Tuesday, February 19, 2008

"A taxonomy of financial folly"

From the perspective of neoclassical economics, self-punishing decisions are difficult to explain. Rational calculators are supposed to consider their options, then pick the one that maximizes the benefit to them. Yet actual economic life, as opposed to the theoretical version, is full of miscalculations, from the gallon jar of mayonnaise purchased at spectacular savings to the billions of dollars Americans will spend this year to service their credit-card debt. The real mystery, it could be argued, isn’t why we make so many poor economic choices but why we persist in accepting economic theory.

In “Predictably Irrational: The Hidden Forces That Shape Our Decisions” (Harper; $25.95), Dan Ariely, a professor at M.I.T., offers a taxonomy of financial folly. His approach is empirical rather than historical or theoretical. In pursuit of his research, Ariely has served beer laced with vinegar, left plates full of dollar bills in dorm refrigerators, and asked undergraduates to fill out surveys while masturbating. He claims that his experiments, and others like them, reveal the underlying logic to our illogic. “Our irrational behaviors are neither random nor senseless—they are systematic,” he writes. “We all make the same types of mistakes over and over.” So attached are we to certain kinds of errors, he contends, that we are incapable even of recognizing them as errors.

From Elizabeth Kolbert's New Yorker review of Predictably Irrational: The Hidden Forces That Shape Our Decisions by MIT's Dan Ariely, whose blog is also hosted at the book's site. Kolbert's review also covers another book -- Nudge: Improving Decisions About Health, Wealth, and Happiness by Richard Thaler and Cass Sunstein -- that appears to use our predictably irrational behaviours to recommend policy choices (such as "presumed consent" as opposed to "explicit consent" for organ donors).