Predictably Irrational

by Dan Ariely                             


As futurists we are always trying to understand better how the human mind works because how we think about the future is determined in part by our historical experiences and in part by how we think.

Dan Ariely is of Professor of Behavioural Economics at MIT. It is often said that economists create economic models and then when they do not turn out to be correct they blame the error on the fact that people did not behave as they should. Most classical economic theory is based on the premise that people are rational actors and that they will make rational decisions when they are given the relevant information. The field of behavioural economics is a relatively new field that tries to look at how people actually behave when given information. There are a number of examples in the book on how people seem to behave irrationally:

Page 26 - Ariely describes an experiment where students participated in an auction for several items including a bottle of wine and a computer keyboard. Before the auction commenced they were asked to write down the last two digits of their social security figure as a dollar figure - eg. 23 became $23. They were then asked whether they would pay that dollar amount for a number of items. They were then required to participate in a real auction where they were asked to write down how much they would bid for each item with the winning bidder required to pay for the item with their own money. In the real auction the actual bids correlated with the last two digits of their social security number. Students with higher numbers bid more than those with lower numbers. Interestingly this "anchoring", which Ariely parallels with goslings imprinting on the first thing they see after hatching, actually stayed with the students over a number of other experiments.

Page 59 - Amazon offered free shipping if people bought over a certain dollar value in books. This increased sales significantly except in France. When Amazon investigated it turned out that instead of free shipping the French Amazon offer was shipping reduced to 1 Franc (about 20 cents). When the offer was changed to "Free" there was a dramatic sales increase. The fee of one franc was a huge reduction in shipping costs but had nowhere near the same effect as a free offer.

Page 89 - When students were asked a series of questions about sexual issues and what their responses would be when sexually aroused, and then actually answered the same questions when actually sexually aroused (how he got this past the ethics committee I have no idea - you need to read the book to see how it was actually done) then the responses were totally different. I am sure that this does not surprise you but it does underpin how our decision making is emotionally and hormonally based as well as rationally based and we sometimes forget that.

Page 181 - People were asked to rate a new "painkiller" called Veladone-Rx which was actually a vitamin C capsule. Those familiar with the placebo effect (placebo comes from the Latin mean "I shall please") will not be surprised to know that there was a reduction in pain from taking the capsule. What also happened was that participants in the trial were given different prices for the drug and those who thought it was less expensive got less pain relief. They repeated the experiment with a drink that purported to "elevate your game" and impart "superior functionality". Participants that paid a higher price for the drink were better at problem solving in subsequent tests.

Page 198 - In another case students were given the opportunity to cheat in a maths test where they were paid for correct answers. They were split into two groups beforehand and one group was asked to recall and write down as many of the ten commandments as possible and the other group was asked to recall ten books they read in high school. The ones that were asked to recall the ten commandments did not cheat while those that were asked to recall 10 books did cheat.

A note of caution here - some of these are laboratory experiments and they do not necessarily translate into real life. Tim Harford, who wrote the Undercover Economist and has recently published the Logic of Life, argues that many seemingly irrational decisions are actually rational. The Logic of Life will be the subject of our book review next month.

I believe that the actual true position lies somewhere in between the two. We are sometimes rational and sometimes irrational (I prefer the term non-rational) because, while we are capable of rational thought, we carry in our heads the evolutionary history of our brain development. Evolution does not have the luxury of a complete re-design at each stage of development, only the ability to build on what has gone before. Therefore our brains still contain the primitive brainstem of our ancient ancestors, and brain evolution has gone from reptiles to mammals to modern humans. Our thought processes and our responses are a combination of all of these components, although we like to believe we are mainly rational thinking creatures when we make decisions. Understanding these issues and where the balance lies is critical to thinking about the future.