Thursday, December 10, 2009

Predictably Irrational - by Dan Ariely

This book is about behavioral economics. While the subject alone may convince many would be readers to move onto another title, I would highly recommend otherwise.

Dan Ariely describes, in a very entertaining and informative style, why the assumption of rational behavior, which underlies most classic economic theory, is not always valid. Don’t be concerned, however, that the reader will be forced to interpret a traditional scientific dissertation on this topic. Instead, he or she will be treated to explanations of his concepts and findings in terms of everyday, common human behavior which everyone can easily understand and relate to. Further, he backs his concepts with descriptions of real-life experiments with some very enlightening and somewhat surprising results. By reading this book, I think you will gain some personal insight into how we all make real-life decisions. The result is not only the presentation of fascinating information (although I was certainly engaged by it and truly didn’t want to put the book down), but also the demonstration of how these findings might potentially be applied in ingenious manners to improve our lives in personal or societal ways.

For instance, the author explains that humans make decisions in a “relative” context. When carrying out our attempts at rational comparison, however, many factors can affect us irrationally. For example, he demonstrates how we are insensibly biased towards something that is free. He shows that, in our minds, the cost of an item affects its value (e.g., an aspirin costing fifty cents cures headaches more effectively than the same aspirin priced at only 5 cents). He explains that ownership can tremendously skew our valuation of items (e.g., in a pool of loyal Duke basketball fans competing in a lottery for hard to get tickets, those actually awarded tickets valued them at roughly ten times the value of those who were offered a chance at purchasing the tickets after
losing the lottery). He illustrates how nonsensical price associations (e.g. Social Security digits) can even affect human valuation decisions.

The book documents similar results for moral decision-making. For example, Ariely describes an experiment which demonstrates radical shifts between results during “cold” and “passionate” mental states (he used arousal for his experiment, but pointed out that anger, fear, or any other such criteria would likely produce similar results). He provides data to show that people are more honest when cash is directly involved. Likewise, he shows that moral reminders (e.g., honor codes or recalling the ten commandments) actually reduce dishonesty. He points out the differences between business and social norms and some unanticipated results of trying to blend the two.

In summary, I found this to be a great book. I thoroughly enjoyed it, learned much, and highly recommend it. I hope you read it and have a similar experience.

No comments:

Post a Comment