Book Review: Predictably Irrational

Title: Predictably Irrational: The Hidden Forces That Shape Our Decisions
Author: Dan Ariely
Publisher: Harper-Collins

Are people rational? Ask this question to almost anyone and he/she will answer (typically indignantly) with a resounding yes. This is also carried over into the field of Economics where it is assumed that people are rational beings who seek to maximize their satisfaction - a Homo Economicus.

Professor Dan Ariely begs to differ. He believes that people are not fundamentally rational. They behave in irrational ways under many situations all the while thinking that they are behaving perfectly rationally. Moreover, people are irrational in a predictable fashion. In his book, Predictably Irrational, Professor Ariely gives many examples - backed by experiments carried out by him and his colleagues - of people behaving in an objectively irrational manner while believing that they were behaving rationally.

The author divides irrational behavior into several categories. For example, there is the problem of relativity. Nope, I am not talking about Einstein's famous discovery. Relativity in this context means that people take decisions in a relative way and compare them to the available alternative. He gives the example of the price of subscription of the magazine The Economist. While browsing, he came across the subscription page for the magazine. Three options were given: Economist.com subscription (1 year) for $59.00; print subscription (1 year) for $125.00; print and web subscription (1 year) for $125.00. What's going on here? Faced with choices like these, the author in an experiment discovered that more people would choose the third option because compared to the second option, it seems like a great deal. When the author undertook another experiment in which the third option had been removed, he discovered that most people chose the first option. The presence of the third option prompted more people to go for the more expensive subscription because relatively speaking it seemed a great deal as compared to the second option.

Taking another example: the laws of supply and demand are a staple of Econom

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ics. Every student studies these laws typically illustrated by nice charts like the one shown. These show demand decreasing as price increase and the reverse happening with supply. It is assumed that where the two curves intersect is where the price point will be set. But as the author discovered, people are not so rational. It seems that exposure to the initial price point for a product will determine what people will subsequently pay. If they are exposed to a high price, they will be more willing to pay higher prices than if they are initially exposed to a low price.

There are a number of other examples given where people think they are behaving rationally, but it turns out that their behavior is being governed by irrational factors of which they are not even aware of.

This book is an eye opener into human behavior. It should be considered as a must-read for any manager. It exposes the irrational in people and shows that they are not irrational in a random manner; instead the irrationality is very predictable. I highly recommend this book.