Tuesday, April 29, 2008

Predictably irrational

I just finished a fantastic book by Dan Ariely of MIT on Predictably Irrational: The Hidden Forces that Shape our Decisions. The book describes a large number of experiments in behavioral economics and psychology how on first site irrelevant factors have a major role in the outcomes in decision making experiments. Whether decisions are framed in terms of monetary rewards or social norms, how consumers start buying more expensive products when introducing an outragous expensive alternative that nobody will buy. Why honest people steal office supplies but not money. How Asian woman score differently on math test if they have read first a story on women vs asian people. If they read the story about women they scored lower, perhaps by triggering another stereotype compared with the other read.
Deriving a better understanding how humans make choices, and how different frames of information affect the decision making, is important in crafting effective institutions. If you like to read more about Predictably irrational, see http://www.predictablyirrational.com/