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Book review: Predictably Irrational

I recently read Dan Ariely’s book Predictably Irrational and wrote down my comments as I read. After the jump, you can read these thoughts.

Behavioral economics seems to be the hot thing to write about in layman’s terms, these days. It’s easy to see why: the experiments tend to be about relate-able topics, and the results can be understood by anyone (once the data has been organized and explained). Ariely explains each experiment in much detail, peppered with personal anecdotes, and it’s quite entertaining to read.

Before I go further, a disclaimer: I took a behavioral economics class about a year ago, and I have my personal annoyances with the field. First, I prefer looking at statistics gathered from a cross-section of a particular population, rather than working with data gathered from experiments usually done on a sample of college-aged volunteers. (I also took Andrew’s sample surveys course, so maybe that’s what did it…) Second, I have trouble identifying which “effect” is which: why is the result of one experiment particularly due to people’s “loss aversion” as opposed to their “anchoring”, etc. I find that the explanations often seem glib to me and I’m not sure where one “effect” leaves off and another begins. That said, I did enjoy reading the book, though I had heard much of the content before.

The introduction, where Ariely relates his story of being burned with a magnesium flare, is not at all what I expected to start the book. But it’s interesting to hear how someone was drawn into their field, and it started off the book on a very non-dry note, which I appreciated.

The first chapter starts with a discussion on subscription choices, and I found that to belabor the point too much. Perhaps that works well for the intended audience (i.e. those who are not necessarily familiar with behavioral economics), but it just seemed repetitive. I feel like a lot of these sorts of books take a chapter or so to hit their proverbial strides. The chapter moves on to a discussion of how we use convenient comparisons to view things relatively; for example, we see our salaries as compared to our friends or family members’ salaries and judge from there if we like them or not. I remember this being discussed in Richard Layard’s book Happiness (in much more detail) so it again felt repetitive – though I remember it being fascinating when I first read about that, so perhaps my judgement is unfair. The chapter closes with a discussion about James Hong, who started Hotornot.com, which is an excellent choice of people to mention: very popular web sites and their creators are hot topics, and tying that in to a subject like this makes the field more interesting by juxtaposition, in my opinion. It also reminded me of my friends who started out as investment bankers right out of college and now hate their jobs, but can’t seem to leave because they’d have to give up the high salary. The idea of downsizing their salaries is just too painful.

Chapter two discusses some experiments, to which I had my inevitable “but your participants are college students” (and in one case, investment bankers). That bothers me. He goes on to talk about anchoring, which is a very interesting topic. Discussing how people across the US suddenly felt perfectly fine paying $4 for a cup of coffee is fascinating. I see the anchoring effect all the time when people move to New York City. It’s very easy to tell if someone moved from another big city or not just by seeing the reactions to prices. When my parents come to visit, I’m afraid they might faint when we go into restaurants. But when my sister flies in from London, she’s on a shopping spree. And to me, this is just what groceries, rent, and dinner out costs.

Ariely shows how anchors can be adjusted. It takes awhile, but people can shift their focus to new anchors. This made me think that from a marketing perspective, it is hugely beneficial to blame a higher charge on some other price increase, have people adjust to your price increase, and then disconnect from the other price. For example, hybrid cars are latching on to the high gas prices in a theory of “you’ll save so much on gas [in X years] that it’s worth the higher price of the car”. Eventually, car manufacturers will need to disconnect from gas prices, because in the end, those will fluctuate endlessly so this is a temporary fix. But a very useful one for the time being. This also reminds me of finding clothes on sale. When I buy a dress marked down from $149.99 to $79.99, I feel like I’m getting the deal of the century, like I’m beating the store at their own game. But I’m still spending $79.99. Is it still as satisfying if the dress was originally $89.99? Likely not. Would I have bought the dress if I found it in the store at an original, non-sale price of $79.99? Again, probably not.

