21 February 2012

Predictably Irrational -- the review

Dan Ariely is a living example of what doesn't kill you makes you stronger. He nearly died in a fire caused by a lab accident when he was in university. In the years of healing and therapy that followed, he started asking more questions about how we perceive pain in ourselves and others. These questions -- and an amazing curiosity -- eventually took him to the pinnacles of academic research in economics and psychology, or what is called "behavioral economics."

I read his Predictably Irrational just before Christmas last year; it's a fascinating book that makes you think more about our individual views of the world and how those views affect our interactions with others, which means that anyone interested in policy formation and implementation should absolutely read this book. People in advertising, marketing, politics and business should also read it during "work hours" but anyone interest in improving their understanding of "reality, the construct" will benefit from it.*

The chapter summaries at wikipedia give you a good idea of the contents, but they are no substitute for the book, since Ariely is a good -- and entertaining -- writer. I was particularly impressed by these points:
  • His citation of Mark Twain's Tom Sawyer as an early example of using framing to make a chore into a privilege, i.e., how only special people should be allowed to paint a fence.
  • His discussions of price anchoring. An iPhone for $399 looks like a deal compared to its old price of $499. We see this in action with water prices, when the price of tap water moves from $2/750 gallons to $4/750 gallons. That move may be from nothing to trivial, but people pay far more attention to the 100 percent increase.
  • "Free" is much better than $0.01 for a product, not just as a means of lowering transaction costs (I saw a woman use her debit card to buy a $0.85 stamp yesterday), but also as a means of manipulating consumers. Two for one offers can be dangerous. 
  • Along the same lines, he has an interesting discussion of how we are happy to give our time for free, but offended when offered payment for it (my neighbor just took an hour of his Sunday to help me move; payment would have been a bad idea). Ariely reminds us just how socially autistic some economists can be, as when the "busy" professor offered to hire a moving crew for a friend who needed help so he didn't have to stop doing important research (I can't remember his name, because he's not that important).
  • Sexual arousal does not lead to good decisions (he used some particularly graphic experiments to confirm this).
  • Money is a useful means of exchange, but money for the sake of money interferes with human relations. Ariely is also a burner :)
  • People are more likely to share a "free" good (so that others have a chance to get some) than a good that costs $0.01. That's either because they assume payment gives them the right to buy as much as they want (satiating their demand) or that a price signal means a replenishment mechanism exists.
  • His interesting discussion of associating good feelings (watching a movie) with unpleasant tasks (taking your medicine), to make them easier to stomach (literally, in his case).
  • His exploration of the "too many choices" problem, using an experiment in which a person faces changing probabilities of payoffs at different doors. Many people cycle among the doors instead of choosing a "decent" stream of payoffs, even when cycling burns up profits. This happens to "optimizers" who try to find the BEST outcome, rather than "satisficers" who stop when they get a decent outcome. I am more happy as a satisficer.
  • His discussion of "taking" a pencil from work vs "stealing" cash from work. The former is easier to rationalize, even if it's the equivalent. Apply this lesson to stock options (vs. cash withdrawals) or lobbying (vs. bribery), and you will see how people justify corruption in businesses and politics.
Bottom Line: I give this book FIVE STARS, for its clear, knowledgeable and interesting exploration of why we do what we do -- and how to improve our choices.
* In the same genre, I also recommend The Moral Sense, The Origins of Virtue and Company of Strangers.

2 comments:

Jay said...

Dan's work is very interesting. You can find his website here: http://danariely.com/

He has posted a series of videos that are well worth watching.

I second the recomendation for "The Origins of Virtue". The others are on my reading list.

Bottom Line: Behavioral economics is an exciting field that will strongly impact conventional economics with its reliance on rational behavior.

MV said...

How weird is that. I bought the book on 3 July 2010 in Paris, and stumbled over it yesterday, reading the rest before falling asleep. (It helped!) And now you wrote a review.

I would not give it 5 out of 5 because, as is the case with most American books, it writes too much from personal (and very American) experience for my taste*. But it is good.

* Take the average management book and find that the author has a wife and two kids, and then the eldest son, who happens to be the youngest son as well, as the other kid is a girl, kicks a ball over the fence/breaks a window/does not want to eat his dinner/go to bed, and then terribly slowly, step by little step, the author describes the strategy he uses to convince the little boy by making him decide for himself that eating all the cauliflower is the better choice (his wife has no role in this apparently). And at the beginning of the next chapter the first 5-10 pages reflect again on what happened in the previous chapter, outlining all the steps of decision making again in a painstakingly slow manner, before introducing 45 more people with 45 different problems that can all be solved in a similar way. Instead of just writing down the solution, the authors waste our time and paper by describing all the 45 different cases, including irrelevant details about the specs of their pizza habits, introducing Joe, Dana, her two boyfriends, Jiwoong Shin (a professor at Yale; so what?), himself, Xiang Yu (who is that?), three irrelevant halls in MIT's East Campus (who cares where this is?) and Kim on no more than two pages. By that time I am lost about who is who, and why the previous three persons were introduced to me in such detail if all we need to know it that number 4 clicked on a green door in a quest for money. Many of these books can be summarized on half a page: think, eat, be happy.

To be short, I think Ariely is using too many pages as well. That's when and why I fell asleep.