Predictably Irrational: The Hidden Forces That Shape our Decisions

Behavioral economics is a relatively new field in economics that draws on aspects of psychology and economics to understand human behavior. In contrast to standard economic theory, behavioral economics focuses “on the (quite intuitive) idea that people do not always behave rationally and that they often make mistakes in their decisions” (317). This field presents a more pessimistic view of human nature by acknowledging human weaknesses. Ariely believes this viewpoint has a silver lining: The fact that humans make predictable mistakes means there are ways to improve their decision-making processes (a concept known as “free lunches”). Ariely is a strong proponent of behavioral economics.

In behavioral economics, the endowment effect is when people value the items that they own more than others value the items. Ariely’s football ticket experiment in Chapter 8 exemplifies this concept in action. Traditional economic theory suggests that the ticket holders and non-holders should have equally valued the football game, since both groups went through the lottery process of trying to acquire the tickets; however, the ticket holders came to value the tickets much more than non-holders. Ariely suggests that this effect is due to humans’ aversion to loss. Ticket holders justified their selling price in terms of lifelong memories and the experience they believed game attendance would provide; they priced the tickets so high because they felt they could not quantify the loss of these experiences and memories. In contrast, non-holders were not attached to these imagined experiences.

In behavioral economics, a free lunch refers to the idea that there are tools, strategies, and policies that can help humans make better decisions both individually and collectively. Standard economic theory does not include this concept, instead arguing that humans always make “good, informed decisions in every aspect of their lives” (319); therefore, people neither make mistakes nor need free lunches. As Ariely demonstrates, however, humans are far from rational —which is why they need free lunches.

Placebo comes directly from an inflected Latin phrase meaning “I shall please” (228). In the context of Ariely’s work, the placebo effect is when an individual’s symptoms appear to improve after taking a placebo or fake treatment. Placebos have a long history; the earliest recorded example comes from an Italian physician in 1794. Almost all pre-modern medicines—such as mummy powder, which was considered a cure-all—were placebos. Even today, physicians prescribe placebo treatments.

Placebos work due to two mechanisms that shape a person’s expectations. The first is belief: A patient has confidence in the placebo (e.g., drug, caregiver, procedure, etc.), which may predispose them to a beneficial outcome. The second mechanism is conditioning—that is, the expectation that the placebo will work. Ariely raises ethical questions, including whether the medical profession should consider discontinuing placebos. He argues, based on his own experiences, that the benefits outweigh their costs.

“Predictably irrational” means that irrational human behaviors happen repeatedly and in the same predictable manner. This concept forms the basis of behavioral economics and is the heart of Ariely’s book (as evidenced by the title). Certain forces—emotions, social norms, cash, etc.—exert tremendous power over human behavior, something that people fail to comprehend. These forces impact everyone, including experts who study human behavior and who, one might assume, would know better (the author emphasizes this point): “[T]he resulting mistakes are simply how we go about our lives, how we ‘do business.’ They are a part of us” (321).

Relativity profoundly influences human behavior: “[H]umans rarely choose things in absolute terms. We don’t have an internal value meter that tells us how much things are worth. Rather, we focus on the relative advantage of one thing over another, and estimate value accordingly” (2). People also avoid comparing items that are difficult to compare. Relativity impacts all domains of life, including who a person dates, what they buy, and the vacation and education experiences they seek.