exact supplier just under a different name and it doesn’t matter. He’ll pay $5 and $6 for a box of cereal with a brand name attached to it before he’ll even consider eating a box of $2.99 frosted flakes.

  4. Captain Franchise

    Well Chris I think we can all agree that in this world most of the time you get what you pay for right? 🙂 That’s how it has been in my experience anyways, and so I think that’s why many men might have this stigma attached to brand name goods.

  5. Very good point Captain! I know that’s the case behind that line of thinking and it’s understandable. But we still do poke fun at him on occasion for his stubborness 🙂

  6. Chris,

    Good book review…

    About the power of price, it is indeed ways to capitalise on human’s irrational behaviour in pricing policy, and for sure, lower price not always a way to go to win customer. Higher price commands higher quality – even though it’s not a fact, but perceived only 😉

    Cheers!

  7. Anita Campbell

    There’s a lot of great stuff packed into this short post, Scott.

    For instance, on your point #3, that can be applied very well to service businesses. I learned early on when I used to do strategic planning consulting that if I cut my price the prospective buyers just didn’t perceive the work as being valuable. And I was still doing the same amount of work and delivering value, but getting paid peanuts for it.

    Like many people starting out, I tended to naturally undervalue my own work and subconsciously the message that got conveyed to those I was trying to sell to was: “this may not be worth it.”

    Once I developed confidence in my own work product, it got much easier to ask for the price I deserved, and buyers treated it with more respect too, when I asked for a higher price.

    Anita

  8. Nice concise summary of take-aways from the book for entrepreneurs. There was a news story recently on the effect of perceived cost on the enjoyment of wine, where people enjoyed the taste of wine the more expensive they thought it was–#3 in a nutshell. I just finished the book myself and enjoyed it quite a bit, enough that I wrote my own (more lengthy) post on it here, in case you are interested:
    http://brentblog.typepad.com/brentblog/2008/06/read-this-post.html

  9. As a fan of the father of logic, Aristotle, I am intrigued to look into this book.

    Brent Edwards: Regarding the wine. If you are not an expert on wine, you could assume that the price is different. As a long-time purchaser, I go after the three part formula: Quality, delivery time and total price. I want to explore the wine field more and more in the future. It is good for you with a glass of flavonoids per day. I would recommend you to travel to a great wine country in the middle of Europe. Hungary has over 20 wine districts. You could buy wine that is cheaper than a bottle of soft drink.

    Chris: A “noname” / generic brand of cereals could be as good as a leading brand like Kellogg’s, but on the other hand it could be a safe pick to continue with the brand name. Here in Sweden it is starting to get complicated with the grocery chain starting with their own brands.

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