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Predictable Irrationality

Predictable Irrationality

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Published by cbrayton
Reviewed by Brazil's Exame magazine
Reviewed by Brazil's Exame magazine

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Published by: cbrayton on Apr 20, 2008
Copyright:Attribution Non-commercial

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04/25/2013

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Review of
Predictably Irrational 
, by Dan Ariely
 Exame
magazine (Brazil), April 14, 2008by S
é
rgio Teixeira Jr. (translated CB)
If there is a thread of continuity between Adam Smith and the complex mathematicalformulas that move the international financial markets of the twenty-first century, it is thebelief that the human being, at least when it comes to material possessions, is a rationalbeing. We evaluate all available options, know the implications of all of then, and alwayschoose the best path. We do this every day, several times a day. Bad choices? Noproblem: the proverbial "invisble hand of the market" is there to set us back on the pathtoward reason and well-being. Based on these assumptions, generations of economistshave been drawing conclusions about everything from how the price of bread is establishto public policy on health and education. This is precisely the type of economic theory thata provocative new book does not deal with.
Predictably Irrational 
, by MIT professor DanAriely, sets out to demonstrate precisely the opposite: that we human beings are irrational.Much less sensible and calculating than the
homo economicus
described by traditionaltheory. Much more susceptible to giving in to psychological stimuli we scarcelycomprehend but which are easy to identify. Our capacity to act against our own bestinterests is so great that it can even be predicted, Ariely argues. "Understanding howpredictably irrational we are is the point of departure for improving our decision-makingand changing our lives for the better."Dan Ariely is one of the new exponents of a relatively new branch of economics known asbehavior economics. Instead of dealing with spreadsheets, charts and models, Arielyconcentrates on experiments that show how people really behave when buying, selling,working, changing jobs, and so on. His studies overlap with psychology, because they tryto understand how various emotions -- rage, fear, sexual desire -- are fundamental toevery economic decision we make in our daily lives. Though it does not enjoy the prestigeof conventional economic theory, behavior economices is conquering space in theacademic world. In 2002, The Nobel Prize in economics went to psychologist DanielKahneman for his studies on decision-making. Ariely follows the same path, and his bookrecounts dozens of experiments that might seem trivial, but which are surprisinglyrevealing 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 makingincorrect 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 atest 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 maximumprice they would pay for the product in an auctionn. "I asked them if they thought thenumber of their Social Security document had any influence on the bids they made. Theyquickly rejected this suggestion: 'No way!' " Ariely recalls. Well, then. Those studentswhose SSNs ended in higher numbers (between 80 and 99) tended to offer a great dealmore than their classmates with lower numbers. A number chosen at random without anyrelation to the products on the list served as the basis for a decision about price. Does thatseem rational?Ariely writes ably about experiments and the ideas they help to illustrate. Some are veryamusing, such as the test in which his students respond to questions about their sexualbehavior in two situations: In an interview and in their bedrooms, looking at pornographicimages. The result? The excited participants exhibit a greater tendency to dispense withthe use of condoms and engage in sexual adventures considered tabu. Another curiousstudy examines how money changes our attitudes about certain tasks. Participants wereasked to repeat a monotonous task on a computer: Drag an image located inside a circleinto a square. Some received $5, others, $0.50. A third group was offered no payment: thetask was done as a favor. Ariely found that it was the third group that worked hardest at thetask. In a variant on this experiment, payment was made with presents (again, with a thirdgroup 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 thesocial sphere to the sphere of market relations. In many cases, a present is a positivereinforcement that works much better than a check. We all work for money -- but praisecan have a powerful effect. Remember this the next time you go to renegotiate the salariesof your employees.Reading the anecdotes in
Predictably Irrational 
is literally an exercise in reflection: in eachcase study, and there are many of them, the reader sees himself in the situation of the testsubjects and participates mentally in the tests. One's initial reaction is to laugh along withAriely. His text is fluently written and has none of that egg-headed quality you expect froma typical book on economics. He tells stories with good humor and a light touch. But as theexamples accumlate, you begin to get a clear sense of how often in our daily lives we arethinking more with our heart, our stomach, or -- which is probably worse -- with a brain thathas a habit of betraying us. In 210 B.C., Ariely writes, the Chinese general Xiang Yu waspreparing an attack against the [Qing] dynasty. After crossing the Yangtze River, hesurprised his troops by burning their boats and cooking pots. Lacking the conditions toretreat or maintain their position, the only option remaining was to attack. Xiang and hissoliders won nine battles in a row. Common sense requires us to always keep themaximum 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 acertain comfort in knowing that if we need them one day, they will be there. No one has thetime or disposition to keep in touch with all those friends from decades past who ask to beadded 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 investigatethe 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 clicksand three doors to choose from. Each door involved a small reward, varying from one toten cents. Here is the assumption: after a few attempts, the player will realize which doorstend 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 newoption, 3 cents would be subtracted (and no longer just the subtraction of a click from thelimited total). The result was the same."In our modern society, we are constantly reminded that we are free to do whatever wewant." We have to develop ourselves in all possible ways; we must experience all aspectsof life; we have to make sure that, of the 1,000 things to see before we die, we do not missa single one," writes Ariely. This compulsion to go pursue everything all the time, to openall 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 thesedoors, decisions may become easier, especially when we know that the time and energywe invest in making the decision also has a cost. Ariely relates a choice he himself had tomake: 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 thedecision 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 knowledgeabout the difficulties of the decision-making process, was as predictably irrational asanyone else."What to do? The answers are a bit obvious, but even so it is difficult not to agree withthem. Avoiding taking on too many projects is a good start. Accepting that some friendsfrom the past will no longer be part of your intimate circle is another. But aside from theoccasional practical tip, this book does not set out to be a self-help manual. Nor is it anattack on traditional economic theory. But understanding how our mind functions in certainsituations can be useful in creating some defenses, albeit simple ones, against thetendency to act in an irrational manner. A good start is to be objective when you go to abookstore. Do not waste time deciding between the business books that are in fashion atthe moment: choose
Predictably Irrational 
without thinking twice.
The book is priced at R$55 (US$32) at the online retailer Submarino, and comparably at otherbookstores – 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 theUnited States.So if I followed this reviewer's advice, I would be getting price-gouged to an outrageous freakingdegree.Which would be irrational -- and, to someone with my upbringing (I was raised by insanely frugalMethodists 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 bya renowned economist who died some ten years ago: "The economy does not

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