Adriel's Reviews > Predictably Irrational: The Hidden Forces That Shape Our Decisions

Predictably Irrational by Dan Ariely
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Oct 19, 12

Read in January, 2012

Predictably Irrational is nano-economics, a Freakonomics twist on the psychology of buying and selling, deciding and choosing. Dan Ariely, an MIT professor of Behavioral Economics, presents in a readable style his many simple and ingenious experiments that demonstrate the irrational side of the everyday decisions we make. Apparently, we may believe we follow a common sense pattern of decision-making governed by the unseen hand of economics, but we really are more ruled by unacknowledged passions, inhibitions, and cultural values.

Some of his experiments do show what seem to be directed by common sense. For instance, in the experiments where he gives away some chocolates and sells cheaply some others, he shows how most everyone is reluctant to take something for free. It just isn't polite to take the last piece of bacon, but Ariely goes to some length to find this an irrational contradiction to traditional economic rules. And of course, we all tend to decide on a purchase when the vendor can show a similar, equally valuable product for a much higher price.

However, a subtle and irrational twist on purchasing what we think is a bargain is demonstrated by Ariely’s analysis of a subscription offer from the Economist. The offer was $59 for web access, $125 for print, and $125 for print and web. Of course, print and web is superior to print only for the same price, but the clever construction of the ad leads the reader to make a comparison and to purchase on the basis that it is a bargain. Irrational, but we tend to make decisions by making comparisons. When vendors introduce a product they may well be wise to also sell a slightly upgraded and higher priced similar product so that purchases will feel the lesser priced one is a deal.

The book also demonstrates with clever experiments that we all change the basis of decision making based on social norms and market norms and never the twain shall meet, or the consequences are drastic. Buying and selling is where greed is good, but our interactions with people are based on love or maybe compassion or at the least on respect. Don’t read the prices on the menu aloud at the expensive restaurant if you plan on a second date. And even though your employees or fellow employees are in a market-based agreement with you, it is wise to treat them with the respect that social norms demand.

The chapter on decision-making under the heat of arousal can easily be skipped as a too-many-details story. On the other hand, the book discusses some intriguing experiments on trust, cheating, and cooperation. Students, given a chance to verbally report their own scores on simple tests for cash rewards will cheat, but only a little. Students also quickly helped themselves to soft drinks Ariely left to entice them in dorm refrigerators. He also left small stacks of dollar bills, but no one at all took any unattended cash. People will cheat and even steal, but money is safer because it is clearly stealing and it cannot be rationalized. Stores lose billions every year due to employee pilfering, but far less actual cash is stolen. You can trust people only so much, but we knew that.

We also know, or most everyone does, about the “tragedy of the commons” where selfish fishing or any kind of common harvesting operations will harvest far too much and destroy the commons for themselves and all of us. Ariely also discuss a game theory experiment that demonstrates the flip side of the tragedy of the commons. In the Public Goods Game, four participants are given $10 each and allowed to pool as much of that as they wish. The common pool is double, then divided by four and re-distributed. If they all put in their $10, they will each end with $20. But if one player puts in nothing, then he ends up with $25 while the others get $15 ($30 doubles to $60 divided by 4 is $15). On the second round, the cycle of mistrust begins and players contribute less until no one cooperates and they all lose.

Could it be that the fiscal conservatives, the one per centers and laissez-faire independents are the ones who know how to game the system while the rest of us poor players think that we will be served best by cooperation and contributions to the common good. Or do we eventually learn that trust yields less than mistrust?
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