Predictably Irrational: The Hidden Forces That Shape Our Decisions
Revised and Expanded Edition, Dan Ariely, Harper Collins 2009, 322 pages
In short, this book was an enjoyable read. It offers a stinging retort to the bedrock wisdom that underlies markets and economic thinking today and it offers tremendous value for anyone who wants to know about rationality . This book is a good base level retort to the idea that we are all biological calculators, rational and cold. Ariley quotes Shakespeare who is speaking highly of the rationality of mankind:
What a piece of work is a man! how noble in reason! how infinite in faculty! in form and moving from express and admirable! in action how like an angel! in apprehension how like a god! The beauty of the world, the paragon of animals. – From act II, scene 2, of Hamlet. (pg.xviii)
I think on one level we all know that’s not true, folk psychology informs of us that sometimes emotions influence our decisions in an irrational manner. Ariely takes it a step up, it’s not just dust storms of emotion that cloud us from the rational prize, it’s more that the way we think, our biological circuits are made in a way that preclude us from making rational decisions. It’s not that we are occasionally irrational, but we are in many ways systemically irrational.
This book argues that the human mind is a wonderful thing, capable of many feats, but one that we commonly assume that we have, rationality, is not exactly the case. Ariely is quite the experimenter, as he loves experimenting on students. Each chapter seems to have a small-scale campus level experiment on MIT (or Harvard) students to help illustrate and give some limited empirical evidence to back his claims, which while illuminating and helps Ariely bring this thing to port, it also gets repetitive. While, I think these experiments offers value, the scientific validity of such is in question. Ivy League students are hardly representative of the population writ large, but, that being said, I still think his work provides good-enough data, at least for this book.
Ariely does provide some good details, I’ll go through the most interesting ideas:
Early on in the book Ariely discusses anchoring and relativity . Both are important concepts that explain a lot of irrational decision making when it comes to buying stuff at the store. When it comes to prices and buying things, we don’t have a good idea of what a product should cost in a vacuum, so we compare it with likes. Ariely shares a story (which I’ve heard elsewhere) about an early model bread machine which sat on the self. It cost around $250, sales weren’t great. So what did they do? They put another bread machine beside it, it cost significantly more, after that, the $250 bread machines flew off the shelf. $250 is a steal compared to the more expensive one. Ariely found in an experiment that people can anchor prices on entirely arbitrary data (in this case the last two digits of a social security number)
Ariely also noted that when regulators in the US made CEOs disclose their salaries, in an attempt to shame them for being so high, CEO salaries went up even more, because CEOs knew what they were making relative to others, and demanded more. Another concrete example of relative pricing.
Free often throws a wrench into the works. Ariely found that people will make worse choices when something free is involved. Using candy and treats, Ariley found people are irrational when free factors into the equation. Free doesn’t fit into a standard linear relationship, once you introduce free people will make what can be seen as irrational decision making, free has power.
Power of Arousal
Reading a couple other reviews, I realized I nearly forgot that Ariely had a chapter on people (well, men) and how they make bad decisions while sexually aroused. I saw some reviewers were upset because the experiment only tested men, and some people were upset at the questions. His experiment involved giving a questionnaire to men while non-aroused, then they were asked to fill out the same set of questions while aroused. Some of the questions were like “Can imagine having sex with a 40-year-old-woman?”, “Could it be fun to have sex with someone who is extremely fat?” and “Could you enjoy having sex with someone you hated”, the men surveyed said yes a lot more when aroused. We all probably knew this, but people make bad decisions while aroused (i.e., won’t wear a condom, but know it’s a good idea otherwise, etc).
