I’ve read many books like Dan Ariely’s Predictably Irrational, about how people are consistently irrational in specific ways. It’s my favorite topic in psychology. I wonder what long-term effect this reading has. Does being aware of your own irrational tendencies help you to counteract those tendencies, or are they like optical illusions: We see them even when we know that we shouldn’t?
I suspect the first. This knowledge influences me all the time. It’s why I try to read books and watch movies without any foreknowledge, (to prevent expectations from tainting the experience), why I don’t pretend I can tell an expensive wine from a cheap wine, and why I try to decouple my political principles from factual claims. (Gender discrimination is not wrong because it, say, reduces economic growth. Maybe it’s good for the economy. It would still be wrong.)
This is one reason why I think behavioral economics has its limits. Another is methodology: Almost all these experiments use students as subjects. What happens when they grow old and gain experience? Do they learn that FREE isn’t magical? Do they learn tricks to stop overvaluing short-term benefits? Probably, even if they never read this book.
What researchers like Ariely has done is not to introduce brand new ideas. What they’ve done is replace the first step towards wisdom with science. That’s great, it makes the step easier to make, but it doesn’t help you with the next step. At some point science must give way to intuition.
Behavioral economics is certainly an important field, perhaps more so with regard to micro decisions than with regard to macro policy. But still, assumptions about hyper-rationality often used as a basis for macro-economics are of course wildely unrealistic. Not only do we humans lack the capacity to be hyper-rational (we can not foresee all possible long-term consequences of private or political decisions), nor are we able to treat the information we do have fully rational. The result is all the well-known irrational pitfalls, such as gambles fallacy, winner’s curse and sunk cost.
Kahneman (with Tversky) pioneered this field. Yes, using students is methodological weakness, but the problems they and others identified are real.
Yes, absolutely. Which is why I find all this stuff so interesting. It steps out of theory into the real world. What I’m saying is that it only takes one step – the rest of the steps we have to take without the aid of science. There are no iron laws of how people make decisions, and that’s fundamentally what this is about. Behavioral economics reveals strong tendencies with simple experiments, but the problem with all psychology is that the output of the research becomes the input to future decision making. Most of our real life decisions are made in contexts that I don’t see how you can fully capture with an experiment.
Experiments are of course designed to isolate a single phenomenon, this phenomenon of course also occurs in real-life but then in a complex context of countless other factors.
“Cold” irrationality (errors in reasoning and logic) we can to some extent counteract (given that we are aware of the pitfalls), but “hot” irrationality (emotions, weakness of the will) are difficult to control (important reason why people favour short term satisfaction, such as when trying to control to weight). Ulysses bound himself to the mast because he was aware. So you are right, knowing about the pitfalls can change our tendency to act irrational.
Sheena Iyengar touched on some of those difficult choices in The Art of Choosing. Ulysses is a good example on how we can make difficult choices, (his crewmates is perhaps a better one). We just need to be smart, have good rules of thumb. So irrational tendences are just a starting point, not destiny.