21 Feb 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.