Made me think through some things I'd overlooked about market behavior
I have been thinking about economics seriously for nearly 30 years. Classical economics is built to no small degree on the notion that people will generally act in their own best self interest, after rationally and intelligently examining their options. This fit my world view fine in my first career as an engineer (BS and MS in Electrical Engineering).
From my 2nd Career as a Business Development person (MBA), I began to have to deal with people's tendency to not entirely think things through.
Here in this book, we have a professor who runs socioeconomic tests on his MBA students. These students are smart enough, worldly enough, experienced enough, and educated enough to approximate the standard economic assumptions and produce reasonably rational behavior.
Guess what. Even among broad experiments conducted on multiple MBA classes over time, one can predictably pre-bias the outcome of a particular run of a socioeconomic experiment by what seeds you plant in the class members' minds before the experiment. For example, in one experiment in estimating prices, the author requires his students to write the last two digits of their social security numbers on the top of the paper. Simply the act of writing a high number (e.g., 88) versus a low number (e.g., 08) produced statistically significant correlatable influences on the students' later price estimates. Those compelled to write "88" at the top of their papers would reliably estimate higher prices than those compelled to write "08" at the top of their papers, to a statistically significant degree.
Extrapolating to "real life." Watching Fox News will tend to make you more conservative without you knowing it. Watching MSNBC news will tend to make you more liberal without you knowing it.
If you want to understand "real truth," you are just going to have to do a little more than self-select your news feeds. You are going to have to seriously consider a diversity of viewpoints.
Moreover, if you have Social Darwinist beliefs as I once did, you may need to re-think the concept of the Poverty Trap. Early pre-conditioning really does make a difference.
Here is the way I think of it as an Engineer. Classical Economic Theory is analogous to Classical Newtonian Physics. There is nothing badly wrong with it, and it is a good approximation for most real world problems at the middle of the distribution.
However, General Relativity is indeed more correct that Classical Newtonian Physics, and the additional knowledge makes a real difference in certain special cases. And, those special cases are sometimes the really important ones. Likewise, Behavioral Economics is adding something very valuable to our knowledge of Classical Economics.
Read this only if you are brave enough to contemplate that the world might be a little more complex than we wish it were.
An excellent book which provides valuable insights
This book and Dan Ariely have recieved a lot of media attention, so I approached the book with some skepticism, thinking that it might be overhyped. I'm pleased to report that my skepticism turned out to be unwarranted.
The book has many strengths, the main one being that it convincingly presents many ways people are wired and/or conditioned to be irrational, usually without even being aware of it. This eye-opening revelation can be a bit disheartening, but the good news is that we can fix at least some of this irrationality by being aware of how it can arise and then making a steady effort to override it or compensate for it. That's not an easy task, but it can be done. As a simple example, I've programmed a realistic exercise schedule into my PDA, and I've been very consistent with my exercise because of that. The PDA imposes a discipline on me which I couldn't otherwise impose on myself (as I know from experience).
The book is also well written, and I would even say enjoyable to read. The many experiments described in the book are presented in a lively way which elicits interest, and Ariely goes into just the right amount of detail -- enough to convey the basic experimental designs, results, and plausible interpretations, without boring the reader by getting into esoteric points which are more appropriate for journal papers.
The one criticism I have of the book, which applies to most of Western pscyhology, is that most of the described experiments used US college students as subjects. That raises a serious question regarding the extent to which the results can be generalized to people of the same age who aren't college students, people of other ages, and people outside the US. Study of cultural psychology reveals that differences due to these factors can be profound, and Ariely himself notes a Korean study where such differences were observed, but he doesn't really elaborate on the point.
Despite this one criticism, I think this is an excellent and authoritative book, and among the better ones in the "why smart people do dumb things" genre, so I highly recommend it. The insights revealed are both fascinating and practical, if you can muster the discipline to apply them.
Insightful Read
Professor Dan Ariely, a behaviorial economist at Duke, wrote "Predictably Irrational," a compilation of his ground-breaking psychology experiments into human behavior as a cogent counter to mainstream economics' standard model of individual behavior. Most economists assume that individuals behave "rationally," meaning that they accurately assess and evaluate risk and make decisions to maximize their economic self-interest.
