I first discovered an interest in behavioral economics when I was a financial advisor at Morgan Stanley in 2012. After failing miserably to land new clients, I wanted to understand why some people would say yes to a pitch while others would simply say no. In 2005, acclaimed economist Steven Levitt teamed-up with writer Stephen Dubner and authored a book called Freakonomics: A Rogue Economist Explores the Hidden Side of Everything. With chapter titles like, “What do Schoolteachers and Sumo Wrestlers Have in Common?”, and “Why do Drug Dealers Still Live with Their Moms?”, Freakonomics popularized the field of economics in a new way. The book did so well that Levitt and Dubner followed it up in 2009 with a second title, SuperFreakonomics: Global Cooling, Patriotic Prostitutes and Why Suicide Bombers Should Buy Life Insurance. Thinking about economic decision-making and psychology became something of a passion that I’ve pursued since then.
Freakonomics and SuperFreakonomics built on an approach to economics started by Daniel Kahneman and Richard Thaler back in the 1980s. Dan Ariely’s Predictably Irrational: The Hidden Forces That Shape Our Decisions expands on the genre and looks into the differences between classical and behavioral economics. By citing the results of experiments he’s conducted at Harvard, Stanford, Duke, and many other prestigious universities, Ariely makes the case that traditional economics, based on the belief that humans make decisions using perfectly rational thought, is ultimately wrong. He shows, and I would say definitively so, that we behave in irrational ways, and this upends many of the principles on which businesses, policy-makers, and academics develop products, spend our money, and teach our kids.
In a relatively short space of three-hundred-fifty pages, Ariely shows that if people always acted rationally, they wouldn’t overeat, go into unsustainable debt, procrastinate, lie, or pay more for something because of perceived value. Each of these things occur every day, and this makes the premise on which traditional economics is based – rationality – fundamentally flawed. Ariely’s experiments convincingly prove that we are irrational beings who connect action and rational thought sporadically at best. Irrationality is the rule rather than the exception.
This is a fun book to read. Instead of peppering the text with countless academic studies and cryptic jargon, Ariely presents his case in a narrative form that tells a compelling and convincing story through anecdotes and personal observations. The data and numbers are there but are couched in an approachable conversational style. The only criticism I have is, at times, the story becomes bogged down as he describes the set-up of some of the experiments, but those sections don’t distract from the book’s central message.
Predictably Irrational is a must read for anyone who believes we are more than numbers, data profiles, and points on a line chart. Our humanity defines us and we should embrace that with all our irrational might.
Notable Quotes
On Corporate Social Relationships, Social Norms, and Market Norms
“Although companies have poured billions of dollars into marketing and advertising to create social relationships – or at least an impression of social relationships – they don’t seem to understand the nature of a social relationship, and its risks.”
“For example, what happens when a customer’s check bounces? If the relationship is based on market norms, the bank charges a fee, and the customer shakes it off. Business is business. While the fee is annoying, it’s nonetheless acceptable. In a social relationship, however, a hefty late fee – rather than a friendly call from the manager or an automatic fee waiver – is not only a relationship-killer; it’s a stab in the back. Consumers will take personal offense. They’ll leave the bank angry and spend hours complaining to their friends about this awful bank. After all, this was a relationship framed as a social exchange. No matter how many cookies, slogans, or tokens of friendship a bank provides, one violation of the social exchange means that the consumer is back to the market exchange. It can happen that quickly.”
“What’s the upshot? If you’re a company, my advice is to remember you can’t have it both ways. You can’t treat your customers like family one moment and then treat them impersonally – or even worse, as a nuisance or competitor – a moment later when this becomes more convenient or profitable. This is not how social relationships work. If you want a social relationship, go for it, but remember that you have to maintain it under all circumstances.”
“On the other hand, if you think you may have to play tough from time to time – charging extra for additional services or rapping knuckles swiftly to keep the consumers in line – you might not want to waste money in the first place on making your company the fuzzy-feel good choice. In that case, stick to a simple value proposition: state what you give and what you expect in return. Since you’re not setting-up any social norms or expectations, you also can’t violate any – after all, it’s just business.”
The Details
Title: Predictably Irrational: The Hidden Forces That Shape Our Decisions
Author: Dan Ariely
Publisher: Harper Perennial
Date: 2008
Pages: 349
