Irrationality: is it good or bad?
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All of us, to some degree, display irrational behaviour on a daily basis. Dan Arielly wrote books about it and Daniel Kahnmen won the Nobel Prize for his work on behavioral economics.
Most of the popular literature on the subject is discussing how you should avoid irrationality. But we’re more interested on the writers and thinkers who discuss what’s called “influence” or “habit forming”.
Specifically, we’d like to suggest something very simple: irrational behaviour is prevalent. It’s all around us. Is it bad? Is it good? And more interestingly: why does it matter?
If it’s there, why not leverage it to create great value (for yourself)?
Actually, this is nothing new. Most of the companies, who are industry leaders, are already doing it. How can you tell? Quite simple: First you ask consumers of a product “what is the most important feature about [the product]”.
Second, you just look at an industry and check whether the winning product is indeed characterized by that same feature.
So, you can ask is Starbucks selling the best coffee? Do McDonald’s offer the best tasting burgers? Is Ikea’s furniture the best or the cheapest? Is Microsoft selling the best computer software? Is iPhone the best phone? and so on.
Sometime, an entire industry is destroying value, creating horrible consequences for society. Consider the mutual fund industry: there are more mutual funds than there are stocks, and over any 10 year period, 96% of those funds, managing our money, underperform the main index such as S&P500. That means they provide us with poor results not before then cut their 2-3% commissions. A rational market would not reward systematic incompetence, and invest most of its funds in index funds. An irrational market, which is what we have, makes sure that most of us won’t have enough money set aside by then time we retire.
If you’re reading this and smiling, it means you already knew this, at least intuitively. Consumers don’t know why they buy things or make decisions. And typically, most of the companies who are extremely successful in selling those things to consumers – don’t know either why they’re so successful.
And even if they did, they wouldn’t share the secret.
And it’s hardly ever being the pioneer, providing excellent customer service, or having the best ingredients, etc.
People use theories like “disruptive innovation” (Clayton Christensen), “Competitive Strategy” (Michael Porter) and “Blue Ocean” (W. Chan Kim and Renée Mauborgne), and “Start with Why” (Simon Sinek) which give great description of what makes a successful venture, in hindsight. They are notoriously inaccurate and unhelpful in advance. Some people already understood that, and others are insisting to learn it the hard way. Clayton Christensen, who turned “disruption” into the most popular buzzword in Silicon Valley’s history, has also predicted in 2005 that the iPhone will fail, for example.
That means that not just consumers, but even smart managers fail, because of their emotions. They feel that they should talk, think or act a certain way, and that also means that they have to know stuff, even if it’s impossible to know.
And what we’re forgetting is something very interesting: that every time someone acts irrationally and loses, someone on the other end wins.
What if it was not an accident?
