Friday, April 25, 2008

On the coffee table – ‘Predictably Irrational’

Earlier this week, I blogged about how behavioral economics is the best refutation of libertarianism (I originally typed “liberalism,” sorry!).

In a nutshell, as opposed to the neoclassicism of Milton Friedman, Ludwig von Mises, Alan Greenspan, et al. (hell, Adam Smith and his deist philosophical basis for that matter), behavioral economics, which owes a lot to modern neuroscience, cognitive philosophy and evolutionary psychology, says we are often irrational, even hugely irrational, in our economic decision-making.

Behavioral economics also differs from neoclassicism in another way. Neoclassicist economics has been like Aristotelian “science” as practiced in the Middle Ages – rote dogma, without experimentation.

Behavioral economics, on the other hand, has been a leader in empirical, experimental research. Oh, sure, neoclassicism has started to do more research, but it hasn’t gotten into neuroscience tools like the use of fMRIs, etc.

What’s this all mean? Other than Alan Greenspan was bullshitting about the rationality of the markets all these years, of course.

Well, Dan Ariely spells it out in “Predictably Irrational,” an excellent intro to the field.

Common-sense psychology would tell us these are “no duh” statements, but two of Homo sapiens’ highest irrationality pushers? Money and sex.

Whether it’s abstinence pledges, the use of condoms, kinky sex or whatever, what people say they will and won’t do in moments of calmness changes a lot when they get hot and bothered. Obviously, this has fallout for abstinence-only teen sexuality programs.

Money? First way we are irrational is whenever the word “free” gets attached to something. Doesn’t matter how little we need something. Doesn’t even matter how little we LIKE something. Ariely shows that if it’s free, we’re taking more of it.

The second way money makes us irrational is much more serious – financial cheating. Ariely thinks that the Enrons and other situations of our world have increased precisely because more complex investment vehicles and other things separate us more from direct contact with money, thereby making it easier to rationalize cheating. His experiments have demonstrated this with things like test cheating. People will cheat more if their scores are based on getting a token, then exchanging that for money, rather than being directly paid in money. In fact, they’ll cheat at least twice as much.

Besides money and sex, social issues can cause irrational behavior. Here in individualistic America, people in groups/at tables will often order food and drinks they don’t like just not to be imitative. In some traditional societies elsewhere in the world, just the opposite is true.

And, that gets back to financial cheating. Ariely says other things, like ethics codes, more contract signatures, etc., can “prime” ethical behavior in people’s heads, even if they are several steps removed from actual cash.

This is a light 250-page read and a five-star book.