At the core of economics (especially economics teaching) is the idea that people are fundamentally rational, self-interested, utility maximising individuals who make decisions after logically considering all the relevant facts. As these people know best what’s best for themselves, these decisions are optimal for society. However, one of the newest and fastest growing school of thought is the Behavioural School which uses the insights of psychology to show that this simply is not the case. These insights are sometimes viewed only in isolation or glossed over as minor trivia. However, when you put all the different pieces together, you see that the conclusions are far reaching for how the economy operates. Continue reading “4 Ways We Are Not Rational And How It Affects Economics”
Economics is not a homogenous or unified subject, rather there are a series of competing ideas over the key areas. These ideas can be roughly divided into several schools of thought and I’ll give a guide to them here. It is the great myth that economists pretend to be non-partisan when in reality we all have our own biases and opinions. It is impossible to study a topic without forming an opinion of it and economists are no exception. So by understanding the different schools of thought you can not only understand why economists give different and contradicting policy advice but also how they see through different lenses. Continue reading “Guide To The Economic Schools Of Thought”
Chapters 11 and 12 of “Predictably Irrational” by Dan Ariely are all about dishonesty. He discusses the decline in ethics which is relevant at a time of corporate scandals and financial scams. He examines and measures the likelihood of people cheating for financial gain and ways to keep them honest. The level of integrity his experiments reveal is particularly interesting. He also finds how people differentiate between cheating, being more likely to cheat if non-monetary items are involved. Continue reading “Predictably Irrational Chapter 11 & 12 – The Context Of Our Character”
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. Continue reading “Predictably Irrational Chapters 9 & 10 – The Effect Of Expectation & The Power Of Price”
In Chapter 7 of “Predictably Irrational”, Dan Ariely discusses how once we value things we own far more than any stranger would. Even a simple mug becomes valuable once you claim ownership over it. People create a connection with what they own and familiarity leads us to overvalue our own possessions. This is why the market in possessions is prone to distortions and outright market failures. People selling their possessions will charge a price no potential buyer would see as reasonable. Continue reading “Predictably Irrational Chapter 7 – The High Price Of Ownership”
In chapter 6 of “Predictably Irrational”, Dan Ariely discusses a problem every student is familiar with, procrastination. You have an essay to do yet here you are browsing through facebook, looking at pictures of strangers and comments from people you don’t like. You know you should study but you could watch one more youtube clip. Every night you promise that the next day you will work hard and study, yet you never get around to it. You promise that you will exercise and eat healthy but end up sitting on the couch all day eating pizza.
In Chapter of “Predictably Irrational”, Dan Ariely discusses the importance of social norms in determining our actions and the paradox of how we will do some things for free but not if we are paid. Economics is based on the idea that we are all self-interested and will only do something if we have something (money) to gain. Ariely shows that we are not as greedy and selfish as this depiction describes us and that we are also motivated by social norms that can often be more important than money. Continue reading “Predictably Irrational Chapter 4 – The Cost Of Social Norms”
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. Continue reading “Predictably Irrational Chapter 3 – The Cost Of Zero Cost”
In chapter 2 of Dan Ariely’s fantastic “Predictably Irrational”, he discusses how supply and demand are not the independent forces that drive prices in the market as usually described. Instead consumers are subject to anchoring and arbitrary coherence which nudges them towards higher or lower prices. Our first impressions have a large effect on later decisions so that too an extent, the market drives the consumer not the other way around. As Tom Sawyer discovered, people pay a high price for what is hard to get regardless of its supply or demand curve. Continue reading “Predictably Irrational Chapter 2 – The Fallacy Of Supply And Demand”
Predictably Irrational byDan 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 that the book is heavily based upon evidence and empirical studies, so no claim is made without being backed up. In fact Ariely does most of the experiments himself so you are really hearing it from the horse’s mouth.