The Logic of Life

by Tim Harford

                                
 

One of the main things that futurists must do is to understand the underlying drivers that determine human behaviour. If we only look at surface trends and behaviours then our ability to understand what might happen is significantly diminished. Tim Harford describes a number of situations and experiments that look at our decision making and he quite correctly cautions that we should be careful with experimental results and how they translate into real life.

For example on page 16 he describes an experiment with what economists call “the endowment effect” – that we irrationally value things more highly because we own them. This effect goes beyond just things we have a deep seated emotional attachment to. Harford also describes extended experiments in the real world where experience in buying and selling moderates the effect – something that did not show up in lab experiments.

On page 18 he describes another experiment that shows that rats can respond rationally and make economic decisions. They did this by setting an income – limiting the number of times that the rats could press two levers to get a drink - and then setting price by varying how much liquid came from each press of a lever. One lever dispensed root beer which the rats preferred on taste and one dispensed tonic water, but the tonic water supplied much more volume. One might expect that when the “price” of tonic water went up (there was less supplied per lever push) but was still cheaper than the root beer, that the rats would drink more root beer and less tonic water. However the opposite happened – the rats made a rational decision to drink more tonic water because they needed a certain volume of fluid to stay alive and they altered their behaviour to get what they needed from their “income”. Of course rats don’t have credit cards.

One excellent piece of work is in Chapter 6 (p130 onwards) where Harford demonstrates that rational racism (racism that makes rational economic sense) is much more dangerous and pervasive than non-rational racism. Finding the underlying causes and drivers for these sorts of behaviours give us a much better chance of creating robust solutions and also justifying those solutions to the community.

In Chapter 7 Harford suggests that while wages are higher in the big cities the cost of living is proportionally higher and therefore people are disadvantaged financially by living in them so there must be other benefits to staying. This seems fairly straightforward but he then goes on to purport that this benefit gap is filled by the ability to innovate because of the myriad of opportunities to meet and interact with interesting people. While I think this is true to some extent it ignores the emotional attachments of family, upbringing, etc.

I would take issue with Tim Harford on his view that most things in our society can be explained by a rational analysis or that they are a result of a group of rational decisions, even subconsciously. It is clear to me that our decisions and how we make them are partly rational and partly emotional because of the way that our brains have evolved. It is also clear that we cannot always make rational decisions even when we try to. A recent blog on the MIT Technology Review site posed the following question: if your family has two cars and one does 12 miles to the gallon (mpg) and one does 34 mpg and you drive both 10,000 miles a year do you save more petrol by replacing the 12 mpg car with a 14 mpg car or replacing the 34mpg car with a 50 mpg car. Instinctively it looks like the 50mpg car is a better result but actually the opposite is the correct answer (do the maths if you don’t believe me). If we can’t make those simple decisions in a rational way then how can we expect that more complicated and complex decisions are all done in a rational way?

Reading this book and the work that has been done is greatly beneficial for understanding rational analysis and drivers. However we must be careful not to confuse causation with correlation and remember that we are in part emotional decision makers and only partly successful rational decision makers. Within that framework this book is an excellent reference for anybody who wants to think about the future. Read together with Predictably Irrational by Dan Ariely (see our last book review) they make an excellent comparison between the two approaches.