4 November 2015 at 14:11 #2288
Predictably Irrational: The Hidden Forces That Shape Our Decisions
Citation: Ariely, Dan. Predictably Irrational, Revised and Expanded Edition: The Hidden Forces That Shape Our Decisions. 1 Exp Rev. Harper Perennial, 2010. Print.
Predictably Irrational is a book by Dan Airely in the field of Behaviour Economics. The subject of the book is decision-making. The central premise is that human decision-making is not rational, people make irrational decisions all the time and, most importantly, our irrational behaviour can be predicted. The author devotes most of the book to proving these assertions. Additionally, the author offers the reader advice on how to notice and counteract this irrational behaviour. In the remainder of the book the author places his findings and assertions in the broader context of the debate around “Behavioural Economics versus Standard Economic Theory”. He uses a mixture of experiment, empirical data and anecdotal evidence to back up his assertion that humans are “Predictably Irrational”. He does this by dedicating each chapter to a “hidden force that shapes our decision”. These “forces” include: the decoy effect, anchoring, the zero price effect, social norms, sexual arousal, the need for immediate gratification, the endowment effect, the effect of multiple choices, the effect of expectations, and the placebo effect. Each “force” is examined in detail using experiments devised by the author & experiments from elsewhere. The results of each experiment are analysed in detail and in conclusion he offers up some advice on how to best counteract these forces or use them to our advantage.
The books clearly stated goal is “…to help you fundamentally rethink what makes you and the people around you tick. I hope to lead you there by presenting a wide range of scientific experiments, findings, and anecdotes that are in many cases quite amusing. Once you see how systematic certain mistakes are – how we repeat them again and again – I think you will begin to learn how to avoid some of them.” (xxii) It’s safe to say the book satisfies this goal. In each chapter the author does a great job, early on, of explaining the “hidden force” in question. The explanations and observations are always backed up by data, and most, importantly, the author goes that extra yard by offering the reader advice on how to predict and counteract each of these phenomena. On the other hand, the private experiments, whilst fun, offer limited value. This is mainly because the point has already been well made early on each chapter using external data long before Airely introduces his own private. Another problem with the private experiments is the size of the dataset, the dataset is usually quite small. Also, I can’t help but think the “observer effect” (whereby, the subjects know they are involved in an experiment and may implicitly change their behaviour) may play some part in skewing the results of the private experiments. The author does not broach this. We can look no further than the first chapter for examples to back up my general criticisms. The “decoy effect” is explained perfectly well in the first 5 pages, and by page 10 the author has presented enough data to convince the reader. However, he goes on to detail his own private (and somewhat dubious) experiment using photographs of people to explain the decoy effect (10-14). Not only was the experiment redundant it is potentially flawed – the laws of human attraction (however intangible they may be) are surely strong enough so as to trump the phenomenon of the decoy effect?
An additional criticism would be some of the “hidden forces” that Airely chooses. For example, the author spends 20 pages examining the effects of sexual arousal on our decision making (Chapter 5: The influence of Arousal). The idea that decision making is affected by state of sexual arousal has been around since time immemorial; to paraphrase Plato’s Republic “The Male Libido is Like Being Chained to a Madman”.
Not only does the author spend 12 Chapters detailing each of these hidden forces, in the final chapter he makes an excellent attempt to place his findings in the broader context of standard versus behavioural economics. To summarise the debate: whereas standard economics is built on the simplifying assumption that humans will always make rational decisions that will always yield the best possible results, behavioural economics factors in more realistic human traits, like irrationality. The broader argument (not confined to just Airely’s book) is that standard economic frameworks should place more emphasis on behavioural economics (actual human behaviours). Although, converging his findings into the higher order discussion is not a stated goal of the book, it is worth mentioning that Airely does a great job of actually doing this. In chapter 13 he fervently advocates that “Predictable Irrationality” should be factored into worldwide economic practices – “Wouldn’t economics make a lot more sense if it were based on how people actually behave, instead of how they should behave? We all make the same types of mistakes over and over, because of the basic wiring of our brains. So wouldn’t it make sense to modify standard economics to move away from naive psychology …” (239)
All told, the positives of the book by far outweigh the mild criticisms I have. The author does a great job of explaining “the hidden forces that shape our decisions” and putting them in context of the wider debate around behaviour economics versus traditional economics. The main questions I’m left with having read the book is “What other “hidden forces” are there?” and how can these observations be applied beyond the everyday to world of finance and economics; can these findings really be applied to the wider world of Economics and Finance? With that in mind it’s worth juxtaposing the book with other materials in this area. The comparison isn’t favourable, I readily found plenty of other articles online that explained both the basic concepts behind Airely’s “hidden forces” and the higher order debate around standard and behavioural economics more concisely that Airely did in the book. For example, this short online article “Behavioral Economics” (Thaler and Mullainathan) (http://www.econlib.org/library/Enc/BehavioralEconomics.html) perfectly and concisely explains the wider debate on Standard versus Behavioural economics better than Airely does in the book. Additionally, we need look further than Wikipedia for a thorough, though arguably less fun, explanation of the decoy effect. (https://en.wikipedia.org/wiki/Decoy_effect)
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