We usually think of ourselves as sitting in the driver’s seat, with ultimate control over the decisions we make and the direction our life takes; but, alas, this perception has more to do with our desires – with how we want to view ourselves – than with reality.
One standard critique of standard economic theory is the construct of a perfectly rational man. No human being however is perfectly rational, even in a very basic economic transaction. However, irrationalities are seen as random i.e. not repeatable and hence intractable for scientific inquiry. Dan Ariely and other behavioral economists over the years have focused on tackling these irrationalities in our choices so that they can be incorporated into policy making and other applications of economic theory. Predictably Irrational is an attempt to bring to bring this field into mainstream much like Freakonomics and The Undercover Economist did for standard economics.
Some of the findings reported are very simple – once you sit down and think about it. For example, it is not rocket science that one’s head kind of goes screwy in times of great emotional or physical stress. But that is not the main point – the crux is that we never take into account these behavioral deviations when in decision making mode. While this can be disastrous for individuals, it can also weigh heavily on how policies are structured and things are marketed. For example, a nation of people procrastinating on savings and living beyond their means lead to the current credit crisis. But in some of the more subtle findings , the author comes to his element. Chapters on relative thinking, supply & demand, our reactions to zero cost goods & cost of social norms are in my opinion must reads for any marketeer and pricing expert.
The methodology employed clearly has some flaws. Our decisions do not remain constant for any situation; they change in interaction with others. In the chapter on cheating and dishonesty for example, the experiment never sees the effects of people talking with each other. Also the rewards and risks in any of the experimental situations does not model the true nature of these forces in real life. A more detailed critique of behavioral economics outlines these and other problems.
Predictably Irrational as a book, is an unique mix of popular economics, business concepts and self-help ideas. The author sometimes adopts the preachy tone, especially in the self-help mode (no wonder I hate those books). But the insights presented here make these minor irritations a temporary blip in one of the most interesting books I have read.
