In Chapter 9 and 10 (I combined them as they’re quite similar) of “Predictably Irrational” by Dan Ariely, the concept of how are expectations affect our decision making is discussed. We are not rational actors making choices in a vacuum but rather we are deeply affected by our expectations. If we expect a movie to be good, then it often is. This placebo effect is always to be found with prices. If we pay more for something, we value it more and get more from it. This creates serious problems for those who claim that market distortions will be corrected by market forces pushing a return to equilibrium. Ariely conducted an experiment involving free beer (I knew that would get … Continue reading “Predictably Irrational Chapters 9 & 10 – The Effect Of Expectation & The Power Of Price”
Category: Economics
Predictably Irrational Chapter 3 – The Cost Of Zero Cost
To a neo-classical economist zero is just another price. To the average consumer it brings the magical connotations of free. We are always trying to get something for nothing so if something is free then consumers impulsively take the option. Ariely shows how this impulse comes with hidden costs that debunk the myth of rational consumers. Whether it’s from eating too much free food or accumulating worthless free pens, clickers etc, people are always trying to get a free lunch. As usual (this is what is so great about the book) Ariely did an experiment to find the answer (neo-classical economists take note). He set up a stall with offering (one per customer) two piles of chocolates, the first being … Continue reading “Predictably Irrational Chapter 3 – The Cost Of Zero Cost”
Predictably Irrational Chapter 1 – The Truth About Relativity
Predictably Irrational by Dan Ariely is a fascinating and deeply insightful book that is a pleasure to read and full of gems. It is bursting with interesting and ground breaking experiments that completely debunk many of the assumptions of economics. It will reshape how you view economics and how consumers react in real life, as opposed to in economics textbooks. It is a book I would highly recommend and should be considered a behavioural economics classic. In fact it’s so great that I couldn’t fit all I wanted to say about it into one post (or three) so instead I will summarise my favourite chapters (which is most of them) and highlight the important points they make. What is particularly interesting is … Continue reading “Predictably Irrational Chapter 1 – The Truth About Relativity”
The Flaw Of The Invisible Hand
Introductions to economics usually start with gushing tales about the magic of the free market. It is usually stated that the free market allows everyone to get the best quality goods at the cheapest prices. The magical invisible hand guides everyone to the best place without any unnecessary government intervention. Below is a link to a video typical of the kind. (I’ll ignore for the moment that it completely misrepresents what Adam Smith said). Its short and simple, but it is a simple argument. This is the typical free market argument with its claim that left alone it will bring the best world for everyone. So in the video it compares two bakers offering bread and the consumer chooses either … Continue reading “The Flaw Of The Invisible Hand”
Do Generous Welfare Benefits Lead To High Unemployment? (Long Version)
(This was originally written as a college essay. For this reason it is 3,000 words long and contains a lot of economics terms references. It is meant as a help for anyone who wants an in-depth study of the topic with supporting facts and figures. For a short version in plain English see here. The essay was marked the best in my class of 80 students. It won the Undergraduate Award 2012 in Economics along with someone from Yale. I’m not trying to boast but I’m over the moon.) Abstract This paper discusses the conventional wisdom that unemployment benefits create a disincentive to work, the so-called “welfare trap”. It examines if higher benefit levels or longer benefit durations lead to higher unemployment … Continue reading “Do Generous Welfare Benefits Lead To High Unemployment? (Long Version)”
The Euro: It Seemed Like A Good Idea At The Time
Ten years ago most countries of the European Union abolished their individual currencies in favour of one regional currency, the Euro. There were celebrations and rejoicing at a further step towards European integration and co-operation. It was proclaimed that this would lead to peace and prosperity. Most people gave it little thought beyond the fact it would be handy to use the home currency abroad on holidays. Very little consideration was given to the economic effects the currency might have. Rather it was presumed Europe could only benefit from a single currency. Ten years on and the Euro is facing widespread and possibly even collapse. Where did it go wrong? In a nutshell, the Euro is in trouble because European … Continue reading “The Euro: It Seemed Like A Good Idea At The Time”