In the past decade or so Behavioural Economics has become all the rage in both academic circles and among the general public. The financial crisis that started with the bursting of the sub-prime mortgage bubble in the US a couple of years ago has given behavioural economists a major boost.

The basic premise of behavioural economists is that humans are not necessarily rational when they make economic or financial decisions. One of the cornerstone assumptions of “traditional” economics is that we decide based on rational analysis of costs and benefits and seek to maximise our financial gains. It turns out this is not the case and many of our decisions are driven by “irrational” factors that defy the premises of traditional economics.

Professor Dan Ariely is another ex-Israeli scientist that has popularised Behavioral Economics with his book Predictably Irrational. Using relatively simple experiments he shows that many of our decisions are influenced by irrational factors, but more importantly, that this irrational behaviour is, in many cases, predictable. In other words, contrary to popular belief (at least in the last 300 or so years of the “scientific era”), humans are inherently irrational.

Here are a few examples:

- People will feel better taking a medicine that costs 10 times as much as another, identical, medicine.
- When faced with a free product, we will likely “buy” it even if they don’t need it.
- Sexual arousal will lead people to change their behaviour and perform deeds they deem immoral.
- We will think food or drink are better if they are presented in a more glamorous setting.

Ariely’s book is highly entertaining and provides some delightful nuggets of truth about ourselves. But I didn’t find many of his “discoveries” surprising. It is true that we like to see ourselves as rational machines, but most of our life experiences clearly demonstrate this is not the case. Blind belief in a purely rational brain is, well, irrational. The work of Nobel prize winner Daniel Kahenman (with his partner Amos Tversky), around how people decide between alternatives involving risk, has been known for many years. Ariely’s achievement is mainly in popularising the subject and presenting it in a way that most people can understand. ( )

Ariely is interested in understanding how we actually make our decisions; he shows that
certainly the standard economic model does not apply. The ideas introduced are important
and interesting. The book is written in a light and engaging style, which is both a blessing
and a curse. On the one hand, it's an easy read; on the other, I am confident that the key ideas
could have been expressed eloquently in 50 pages, rather than 250. ( )

http://www.book-blog.com/2009/10/arie... ( )

Predictably Irrational belongs to the category of books such as Nudge by Thaler and Sunstein, and Bounded rationality: The adaptive toolbox by Gigerenzer. You'll find similar examples in the books by those authors and maybe in more detail so why another book on a similar subject? Maybe it is because Dan Ariely concentrated on behavioral economics after a very critical and painful personal experience. Or maybe because he is the professor from MIT with a very keen sense of humour when it comes to explaining his examples. Or can it be because he generally relates different modes of 'irrationality' to his life, too?

If you haven't read any book from Gigerenzer, Thaler, Sunstein, etc. then Predictably Irrational may be a very good start to understand what this behavioral economics stuff is all about. I guess living afer (or in the middle of) a global economic crisis gives people opportunities to question the assumptions that they didn't even realize they held. This may be one of the reasons why these kind of books and research became very popular.

So if you want a good and non-academic headstart in behavioral economics this book is fine as a first choice. If you want to learn and understand more about the field please invest some time in Gigerenzer's, Kahneman's and Tversky's work, too.

Your reward will be a much better understanding of human nature and you'll be much more suspicious of classical economic theories, rational agent based assumptions and the 'virtues' of free markets. ( )

When it comes to making decisions you like to think of yourself as pretty sensible, right? Well, now comes Dan Ariely, a good-humored and self-effacing professor at MIT in the emerging field of behavioral economics, a discipline that blends insights of both psychology and conventional economics, to tell you you’re wrong. Not only isn’t your decision-making process rational, as this engaging book demonstrates, he can show you how you’re likely to make the same irrational judgments time and again.

Ariely sets himself a challenging task: “My goal, by the end of this book,” he writes, “is to help you fundamentally rethink what makes you and the people around you tick.” To accomplish that he summons up a host of entertaining and revealing controlled experiments to demonstrate the frequently odd but disturbingly consistent way the human mind works.

He leads off his study by exploring the concept of relativity. We “rarely choose things in absolute terms,” he observes. “Rather, we focus on the relative advantage of one thing over another, and estimate value accordingly.” That’s the reason why high-priced restaurants that want to promote a particular entrée make it the second most expensive dish and why home buyers moving to a new community tend to base their buying decision on prices in their former home town. From these examples, Ariely moves on to consider the concept of anchoring, or how our initial beliefs subtly influence future behavior. To illustrate this tendency he reports that when subjects were asked to write down the last two digits of their Social Security numbers their bids on various objects in a hypothetical auction tended to be high or low based upon those digits.

Ariely is particularly intrigued by our sometimes bizarre behavior when we think we’re getting something for “free.” In one particularly entertaining experiment, he shows that some 70 percent of people will choose a Hershey Kiss over a piece of premium chocolate when the price of the Kiss is reduced from one cent to free while the percentage is exactly reversed when the price of the premium chocolate is fifteen cents and the Kiss is a penny.

Compelling as are these and many other tests (often subtly humorous ones) he recounts, if Ariely were satisfied merely to regale us with them his book would be intriguing, but likely soon forgotten. Instead, he questions nothing less than the foundation beliefs of standard economic theory, by demonstrating the lack of scientific support for those beliefs. “So wouldn’t it make sense to modify standard economics,” he concludes, “and move way from naïve psychology, which often fails the tests of reason, introspection, and --- most important --- empirical scrutiny.” The public policy implications of Ariely’s behavioral research --- from health care to retirement saving, even to developing a new kind of credit card that would enable us to exercise greater self-control over its use --- are potentially enormous.

Ariely’s “one main lesson” from his research is that “we are pawns in a game whose forces we largely fail to comprehend." Yet he refuses to yield to the essentially pessimistic view that we are doomed to make the same irrational mistakes over and over. “If we all make systematic mistakes in our decisions,” he offers, “then why not develop new strategies, tools and methods to help us make better decisions and improve our overall well-being?” That’s an especially pertinent question as we struggle to shake off the hangover brought on by years of binging on excessive borrowing, fueled in part by irrational assumptions about the inevitability of rising home prices.

There’s no doubt Ariely brings a strong, perhaps even a controversial, political perspective to his work. He’s no fan, for example, of the “market norms” inherent in the No Child Left Behind program, and he believes that cuts in employer-sponsored medical insurance are responsible for “undermining the social contract.” In his view, life with “fewer market norms and more social norms would be more satisfying, creative, fulfilling and fun.”

But whether you accept Dan Ariely’s political prescriptions or not, where Predictably Irrational succeeds, in the end, is in its insistence on shaking us out of the complacency that surrounds our decision-making process. Whether you choose a cheaper or more expensive brand of chocolate isn’t the point. Gaining more insight into the way the mind works can translate more astute decisions as we wend our way through the thicket of choices that confront us daily. That guidance makes a few hours spent in the company of Dan Ariely worthwhile ones.

Copyright Harrisburg Magazine 2009 ( )