22 January 2009

Predictably Irrational – Dan Ariely (2008)

Predictably Irrational is a book by Dan Ariely, a professor of behavioral economics at MIT, and it’s subtitled ‘The Hidden Forces That Shape Our Decisions’.  Ariely takes issue with the standard economics assumption of the fully rational man, and shows through various experiments a few of the many ways in which we make systematically irrational decisions.  Some topics I’ve heard about before, such as the effect of anchoring (the notion that thinking of a random number, such as a value between 1 and 100, can then influence how much you might be willing to pay for an item), but there’s plenty of new findings here that really make you think about your own habits.

I’ll let Dan himself tell you the bottom line, from page 239:
Standard economics assumes that we are rational – that we know all the pertinent information about our decisions, that we can calculate the value of the different options we face, and that we are cognitively unhindered in weighing the ramifications of each potential choice.

The result is that we are presumed to be making logical and sensible decisions. And even if we make a wrong decision from time to time, the standard economics perspective suggests that we will quickly learn from our mistakes either on our own or with the help of ‘market forces.’ On the basis of these assumptions, economists draw far-reaching conclusions about everything from shopping trends to law to public policy.

But, as the results presented in this book (and others) show, we are all far less rational in our decision making than standard economic theory assumes. Our irrational  behaviors are neither random nor senseless – they are systematic and predictable. We all make the same types of mistakes over and over, because of the basic wiring of our brains. So wouldn’t it make sense to modify standard economics and move away from naive psychology, which often fails the tests of reason, introspection, and – most important – empirical scrutiny?
Recommended, an easy yet thought-provoking book.