I picked up the book from Ankita’s place. Ankita is a Brand Manager in a MNC and a lot of the work involves in understanding ‘why people buy what they buy’ and understanding this consumer behavior involves dallying with psychology, sociology and of course behavioral economics. Behavioral economics is a new field and is given lots of importance now days because it differs from classical economics in the way that its treats people not as rational machines but as flesh and blood, whose behavior is fashioned by emotions, confusion, historical baggage and social conditioning. It’s almost like what the philosophers have been saying about reality and perception, that we tend to see the world not so much on what is the reality but through our own tinted glass. Now one of the principal tenets of classical economics is that individuals act in the best of their interest and in the most rational ways.
Behavioral economics tends to complement classical economics because the central tenet is that human beings may not always ways act in the most rational ways and that experiments carried out on human behavior reveal that human being are extremely irrational in some ways and that they are extremely sensitive to the way choice is presented to them. The last point deserves some explanation and is the subject of another book called Nudge (Nudge: Improving Decisions About Health, Wealth, and Happiness by Richard H. Thaler, Cass R. Sunstein). The main point of the book is ‘Libertarian Paternalism ‘, an amazing theory which says, since its sometimes difficult to educate people on what is right and what is wrong, its easier to trick them into the right choice through the way the choice is presented to them. This shall be a discussion point when I write the review for Nudge, but those who are interested can read more at – http://freakonomics.blogs.nytimes.com/2008/04/11/nudge/
Now that the context has been set I shall get back to the review of the book ‘Predictably Irrational’ by Dan Ariely. I would say the first example in the book riveted me to the rest of the chapters. The first chapter is ‘The truth about relativity’ and it explains how human beings by nature find it difficult to decide on absolute terms because of what the author describes as ‘ individuals lacking an absolute value meter’. Hence individuals can be made to choose a particular option in a way the option is presented to them. Here the role of the ‘decoy ‘is very important. To give an example from the book-
“So let’s run through the Economist’s sleigh of hand in slow motion. As you recall the choices were:
- Internet-only subscription for $59
- Print-only subscription for $125
- Print – and – Internet subscription for $125
When I gave these options to 100 students at MIT’s Sloan School of Management, they opted as follows-
- Internet-only subscription for $59—16 students
- Print-only subscription for $125—zero students
- Print – and – Internet subscription for $125—84 students”
The author then goes on to prove how the second option is a decoy aimed to shift the preference to the third option. This is such a strong example that it sets the momentum for the remaining chapters. In fact the role of decoy is further extended to discuss their importance in deciding whom to date and marry.
The subsequent chapters discuss a wide range of topics from the fallacy of demand and supply to how much will we cheat if we are given the option and if cash actually plays an important a role in deciding the magnitude of the amount we are ready to cheat. Through a set of experiments the author meticulously proves how there is a pattern in the way we behave in different circumstances and how we are guided by action which is not always rational.
Read the book for the sheer uniqueness of the examples, the diverse range of topics presented and the simplicity of the arguments. Still if you are not convinced, read the book for the experience of pausing in between the pages and exclaiming, “God, I would have done the same and I thought I was totally rational.”
PS- The author maintains a web site called http://www.predictablyirrational.com/