December 5, 2009

2 Examples that Help you Understand Irrational Decisions

So why do I continue yapping about Economics when this blog is about social media and SEO? Well basically it has an intrinsic relationship. If you want to know where revenues can be returned from  your social media investments, you really have to pay notice to the way that we as humans make decisions about our finances.

I haven’t seen any blogs yet that have made the connection with regards to Social media so I believe there is a void to fill here. This blog post takes aim at describing what an irrational decision is.

Irrational Economics

Basically an irrational economic decision is when we have the face value of two different alternatives. One is definitively better from an economic stand point but we choose the other.

1. Getting Elected – Belief in something greater, earning status

A process where we commonly see irrationality is the American election process. Here is one example I found on a website:

“Even the richest among us act economically irrational at times. In recent days New York City Mayor Michael Bloomberg has been hinting that he will not only continue, but seriously ramp up, his personal record of mindless economic waste. In 2001 Bloomberg spent a staggering $74 million on his mayoral campaign. In 2005, apparently still unsatisfied with his name recognition garnered after his first term running Havana-on-the-Hudson, Bloomberg ponied up another $85 million to extend his tenure another four years. That amounts to almost $160 million to buy a job paying less than $200,000 per year. No one spends $160 million on something that returns roughly $1.6 million dollars over eight years unless something much deeper compels him.” – Mark G. Brennan

Now this is clearly an act of irrational economic decision making. Why would you spend more than you receive? Why would you invest in something that does not return? You, as a reader are itching now, possibly screaming – “WELL JESPER IDIOT, HE ISN*T IN IT FOR THE MONEY”…. Correct!! I say. But from an economic standpoint it is an irrational decision.

I am sure that mr Bloomberg was highly satisfied with his investment and pleased to become the Mayor of New York.

2. Getting now, Paying Later – Timing and NOW value

There are quite a few times when we are approached by sales men where we are asked to buy now but pay later. I like to change that phrase to GET NOW and PAY MORE FOR A LONG TIME. That would more accurately describe the situation as well as ease the pressure on the NOW value we see in something.

Irrational economic TV buyTo exemplify I would like to bring up a TV I bought as a student. If I would have bought it right off the bat, I would have got it for 3200 SEK (Swedish Kronor). As I got to the sales person available in the store, they obviously saw that I wasn’t as rich as I wanted to be and thus the sales guy popped the question right away: “Hey, you know you can finance this buy through a monthly payment of only 149 SEK for three years”.

For me, who only wanted a TV so that I could watch the world championship of football (soccer) that started that same night, it started to bubble in my belly. Yummy!! Was this possible. Would I be able to walk out of the store loosing only 149 SEK plus the “in store credit fee” of 249 SEK. My mouth started to water. I said YES!! A TV worth a whole lot to me, would become available to me right away by only paying 398 SEK. Lovely!! I signed the papers, got cleared for the credit and carried my TV home. Extremely pleased and well equipped for the Championship!!

Now. I knew what I wanted. I had the money to pay for it. Yet, when given an option to get the perceived “now value” of the TV for less money than I had calculated, was greater than my rational economic thought. As it turns out, I payed an extreme price for the TV. I even agreed to pay a fee so that they could rip me off. Instead of paying 3200 SEK I ended up paying 5364 SEK plus the fee of 249 SEK.

I must say I feel stupid when I look back at this, but right then and there, and during those three years, I was a very satisfied customer. I had my TV and the 149 SEK per month didn’t bother me at all. So although I made an irrational economic decision I was still pleased with the outcome.

When used in social media

When wanting to lean your business model on social media interaction you have to take these behaviors we have as humans into play when creating your offers. I payed almost double for my TV and Mr Bloomberg invested a 1:10 on the kickback he got from his Mayor seat.

Both of these situations are socially constructed. The world championship of football might not be the best football in the world. I might watch games in the 3 league of Spain and those games are more exciting to watch. But none of my friends watch those games and so in the sense of my social context, I will be an outcast as I cannot discuss what happened in the game everyone else saw last night. They are neither interested in listening to me talk about the game I watched, and they will tease me if I didn’t see the game they saw.

In Mr Bloombergs case, winning the election brought social status and power. This is also a socially constructed arena where we as humans accept that a majority gets to decide over minorities through an institution or a person. This is not an absolute, natural truth, but we as humans have in many societies accepted this to be the status quo.

What I am getting at

You as a business now have the possibility to enable people to reach social status, great now values and socially constructed power by being an enabler. You can also extract great values from being an enabler. If your product is what lies between more status and no status, or if it lies between easier communication or no communication, then you can build values.

In most cases this value is displayed in the nature of choice between two otherwise similar products. If you are an enabler you can most definitively charge more for your product than your competitor without adding a single feature to your product. Just have a look at brands. Companies with known brands have values you cannot explain.

But there are more direct examples such as “other people have bought this so you should too” or “most recently bought from the same category”. Both of which put products in a social context.

Irrational economic decision making gives proof that we can extract values from social contexts. Why aren’t more companies looking at themselves and their products through these goggles? All you need to do is to find the social context where your product enables people.


  • Hessam Lavi, December 10, 2009 Reply

    Make sure to check out Dan Ariely who is a behavioral economist and has written about irrational decision making - this is a very entertaining speech

  • admin, December 10, 2009 Reply

    @Hessam - YEE... thanks for the tip!! I have just ordered 5 new releases on behavioral economics and Game Theory.. but I suppose Amazon don't mind if I spend some more :D haha... Any title you suggest in front of another?

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