Thursday, September 30, 2010

Review - Predictably Irrational: The Hidden Forces That Shape Our Decisions by Dan Ariely

Short review: Humans are irrational, but systemically so, in a manner that can be studied.

When you study them
Humans are irrational
Predictably so

Full review: Traditional economic theory is built upon the idea that people are essentially rational, and upon that foundation it constructs demand curves, supply curves, elasticity functions, and a vast number of other concepts. In recent years, however, a group of economists, often with training in the field of psychology, have begun to test and challenge some of the foundational assumptions of economic theory. This field is known as "behavioral economics", and unlike much of traditional economics, it incorporates field experiments into its repertoire in order to test the questions posed by human behavior. Predictably Irrational is Dan Ariely's enjoyably readable introduction to the field of behavioral economics, and one of the more interesting conclusions that this branch of economic study has to offer: people are not rational, but they are irrational in consistent and predictable ways.

In the book, Ariely takes the reader through an examination of several of the basic concepts of economic theory, and explains why experimental investigation casts doubt upon the assumptions those concepts are built upon. Tackling topics ranging from how we assess value, to why people may not actually have preferences that make sense, to the effect prices have on our decision-making ability and why and how people cheat, the book repeatedly demonstrates that people don't behave in the tidy, sensible ways that most everyone has always assumed they do, but rather that our decisions appear to be profoundly affected by external factors of which we are only vaguely aware. The most interesting examples come at the corners of the commercial marketplace - the fact that we respond in wholly irrational ways when confronted with something that is presented as being "free", and how our reaction to "free" can change radically depending on whether we evaluate it in the context of a commercial or social exchange; or the fact that our expectations have an enormous influence on our reaction to a particular item or service regardless of the actual objective efficacy of that item or service.

Two of the overarching examinations of the book deal with the question of commercial transactions as opposed to social norms, and an extensive study in the conditions under which people cheat. To a certain extent, these two issues seem to be related - from the experiments into the question of cheating, it seems reasonably clear that the true deterrent to cheating is not the potential commercial penalty of being caught and financially penalized, but the social pressure to behave in an ethical manner. Unfortunately, Ariely doesn't follow his experiments to their logical conclusion in the book and make this connection for the reader. And this omission highlights what may be the only notable flaw in the book, which is that Ariely, probably out of an abundance of caution, does not do much more than explain what irrational behavior people are observed to engage in, but does not follow up to try to explain why people might display this behavior in more than a purely superficial way. To a certain extent this is understandable, since the experiments he described don't address motivations, but rather merely assess behavior (which is probably why they are experiments in the field of behavioral economics). Some people might criticize some of the conclusions the experiments point to as obvious, but the fundamental basis of any field of inquiry must be to establish that the obviously true is, in fact, obviously true and not merely an unfounded assumption. The deeper point is not merely that people make what could objectively be termed as poor choices, but, as is demonstrated over and over in the experimental results described in the book, that people do so in predictable ways that can be replicated and studied.

However, even with this minor (and quite possibly unsolvable) gap in the research presented, the book remains a compelling study into actual human behaviors, and an application of that revealed behavior to the field of economics. Although he does not explain why so many people feel compelled to cheat in small ways, Ariely's studies go a long way towards explaining why cheating in the corporate world seems to be endemic, and, via experimental results, gives some ideas that could potentially be used to deter such behavior. Similarly, while he does not explore why people view social transactions so differently from the way they view commercial transactions, his research clearly shows that they do have these differing views. Ariely's writing style is casual and readable, making it approachable even for someone with a limited background in the academic world of economics, but it is detailed enough that even those with a solid background in the area will find the book engaging and interesting. For anyone who is interested in understanding the nature of the decisions that people actually make, this book is a must read.

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