Monday, April 16, 2012

Last Week's Book... I Know...

I'm finally back to posting these things. This book is for April 1-7, although I finished it this past Wednesday. Easter weekend will do these things to you...

April 1-7: Predictably Irrational by Dan Ariely

Psychology/Economics (2010 - 325pp.) 

Yet another behavioural economics book, I'm well aware. It's one of my areas of interest, somehow. 

Much of the book goes over previously developed material, such as anchoring effects and merchants' use of perceived value. Ariely's examples for these are interesting. For the former, he exposes students to unpleasant noises and then offers them small amounts of money based on an anchor to listen to them again. For the latter, he mentions the lucrative sale of supposedly worthless black pearls based on rarity and perceived value. It's true - people often act in ways that seem incompatible with economic analysis, most notably with expected utility theory. Where this is measurable, in monetary terms, is where the distinction is most easily seen. Otherwise, it would be difficult to imagine (many) people carrying as much debt as they do, or any number of other financial situations that appear irrational from an expected utility theory perspective. As to whether we are all completely irrational, though, I like to have a little more faith. 

Even more so than the other practitioners of this field, Dan Ariely provokes. A chapter called "The Fallacy of Supply and Demand" is a good example of this. While challenging existing knowledge is admirable, and Ariely does a good job of it, there are certain times when the need for irrationality overshadows our surprisingly rational nature as human beings. For example, Ariely's discussion of peoples' willingness to sacrifice financial payoffs feels as though it is answered very well by Matthew Rabin's influential work on ego utility - that is to say, that making ourselves feel better about ourselves can be expressed as a form of utility, and thus has to enter any utility-maximization problem. This works in much the same way as the Duke basketball tickets discussion, in which no owner would be willing to sell for a price a buyer would be willing to pay. The endowment effect is not so much irrational as it is a way to express a certain type of utility. To this end, the book could be called Predictably Human

Predictably Irrational is a fun read that taught me a lot. Praise from the illustrious George Akerlof - that "Ariely not only gives us a great read; He also makes us much wiser" is merited. As to what constitutes rationality, that could probably be argued over for thousands of pages and never truly solved. 

Ease of Reading: 7 
Educational Content: 7

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