Sunday, March 29, 2009

Predictably Irrational + Nudge

A book I've reviewed previously, "Fooled by Randomness", mentioned how
humans often make irrational decisions.  I decided to explore in more
depth some of the reasons why we don't always make good decisions, and
what can be done about it.

1. "Predictably Irrational: The Hidden Forces That Shape Our Decisions"
   by Dan Ariely

Dan Ariely is a professor of behavioural economics.  In collaboration
with other researchers, he's conducted many social experiments on
students and the general public.  This book summarises the findings of
those and other studies concerning why humans make the decisions they

Good summaries of the book are available at:

Each chapter investigates particular aspects of, and problems with, our
decision making.  Numerous published scientific studies are cited, so
you know you're not just dealing with a collection of anecdotes or
untested hypotheses.

Some of the experiments are quite amusing.  For example, patrons at a
university bar were asked to try a couple of beers: brew "A" was a
standard beer, and brew "B" was the same beer with a dash of balsamic
vinegar added.  How the tasters assessed the brews depended on what
information they were given.  When they weren't told about the vinegar,
they overwhelmingly preferred the vinegar-laced brew!  But when they
were told about the vinegar, they overwhelmingly preferred the normal
brew.  This, say the authors, is a result of expectations.  The related
(and infamous) Coke versus Pepsi taste test is also discussed.

The results of these and other studies suggest that our decisions are
often not very rational.  But it's not all bad news: our decision making
may be irrational, but it is usually systematic and predictable.  Hence
the title of the book.

Once we are aware of how our decisions are adversely affected by various
conditions, we can learn to improve our decision making.  For example,
diners often allow the menu decisions of their companions to affect their
own choices.  This often leads to dissatisfaction with those choices, so
the advice is to plan your menu decision in advance and stick to it,
regardless of what other people may have already ordered.

The conclusion that humans seem to not always make rational decisions
challenges one of the fundamental assumptions of standard, free-market
based, economic theory.  A new field, behavioural economics, has emerged
to establish an alternative basis for analysing "economic decisions by
consumers, borrowers, investors, and how they affect market prices,
returns and the allocation of resources" (quote from Wikipedia).

Overall, this book succeeded in being both educational and entertaining.
The language is not too technical, and it would appeal to anyone
interested in understanding human behaviour.

2. "Nudge: Improving Decisions About Health, Wealth, and Happiness"
   by Richard H. Thaler and Cass R. Sunstein

This book, by two professors from the University of Chicago, seeks to
apply the lessons learned about irrational decisions to policy making.
Richard Thaler, an economist, is credited with having helped define the
field of behavioural economics.  Cass Sunstein is a legal scholar, and
is interested in government policy and regulation.  He's been appointed
to President Obama's Administration.

The book briefly covers many of the reasons why individuals make poor
decisions, as discussed in "Predictably Irrational".  Given that we
are not always good decision makers, the authors propose "libertarian
paternalism" as a way of improving the general well-being of members of
society.  The "libertarian" part recognises that ultimately individuals
should be free to choose what they want.  The "paternalism" part
recognises that we are fallible, and sometimes need a helping hand when
making decisions.  In other words, it's about helping people "make the
choices [they] would make for [themselves] — if only [they] had the
strength of will and the sharpness of mind" (from Wikipedia).

It's argued that the way choices are presented has a serious impact on
the ultimate decisions made.  Too much choice can lead people to
maintain the status quo (no change) or just accept the default option
(no choice).  To help people make better decisions, the authors advocate
"choice architecture": the presentation of choices in such a way as to
overcome some of the causes of bad decisions.  In particular: offer
sensible defaults options; discourage bad choices; promote positive
behaviour; don't overwhelm people with options; and provide feedback.
Here is where the book's title, comes in.  "Nudging" refers to helping
guide people to make better decisions for themselves, rather than
relying on governments to impose decisions on them.

After presenting the case for the choice architecture, the majority of
the book then looks at how this knowledge can guide policy makers to
implement "libertarian paternalism" in specific areas, such as health
care, social security and the environment.  An example is the "Save More
Tomorrow" plan, where employees are encouraged to provide more for their
own retirement.  This is achieved by getting them to voluntarily commit
part or all of their future pay rises toward a retirement savings

Opponents might have issues with the approach suggested in this book.
For example, who decides what is good and what is bad?  Advocates of a
"hands-off" or laissez faire approach to government would not appreciate
any attempts to restrict options available to people, even if that means
allowing undesirable choices  - people should be allowed to make
mistakes.  On the other hand, some opponents who would argue for more
active government intervention in economics policy than just "nudges".

The authors say they are trying to find a middle way, so that the
greatest number of people can benefit without removing freedom of
choice.  Individual readers can decide if they agree with the idea of
being "nudged" into making better decisions.

Ultimately, I didn't find this book quite as satisfying as "Predictably
Irrational".  That may be in part to its more political focus, but it
also may be because the policy examples were very US-centric.