Seeking Silverdale and Central Kitsap

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Well, I’ve finished Daniel Ariely’s book, Predictably Irrational, and I must say that while I found it interesting and did learn something from reading it, it seemed to fizzle at the end.

The book is very good as a description of a series of experiments that Ariely and his fellow behavioral economists have conducted to try to see what will happen when people are given certain economic choices. As the title of the book suggests, people are apparently predictably irrational in their economic choices. If the behaviors seen in these experiments are truly translated into everyday behavior concerning our economic choices, then the behavioral economists are correct in questioning the real world application of the theories of the free market. Without rational decisions from consumers, there is no “invisible hand” that makes a free market result in the most efficient and effective economic choices.

The book describes many experiments, but ultimately left me wishing that Ariely would have focused more on the impact of the findings on policy and how to bridge the gap between observed and theoretical behavior. At the very end, he tries to sum up, but somehow it seems the culmination of his ideas should require more than barely a page to present. Here’s part of his summary:

“If I were to distill one main lesson from the research described in this book, it is that we are pawns in a game whose forces we largely fail to comprehend. We usually think of ourselves as sitting in the driver’s seat, with ultimate control over the decisions we make and the direction our life takes; but alas, this perception has more to do with our desires — with how we want to view ourselves — than with reality.

“Each of the chapters in this book describes a force (emotions, relativity, social norms, etc.) that influences our behvior. And while these influences exert a lot of power over our behavior, our natural tendency is to vastly underestimate or completely ignore this power. These influences have an effect on us not because we lack knowledge, lack practice or are weak-minded. On the contrary, they repeatedly affect experts as well as novices in systematic and predictable ways. The resulting mistakes are simply how we go about our lives, how we “do business.”

 I’m hoping to find a more powerful explanation of how behavioral economics can guide policy making … especially as we face the most difficult economy this nation has seen in 80 years.

— Jeff

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More from my reading of Dan Ariely’s interesting book on behavioral economics, Predictably Irrational.

When I was an economics student in the early 80s, there was no field of behavioral economics. In fact, at that point, economists were trying their darnedest to make every economic activity predictable by mathematical formula. The push was on to earn economics respect as a “hard” science rather than a social science, and economics were busy creating mathematical models they said would be able to predict the economic impact of nearly any economic input. If the federal reserve tightened the money supply by 1 percent, here’s what would happen to GNP after 6 months or 1 year. They wanted people to think that economics was like physics, with the nature of each atom’s behavior predicted by set formulas and theories. 

That approach to economics never appealed to me. I always thought that the economy was an accumulation of millions of individual choices made by people who simply do not follow the assumptions contained in the models created by the great economic theorists. Yes, in general, if demand for shoes rises because many individuals decide they want to spend their next dollar on another pair of shoes, generally speaking, shoe suppliers will find a way to increase supply and keep the price of shoes from rising to the point that people won’t buy them. But the whole idea that people know themselves and know the choices well enough to be able to decide rationally, with each spending decision, what next purchase would bring them the highest possible satisfaction (economists call it utility) for that marginal dollar spent, I find pretty far-fetched.

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As promised, I’m going to share with you some insights from Predictably Irrational, a book by MIT behavioral economics professor Dan Ariely, as I read it.

His first chapter is about relativity … how we are wired to compare our options to help us make choices. This is something that works well when we compare options that are similar, but can lead to irrational choices when we follow our instinct to compare dissimilar options.

An example of that is posed by Ariely like this. Suppose you are house hunting and you see two houses that are identical in price. One is a colonial style, one is contemporary. With that information alone, you have no basis to choose between one house or the other. But suppose you add a third house to the list of options. It’s also the same price. It’s a colonial. But it’s in need of roof repairs. Now which house do you choose?

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I do a lot of reading for pleasure, typically getting through a couple of books each week. I had expected that my pace may quicken this month due to my recent “retirement,” but I’ve found looking for a job to be nearly as time consuming as actually doing a job. Plus, my part of the household chores has increased since my wife has become our household breadwinner.

So I’m still reading at the clip I established before — and thankful to Kitsap Regional Library for the fact that I can feed my habit without taxing my pocketbook. I do read some novels, but at least half the books I read are non-fiction. I find I learn so much from non-fiction books, and I appreciate the depth of the reporting in a non-fiction book after years of being a daily newspaper editor.

I say all this because I’ve recently started reading a new book, Predictably Irrational, by Dan Ariely, a professor of behavioral economics at Massachusetts Institute of Technology. 

You may ask what this has to do with Silverdale and Central Kitsap, and you may have a very good question. I’m not sure yet. But I have found that much of what I read ends up being processed in my mind (more…)