Traditional vs Behavioral Economics - Predictably Irrational

Traditional economics says that everyone will work towards whatever their best interest is. The invisible hand will take care of the rest. Take a look around and we see that this doesn't quite work. Laissez Fair doesn't work. Predictably Irrational examines an area through experimentation that traditional economics ignores: The times where we don't act logically.

How much are we as humans willing to steal and cheat? When we are dealing with actual dollars, not that much. When we are one step away from money, such as with tokens that can be changed into dollars or a can of coke, we cheat much more. Why? A coke is roughly $1. A token that can be exchanged into $1 is still a $1. We don't mind stealing these items. But stealing a $1 from someone's bank account: for heaven's sake no. Does an expensive pill make us feel better than a cheap pill even though they are the same pill? For some reason, when a pill is $2.50 per pill, more people felt better than when the same pill was only ten cents.

Predictably Irrational examines such economic behaviors and delves even further into weird human behavior. Perhaps my favorite experiment: Asian Women have multiple stereotypes but let's break down each word. Asians are stereotyped to be good in math. Women are stereotyped to be bad in math. What happens if you "prime" real asian women with some stereotypes? Priming refers to filling someone's head with thoughts prior to doing some task. For example, a prime for being old would be the word "ancient". The experiment consists of two groups of asian women: one primed with the asian stereotype and the other primed with the women stereotyped. Lo and behold, those primed to be "asian" did better on a math test than those primed to be "women".

Nifty eh? That's what makes this Predictably Irrational a surprising read. Every chapter focuses on one unreasonable behavior like trust, theft, or priming. Dan Ariely carefully explains every experiment, what it means, and how it is totally irrational. It all culminates into a credible explanation for the need of behavioral economics as a way to compose a better picture about economics and how people make decisions. The only problem is, even though the experiments are interesting and the propositions/conclusions drawn from each experiment are clearly explained, it may be a bit too dumbed down. The book takes extreme care to make sure you understand the experiments and why they are there at the expense of readability. The book has a lot of repetition that gets annoying by chapter 5. Content wise, the book is astounding; just a bit too much spoon feeding.

Comments

[TruePath]

Interesting post. I don't disagree with anything per see but I just wanted to point out that one has to be very very careful interpreting those stereotype threat type studies. It's very easy to offer a nice little narritive explaining these results but when looked at in the larger picture what these studies really say ends up being very unclear. Moreover, the stereotype threat type explanation is just far too neat a fit for those who believe in subtle social effects not to be a little suspicious.

I mean just suppose the effects had gone the other way around with respect to asians and math. Couldn't one equally well have said the anxiety about living up to the stereotype harmed their performance. Or with respect to women and math isn't it a priori an equally good explanation that men felt more pressure to live up to a 'male' level of performance and that's what caused the better performance? These stereotype explanations are just too flexible to really allow one to conclude anything.

Indeed, a pet theory of mine about these stereotype threat results (in addition to some publication bias) is that the test subjects try to suss out the purpose of the study based on the priming questions. Unsurprisingly women who think they are part of a study gathering evidence about male superiority in spacial rotation or white men who think they are helping gather evidence about Asian math superiority may be less enthusiastic about the activity than those who do not.

We may be predictably irrational with respect to this kind of priming but more research is necessary to be clear about the effects. Of course it goes without saying that one needs to be even more careful in generalizing these stereotype threat results to things beyond a single test.