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Predictably Irrational: The Hidden Forces That Shape Our Decisions by Dan Ariely
Predictably Irrational: The Hidden Forces That Shape Our Decisions

Jaffer, March 10, 2008

I enjoyed reading the book but now that I think about the examples and experiments discussed, I find most of them flawed. So, I wondered why I did not catch the flaws when reading the book. It was I think because Dan (the author) either cleverly manipulates the readers or is a natural at it and does not realize he is manipulating them. I'll reserve personal judgement, whether his style is purposely or inadvertently manipulative. Perhaps publishing the book is yet another experiment that he is conducting to see how people respond to the examples and experiments he has reported in the book.

Without further ado, let me begin.

His very first discussion is about his personal experience with a tragic severe skin burn, which led him to question how people perceive situations and how they rationalize or explain their own behavior and that of others. In writing about his own experience he drew my sympathy and admiration for overcoming his tragedy and delivering interesting research to the mass audience. Very clever, Dan! You got me.

Throughout the book he mentions MIT, Harvard, Berkeley as the places where he conducts research and that he had an offer to be at Stanford - he cleverly drops names of prestigious institutions, all in an attempt to create an impression that his work is rigorous. Sub-consciously I guess I gave him a pass while reading the book, but now I feel I was duped.

Here are some flaws with the examples and/or experiments he discusses:

1) The experiment where some students who won football tickets in a lottery, offered to sell their ticket, and the students, who did not win a ticket, offered to buy one from the scalpers (brokers) is flawed and shows that Dan does not understand basic economics. He finds it irrational that those who won the tickets changed their perspective and wanted on average $2400 to sell their tickets, whereas those who did not win a ticket in the lottery were willing to offer only $170 to buy a ticket to the game.

I think the reason why the ticket winners wanted $2,400, on average, for their tickets was probably because that was the "going" price in the secondary (scalpers) market, just before the game. And, the reason the students who did not win the tickets in the lottery were willing to pay at most $170 or $175 (Dan reports two different numbers) is because that's all they could afford. Students don't have the wealth to offer the "going" price in the broad market comprising mostly of alums who can afford $2400, given they are in town and want to be at the game. It is not irrational for students (or people in general) to have different reservation prices when they are selling an item versus when they are bidding to buy one.

The amount people bid for an item depends on their BUDGET (endowment) but what they ask for an item, in order to sell it, is not constrained by their budget but mostly depends on the "going" price that they can get from the highest bidders.

2) Dan makes a big deal about people taking items which are for free but unwilling to pay 1 cent for the same items if that were the price posted by the seller. This behavior, he claims, is irrational. The obvious reason that people are attracted to free items is simple: they don't have to look for change (1 cent or 2 cents) and spend the time to transact. Dan ignores (does not recognize) simple factors like transaction costs to explain much of the behavior of individuals. There's no deep psychological reason for choosing free items as Dan seems to suggest.

3) He suggests that perhaps our ethical compass is coarse - i.e., for most people the compass does not respond to petty theft they commit but it does respond to large scale theft they might contemplate. He gives the example that many people don't (and wouldn't) steal a carton of red pencils from work but they do (or would) steal one pencil from the stationery room at the office. He does not recognize that most people don't (and wouldn't) steal a pencil from a store but they do (or would) take a pencil from the workplace. Clearly the issue is not about the number of pencils but rather the context where the pencil is to be had.

I believe we take a pencil (or two) from work, for our personal use, without paying for it, in cash, but we don't take from a shop because we have a "working" and "cordial" relationship with our employer -- i.e., there's an implicit understanding that we can take certain items from the workplace. Also, if we wish, we can compensate the employer by working a little longer. In taking small-price items from the workplace avoids the transaction cost and the hassle of purchasing a 10 cent pencil at a store or compensating our employer 10 cents in cash for the cost of the pencil.

In my opinion, the social welfare is greater by taking the pencil from the employer instead of forcing a transaction cost on the employer and on oneself and paying the 10 cents. Even leaving 10 cents with the secretary entails a significant transaction cost for the firm. Therefore, it is better to just take the pencil.

