Predictably Irrational

All is good with the world again. This book, "Predictably Irrational", came in two days ago; while picking it up I also came across another book of some interest. How about an author who rode with the Hell's Angel just to get material to write about? Anyone ever hear of Hunter S. Thompson? Neither did I but I find he is quite well known among authors. Anyway, that is my next book...I think. Now on to the subject at hand:

Dan Ariely, “Predictably Irrational” (The Hidden Forces That Shape Our Decisions), Harper, 2008, 247 Pages

This is one of the first books I have read on Behavioral Economics. The author conducts several easy to understand experiments to explore some of the less explainable sides of Economic Theory. Traditional Economic Theory is predicated on the premise that all Economic behavior is a result of rational decisions; Ariely shows this is just not so.

Ariely makes the case that economics would make a lot more sense if it were based on how people actually behave, instead of how they should behave. He finds that many of the decisions we make are irrational, but, predictably irrational. Since, our irrational behavior is predictable, we can take steps individually and as a society to curb our irrational decisions so that we get rational outcomes. His studies bring to light a lot of important economic norms and is full of descriptions from experiments he designed and conducted upon which his conclusions are based.

Each of the chapters in this book describes a force (emotions, relativity, social norms, etc.) that influences our behavior And while these influences exert a lot of power over our behavior, our natural tendency is to vastly underestimate or completely ignore this power.

Pg. XX: Our irrational behaviors are neither random nor senseless. They are systematic, and since we repeat them again and again, predictable. The emerging field of behavioral economics is trying to incorporate these discoveries of our predictable irrational behaviors into more valid economic predictions.

Pg. 2 Relativity: Humans rarely choose things in absolute terms. We do not have an internal value meter that tells us how much things are worth. Rather, we focus on the relative advantage of one thing over another, and estimate value accordingly. (For instance, we do not know how much a six-cylinder car is worth, but we can assume it is more expensive than the four-cylinder model.)

Pg. 16: In 1993 federal securities regulators forced companies, for the first time, to reveal details about the pay and perks of their top executives. The idea was that once pay was in the open, boards would be reluctant to give executives the then prevalent outrageous salaries. It needed t stop: in 1976 the average CEO was paid 36 times as much as the average worker. By 1993, the average CEO was paid 131 times as much. So once salaries became public information executives salaries sky-rocketed! Now the average CEO makes about 369 times as much as the average worker. This is the problem of relativity: each executive compares his salary to the others and thus needs more, relatively speaking.

Pg. 44: Socrates said that the unexamined life is not worth living. Perhaps it is time to inventory the imprints and anchors in our own life.

Pg. 68: We live simultaneously in two different worlds—one where social norms prevail, and the other where market norms make the rules. The social norms include the friendly requests that people make of one another. Could you help me move this couch? Social norms are wrapped up in our social nature ad our need for community. Instant paybacks are not reqird: you may help move your neighbor’s couch, but this does not mean he has to come right over and move yours. The second world, the one governed by market norms, is very different. The exchanges are sharp-edged: wages, prices, rents, interest, and costs-and-benefits. When we keep social norms and market norms on their separate paths, life hums along pretty well.

Pg. 76: A study was made at a day care center to determine whether imposing a fine on parents who arrived late to pick up their children was a useful deterrent. The fine did not work well and in fact had negative effects. Why? Before the fine was introduced, the teachers and parents had a social contract, with social norms about being late. Thus if parents were late, they felt guilty and became more prompt in the future. But once the fine was imposed, the day care center had inadvertently replaced the social norms with market norms. Now that the parents were paying for their tardiness, they interpreted the situation in terms of market norms. Now they could decide for themselves whether to be late or not, and they frequently chose to be late. So they removed the fine. And again tardiness increased. After all, both the social norms and the fine (market norms) had been removed. Once a social norm is trumped by a market norm—it will rarely return.

Pg. 213: The author demonstrates through many experiments that people cheat when they have a chance to do so, but they do not cheat as much as they could. Moreover, once they begin thinking about honesty-whether by recalling the Ten Commandments or by signing –they stop cheating completely. In other words, when we are removed from any benchmarks of ethical thought, we tend to stray into dishonesty. But if we are reminded of morality at the moment we are tempted, then we are much more likely to be honest.

Pg. 214: In 2002, the U.S. ranked twentieth in the world in terms of integrity, according t one survey (Denmark, Finland, and New Zealand were first; Haiti, Iraq, Myanmar, and Somalia were last, at number 163). However, in 2000 the U.S. ranked fourteenth, before the wave of corporate scandals made the business pages in American newspapers look like a police blotter. We are going down the slippery slope and this can have tremendous long-term costs.

Pg. 223: Wardrobing is buying an item of clothing, wearing it for a while, and then returning it in such a state that the store has to accept it but can no longer resell it. The clothing industry estimates that its annual losses from wardrobing are about $16 billion (about the same amount as the estimated annual loss from home burglaries and automobile theft combined).

Author ran a study in a dorm by putting a six-pack of coke in a community refrigerator along with a plate upon which six dollar bills were placed. Within 72 hours the coke was always gone but the money was never touched. People tend to steal when the item is not directly related to cash (wardrobing, back-dating stock options, etc.). Of course companies steal too: credit card rates, frequent flyer mile blackouts (unless you pony up double the miles, then a seat usually appears, etc…)