Monday, 8 February 2010

Predictably Irrational – Dan Ariely ****

There is a certain breed of popular science book, often around the social sciences or economics that sets out to shock us by revealing that human nature doesn’t work the way we expect it to. I suppose a good example would be Freakonomics. This books is very much of that ilk, but is more based on science than the purely observational approach of Freakonomics, and manages to produce a similar level of fascination.
In a sense, although not presented as such, it’s a wholesale attack on economics as it is traditionally practised. This is, let’s face it, an easy target. I’ve never understood how economics can compare itself to real sciences, when Nobel Prizes are regularly awarded for totally opposing theories. Real science is built on observation and experiment, while economics seems more based on the Ancient Greek approach of coming up with a top-of-the-head theory to explain something, then defending it by argument.
At the core of the book’s attack is the assumption in traditional economics that human beings are rational and that we try to maximize our benefit. It is only in such circumstances that it is sensible to let the market determine anything – yet the reality (and well all know this without the experiments, but they serve to underline the situation) is that our decisions are anything but rational. We are, as the book’s title suggests, predictably irrational.
This is demonstrated with a wide range of experiments undertaken on the long suffering students of MIT and other nearby universities. (In case this suggests an economic bias, they do sometimes experiment on real human beings, as well as students.) Because this is first person stuff, there are sometimes entertaining outcomes, such as when the author, posing as a barman to study how people’s drink orders are influenced by others at the same table, is assumed to have failed in his career by an ex-colleague. But there is also a steady flow of small shocks as we realize just how irrational we are, whether we’re being unfairly influenced by initial prices (sale, anyone?) or being cured better by expensive medicine.
One side effect of reading this book is you pick up more on irrationality around you. Immediately afterwards, a friend came back from a visit to Blockbuster to rent two DVDs. He came back with four. When asked why, he pointed out that two would have cost £7.50, while four only cost £10. It was much better value for money, he argued. Yes, but he only wanted two DVDs, and he had just spent a third as much again. Yet he couldn’t see that the cunning pricing structure had forced him into irrationality.
The only trouble with a book like this is that after a while the ‘surprises’ when people act irrational are lessened because we’ve come to expect it. So it sags a little towards the end. And it’s short on answers when the author points out the negative effect of a particular irrationality, but can’t suggest any way to overcome that negative. But it’s still a very useful addition to the literature giving the general reader an understanding of why humans will never be truly rational – and why economics needs to recognize this.
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Review by Brian Clegg

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