This "rational" model of economic behavior that underpins economics and permits for economics' cold, sober mathematical approach is simply irrational, according to Professor Ariely. First, people may be clear-headed most of the time, but it's very easy for them to lose all sound judgement when aroused or excited: all men know the importance of wearing a condom, but how many do it in the heat of passion? Second, his experiments have demonstrated that people do not evaluate and judge in absolute terms, but in relative terms. That's why you should always go into a bar with a friend who's shorter, uglier, and fatter than you. Also, consider the awesome marketing power of the word "free": given a choice between a pair of socks discounted at 50% or a "buy two pair, get one free" deal most consumers would choose the latter, even though the discount is only 33%. Then there's the power of pricing: in his most insightful chapter "Why a 50 cent Advil really is more effective than a 1 cent Advil" Dr. Ariely explains experiments where by only raising the prices of performance-enhancing drugs he raised the students' performance. And then there's the power of suggestions and anchoring: by getting people to think in high numbers you can also get them to pay high prices for cheap quality goods. Morever, expectations will influence outcome: people will like something better if they went in thinking they would like it better. Dr. Ariely research shows that people enjoy Coke not because it tastes better but because its powerful brand makes it feel better to drink: Madison Avenue does deserve its paycheck.
None of Dr. Ariely's conclusions really fit into economics' understanding of the world, but then again wasn't mainstream economics partly responsible for the world's current financial meltdown? The problem is that economics is a recent phenomenon with only a few centuries of history, but humans have been around millions of year and have been designed to survive in this world by interacting properly with others. The rub is that free market capitalism is also a recent phenomenon, and to do well in this brave new world individuals really ought to be predictably rational instead of so emotional and instinctive. In other words, economics is a normative discipline, offering guidelines on how to properly position yourself in a free market economy.
The really positive news is that Dr. Ariely confirms with his psychological experiments what spiritual and religious people have known for thousands of years: the power of the mind is simply incredible and unquantifiable. It's not changing the price of a drug that makes it more effective; it's how the change motivates and encourages the mind. Thus, prayer, meditation, religious worship, church meetings, and the like are as effective as placebos: which is to say they're very effective. From an objective perspective, they may have no intrinsic economic or scientific value but their ability to transform people and their lives is priceless. Perhaps the real problem with these activities is that they've been free for so many thousands of years, marketers, entrepreneurs, and economists can't price and extract value from them, and so ignore them.
While Dr. Ariely's book is sure to convince nearly all of his readers. But I do have a suggestion on how Dr. Ariely can improve his research: he needs to consider the idea of variation. Traditional economists believe that the average individual is predictably rational, and Dr. Ariely believes the opposite. Both mistakenly adhere to the idea that an "average" individual exists. What exists and is more pertinent to the study of economics is the group, and in any group you have variation in personality and behavior. In any group, you are bound to have the predictably rational, the predictably irrational, the unpredictably rational, and the unpredictably irrational. In Dr. Ariely's experiments there was never a 100% majority: a convincing majority was 75-80%. You're always going to have a good minority of 10-20% who go their own separate way (as one Dr. Ariely's experiment shows, when beer drinkers will order beers they don't like just so that they can beers different from those of their drinking partners).
Variation is the ultimate rule of human behavior, and for economists to gain deeper insight into human behavior this ought to be next great area of focus and study.
About Predictably Irrational, Revised and Expanded Edition: The Hidden Forces That Shape Our Decisions detail
- Amazon Sales Rank: #461 in Books
- Published on: 2009-06-01
- Released on: 2009-05-19
- Original language: English
- Number of items: 1
- Binding: Hardcover
- 400 pages
Features
- ISBN13: 9780061854545
- Condition: NEW
- Notes: Brand New from Publisher. No Remainder Mark.
- Click here to view our Condition Guide and Shipping Prices
Predictably Irrational, Revised and Expanded Edition: The Hidden Forces That Shape Our Decisions Description
How do we think about money?
What caused bankers to lose sight of the economy?
What caused individuals to take on mortgages that were not within their means?
What irrational forces guided our decisions?
And how can we recover from an economic crisis?
In this revised and expanded edition of the New York Times and Wall Street Journal bestseller Predictably Irrational, Duke University's behavioral economist Dan Ariely explores the hidden forces that shape our decisions, including some of the causes responsible for the current economic crisis. Bringing a much-needed dose of sophisticated psychological study to the realm of public policy, Ariely offers his own insights into the irrationalities of everyday life, the decisions that led us to the financial meltdown of 2008, and the general ways we get ourselves into trouble.
Blending common experiences and clever experiments with groundbreaking analysis, Ariely demonstrates how expectations, emotions, social norms, and other invisible, seemingly illogical forces skew our reasoning abilities. As he explains, our reliance on standard economic theory to design personal, national, and global policies may, in fact, be dangerous. The mistakes that we make as individuals and institutions are not random, and they can aggregate in the market—with devastating results. In light of our current economic crisis, the consequences of these systematic and predictable mistakes have never been clearer.
Packed with new studies and thought-provoking responses to readers' questions and comments, this revised and expanded edition of Predictably Irrational will change the way we interact with the world—from the small decisions we make in our own lives to the individual and collective choices that shape our economy.
