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Kamis, 12 Maret 2009

Irrationality and Improvement

In standard economics, human are assumed rational. Our decisions are made based on not only rational judgement but also complete information and knowledge. In this assumed context, there is no chance that we get free lunches because of others' misjudgement. In theory, misjudgement shall be corrected. First, it may be corrected by the rational agents, basically us as individual decision makers. Second, it may be corrected by market forces. The market itself consists of individual decision makers making up the wisdom of crowds. This is all a nice story to believe. Dan Ariely's findings, however, make this nice story only in dreams. We human are indeed irrational, systematically and predictably.

In his Predictably Irrational closing chapter, Chapter 13, Dan Ariely argues probably economics could make itself more sense if containing human's irrationality. In a broader term, the fact that we are not always rational should influence such areas as from the making of public policy to our individual decision making. The logic behind is that our irrationality creates free lunches. In behavioral economics, however, free lunches are not perceived as bad as in standard economics. By the same token, free lunches mean opportunities for improvement.

After delivering the results of his experiments in his book, Dan Ariely concludes that we human often give up our personal utility due to our irrationality. For example, in America, when ordering a menu out loud, a group of a restaurant guests tend to show their individual uniqueness. Hence, if a particular menu is already chosen by others in the group, the menu is less likely to be chosen by the next guest, however good it is. The next guest predictably will give up his personal utility by choosing another unselected menu to project his or her uniqueness to others in the group. In this case, the first person choosing the menu is the one having the most satisfaction with his / her selection.

What improvement can be taken for the above case? Devising an improved process for taking order could be an answer. Each guest is asked to write down his / her own selections. As Dan Ariely proved in his experiment at The University of North Carolina, Chapel Hill, this kind of improved process made all guests in a group more satisfied. Moreover, implementing this improvement could mean more revenue for the restaurant. So everybody gets a free lunch. Everybody happy!

Below are my articles written based on each chapter of Predictably Irrational. Enjoy the reading.

Irrational regards,
Y Pan

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