Wednesday, October 20, 2010

Review - The Upside of Irrationality by Dan Ariely

Short review: Humans are much more irrational than standard economics assumes. This can be a good thing.

Once again look at
How irrational we are
But there's an upside

Full review: The first thing to understand about Dan Ariely's The Upside of Irrationality and his related book Predictably Irrational (read review) is that by "irrational", Ariely is not describing actions that are insane, foolish, or stupid. Instead, irrationality is used in contrast to the "rational economic agent" model used in standard economics. In that model, people in the aggregate can be treated as rational beings who strive to maximize their benefit while avoiding decisions that are costly, time consuming, or require additional work if they can. As he pointed out in Predictably Irrational, experimental evidence shows that people make decisions that don't fit this model, but do so in predictable ways, calling into question the conclusions reached by standard economics in many areas. In this volume, Ariely expands upon the ideas in Predictably Irrational and explores the possible reasons behind this consistent irrationality and why it may actually be beneficial in many cases.

One might think that the primary difference between standard economics and behavioral economics is the abandonment of the rational economic actor standard. But the real difference seems to stem from the fact that a behavioral economist seeks to test their assumption and at least make an effort to evaluate whether they are justified, whereas most of the assumptions underlying standard economics are not only untested, but many are to a certain extent untestable. While many adherents to the standard economic models criticize behavioral economists conclusions that are at variance with the standard theories, one has to wonder on what basis they do this? It is certain that many experiments done by behavioral economists are crude at best, as the ones illustrated in The Upside of Irrationality will bear out, but since the standard economists have nothing similar on their side to put forward as evidence for their assumptions, it seems to me that they are infinitely outclassed in the support arena.

Each chapter more or less follows the same format. Ariely identifies an area of human behavior in which actions are taken based upon what seem to be reasonable assumptions, and then sets out to recount experiments he and others have created to test them, and analyse the resulting data. Ariely then connects the experimental data with real world practices, and evaluates why he believes they do or do not work. In this way, Ariely tackles questions including whether large bonuses spark better work (they don't), why people are often dissatisfied with their work, whether we can correctly evaluate our own work product (we can't), why people engage in revenge, even when it is costly to do so, whether we should do all of an unpleasant task at once or break it up into smaller sizes (break it up), why the modern dating market is a failure, and whether online dating sites are a solution (they aren't), why we feel the need to save a single person we can see, but are unwilling to spend less to save many people we cannot and whether we can correct the poor decisions we made while in an emotionally charged state and make better decisions on the same subject in the future (probably not). In each case, Ariely frames the question, describes the experiments, and recounts the results, all in an engaging and interesting way that allows the reader to absorb the large volumes of data without choking on it.

But the real beauty of the book comes when Ariely takes each case and explains why our irrational decisions often amount to a better result than "rational" ones would. For example, Ariely explores the question of charity, and why a person who would jump into a river ruining his thousand dollar suit to save a single six year old girl would not spend an equal amount of money and far less effort to save a thousand children in Africa (or some other faraway place). In short, why does Jessica McClure get outpourings of support while the victims of Rwandan genocide are ignored? And given that this is true, would we want to spur people to be more rational in their decision making? Like the other examples, Ariely conducts and reports on several experiments, and determines that in fact, we would not like the results if people were wholly rational, as rather than leading to more rational empathic decision, people would likely make less empathic decisions in general. Irrationality, it appears, makes us nicer to one another, even if our efforts are not directed in the most efficient manner.

For anyone who is interested in seeing concrete evidence concerning how humans actually behave, The Upside of Irrationality is an excellent resource while remaining eminently readable (despite Ariely's protestations concerning his lack of writing skill). The book is further enhanced by Ariely's injection of recollections from his own life, including the extreme trauma that got him interested in human behavior (while he was a teen, he suffered severe burns over most of his body, requiring prolonged hospitalization), which gives the book a personal touch that many economic texts lack. In the end, this follow-up to Predictably Irrational is just as good as the first book, and a book almost anyone would benefit from reading.

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