My fellow PT blogger Dan Ariely is one of the most creative behavioral economists in the world today, one of the hotshots in currently the hottest academic field. Ariely is to behavioral economics what Steven Levitt (coauthor of Freakonomics) is to standard economics, simultaneously a superb and mind-bogglingly creative scientist and excellent communicator of their science to the general audience. As great as Dan Ariely is, however, he has one major flaw: He is not an evolutionary psychologist.
The field of behavioral economics began in the late 1970s and early 1980s with the pioneering work of the 2002 Nobel laureate Daniel Kahneman and the late Amos Tversky. (Tversky would most certainly have shared the Nobel prize with Kahneman, but he died in 1996 and the Nobel prize is never awarded posthumously.) Their work has demonstrated that the decisions people make routinely and predictably deviate from rationality that standard economics (otherwise known as the rational choice theory) predicts.
For example, imagine that the current swine flu epidemic is expected to kill 600 more people in the United States during this year’s winter flu season. There are two alterative vaccines available to administer. If Vaccine A is administered to everyone, it will save 200 people. If Vaccine B is administered to everyone, 400 people will die. Which vaccine is preferable?
Even though the two scenarios are mathematically identical, a large majority of people would support the administration of Vaccine A, while an equally large majority would oppose the administration of Vaccine B. This is because “saving the lives of 200 people” sounds much better than “killing 400 people,” even though, once again, they are completely equivalent. What Kahneman and Tversky discovered was that, in clear contrast to what the standard economic theory predicts, how you frame the question strongly affects people’s choices and decisions.
A long line of behavioral economists since Kahneman and Tversky has convincingly demonstrated, experiment after experiment, that people’s decision making deviates from the rational calculation posited by standard economic theory in so many predictable ways. Now Dan Ariely, the new prince of behavioral economics, has summarized his own series of experiments over the last two decades for the general audience in his book Predictably Irrational. The book is full of fascinating examples of how we make irrational decisions and how our choices do not conform to the predictions of the standard economic theory. More importantly, the book gives us a glimpse into how ingeniously Ariely demonstrates these empirical patterns (or anomalies from the perspective of standard economics) in his very creative experiments.
For example, suppose you want to subscribe to the magazine The Economist, and there are two options: 1) an electronic-only subscription (at Economist.com) for $59/year; or 2) print and electronic subscriptions for $125/year. Given these two choices, 68% of people will choose the former option, while 32% will choose the latter. In standard economic terms, it means that a majority of people considers buying an electronic-only subscription to the journal’s articles for the reduced cost of $59 to be “better value” than having to pay more than twice as much for a combination of print subscription and electronic subscription. So far so good.
But then let’s say there are three options now: 1) an electronic-only subscription for $59/year; 2) a print-only subscription for $125/year; and 3) print and electronic subscriptions for $125/year. Given these three options, 16% of people will choose the first option, 0% of people will choose the second option, and 84% of people will choose the third option. That nobody chooses the second option makes perfect sense; why would you pay $125 to get a print-only subscription when you can get both print and electronic subscriptions for the same price? But here’s the puzzle: Now a vast majority of people considers print and web subscriptions for $125/year to be “better value” than an electronic-only subscription for $59/year, in clear contrast to their expressed preference when there were only two options. If people thought that A was better value than B when there were only two options, why does throwing in a third option C, which nobody chooses, entirely reverse their preferences?
Another example: People enter an auction for several items, such as cordless computer peripheries, books, chocolates, and bottles of wine. They bid for these items by submitting their bids; they write down the maximum amount of money that they are willing to pay for each item. Whoever submits the highest bid wins the item and pays for it with the amount they wrote down. Some people enter higher bids than others because they want the items and place higher values for them. So far there’s nothing strange; that’s how auctions work everywhere.
But here’s the twist (as well as Ariely’s genius). Before they enter their bids for each item, they write down the last two digits of their Social Security number. Then they write down their bids. Remarkably, Ariely’s experiment shows that there is a significant positive correlation between the last two digits of their Social Security number and their entered bids, so that those whose last two digits of the Social Security number are lager in numerical values enter higher bids for a given item than those whose last two digits are smaller. For example, those whose last two digits of the Social Security number are between 00-19 are on average willing to pay a maximum of $8.64 for a cordless trackball. In sharp contrast, those whose last two digits of the Social Security number are between 80-99 are on average willing to pay a maximum of $26.18 for the same item, more than three times as much. In terms of standard economics, it means that those whose last two digits of Social Security number are between 80-99 value the cordless trackball more than three times as much as do those whose last two digits are between 00-19. In fact, Ariely’s experiment shows that the former group of people place greater value on (and thus are willing to pay much more for) everything than the latter group. How can the last two digits of their Social Security number possibly affect how much they are willing to pay for a whole host of items?
These are just two of the examples from the book chock full of examples of such irrational behavior that standard economics would have a hard time explaining. (And I haven’t even mentioned how many young men in their 20s would have sex with a 60-year-old woman or a 12-year-old girl or a dog if they have an erection.) I would highly recommend the book to anyone interested in human behavior and its potentially irrational manifestations. The book is very well written and highly entertaining. As an aficionado of scientific biographies, I particularly enjoyed the section in the back of the book, where Ariely introduces all of his coauthors for all of the studies discussed in the book. Ariely has nice, kind, and funny things to say about all of his collaborators.
So what’s my problem? If Predictably Irrational is full of fascinating examples of irrational human behavior, revealed by a series of highly ingenious experiments conducted by Ariely and his colleagues, and if the book is written well and highly entertaining, what’s not to like? Why do I choose to call him the worst possible name that a scientist can call another scientist – “not an evolutionary psychologist”? I’ll explain in my next post.
