Rationality Myth
How & Why People Make Weird Choices
„Man is a rational animal – so at least I have been
told. Throughout a long life I have been looking
diligently for evidence in favour of this
statement, but so far I have not had the good
fortune to come across it.“
B. Russell
 What does “RATIONAL” mean?
 Reasonable & logical
 Unbiased by emotions
 Optimal, relative to the information available
 Expected Utility Theory:
Expectancy × Value
Set A:
24 pieces
 Dinner plates 8, all in good
condition
 Soup/salad bowls 8, all in
good condition
 Dessert plates 8, all in good
condition
Set B:
31 pieces
 Dinner plates 8, all in good
condition
 Soup/salad bowls 8, all in
good condition
 Dessert plates 8, all in good
condition
 Cups 8, 2 of them broken
 Saucers 8, 7 of them broken
Hsee, C. K. (1998). Less is better: When low-value options are valued more highly than
high-value options. Journal of Behavioral Decision Making, 11, 107-121.
Three groups:
Hsee, C. K. (1998). Less is better: When low-value options are valued more highly than
high-value options. Journal of Behavioral Decision Making, 11, 107-121.
Offered price
Set A(24pcs)
Offered price
Set B (31pcs)
Group 1 –
simultaneous
evaluation
$ 30 $ 32
Group 2 – Set A
only $ 33 Group
B – Set B
only - $ 23
Dictionary A:
 Published 1993
 10,000 entries
 Like new
Dictionary B:
 Published 1993
 20,000 entries
 Cover torn, otherwise
like new
Hsee, C. K. (1996). The evaluability hypothesis: An explanation for preference reversals
between joint and separate evaluations of alternatives. Organizational behavior and
human decision processes, 67(3), 247-257.
Three groups:
Hsee, C. K. (1998). Less is better: When low-value options are valued more highly than
high-value options. Journal of Behavioral Decision Making, 11, 107-121.
Offered price
Dictionary A
Offered price
Dictionary B
Group 1 –
simultaneous
evaluation
$ 19 $ 27
Group 2 –
Dictionary A only $ 24 Group
B –
Dictionary B only - $ 20
 Preference reversal
In certain conditions, our preferences and/or
evaluations may change even though the
attributes of the objects remain the same.
Rational prioritization (transitive):
A is more than B is more than C
Irrational prioritization (intransitive):
A is more than B is more than C is more than A
amount amount amount
defect defect defect
 Preference reversal
 Evaluability effect
Our evaluation of options is only based on the
information immediately available.
We do not consider relative value of possible
alternatives if they are not available.
Rational thinking /
decision making
Irrational thinking /
decision making
HEURISTICS
 Preference reversal
 Evaluability effect
 Loss aversion
We invest more into avoiding losses than into
achieving gains (of the same value).
When negative information is available, we tend to
give it special attention and prioritize it.
Daniel Kahneman Amos Tversky
Behavioural economics
People avoid uncertainty.
(Daniel Bernoulli)
Situation A:
You have been given $1,000.
You are now asked to
choose one of these
options: 50% chance to
win $1,000 OR get $500
for sure
50% chance of $1,000 or $2,000
OR
100% chance of $1,500
Situation B:
You have been given $2,000.
You are now asked to
choose one of these options:
50% chance to lose
$1,000 OR lose $500 for
sure
50% chance of $1,000 or $2,000
OR
100% chance of $1,500
Kahneman & Tversky
Kahneman & Tversky
Certain $1,500
gain
Uncertain $1,000
or $2,000 gain
Situation A:
$1,000 given
50% chance to win
additional $1,000 OR
get $500 for sure
YES!!! No, thanks.
Situation B:
$ 2,000 given
50% chance to lose
$1,000 OR lose $500
for sure
Not if I can avoid
it.
THANKS FOR
THE CHANCE!!!
Certain $500 gain Uncertain $1,000
or $0 gain
Situation A:
$1,000 given
50% chance to win
additional $1,000 OR
get $500 for sure
YES!!! No, thanks.
Situation B:
$ 2,000 given
50% chance to lose
$1,000 OR lose $500
for sure
Not if I can avoid
it.
THANKS FOR
THE CHANCE!!!
Certain $500 loss Uncertain $1,000
or $0 loss
Situation A:
$1,000 given
50% chance to win
additional $1,000 OR
get $500 for sure
YES!!! No, thanks.
Situation B:
$ 2,000 given
50% chance to lose
$1,000 OR lose $500
for sure
Not if I can avoid
it.
THANKS FOR
THE CHANCE!!!
A matter of FRAMING.
”Let’s go for a hike! Adam and Susan said they would also
be going!”
”Let’s go for a hike! Adam and Susan said they would also
be going, but, unfortunately, Steve cannot make it…”
A matter of FRAMING.
Influenced by CONTEXT.
Three groups:
Hsee, C. K. (1998). Less is better: When low-value options are valued more highly than
high-value options. Journal of Behavioral Decision Making, 11, 107-121.
Offered price
Dictionary A
(10,000 entries, like
new)
Offered price
Dictionary B
(20,000 entries,
cover torn)
Group 1 –
simultaneous
evaluation
$ 19 $ 27
Group 2 –
Dictionary A only $ 24 Group
B –
Dictionary B only - $ 20
 Before attempting the first quiz, watch the two
videos available in the interactive syllabus in
the IS:
Dan Ariely’s TED talk on decision making
Daniel Kahneman’s TED talk on past, present and
future selves
 Recommended good reading on behavioural
economics:
Kahneman, Daniel: Thinking, Fast and Slow.
Ariely, Dan: Predictably Irrational.
Ariely, Dan: The Upside of Irrationality.