Ariely provides some interesting insights outside of the economic realm. Choices, choices, choices, we are confounded with a multitude of choices everyday. We also like to keep choices open, even as we are required to make choices that are mutually exclusive. The idea is best illustrated in the story about a donkey who can’t decide what barn to eat out of, so the donkey dies. Tony Soprano had a good quote (which was originally Carmella’s quote for those Soprano watchers out there) for aspiring mob bosses:
“A wrong decision is better than indecision”
Ariely shared a story a student told him about how she was having troubles with a relationship: stay in a broken relationship or move onto the new guy she was seeing that was promising. Why stay in a broken relationship that is unlikely to work? Leaving it closes a door, and we are psychological resistant to door closing. The mantra of just automatically keeping doors open can impact us in negative ways
Placebos get a bit of treatment as well, as is no surprise. Placebos are an amazing phenomenon and speaks to the power of the mind. Again, we see Ariely doing experiments, one involving pain (I wonder how much wrangling he had to go through with the ethics research board) and pain medication, which was priced at various levels. Lower priced pills didn’t do as well, because, well, they were cheaper. If you knew about placebos, this chapter probably won’t bring you anything new. Although I did find it interesting, certain medical studies suggested that certain surgeries were entirely placebos. Yup, in this cases, some went under the knife, others got just a simulated surgery, and both groups had the type of relief and positive outcome. That stirred the pot of the medical community!
Marketing and trust
Later on in the book, Ariely shares with us something that must of us probably realized. We are skeptical of marketers and advertisers. Must people hear something like “free cable” and they think, “oh gee, probably not free”, and most of the time they are right. Ariely did an experiment where he set up a booth on campus and handed out money, for free. He tested various values, from $1 up to a whooping $50, with a big sign to boot. Only 19 percent of people passing by actually stopped (pg. 254).
Imagine a field that is used for grazzing. You and a number of herders share it with your farm animals. You find out, that if you add more animals you can make more profit. Eventfully the commons gets eaten away by all your animals, ultimately reducing the quality for everyone, including yourself.
I’m also personally glad that Ariely brought up the classic economic tale of the tragedy of the commons to help bolster his arguments. Marketers have eaten themselves by being sketchy shadebags, even ones who want to play sensibly are ignored because people writ large are skeptical of marketers because it only takes a few bad apples to ruin the whole barrel.
Later on, Ariley had a notable chapter on honesty. The results were this: people would cheat if they had the opportunity, but, even an increase in the easiness in cheating did not create more cheaters. In his experiment, he made it so easy to cheat, that you were guaranteed not to get caught, yet the same rate of cheaters occurred as if there was some risk. Ariely also found that people were more honest when dealing with cash, but when it was something that wasn’t cash, say pens from work, people could rationalize their mischievous behavior better and were more dishonest.
To wrap things up, this book was good, but it wasn’t as good as I thought it would be. The intersection of rationality and consumerism (and the economy writ large) has been a great area of interest for me. The book did deliver on that ground, but instead of a whole inter-modal shipping container filled of goody knowledge, instead I got a couple pallets that were nicely shrink wrapped. I was hoping that Ariely would talk more about the economic ramifications of this fact. For those who are uninitiated to economics club, the classic perspective of economics is simple (not every economist is a classical economist): we are all rational utility maximizing machines. Holding classical economics literally, we are in no position to complain about things that we complain about. For instance Ariely brings up the saving rate, how it is so very low, and that the classical economist looks at the saving rate, shrugs his shoulders, declares that the people (i.e., most people) are maximizing their utility, choosing according to his or her preference. If people didn’t save, it’s because they don’t have to, or they will when it gives them utility. Except, we don’t live in such a fantastical land, low savings has huge economic ramifications for generations of people entering old age without sufficient financial support and no means to raise their own revenue. I wished Ariely would have spend more time loitering on the classical economist turf, mucking it up. But instead he really only talks about it at the end and even there we only get a couple pages of treatment. Ariely does talk about how the tides are changing in the dismal science, behavioral economics is getting a make over, and paying more attention to irrationality. Anyone who has taken an economist course have probably heard the professor say something like “this is the theory, but it doesn’t work this way in real life”. Behavioral economics is working to better get a grasp of what happens in real life. Ariely ends the book on a quote that tells us that social science is pretty hard. Ariely quotes Nobel laureate Murray Gell-Mann who said “Think how hard physics would be if particles could think” (pg.322).