Dan Ariely’s PREDICTABLY IRRATIONAL: The Hidden Forces That Shape Our Decisions (Harper 2008) is one of the earliest popular books that summarizes various findings of experimental psychology in recent decades that reveal the biases of human nature.

Key point: traditional economics assumed that people are rational individuals. But in fact, humans are not only irrational, they are irrational in predictable, systematic ways.

The thirteen chapters explore examples, in the Malcolm Gladwell mode of telling stories and drawing conclusions (though without much underlying interest in the mechanisms that explains *why* we behave like this, e.g in terms of evolutionary psychology; there are other books for that). Here’s one bullet per chapter summary.

  • Everything is relative: how subscription forms plant decoys, or surveys anchor with photos of handsome students or houses. We make choices based on comparisons, not by any absolute standards. How to control this? Reduce the circle of comparison. Realize that the more we have, the more we want; so consciously reduce one’s expectations.
  • The fallacy of supply and demand. How to increase the demand by simply raising the price. People imprint on the first idea they see: anchoring. The initial anchors can be arbitrary. Thus: realize that life decisions may be based on ‘arbitrary coherence’ – contingencies, randomness. And so question such decisions. And: “a free market based on supply, demand, and no friction would be the ideal if we were truly rational. Yet when we are not rational but irrational, policies should take this important factor into account.” P48.
  • The cost of zero cost: it’s fun to get free stuff, and so Amazon sales boomed when they offered free shipping, and cars sold better with deals for free oil changes. So apply this to social policy: make wise preventable measures free.
  • The cost of social norms. We’re happy to do things, but not when we’re paid to do them, e.g. working for a cause rather than for cash. Fining parents for being late to pick up their kids made the problem worse, because it removed the social obligation factor and reduced it to a cash transaction. So: Education might be enhanced by switching to social goals, rather than focusing on taking tests. Example of Burning Man, and its gift exchange economy.
  • The influence of arousal. We take greater risks when aroused or angry, confirmed in psychology tests. So: take this into account in advance; carry condoms, even if pledging to say no; don’t drive or make decisions when upset.
  • The problem of procrastination and self-control. Over and over again experiments show that people put things off – even when allowed to set their own deadlines in advance! Solutions: force commitment in advance, e.g. regulations to enforce health checkups; how auto makers bundle maintenance into periodic service checks. [Everyone does this now.]
  • The high price of ownership – why we overvalue what have. An experiment with basketball tickets given by lottery; once the winners had their tickets, how much would they take to sell them? Vs. how much would those who didn’t get them pay to get one? The former valued them much more. When we have something, especially if we’ve put work into it (like assembling Ikea furniture) we value it more. Similar comments about ownership of ideas, and why we’re reluctant to change our minds; ideologies. (No cure for this, except to try considering transactions from the POV of a non-owner.)
  • Keeping door open – why options distract us from our main objective. Examples of choosing a major, or a boyfriend; we’re reluctant to commit when many options are available. Solution: start small, close some doors, and move on. The consequences of not deciding at all can be worse in the long run.
  • The effect of expectations – why the mind gets what it expects. How opposing fans watching the same game interpret it very differently. How taste tests turn out differently when products are described beforehand, or afterwards. Caterers and advertisers know this; it’s called priming. Solution: consider both sides of a conflict without knowing who’s on which side.
  • The power of price. How various surgical procedures have been revealed as mere placebo exercises. (It’s apt to realize that *all* early medical procedures – eye of newt, etc. – relied on placebo effects.) Prescriptions drugs vary in effect on how they are described and priced. If placebos work, why not enjoy them? Because they drive up the cost of health care.
  • The context of our character – why we’re dishonest. When given a chance to cheat, everyone cheats – but just a little. Experiments show that when reminded of the 10 commandments – or any other ethical standard, like a professional oath – people cheat less. Professions were de-regulated in the ‘60s, and has led to declines in standards. What to do? Perhaps practices like signing a code of honor will actually lead to better behavior. [ Matthew Hutson describes this as one of his 7 laws of magical thinking, in a book whose theme is that you can be aware of these effects *and still employ them* to lead to better behavior. ]
  • The context of our character part 2 – why dealing with cash makes us more honest. Students take Cokes left in dorm refrigerators – but not dollars from a plate of cash. Cheating is easier if it’s removed from actual money. Thus complex financial schemes enable corporate misdeeds, e.g. Enron. Upton Sinclair, quoted p227: “It is difficult to get a man to understand something when his salary depends upon his not understanding it.” This is a problem because cash is going away in the modern economy, and schemes like airline frequent flier miles and credit card interest rates, all very abstract, make cheating easier.
  • Beer and free lunches – what is behavioral economics, and where are the free lunches? When people in a group place their orders in a pub, they are affected by the orders of those who spoke first – not to be the same, but to be different, to the point of not ordering what they truly want, out of a ‘need for uniqueness’.

This final section concludes how we’ve seen how economics is not about rational decisions. So shouldn’t economics be about how people actually behave? Here’s the free lunch: do we take these recognitions of irrationality and recognize them as opportunities to improve? Page 243:

If I were to distill one main lesson from the research described in this book, it is that we are pawns in a game whose forces we largely fail to comprehend. We usually think of ourselves as sitting in the driver’s seat, with ultimate control over the decisions we make and the direction of our life takes; but, alas, this perception has more to do with our desires—with how we want to view ourselves—than with reality.

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