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Predictably Irrational: The Hidden Forces That Shape Our Decisions Hardcover – Deckle Edge, May 19, 2009
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“This is a wonderful, eye-opening book. Deep, readable, and providing refreshing evidence that there are domains and situations in which material incentives work in unexpected ways. We humans are humans, with qualities that can be destroyed by the introduction of economic gains. A must read!” (Nassim Nicholas Taleb, New York Times bestselling author of The Black Swan: The Impact of the Highly Improbable)
“Sly and lucid. . . . Predictably Irrational is a far more revolutionary book than its unthreatening manner lets on.” (New York Times Book Review)
“Surprisingly entertaining. . . . Easy to read. . . . Ariely’s book makes economics and the strange happenings of the human mind fun.” (USA Today)
“A fascinating romp through the science of decision-making that unmasks the ways that emotions, social norms, expectations, and context lead us astray.” (Time magazine)
“In creative ways, author Dan Ariely puts rationality to the test. . . . New experiments and optimistic ideas tumble out of him, like water from a fountain.” (Boston Globe)
“An entertaining tour of the many ways people act against their best interests, drawing on Ariely’s own ingeniously designed experiments. . . . Personal and accessible.” (BusinessWeek)
“Ariely’s book addresses some weighty issues . . . with an unexpected dash of humor.” (Entertainment Weekly)
“Inventive. . . . An accessible account. . . . Ariely is a more than capable storyteller . . . If only more researchers could write like this, the world would be a better place.” (Financial Times)
“Ariely’s intelligent, exuberant style and thought-provoking arguments make for a fascinating, eye-opening read.” (Publishers Weekly)
“A taxonomy of financial folly.” (The New Yorker)
From the Back Cover
How do we think about money?
What caused bankers to lose sight of the economy?
What caused individuals to take on mortgages that were not within their means?
What irrational forces guided our decisions?
And how can we recover from an economic crisis?
In this revised and expanded edition of the New York Times and Wall Street Journal bestseller Predictably Irrational, Duke University's behavioral economist Dan Ariely explores the hidden forces that shape our decisions, including some of the causes responsible for the current economic crisis. Bringing a much-needed dose of sophisticated psychological study to the realm of public policy, Ariely offers his own insights into the irrationalities of everyday life, the decisions that led us to the financial meltdown of 2008, and the general ways we get ourselves into trouble.
Blending common experiences and clever experiments with groundbreaking analysis, Ariely demonstrates how expectations, emotions, social norms, and other invisible, seemingly illogical forces skew our reasoning abilities. As he explains, our reliance on standard economic theory to design personal, national, and global policies may, in fact, be dangerous. The mistakes that we make as individuals and institutions are not random, and they can aggregate in the market—with devastating results. In light of our current economic crisis, the consequences of these systematic and predictable mistakes have never been clearer.
Packed with new studies and thought-provoking responses to readers' questions and comments, this revised and expanded edition of Predictably Irrational will change the way we interact with the world—from the small decisions we make in our own lives to the individual and collective choices that shape our economy.
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There are some very interesting anecdotes (for example, do you know why we think black pearls are valuable when originally no one wanted to buy them at any price?) and these are where most of the book's value lies.
The principal weakness comes from Ariely's conclusions based on the work he's carried out. He acknowledges that we humans are "irrational" compared to the straw man of the "rational optimizer" beloved of neoclassical economic theory, but while some of his examples are interesting he fails to see the entire picture. Thus whereas Keen shows that the neoclassical model is computationally impossible, Ariely merely shows that we have different decision-making processes in two distinct contexts: interpersonal and financial. This is valid, but Ariely then goes on to show that he hasn't really explored the interpersonal context with any degree of rigor.
A couple of examples will illustrate what I mean. In the first example Ariely talks about how companies strive to create a "social exchange" in the workplace because people generally work harder and more diligently in social exchange settings than in compensation-based settings. We can think of how we might keep on struggling to get a friend's piano up the stairs of a narrow apartment building long after we'd have given up if we were simply being paid $10 per hour by a stranger to perform the same task. So Ariely notes that companies try to exploit our social side in order to get more work out of us (he doesn't look at the ethics of this attempt, or even at its many infeasibilities). Then he suggests that in order to reinforce the social dynamic and avoid corrupting it with the financial dynamic (because it's not possible to combine the two) companies should not give bonuses but instead should send employees off on a paid-for vacation. The problem, of course, is that most employees don't want to be placed in a parent-child relationship. Most employees think of themselves as independent adults. Saying "here's a vacation we've arranged for you" violates an employee's independence. Worse still it assumes the employee's plans for their free time are irrelevant (the cost of leaving one's home, family, and friends for the duration of the enforced vacation are apparently zero where the company is concerned...). Obviously this recommendation would be disastrous under real-world conditions and one wonders how Ariely failed to think through his proposal.
A second example of this failure to think things through comes with Ariely's analysis of cap-and-trade. Rightly he points out that when you set a price on something (in this case pollution) then people may elect to pay more in order to get more. Just as we might only take a single candy from a tray being passed around the group but might buy ten if the candies are being sold, so too might companies pollute less if pollution were a "social good" rather than a priced good. With cap-and-trade companies might simply elect to pay more in order to feel free to pollute more. So Ariely proposes making pollution a "social good." But again a moment's thought shows this to be absurd. Not only do we have far too many examples of companies being quite happy to pollute when it's a cost-free exercise, Ariely's own book shows that executives will ignore social factors when their focus in on financial rewards. As executives are almost exclusively motivated by fat financial rewards, the notion that they would take social norms into account when deciding whether or not (or how much) to pollute is like saying that investment bankers would put the needs of their clients and the financial system in general ahead of their own desire for the $100 million bonus they get from pushing CDOs onto unsuspecting dupes.
So in the end the book is worth reading for its anecdotal value but not for Ariely's own conclusions or policy suggestions. He's not-quite an economist and not-quite a behavioral psychologist and ultimately that means he's not-quite useful as a guide to policy formulation on either the micro or the macro scales.
Advertisers have known all along that economic decisions are often heavily based on social, cognitive and emotional factors. We can know too. Author Dan Ariely gave incredible insights into ways that people commonly make irrational decisions. Sure they were based on college experiments, but we learn a lot about ourselves from the results and Ariely's interpretations.
From knowledge gained studying irrational decision-making, I wonder to what extent we can rationalize behavior. It seems the complexity of decision-making might be increasing, and the irrational biases are apparently hardwired. For example, even though we know based on Ariely's research that we put energy into being penny wise and pound foolish regarding certain purchases, it seems likely that smart people will continue to do so.
The solutions posed in the book are really separate from the value of the knowledge gained. Obviously, government has a legitimate role in consumer protection. Consumers, working constantly and with no time to research the fine print of every type of deal, should be protected to some extent. Even so, there is no way government can protect citizens from every pitfall. It makes me wonder if a type of training could be devised to help me, and all of us, override most irrational impacts on decision-making.