Review of Predictably Irrational, by Dan Ariely

Exame magazine (Brazil), April 14, 2008

by Sérgio Teixeira Jr. (translated CB)

If there is a thread of continuity between Adam Smith and the complex mathematical
formulas that move the international financial markets of the twenty-first century, it is the
belief that the human being, at least when it comes to material possessions, is a rational
being. We evaluate all available options, know the implications of all of then, and always
choose the best path. We do this every day, several times a day. Bad choices? No
problem: the proverbial "invisble hand of the market" is there to set us back on the path
toward reason and well-being. Based on these assumptions, generations of economists
have been drawing conclusions about everything from how the price of bread is establish
to public policy on health and education. This is precisely the type of economic theory that
a provocative new book does not deal with. Predictably Irrational, by MIT professor Dan
Ariely, sets out to demonstrate precisely the opposite: that we human beings are irrational.
Much less sensible and calculating than the homo economicus described by traditional
theory. Much more susceptible to giving in to psychological stimuli we scarcely
comprehend but which are easy to identify. Our capacity to act against our own best
interests is so great that it can even be predicted, Ariely argues. "Understanding how
predictably irrational we are is the point of departure for improving our decision-making
and changing our lives for the better."

Dan Ariely is one of the new exponents of a relatively new branch of economics known as
behavior economics. Instead of dealing with spreadsheets, charts and models, Ariely
concentrates on experiments that show how people really behave when buying, selling,
working, changing jobs, and so on. His studies overlap with psychology, because they try
to understand how various emotions -- rage, fear, sexual desire -- are fundamental to
every economic decision we make in our daily lives. Though it does not enjoy the prestige
of conventional economic theory, behavior economices is conquering space in the
academic world. In 2002, The Nobel Prize in economics went to psychologist Daniel
Kahneman for his studies on decision-making. Ariely follows the same path, and his book
recounts dozens of experiments that might seem trivial, but which are surprisingly
revealing about the errant ways of our mind.

Why you should read this book

In a light-hearted and amusing style, Ariely points out how capable we are of making
incorrect decisions — without even being aware of it.

"We are much less rational than traditional economic theory assumes. Furthermore, our
irrational behavior is not random. It is systematic and, as we will constantly insist,
predictable"

In a chapter provocatively titled "The Fallacy of Supply and Demand,' he shows how our
relationship to prices is subject to the most probable influences [sic]. Ariely conducted a
test involving 55 MBA students. Each received a list of items such as wine, computer
equipment, books and chocolates. Each student wrote, beside each product, the last two
numbers of their Social Security number, as if these were the price of the items on the list.
He then asks the students if they would buy the products for that price, and the maximum
price they would pay for the product in an auctionn. "I asked them if they thought the
number of their Social Security document had any influence on the bids they made. They
quickly rejected this suggestion: 'No way!' " Ariely recalls. Well, then. Those students
whose SSNs ended in higher numbers (between 80 and 99) tended to offer a great deal
more than their classmates with lower numbers. A number chosen at random without any
relation to the products on the list served as the basis for a decision about price. Does that
seem rational?

Ariely writes ably about experiments and the ideas they help to illustrate. Some are very
amusing, such as the test in which his students respond to questions about their sexual
behavior in two situations: In an interview and in their bedrooms, looking at pornographic
images. The result? The excited participants exhibit a greater tendency to dispense with
the use of condoms and engage in sexual adventures considered tabu. Another curious
study examines how money changes our attitudes about certain tasks. Participants were
asked to repeat a monotonous task on a computer: Drag an image located inside a circle
into a square. Some received $5, others, $0.50. A third group was offered no payment: the
task was done as a favor. Ariely found that it was the third group that worked hardest at the
task. In a variant on this experiment, payment was made with presents (again, with a third
group that received nothinng). This time, all the groups worked with the same intensity.
Ariely's conclusion? When money enters the equation, the relationship shifts from the
social sphere to the sphere of market relations. In many cases, a present is a positive
reinforcement that works much better than a check. We all work for money -- but praise
can have a powerful effect. Remember this the next time you go to renegotiate the salaries
of your employees.

Reading the anecdotes in Predictably Irrational is literally an exercise in reflection: in each

case study, and there are many of them, the reader sees himself in the situation of the test
subjects and participates mentally in the tests. One's initial reaction is to laugh along with
Ariely. His text is fluently written and has none of that egg-headed quality you expect from
a typical book on economics. He tells stories with good humor and a light touch. But as the
examples accumlate, you begin to get a clear sense of how often in our daily lives we are
thinking more with our heart, our stomach, or -- which is probably worse -- with a brain that
has a habit of betraying us. In 210 B.C., Ariely writes, the Chinese general Xiang Yu was
preparing an attack against the [Qing] dynasty. After crossing the Yangtze River, he
surprised his troops by burning their boats and cooking pots. Lacking the conditions to
retreat or maintain their position, the only option remaining was to attack. Xiang and his
soliders won nine battles in a row. Common sense requires us to always keep the
maximum number of options open. But is this really the most rational course?