Chapter three discusses how excited people get when something is free, which frankly seems like it’s not all that irrational. After all, free means that you put in nothing but you get something out of it, so it seems tempting to me! Ariely chronicles Amazon’s free shipping offer and how it caused people to order more stuff just to hit the amount of money they needed to spend to get the shipping costs eliminated. They initially didn’t do this is France – they just reduced shipping costs – and costs were quite different. Interestingly, I looked this up and it turns out that after they indeed changed the policy to have free shipping in France, they were dragged to court as this constitutes an illegal subsidy for a bookseller in that country. More interestingly, they opted to pay the 1,000 euros per pay fine instead of reinstating the shipping fee: they knew just how much it would hurt to take away the “free” after it had already existed…

It took me awhile to realize that the end of each chapter is peppered with potential applicants of the theories laid out at the beginning. Perhaps the structure isn’t terribly clear or perhaps this is just because I often slip into reading fast rather than carefully. Anyway, chapter four has a few good points about how to treat employees. There is a distinct difference between giving people more money and giving people more sick days, for example. This is not just a financial difference, but a difference in how the person feels about the company. This happens to be a subject about which I can babble on for hours. I worked at a company which was run like a dictatorship, with terrible benefits and an awful work environment. They hired people right out of college – when choices of employment are limited and so is your frame of reference – and paid a little more than other companies might for fresh-faced college grads. After the long hours and the constant verbal abuse, I realized that I would gladly trade $10,000/yr off my salary to be treated more nicely every day.

Similarly, I worked at two different schools, one which treated its employees horribly and one which treated its employees wonderfully. However, explaining the exact differences is still not easy, because they are little things, which Ariely calls “social norms”. For example, the first school didn’t have coffee or even water for us (arguing there was no money for that), whereas the second school offered a water cooler and full coffee pot every day without commentary. The first school rarely had toilet paper; the second school worked hard to make sure the bathrooms were clean and well-stocked. I am still convinced that these environmental differences had a massive impact on student achievement; indeed, students in the second school performed much better behaviorally, on classwork, and on standardized tests.

Chapter seven made me question a few points. Ariely talks about Duke basketball tickets, and how people who own them ask a ridiculously high price to sell them whereas those who would like to buy them aren’t even in the correct general range with their proposal prices. I feel like this neglects to take into account that these are students, with student budgets. Sure, sleeping outside for a week is an adventure, and it’s free, other than time. Students, arguably, have time. Students, again arguably, do not have tons of money. So when it’s translated into $2,400 per ticket, it seems natural to me that they would refuse to pay that. However, this seems less because of the ownership argument to me, and more that students don’t have $2,400 lying around for basketball tickets! Additionally, I would imagine that there is a “cooling down” after the camping is over and you’re back in your dorm again – suddenly, you’re not nearly as wrapped up in the excitement of what those tickets might (or might not) mean to you. On a side note, this made me think of those eBay ads that say “it’s better when you win it”…

Chapter eight describes a fascinating experiment – albeit still a simulated experiment. When options are kept open, people are pretty systematic, but he shows that when options slowly diminish, people become erratic and panicky. Of course, this is used in “limited stock available!” and “only a few items left”. I can see how the urgency weighs on people, but the extent to which people become totally irrational (if you will) when simulated doors start to shrink is much higher than I would have predicted. It’s wanting what you – almost – can’t have.

In chapter nine, Ariely talks about an experiment with how people are influenced by the packaging of coffee additives. All I could think about throughout this chapter was, how would I react? Would I have thought for myself? Or would I have fallen prey to the same things their participants did? At the end of the chapter, Ariely mentions how people see things through the lens of their experiences, essentially; for example, wars are seen through the lens of what side you’re on. This seems relevant to our red/blue polarization project, to me: how Democrats view other Democrats versus how they view Republicans, how Republicans view members of both parties, and then how members of each party interpret political news; all these things must vary in a similar manner.

All in all, interesting to read (often because of relate-able tangential stories within the chapters) and appropriate for a lay audience, which I’m assuming was the point. I have my own biases, as I described earlier, and I found some of this quite repetitive – both within the book and because of other books I’ve read recently – but I would imagine that this would go over well with someone just interested in hearing some basics. I do think that this suffers from the same thing that a lot of other books about academic-subjects-for-lay-audiences do: paring down theories to being very basic can undermine the relative complexity of some of the theories. I would be more interested to learn more about where each of the discussed “effects” overlap and how they are currently being used in industry.

One Comment

  1. Andrew says:

    Juli,

    Thanks for writing the review. At one point you mention loss aversion, and I'd like to point out that this is a concept that's often used (not necessarily by Ariely; I haven't read his book yet) sloppily as a catchall for various cognitive biases); see here.