predictably+irrational

Sarah Quinn 3rd AP Macro Mrs. Moeller 12/11/08

//Predictably Irrational// by Dan Ariely is not your typical free lance economic book. //Predictably Irrational// does not contain the standard supply and demand graphs with endless figures attempting to explain in the most well, "rational" way possible the seemingly important subject of economics. Ironically enough, Ariely explains the ironic fallacy of our decisions! What most people believe is a perfectly rational decision is in all actuality, relative to economic factors, absurdly irrational. In addition, Ariely delves into the fringes of economics: behavioral economics, a still developing method and outlook of economics. Behavioral economics is basically economics plus psychology rolled into one. It explains //why// people make the choices they make and how it thus affects the economy; why the choices we make our repetitive and thus predictable due to human nature, according to Dan.

First of all, the intro of this book really grapples with your soft side. Dan starts off his book with how he initially became interested in behavioral economics: Dan Ariely was tragically caught in an explosion that left 75% of his body covered in 3rd degree burns. As to be expected this life changing event affected Dan in unimaginable ways. Most importantly, relative to this topic and consequently his book, Dan's method of thinking, particularly economically, shifted dramatically. The emotional turmoil and painful method of removing bandages and disinfectant baths instigated a rather obvious question: Which is a less painful method for a burn victim? According to Ariely pulling bandages off more slowly is the less painful method. According to the nurses removing the bandages, emotionally, pulling the bandages off more quickly is the less painful method. But a less obvious question also manifested: Why do we choose one over the other? From this experience on, Dan embarked on a mission to give apply his questions of psychological behavior and propensities to economics. //Predictably Irrational// is essentially a compilation of all of Dan’s studies and experiments regarding behavioral economics. All are entertaining and quite thoroughly thought provoking because you know you would choose the same outcomes as the lab rats in his experiments. Dan explains many theories and studies behind behavior economics in which, as you read on, you’ll realize the irrationality of the situations and the fact that you too would make the same decision. First of all Dan explains the decoy effect. For example, the most simplistic of his explanations is the bread-making machines. At first, the break-making machine is a rather disappointing endeavor for its founders because the public can only think “what the heck is a bread-making machine?” But in order to boost sales all the company had to do was create another bread-making machine for a lower price, a decoy, creating the answer: “I don’t know what a bread-making machine is, but it has a competitor and it’s cheaper.” Similarly, I’m sure you’ll agree that there are many new “endeavors” to try or avoid in this world. But without something to compare it to, without a decoy, we are less likely to go out on a limb to try it. I’m pretty sure this is as simplistic as it gets, but the reasons behind it are not solely companies trying to make money of ridiculous products like a bread-making machine. They KNOW they can trick us into purchasing the products because of the psychological tendencies that we have.  Another interesting psychological propensity we contain is a concept called anchoring. This basically means the first price we see, and like, serves as the comparison for all other subsequent varying prices of that item. This too can be explained with a psychological concept: imprinting. At first is sounds kind of ridiculous because Ariely begins his explanation with the statement that goes something like, “in order to explain anchoring I’ll need to talk about baby geese.” Although it sounds rather silly, Ariely used this simple and common example to explain that anchoring is to price what a baby goose is the first thing it sees. The first thing a baby goose sees is what it calls its mother. Pretty simple huh? But it gets the point across.  The rest of //Predictably Irrational// is just a continuous multitude of experiments and pretty quirky and simplistic reasoning for our irrational behavior; the fact that our logic is flawed and we are easily tricked in the realm of economics. We just don’t know we’re being irrational. More importantly Dan challenges you to question your own logic. Why is it that we only have to hear the word “FREE!!” and it somehow changes the value of the product from reasonably desirably to absolutely necessary? Psychologically, the word free has such a positive connotation and is so exquisitely rare, that to hear it ensures gold.  Dan also presents another interesting case: surprise, surprise, we all procrastinate, and of course this is very pertinent to behavioral economics. Ariely basically questioned how students would do under certain restrictions. He gave 3 classes each a different option for their assignments. One class chose their own deadlines throughout the semester, one had until the last day of the semester, and the last had dictated deadlines. Surprisingly enough, when the work was compared, the students with dictated deadlines did the best, while the class with the chosen deadlines came in second and the single deadline on the last day following last. What does this tell us? Giving us restrictions with some flexibility is the best way to beat procrastination. So keep that in mind next time you have a really extremely flexible deadline.  Although procrastination most directly pertains to us, there is even another more interesting form of predictability among us humans: passion. Basically Ariely uses studies of sexual arousal, the most common heightened emotional state, to explain the fact that no matter how often we predict our decisions, in another emotional state, such as sexual arousal, we are ALWAYS wrong. Our predictions and expectations of ourselves will never hold true. Basically emotions take control of our behavior. Dan specifically advises us to “protect ourselves from ourselves” and to avoid the Dr. Jekyll and Mr. Hyde syndrome.  If you are getting frustrated because you don’t see how these topics relate to economics, please remember that //Predictably Irrational// is not about economics, it is about behavioral economics, and these tendencies and standards of human nature directly affect the decisions we make economically.  Overall Dan Ariely made economics a heck of a lot more entertaining and relative. If you are at all interested in the why rather than the what, this book is a good read. Instead of just looking at a graph that tells you why demand shifted to the right, Dan explains the causes of human nature, that made us make a certain decisions, most likely irrational, that in turn shifted the demand to the right. Dan incorporates every tendency imaginable. And I can safely say that when I was forced to read an economics book for AP Macro, the topics in this book were not at all what I expected. Can you honestly tell me when you think of “economics” you think of sexual arousal, or procrastination, or freaking bread-making machines? I sure as heck wasn’t thinking about FREE!! The darn book cost me 25 dollars! Overall there is nothing more fascinating than the human mind. Ironically we make decisions every day that are completely irrational. It seems extremely rational to go to the museum when the sign says FREE ADMISSION, but as you wait endlessly in line hardly able to enjoy the sights, the decisions seems less and less like a good idea. But the upside of this book is that you come away from it with the intent of making more informed decisions. You’ll rethink those first impressions or that cheaper Panasonic television or that Victorian home. There are decisions that require our innate ability to deduce and inquire with our logic, and rationality. Of course as Dan constantly reiterates through his numerous experiments, references, and quirky comparisons, decisions derive from human nature, and human nature is predictably irrational.