Book Review: Predictably Irrational

Predictably Irrational by Dan Ariely does a great job of demolishing the idea that people make decisions in a rational manner. Ariely, a behavioral economist at Duke, describes dozens of experiments that show how we procrastinate, when we cheat, how we interpret prices (definitely a neuromarketing hot button), and much more. Ariely’s work is fascinating at least in part because of the simplicity of most of his experiments. Instead of using multi-million dollar fMRI machines, Ariely’s work tends to involve a simple concept, a few props, and willing subjects (always plentiful on college campuses). The simplicity is deceptive, though, because the results demonstrate the complexity of the brain’s decision-making process.

I’m going to discuss some of the pricing topics Ariely covers in subsequent posts, but here’s an example of how a seemingly trivial experiment can yield interesting, and perhaps unexpected results. Ariely wanted to better understand how people like the Enron executives responsible for fleecing millions from shareholders and retirees could do that, but would likely be unwilling to steal ten dollars from an old lady’s purse. He theorized that it’s easier to steal when the object is one step removed from cash, noting that you might steal a pencil from your work place but probably not the money to buy a pencil. So, he set out with six-packs of Coke and plates containing six one-dollar bills. He scurried through the dorms at MIT looking for communal refrigerators, and placed either Cokes or a money plate in each fridge.

What do you think he found 72 hours later? Surely, placing money in an area accessible by many people is crazy… it would be gone in minutes, right? In fact, the Cokes started disppearing within hours and were completely gone by the third day. The money, meanwhile, was untouched in every case, and Ariely finally removed the plates and recovered it all.

To further explore the idea that separating cheating or theft from actual money makes it easer, Ariel conducted another experiment that paid subjects for math problems they solved correctly. The subjects were divided into three groups – one carefully controlled so that cheating was impossible, and two groups where the answer sheets were destroyed and the subjects self-reported the number they had solved. Of the two cheating-enabled groups, one was paid directly while the other collected tokens which could be redeemed for cash on the other side of the room.

Unsurprisingly, perhaps, those that could cheat to get higher pay did so. While the controlled group solved an average of 3.5 problems, the first group of potential cheaters (paid in cash) solved 6.2 problems. Amazingly, the token-paid group of cheating-enabled subjects solved an average of 9.4 problems. The seemingly insignificant separation of the cash payment by the token exchange more than doubled the rate of cheating (and, the score indicates, made cheating almost universal).

Ariely seems like he’d be an ineresting guy to share a beer with. In fact, you might find him serving you a beer – in one of his experiments, he and a few cohorts pretended to be waiters in a popular bar to see how beer preferences were affected by the decisions of others at the table.

Predicatably Irrational is written in an informal and easy-going style that, combined with Ariely’s straightforward experimental techniques, makes the book an enjoyable read for anyone interested in human behavior. Those interested in neuromarketing and neuroeconomics will particularly appreciate Ariely’s research on pricing: how our brains make (apparently) irrational choices when confronted with products at different prices, how “free” is exceptionally potent, and more. I highly recommend the book, and I’ll discuss more of Ariely’s work in the coming days. For rational commentary on the irrational, check out Ariely’s own blog.

The book has generated a lot of coverage in the blogosphere. Here are just a few recent comments:

FT’s Books: “…each story remains separate and strangely non-enticing. Try Freakonomics or The Tipping Point for more excitement.”
Daniel Wahl: “Speak for yourself, brother.” (Mr. Wahl believes himself to be rational.)
Strategic Profits: “It?s simply a must-read for every marketer and business owner.”
Jenny Doh: “It’s a fascinating book.”
Funeral Words: “Chapter 1 alone, which shows the impact of packaging in the magazine business, is worth the price of the book.”
Daily Speculations: “a great read… has provided some deep insights into personal trading and many common everyday situations.”