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

• Relativity and Irrationality (Chapter 1: The Truth about Relativity: Why Everything Is Relative-Even When It Shouldn't Be)
• The Law of Supply and Demand Sucks (Chapter 2: The Fallacy of Supply and Demand: Why the Price of Pearls-and Everything Else-Is Up in the Air)
• Free, Good or Bad? (Chapter 3: The Cost of Zero Cost: Why We Often Pay Too Much When We Pay Nothing)
• Do You Believe in Market? (Chapter 4: The Cost of Social Norms: Why We Are Happy to Do Things, but Not When We Are Paid to Do Them)
• A Monster in Each of Us (Chapter 5: The Influence of Arousal: Why Hot Is Much Hotter Than We Realize)
• Delaying and Flexibility (Chapter 6: The Problem of Procrastination and Self-Control: Why We Can't Make Ourselves Do What We Want to Do)
• Ownership or Stewardship (Chapter 7: The High Price of Ownership: Why We Overvalue What We Have)
• Having Options Doesn't Always Mean Good (Chapter 8: Keeping Doors Open: Why Options Distract Us from Our Main Objective)
• Bias Judgement (Chapter 9: The Effect of Expectations: Why the Mind Gets What It Expects)
• Expensive yet Effective Placebo (Chapter 10: The Power of Price: Why a 50-Cent Aspirin Can Do What a Penny Aspirin Can't)
• Integrity Again (Chapter 11: The Context of Our Character, Part I: Why We Are Dishonest, and What We Can Do about It)
• A Joke about Our Culture (Chapter 12: The Context of Our Character, Part II: Why Dealing with Cash Makes Us More Honest)
• Irrationality and Improvement (Chapter 13: Beer and Free Lunches: What Is Behavioral Economics, and Where Are the Free Lunches?)