Predictably Irrational

Posted by Brian Wed, 03 Mar 2010 23:14:00 GMT

Predictably Irrational: The Hidden Forces That Shape Our Decisions
By Dan Ariely

5/5

Predictably Irrational was the right book at the right time for me, making it one of the best books I have ever read. In it Dan Ariely discusses the findings of behavioral science and how they contradict the assumptions of classical economics.

Classical economics assumes that the actors in a market are completely rational and will always act to maximize their personal gain. Behavioral economics breaks from these assumptions by putting them to the test and, as any honest person can attest, finds that they simply are not true. We are not rational beings. What is being discovered is that we are irrational in consistent and predictable ways though.

Ariely primarily highlights our irrationality through experiments. Each chapter discusses an experiment he or his colleagues have ran to test some aspect of our supposed rational actions. For example, he discusses the influence of sexual arousal on the choices we make. Participants in the study answered a series of questions about their sexual activities and preferences. They were asked to estimate what their preferences would be when aroused. Then the questions were repeated when they were highly aroused to see if they correctly predicted. The results were clear: people can’t estimate how their behavior will change when aroused. The most interesting question referred to condom usage. When unaroused the vast majority of participants said they would take the time during a sexual encounter to put on a condom. However, when they answered the same question aroused, the number plummeted. He then extrapolates that perhaps these types of experiments should be taken into account when advocating abstinence only education.

Another experiment analyzed the effect of a placebo pain killer. Two groups of patients were told they were being given a new pain killer, but one group was told that it cost $2.50/dose and the other group was told it was only $0.10/dose. Those told it was more expensive were more likely by a significant margin to feel that it worked. Experiments such as these can have a profound effect on health policy.

In a way this is a return to the economics of Adam Smith, who classical economists often trumpet as a free market champion. What they either don’t realize or simply ignore is that Smith wrote The Theory of Moral Sentiments in 1759, which, as Ariely reminds us, “notes that emotions, feelings, and morality are aspects of human behavior which the economist should not ignore (or, worse, deny).” Classical economics gives us many useful tools, but they must prove their mettle in a reality that accepts the fact that we are irrational beings.

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