The Book Predictably Irrational - Essay Example

?Running Head: Book Review: Predictably Book Review: Predictably Irrational Submission Book Review: Predictably Irrational The book Predictably Irrational focuses on behavioural economics. Behavioural economics analyzes and explains the real time behaviour of the individuals. The behavioural patterns in real world situations actually vary widely with respect to the predictions made and models developed by classical economics. According to classical economics, people are supposed to show rational behaviour in their own interests. However, this is not always the case. The book discusses that how cognitive psychology influences the ability of an individual to assess the pros and cons of a given economic situation. Behavioural economics being the focus, the book also develops an interdisciplinary approach and topics such as finance, market and management are explored from time to time. The book has been written by Dan Ariely. He is an Israeli – American professor of behavioural economics and psychology. Ariely is currently appointed as a professor in the Duke University, Department of Economics. He is also a Senior Fellow at the Kenan Institute of the same university. (Duke University, 2010) He has a strong grip of psychology and behavioural economics and hence he is better able to analyze people. His background suggests he has intercultural exposure as he has been brought up in Israel and now he works in USA. I think this helps him to develop a deeper insight of the people’s behaviour. Dan Ariely spent his early life in Israel. As a native Israeli, Ariely was engaged in military service when he was eighteen years old. While at service, a magnesium flare explosion left him severely injured. He had 3rd degree burns almost all over his body, and he had to remain in hospital bed for a long time. During this period of his life, Ariely began to reflect on human behaviour. For example, he wondered why the nurses removed his bandages in the way they did. Were they able to behave according to their intention to relieve him? If not, why? He also noted the behaviour of the other patients around him. It is from here Ariely started his research on irrational behaviour of individuals. The book is well structured and planned. It has thirteen chapters. Some chapters have impressive titles like ‘Power of Price (Why a 50-Cent Aspirin Can Do What a Penny Aspirin Can’t?)’ (Ariely, 2009: p. 173) and ‘The Effect of Expectations (Why the Mind Gets What It Expects?)’ (Ariely, 2009: p. 155). These sorts of topics are certainly thought provoking. As the reader looks at the outline of the book, his or her curiosity is increased. The sections in each of Ariely’s chapters tell a story, describe it well and conduct an experiment. Finally, at the end of every chapter, Ariely analyzes the inferences and develops postulates on how the results obtained so far can change a person’s economic behaviour. In the book, the writer has not merely criticized classical economics. He has expressed his concern about behavioural irrationalities too. In the context of the books describing anomalies and irrationalities, there is “a growing fan base within disciplines outside of economics” (McKenzie, 2009: p. 32). Ariely respects the readers from this fan base and he is tireless to continuously explain his economic views so that the readers from non-economics background can also understand the key concepts. The basic idea of the book (as we find in its 2008 ed. too) delivers a strong blow to the very concept that we can operate a system on the basis of the assumptions that people will always act according to the rational calculus. Cognitive inconsistencies are real factors, and they should be analyzed and reflected on by the academia, government, corporations and policy makers. In practice, economic strategies are actually directed to appeal to emotion, not rational calculus (Thomas, 2008). Further, as reviewed by Doctorow (2010), “This is actually the reason why I picked this book; no terms that will make you crazy and over-analyze anything. Dan gives us the simple, day-to-day decisions that shape our lives.” This approach is again based on experiments. In one such experiment involving the students of MIT, Ariely shows us that how we are inclined to compare between available options and offers in the market. By analyzing the results of the experiment, Ariely clarifies that relativity assists us in decision making. However, it is the reason behind envy and jealousy too which finally lead to behavioural irrationalities. I like this analysis by Ariely since it explores the economic implications of our most general instincts. In another experiment, Ariely shows that we prefer to violate a norm in case we are given an opportunity. We prefer to adhere to our personal time schedules even if we have to pay a fine for it. Putting penalties is thus not a helpful way to ensure compliance. I feel this concept is also very critical to our day to day life activities. Further, Ariely writes, “we live in two worlds: one characterized by social exchanges and the other characterized by market exchanges. And we apply different norms to these two kinds of relationships.” (Ariely, 