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Home » Opinion » Book review
Homo sapiens is predictably irrational
By Wu Jiayin |
April 11, 2009, Saturday
|
Print Edition
Print Edition
CONTRARY to the widespread cherished belief that people usually behave rationally, behavioral economics expert Dan Ariely argues that people are irrational.
"We are not only irrational, but predictably irrational ... our irrationality happens the same way, again and again," he declares in his book "Predictably Irrational."
The intriguing argument is strongly backed by abundant experimental discoveries Ariely recounts in the book.
The book is fascinating, lively, easy to read and practical, as it's not bogged down in statistics.
The book poses a challenge to conventional economic principles, which are usually based on the premise that people act rationally.
An example.
It is widely acknowledged that supply and demand determine price. Yet studies by behavioral economists have shown that factors completely irrelevant to the supply-and-demand curve can determine prices.
In one experiment, researchers asked US subjects to put the last two digits of their Social Security numbers at the top of a form where they were to record the prices they were willing to pay for various products.
Participants with high Social Security numbers consistently made higher offers than those with low Social Security numbers.
This may not be sufficient to disprove the supply and demand theory, but it at least shows that the initial price one is willing to pay for an item is more or less arbitrary.
The power of free offers often leads to irrational behaviors as well.
In one case, Ariely offered subjects the choice of buying a premium chocolate truffle for 15 US cents or an ordinary Hershey's Kiss for 1 US cent. Almost 75 percent chose the former.
However, when he reduced the price of both by one cent, so that the truffle cost 14 cents while the Hershey's Kiss was free, most picked the latter.
"FREE! gives us such an emotional charge that we perceive what is being offered as immensely more valuable than it really is," observes Ariely.
In fact, businesses or even governments at all levels are already making use of such predictable irrationality in one way or another.
The city government of Hangzhou, Zhejiang Province, for instance, gave 150 million yuan (US$22 million) worth of coupons to residents nationwide in the past two months.
The coupons for discounted services and goods proved attractive to tourists, although their benefits are quite limited. They can only be used in about 180 designated businesses including scenic spots, cruise ships, restaurants, etc, and one has to pay 40 yuan to use one coupon valued at 10 yuan.
According to a report by www.zhejiangonline.com.cn on April 7, the past Qingming Festival saw an increase of 10 percent of tourists in Hangzhou compared with the same period last year. And the scenic spots where coupons can be used attracted many more tourists than other scenic spots.
Hence the insightful observation by Ariely: "Wouldn't economics make a lot more sense if it were based on how people actually behave, instead of how they should behave?"
The book is not intended, though, as a challenge to conventional economics.
Ariely's goal is to help an ordinary reader "fundamentally rethink what makes you and the people around you tick ... Once you see how systematic some mistakes are - and how we repeat them ... I think you will begin to learn how to avoid some of them."
He also points out that when people have too many options, they tend to make suboptimal decisions. So limiting choices is sometimes necessary.
Other common mistakes that should be avoided include procrastination, cheating, and so on.
Learning that we engage in so many irrational behaviors can be depressing. However, as Ariely sees it, "The fact that we make mistakes also means that there are ways to improve our decisions."
"We are not only irrational, but predictably irrational ... our irrationality happens the same way, again and again," he declares in his book "Predictably Irrational."
The intriguing argument is strongly backed by abundant experimental discoveries Ariely recounts in the book.
The book is fascinating, lively, easy to read and practical, as it's not bogged down in statistics.
The book poses a challenge to conventional economic principles, which are usually based on the premise that people act rationally.
An example.
It is widely acknowledged that supply and demand determine price. Yet studies by behavioral economists have shown that factors completely irrelevant to the supply-and-demand curve can determine prices.
In one experiment, researchers asked US subjects to put the last two digits of their Social Security numbers at the top of a form where they were to record the prices they were willing to pay for various products.
Participants with high Social Security numbers consistently made higher offers than those with low Social Security numbers.
This may not be sufficient to disprove the supply and demand theory, but it at least shows that the initial price one is willing to pay for an item is more or less arbitrary.
The power of free offers often leads to irrational behaviors as well.
In one case, Ariely offered subjects the choice of buying a premium chocolate truffle for 15 US cents or an ordinary Hershey's Kiss for 1 US cent. Almost 75 percent chose the former.
However, when he reduced the price of both by one cent, so that the truffle cost 14 cents while the Hershey's Kiss was free, most picked the latter.
"FREE! gives us such an emotional charge that we perceive what is being offered as immensely more valuable than it really is," observes Ariely.
In fact, businesses or even governments at all levels are already making use of such predictable irrationality in one way or another.
The city government of Hangzhou, Zhejiang Province, for instance, gave 150 million yuan (US$22 million) worth of coupons to residents nationwide in the past two months.
The coupons for discounted services and goods proved attractive to tourists, although their benefits are quite limited. They can only be used in about 180 designated businesses including scenic spots, cruise ships, restaurants, etc, and one has to pay 40 yuan to use one coupon valued at 10 yuan.
According to a report by www.zhejiangonline.com.cn on April 7, the past Qingming Festival saw an increase of 10 percent of tourists in Hangzhou compared with the same period last year. And the scenic spots where coupons can be used attracted many more tourists than other scenic spots.
Hence the insightful observation by Ariely: "Wouldn't economics make a lot more sense if it were based on how people actually behave, instead of how they should behave?"
The book is not intended, though, as a challenge to conventional economics.
Ariely's goal is to help an ordinary reader "fundamentally rethink what makes you and the people around you tick ... Once you see how systematic some mistakes are - and how we repeat them ... I think you will begin to learn how to avoid some of them."
He also points out that when people have too many options, they tend to make suboptimal decisions. So limiting choices is sometimes necessary.
Other common mistakes that should be avoided include procrastination, cheating, and so on.
Learning that we engage in so many irrational behaviors can be depressing. However, as Ariely sees it, "The fact that we make mistakes also means that there are ways to improve our decisions."
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