Behavioural Economics Book review Recommended Read

Book Review | Predictably Irrational

A lucid and insightful description of inherent irrational streaks in our seemingly rational behaviour

My ongoing obsession with the fast-evolving field of ‘Behavioral Economics’ led me to zero in on yet another bestseller in this field – “Predictably Irrational: The hidden forces that shape our destiny” authored by formidable Dan Ariely.

Predictably Irrational is based on the much-acknowledged premise of the difference between our words and the resulting (often unintended) outcomes.

In other words, it’s yet another milestone in what now seems to be an unending battle between the old school (traditional economics) and the new school (behavioral economics).

At the heart of the book are several thought-provoking lessons that unravel the hidden aspects of human behavior. Dan, himself a Ph.D. from MIT, delves into the human mind and lifts the veil off many shrouded aspects of our behavior.

‘Predictably Irrational’ is an upshot of author’s rigorous research work. Based on the outcomes of numerous field experiments, Ariely draws the conclusion that humans often behave in an irrational way. But, only predictably so. Each chapter in the book outlines irrational ways in which humans respond and behave under various circumstances. What keeps you riveted to the book are the finer details of the field-experiments that Dan Ariely and his team conducted and subsequently incorporated in the book.

To corroborate his assertions, the author presents several cases. He talks about price comparisons, the importance of the difference between perceived values of objects being sold and bought, reward/incentive scenarios, etc. He also highlights the parallels between how we behave in non-monetary situations, such as politics and sports, and the ones involving money. In every case study, Ariely’s subjects repeatedly make choices which when viewed objectively are clearly poor.

Our state of mind at a given time can have a telling effect on our response to a situation. Often, the way we respond to a situation sets the template for our future behavior. For example, after a bad day at the office, if you scream at your kids at the slightest of provocation, chances are you’d repeat the action next time, too, when you are under duress.

One of the chapters in the book, namely ‘The influence of arousal’ bears a great testimony to the difference in the way we behave in our superego (rational) state and the way we behave when we are in heat of arousal. A small rush of dopamine or adrenalin is good enough to throw us off the rationality cliff. Ariely proves that human beings often drastically underestimate the effect of passion on our behavior. He takes a leaf from Freud and remarks, “Each of us houses a dark self, an id, a brute that can unpredictably wrest control away from the superego.”

‘Predictably Irrational’ is peppered with quite a few steadfast pearls of wisdom, too. To me, one of the most unassailable ideas in the book is that of the complex interplay between social norms and market norms. How, sometimes, directly or indirectly, our efforts to mingle social norms with market ones result in a heady cocktail working against our advantage.

Another strong idea put forth by Ariely in the book is that of ‘moment of temptation’ in chapter VI. He avers that humans are better off avoiding temptation than endeavoring to overcome it.

Ariely also elaborates upon the adverse effects of ‘Endowment effect’. Ownership of something can change our perspective about it. And, we, more often, value our assets more than they are actually worth.

At a fundamental level, his book helps you rethink what makes you tick. It also helps you make decisions to steer clear of the dangerous quagmire of ‘repetition of mistakes’. By the end of the book, he quite convincingly accomplishes his mission. The only problem is that Ariely is not the only one striving to make us rethink our actions.

Since ‘Predictably Irrational’ was published, a host of authors have emerged on the Behavioral Economics scene. Behavioral Economics as it stands today looks to have the potential to challenge the established foundations of traditional economics.

Finally, I enjoyed reading the book from a purely academic perspective. Ariely deserves the praise for the use of statistically significant results. However, I have questions about the methodology and conclusions that he draws from the results (since no experiment detail comprises information related to the confidence interval, significance levels, etc.).

In particular, a majority of the experiments were conducted on college campuses. So, there is a strong likelihood of the subjects being aware that they were in an experimental situation. And it’s well documented that subjects behave differently when they know that they are being observed. Ariely, I feel, has fallen short of addressing these concerns.

I found ‘Predictably Irrational’ both engaging and stimulating; it’s a book brimming with surprising insights about human behavior. I would highly recommend this book to those interested in fields of Behavioral Economics and Consumer behavior. As a companion reading, I would recommend the following: Levitt and Dubner’s ‘Freakonomics‘ and ‘Superfreakonomics‘. Add to that, Malcolm Gladwell’s ‘What the dog saw‘ and ‘Outliers‘ and Tim Harford’s’The Undercover Economist’.

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