May 10, 2010

Book Review: Predictably Irrational

Definitely a must read for anyone interested in buying a house, starting a bank, creating a pricing scheme for a product set, or just understanding the idiocy of our current economic dogma. Dan Ariely explains in everyday (if not too everyday sometimes) language how and why we as consumers are NOT in fact rational consumers that obey Adam Smith's invisible hand, but rather irrational beings that merely like to think that we are logical. The rational model of economics is, really, nothing more than an optimists view of reality: the actual rules of reality, Ariely shows, are a far cry from what we would have ourselves believe them to be.

Taking the steps to become a savvy consumer begins with reading this book, not to mention taking a few extra steps towards learning how to understand yourself. Most of his points will have you nodding along in agreement, and you'll wonder why this wasn't something you could have written yourself. In fact, as with most social science, it sometimes takes someone with a PhD to prove that which we already know through our own intuition.

Although this book definitely fits into my definition of pop psychology, there are several very important gems for understanding ourselves and our complex relationship to money and expectations that is important for becoming a more savvy consumer. Though, the majority of the book's points could have been condensed into a 30 to 50 page pamphlet; the $30 300+ page monstrosity that it is in current form is merely a testament to the current tendency in the publishing industry to print large and overcharge.

Recommendation: Borrow or Kindle it. My copy is definitely up for grabs.

-SPOILER-
The only example of Ariely's that I would disagree with is his close examination of pricing and valuing mechanisms with an experiment on Duke basketball tickets. While I do agree with his conclusion that owners tend to over-price their belongings, his experiment was inherently flawed. By using a group of students that had both "worked" to earn tickets, some randomly who received them, some who didn't. Those who received tickets valued them 20 times over those who did not. Ariely uses this as an example for how those who possess objects tend to overvalue them without taking into account the following: students who received tickets and were putting them up for sale wanted to be compensated for their entire involvement in getting the ticket: the ticket wasn't just for the game, but for the entire ordeal that they went through to get the ticket. On the other hand, the students that went through the same ordeal but that didn't receive the tickets and were asked how much they would pay for them; they were being asked to pay for the tickets in addition to the work they already invested in waiting for the ticket. In essence, they were being asked what more they would invest for a ticket, whereas the group that received the tickets were being asked how much they valued all of the investment that they already put in. An unfair question and an interesting look at how people value luck and work, but not a very clear cut comparison for owners versus non-owners.

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