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A Manager’s Guide to Human Irrationalities

January 7, 2009 | Dan Ariely | Strategy

Dan Ariely is one of the world’s foremost experts in behavioral economics, the study of how people behave when making business and financial decisions.

Ariely’s insights should make executives think twice about the wisdom of the decisions they regularly make — as well as the inner processes they rely on to make those decisions. Why, for example, will managers veto a 10% cost increase for a $1 million project while thinking nothing of a 1% overrun on a $10 million budget — even though the actual amount is the same? Why will they often agonize trying to choose between two close alternatives when they’re frequently better off just flipping a coin?

In this wide-ranging interview, Ariely talks about how Apple Inc.’s initial decision to price the iPhone at $600 only to drop it to $400 soon after might not have been a mistake but instead a very shrewd marketing maneuver. He also explains why a product monopoly might not necessarily be desirable because it can lead to consumer confusion, resulting in slow sales. With regards to hiring practices, Ariely strongly questions the interviewing processes routinely used and asserts that some companies might be better off hiring graduates from reputable colleges at random. Toward the end of the interview, he describes his research that has investigated ways in which teams might be better able to make group decisions. Lastly, Ariely explains one of his most valuable managerial insights — that adding even just a little meaning to employees’ work will often increase their motivation enormously.

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