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Sunday, October 11, 2009

Book Review: Predictably Irrational

"Predictably Irrational" is what I classify as an "idea book." It's a good read by all means. The central theme of the book by Dan Ariely is twofold; firstly, human beings are not rational---they don't make the most logical choice---and secondly, the dimensions of this irrationality are predictable. Most of the content of the book surrounds "behavioral economics." Dan basis his claims around several "experimental studies" carried out on undergrad students in a few universities of the US (and some other people as well); however, I am not particularly impressed by the details---Dan doesn't discuss the "sample size" of his experiments.

What is genuinely interesting are the areas Dan picks up for study (such as "to what extent people are dishonest") and the reasoning he puts behind his claims---the experiments are a mere reinforcement of his believes.

The book is divided into the following chapters:

  1. The Truth about Relativity: Dan argues that to make sound judgments, human beings are bound to make relative comparisons; marketers can exploit this fact by providing decoy choices. There is an excellent example of "web based" and "print" subscriptions of The Economist. The conclusion drawn is that one shouldn't fall pray to unconscious and unnecessary comparisons specially related to his social status or earnings.

  2. The Fallacy of Supply and Demand: Here, Dan states that the principles of "demand" and "supply" (on which conventional economics is based) are not 100% applicable in practice. Human beings "anchor" to their first impressions, specially for the price of things. It's this first impression which matters more than the balance of demand and supply. Here, I believe, that things are oversimplified by not looking at the dimension introduced by "competition."

  3. The Cost of Zero Cost: The author conjectures that we are afraid of making unsound decisions, and thus the word "FREE!" is so exciting to us. In actual, there is always some price we are paying for it; be it our time or energy.

  4. The Cost of Social Norms: This is perhaps the best topic. Dan states that we live in two worlds---one derived by "market values" and the other one derived by "social values." Tasks, which we think, we are carrying out for market values make us demand more compensation. This includes things like our profession. On the other hand, we get offended if somebody wants to know the compensation required for tasks carried out in the social values context (such as helping a friend pack his stuff). Dan also concludes that the modern office environment mixes these two up to get the best out of human resources but in social lives if we introduce market values, our social lives will be doomed.

  5. The Influence of Arousal: This part claims that the decisions we make in "cold" state are different from the decisions we make in the "hot" state; it's like an alternate-ego being activated when we are aroused. The concepts, although primarily related to sex, are applicable to wide range of issues such as rash driving by teenagers, being violent when annoyed, etc.

  6. The Problem of Procrastination and Self-Control: On the basis of assignments handed over to undergrad students, Dan shows that without an arbitrary deadline, almost all students procrastinate, and thus, mar there grades. However, with self-imposed deadlines (that is, deadlines chosen by students themselves), results are much better; still, the best results were shown when an external deadline is given to the students. The problem of procrastination can be avoided by building systems where each one of us can keep check on himself, and by making things simpler to remember.

  7. The High Price of Ownership: A person selling something values his stuff more than the person buying the same; this is true for "used-stuff" for sale, and mainly so when the seller is not selling out of annoyance, rather because he "has" to sell that something. But a person trying to buy something could also "partially" own (in his mind) the thing he intends to buy. Such kind of "partial ownership before something is bought" is what marketers strive for. One should be wary of his feelings of ownership when he is about to buy something.

  8. Keeping Doors Open: The idea of life is to increase your chances of survival. Many people try to keep their options open, and while doing so, spend too much time in maintaining the balance. One should remember that there is a "cost" of keeping your options open, be it a relationship or a career.

  9. The Effect of Expectations: Preconceived notions and expectations set by marketing do affect the "real experience" of the end users. If you already believe that something would taste good, it usually tastes better than if you didn't have those expectations.

  10. The Power of Price: It's a strange chapter in which Dan talks about placebo treatments; he says, that when a treatment has a high price attached to it, the patient creates his expectations and as a result feels "better" just because of the high price.

  11. The Context of Our Character, Part I: The last two chapters treat "dishonesty." Having an oath undertaken doesn't necessarily mean that nobody would violate the oath, but just reviewing such an oath before a chance of dishonesty, unconsciously makes a lot of people honest.

  12. The Context of Our Character, Part II: In continuation to the last chapter, Dan believes that more and more people would be dishonest when "indirect ways" of cheating are available. For example, there are more chances of "using a can of coke" without knowing who owns it than picking up some money. Such indirect losses to corporations in the US are much hire than the aggregates of robberies.

  13. Beers and Free Lunches: I believe you can safely ignore this chapter. :)

I believe that the book could have been made better in the following ways:

  1. The size of the book (around 300 pages) could be reduced by eliminating the last chapter as well as by merging the chapter on "The Effect of Price" with "The Cost of Zero."

  2. By reading the details of the experiments, I sometimes felt cheated: it feels as if Dan is bent on trying to prove his ideas by ignoring various factors.

Here is an interesting negative review of the book.

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