2009: p.76). This statement challenges the concept of social market economy and compels us to think beyond the conventions of classical views. But Ariely does not stop at this point. He exposes the weaknesses of an overly capitalist market economy as well. In the context of the financial recession of 2008, Ariely helps us to understand that we do not have diverse brain mechanisms for making large versus small decisions. If the authorities gave adequate attention on the factor of irrational behaviour and put proper controls in the right time, the significant loss of jobs and homes could possibly have been avoided. “Belief per-severance may provide a partial explanation as to why those who are initially taught the Efficient Market Hypothesis continue to believe it’s an accurate theory when experience and research suggests otherwise.” (Ariely, 2009: p. 239) However, I would have been fully convinced by the presentation and content of this bestseller if I had not read the article ‘Book review: Predictably Irrational – Statistical Modeling, Causal Inference, and Social Science’ by Thomas (2008). Thomas exposed certain weak points of this excellent book. According to her, Ariely’s tendency to explain the concepts in a very simple language has sometimes compromised the serious academic implications entailed in them. Also, Ariely’s comment, “we are pawns in a game whose forces we largely fail to comprehend” (Ariely, 2009: p. 126) cannot be completely supported. The chess metaphor disregards our urge to learn and understand the system in which we live. In my opinion, this approach is certainly pessimistic. Ariely seems to suggest that Predictably Irrational is the first book of its kind. However, that is not completely true. Books like Behavioural Economics and its Implication (published in 2007) and Advances in Behavioural Economics (published in 2004) are already available which focus on similar issues and exhibit considerable analytical approaches. Moreover, at some places in this book, the theoretical base is undermined and too many experiments are presented before the reader. Empirical derivations are always important, but use of too many of them can hamper the pleasure of reading the book. Despite the fact that there are some minor flaws in the presentation and thought of the book, the material and content are excellent. The approach is comprehensive, revealing and interesting. The book has valid suggestions for the policy makers, society and corporations. The writing style uses simple language and is often humorous and conversational. Dan Ariely’s Predictably Irrational is a very significant work. After reading the book, I learned that people do not behave as rationally as they think they do. This is particularly the case with the financial regulators, stock market analysts and other professionals. Now I think differently about the basic economic behaviour of the people around me. I understand that our expenditure patterns and preferences are not always regulated by reasoning. Emotions, whimsies, and limitations in understanding compel us to behave irrationally at least on certain occasions. The benefit of comprehending this behavioural reality from the book is that it helps us to remain alert and aware of the irrationalities in our financial actions. The book not only describes the contradictions between behavioural economics and classical economics, but also develops practical implications to help the government, corporations, policy makers and the general public. This is definitely a new feature the book has. I suggest that the students and managers must read this book so that they can understand the importance of empirical research and grab the main issues of behavioural economics in the light of meaningful experiments conducted by Ariely and his associates. They can also be aware of how certain wrong decisions at the highest level of the financial world led to speculations that caused the financial crisis of 2008. In this way, I think the book adds a new dimension to the field of behavioural economics and consumer psychology. According to Montier (2010), Ariely’s research topics are very different and attractive. Ariely has an excellent ability to innovate, which he has fully used in his book Predictably Irrational. Reference List Ariely, D. (2009). Predictably Irrational. New York: Harper Collins. Doctorow, C. (2010). Predictably Irrational: subjecting the “rational consumer” hypothesis to scientific scrutiny – Boing Boing. Available: http://boingboing.net/2010/03/01/predictably-irration.html. Last accessed 26 April, 2011. Duke University. (2010). Dan Ariely – Duke University. Available: http://duke.edu/~dandan/webfiles/arielycv.pdf. Last accessed 26 April, 2011. McKenzie, R.B. (2009). Predictably Rational? In Search of Defences for Rational Behaviour in Economics. New York: Springer. Montier, J. (2010). Value Investing: Tools and Techniques for Intelligent Investment. Hobokon: John Wiley and Sons. Thomas, E.J.S. (2008). Book review: Predictably Irrational – Statistical Modeling, Causal Inference, and Social Science. Available: http://www.stat.columbia.edu/~cook/movabletype/archives/2008/03/book_review_pre.html. Last accessed 27 April, 2011. Read More