By Eva Ciabattoni
It’s about time someone challenged conventional economic theory and exposed some of its central tenets as the myths they are.
In “Predictably Irrational: The Hidden Forces That Shape Our Decisions” (HarperCollins, 2008), Dan Ariely, professor of behavioral economics at the Massachusetts Institute of Technology, presents a series of fascinating experiments that stand economist Adam Smith’s “rational actor” on his head. The myth of the rational actor holds that human beings compute the value of all the options available to them, then choose the best one. Further, if people make a mistake, market forces will offer the correction needed to force them back to rationality.
Behavioral economists like Ariely study how human beings actually behave and attempt to assess the size of the gap between actual and rational behavior.
Take beer, for example. Ariely and some colleagues offered MIT students free beer samples at the Muddy Charles pub, one a standard beer (either Budweiser or Sam Adams), the other the same beer doctored with a few drops of balsamic vinegar. Over and over, if students were not told about the vinegared beer, they chose it as their favorite. If they were told about the added vinegar beforehand, they chose the undoctored beer as their favorite.
The experiment demonstrated that expectations influence experience. Through further refinements, Ariely and colleagues showed that expectations actually affect brain activity. In other words, at a neural level, the effect of expectations is not imagined but physiological and very real.
In another experiment with beer, Ariely and a colleague offered students visiting the Carolina Brewery at Duke University a choice of four different free beers if they agreed to fill out a brief questionnaire afterward. When students ordered out loud within full hearing distance of other members of the group, they ordered more variety and, with the exception of the first person ordering (who ordered unencumbered by the choices made by others in the group), they tended to be less satisfied with their choices. When students ordered privately, they ordered the beer that sounded best from the description and tended to be more satisfied with their choices. Ariely concludes that when ordering publicly, factors such as demonstrating individuality play a role absent when ordering privately.
The most interesting experiment was the one where participants could earn payouts by clicking on three differently colored doors. Usually, they quickly identified the door with the biggest payout and clicked on that, ignoring the doors with lesser payouts. But when Ariely and his colleagues changed the experiment so that doors that were not selected gradually disappeared, testers switched their clicking patterns.
The “rational actor” model proposes that no matter what the context, humans will maximize their payout by clicking on the door that pays best. This is not what happened. No matter how the experiment was modified – whether the doors disappeared for good or whether they could be brought back with a click – people focused more on keeping all possible options open than on coolly (and rationally) maximizing their payout.
Ariely concludes that we have an irrational compulsion to keep doors open. We don’t drop dead-end relationships, we join committees that waste our time, we watch too much TV and play too much golf, our children are in too many activities. Meanwhile, the doors that are really important to us – our children’s childhoods, our family life – are closing, albeit very slowly.
Whether examining how we react to “free” offers, the lengths to which we go to avoid loss and the dishonesty we engage in when we are one step removed from cash, Ariely turns many of our favorite beliefs inside out. He concludes his book with examples of how policies could be designed that take into account our predictable irrationality instead of being based on unsupported and disproven myths.
“Predictably Irrational” is available at the Los Altos Library.