Few of us know how to use all the functions on our digital camera or laptop -- but there is a
certain comfort in knowing that if we need them one day, they will be there. No one has the
time or disposition to keep in touch with all those friends from decades past who ask to be
added as their friends on Orkut. But if one day they decide to organize a 30-year junior
school reunion (and recall that the term did not even exist 30 years ago)? To investigate
the weight of multiple options, Ariely set up a virtual experiment involved three doors of
different colors. Sitting in front of a computer, each subject was given a limit of 100 clicks
and three doors to choose from. Each door involved a small reward, varying from one to
ten cents. Here is the assumption: after a few attempts, the player will realize which doors
tend to pay well and will continue clicking on it until his or her clicks are exhausted. Right?
Wrong. Ariely and his colleagues were surprised to see that most participants continued
wasting clicks in an attempt to find a better door. The test was refined: In clicking on a new
option, 3 cents would be subtracted (and no longer just the subtraction of a click from the
limited total). The result was the same.

"In our modern society, we are constantly reminded that we are free to do whatever we
want." We have to develop ourselves in all possible ways; we must experience all aspects
of life; we have to make sure that, of the 1,000 things to see before we die, we do not miss
a single one," writes Ariely. This compulsion to go pursue everything all the time, to open
all the doors, even those that do not offer a reward that would make them worth our while,
is one of the most marked characteristicas of our irrationality In closing some of these
doors, decisions may become easier, especially when we know that the time and energy
we invest in making the decision also has a cost. Ariely relates a choice he himself had to
make: Stay at MIT or accept an invitation to lecture at Stanford. He spent weeks, he says,
comparing the two universities, talking with colleagues, and evaluating the impact of the
decision on his family. In the end, his academic productivity started to suffer as a result of
the impasse. He wound up staying at MIT. And he concluded: "I, with all my knowledge
about the difficulties of the decision-making process, was as predictably irrational as
anyone else."

What to do? The answers are a bit obvious, but even so it is difficult not to agree with
them. Avoiding taking on too many projects is a good start. Accepting that some friends
from the past will no longer be part of your intimate circle is another. But aside from the
occasional practical tip, this book does not set out to be a self-help manual. Nor is it an
attack on traditional economic theory. But understanding how our mind functions in certain
situations can be useful in creating some defenses, albeit simple ones, against the
tendency to act in an irrational manner. A good start is to be objective when you go to a
bookstore. Do not waste time deciding between the business books that are in fashion at
the moment: choose Predictably Irrational without thinking twice.

The book is priced at R$55 (US$32) at the online retailer Submarino, and comparably at other 
bookstores – about 13% of a monthly minimum salary. 

It is available for $15.50 on Amazon at the moment – about 2% of a monthly minimum wage in the 
United States. 

So if I followed this reviewer's advice, I would be getting price­gouged to an outrageous freaking 
degree. 

Which would be irrational ­­ and, to someone with my upbringing (I was raised by insanely frugal 
Methodists from Missouri who lived through the Great Depression), even immoral.
 

Comments

Paulo Varela Sendin (14/04/2008 ­ 08:22)

The idea is very correct and relevant, but is not all that new. Consider this saying by
a renowned economist who died some ten years ago: "The economy does not
 consist of meters, kilograms, liters, hours and numbers. It consists of the interests
and expectations of people of flesh and blood.” -- Kenneth Boulding (1910-1999),
English economist

This happens to be true. From Elizabeth Kolbert's review in The New Yorker  (February 25, 2008):

As an academic discipline, Ariely’s field—behavioral economics—is roughly twenty­five 
years old. It emerged largely in response to work done in the nineteen­seventies by the 
Israeli­American psychologists Amos Tversky and Daniel Kahneman. (Ariely, too, grew up 
in Israel.) When they examined how people deal with uncertainty, Tversky and Kahneman 
found that there were consistent biases to the responses, and that these biases could be traced 
to mental shortcuts, or what they called “heuristics.” Some of these heuristics were pretty 
obvious—people tend to make inferences from their own experiences, so if they’ve recently 
seen a traffic accident they will overestimate the danger of dying in a car crash—but others 
were more surprising, even downright wacky. For instance, Tversky and Kahneman asked 
subjects to estimate what proportion of African nations were members of the United Nations. 
They discovered that they could influence the subjects’ responses by spinning a wheel of 
fortune in front of them to generate a random number: when a big number turned up, the 
estimates suddenly swelled.

And ...

Like neoclassical economics, much democratic theory rests on the assumption that people 
are rational. Here, too, empirical evidence suggests otherwise. Voters, it has been 
demonstrated, are influenced by factors ranging from how names are placed on a ballot to 
the jut of a politician’s jaw. A 2004 study of New York City primary­election results put the 
advantage of being listed first on the ballot for a local office at more than three per cent—
enough of a boost to turn many races. (For statewide office, the advantage was around two 
per cent.) A 2005 study, conducted by psychologists at Princeton, showed that it was 
possible to predict the results of congressional contests by using photographs. Researchers 
presented subjects with fleeting images of candidates’ faces. Those candidates who, in the 
subjects’ opinion, looked more “competent” won about seventy per cent of the time.