Predictably Irrational
Predictably Irrational (2008) by Dan Ariely ought to be required reading. Period.
At first I considered saying “for students” or “for investors,” but what Ariely’s experiments in economic behaviorism show us is how easily our minds and emotions are swayed, and his findings not only have relevance for financial decisions and policy but also for politics, classrooms, sex education, garage sales, restaurants, and the pulpit. In short, he helps readers understand what leads humans to make decisions about anything.
Let’s start with sex, since I’m sure everyone blinked a moment at the thought of a book on economics revealing anything about sexual behavior. Ariely and his colleagues “wanted to understand whether participants would be able to predict how they would behave in a particular emotional state.” They arranged an eyebrow-raising experiment using young male students, laptop computers, pornographic images, and, er, a keyboard covered in plastic wrap. The subjects were asked to answer a computer questionnaire about sexual habits and preferences in two states — an unaroused state, and while masturbating to the pornographic images while recording their “arousal state” on the computer screen. In the latter case, as soon as the meter hit the red zone, the questions began to appear — and all those rational decisions made in the unaroused about safe sex, sex with normally nonpreferred partners (a man? a 60-year-old woman? an animal?), kinkiness, date rape, etc. flew out the door.
Lesson learned: Humans cannot predict their decision-making abilities when they are emotionally aroused — which could include afraid, hungry, sad, happy, etc. in addition to sexually excited. Moreover, they make riskier, less rational decisions when aroused.
Other lessons Ariely and his colleages provide are
- that we would rather take something at lower quality that’s free than something at higher quality that’s significantly discounted (so beware those tempting “free” add-ons to expensive offers!);
- that we will cheat for money if we’re given a chance, but we won’t cheat a lot;
- that we’ll cheat more as the conceptual distance between the cheating and actual cash grows (which is why downloading music seems less illegal than stealing $20 from a studio executive’s desk);
- that being asked to remember the Ten Commandments or sign an honesty statement significantly reduces cheating (as a professor, I got all excited over this!);
- that we do better at meeting deadlines when we’re held to an externally imposed deadline than when we’re asked to set our own deadlines or are given no deadlines (which is why so many Americans don’t sign up for their 401[k]s);
- that we don’t like to order the same thing at the dinner table that someone else has ordered, even if means ordering something we like less;
- and that we hate having our options closed off, even when those options don’t serve us as well (which is why we tend to fret over our life decisions).
All of these findings, and more, are couched in easily accessible, often humorous descriptions of the experiments leading to them, illustrated with numerous examples, and spun out into policies that, if adopted, could significantly improve human life. You can read more about real-world applications of these lessons, and even take a few experiments yourself, at the Predictably Irrational website.
I find behavioral economics fascinating because it throws out assumption that humans are rational creatures and instead proves through actual experimentation that humans are predictably irrational — we make bad decisions in predictable patterns. As a result, it points out where classic economics falls short in predicting human financial decisionmaking — and so much more.
This book is a must-read, because until we know the ways in which we’re vulnerable to manipulation or self-deception, we can’t take steps to protect ourselves.
drupagliassotti @ May 24, 2008