Moreover, the reason people don't steal an entire box of pencils is because they don't need so many pencils -- they need only one.

Since most people would take a pencil from work even when the secretary or the boss is looking, means there is no ethical ambiguity to the act. I don't think Dan has seriously thought about such issues and his research is what a high school student at a mediocre school would do.

4) The experiment about leaving coke in a fridge in a common area versus leaving $$ bills in a common area is a flawed comparison. Dan reports that people are able to rationalize stealing coke but not stealing money (or even a single $ bill from a stack of bills.) He does not recognize the possibility that many people don't mind sharing a 6 pack of coke or beer with others in a dorm suite (when they leave it in a fridge) whereas the money left in a common area is not for sharing -- we all understand that -- but is there most likely because someone accidentally left it there.

If the experiment of leaving coke and money is conducted near a fridge, as reported in the book, then of course people will take the coke, and not the money, because they probably came to the fridge for a drink. But if the coke and money were left at a different place, perhaps where people are required to pay a fare or a fee, like paying for parking at a meter, and if no one is watching, then some people would probably pick a $ from the stack of bills to pay the parking fee, instead of picking a can of coke to drink.

The reason why people take a coke from a common area in the dorm suite, but not the money is because coke quenches their thirst immediately for which there may not exist another substitute whereas taking a $ would not satisfy one's immediate thirst. Most people have some money in their pocket and taking a few bucks from a stack would not increase their utility as much as the cold can of coke would for a thirsty person, who does not carry cold coke around, as one does cash.

5) His example of unethical behavior of returning clothes, after using them, is also flawed.

As long as merchants know that customers could be using clothes (and books and other items) and then returning them, the contract between the sellers and the buyers, which includes a return policy, is an arrangement that is acceptable and even preferred by the merchants. Indeed, return policy is set by merchants when they have the alternative to insist that all sales are final - as some merchants do. The returns policy has evolved over time, with cool business-minded thinking! There's nothing unethical about returning clothes or books, even if used, because the merchant allows it.

It seems there's an optimum for the sellers to have a return policy arrangement than without one. Some items in stores are marked as "final sale." Some stores specialize in selling items at a discount and they do not allow returns. A non-returns policy might lead to lower sales and profits and that's possibly why firms allow returns, even for expensive clothes.

Bookstores, for example, encourage patrons to browse the books and magazines, while eating and drinking in their coffee lounges. The lounge environment soils their books, damages the covers, and causes bookstores to hire additional workers to pick up the books and reshelf them. Yet, they choose to offer such environments. From Dan's perspective, those who buy itemsn, use them and then return the items, are cheating the merchants and violating a social ethic. But, clearly, the bookstore personnel can observe the cutomers who read but don't pay for the items and yet they don't complain or post rules in the lounge area reminding patrons to pay for the items they take to the coffee lounge.

Moreover, merchants can institute a policy whereby returned items are charged, say, a 15% re-stocking fee - i.e., the customer would not receive the full refund - and yet most merchants choose not to institute this policy. Some tried doing so but then decided to reverse it. Circuit City comes to mind.

6) The chapter on students procrastinating by submitting their papers at the end of the term, which ends up earning them poorer grades, is also flawed because Dan does not control for the mindset and biases of the graders.

For example, graders may grade harshly when all the papers by several students are submitted at the end of the term, which have to be graded quickly and the course grades submitted to the department secretaries, at a time when the graders (usually grad students) are exhausted. However, when the papers are submitted periodically, over the term, graders have more time and not as many papers to grade in a short period of time and so they could be more lenient and willing to award higher grades. Also when papers are handed earlier during the semester, students have learned less in the course and are not expected to know as much. Thus, graders could be lenient in grading papers submitted periodically, during the semester, versus when all are submitted at the end of the term.

I could go on pointing flaws, but I think Dan does a disservice to MIT and to customers who buy his book because his experiments and explanations are not well thought out.

Oh well, if you wish to read the book then by all means do so. And if you don't like it, there would be nothing unethical in returning the book, in my opinion, and then writing a review.
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