Like what you've read?

On Line Opinion is the only Australian site where you get all sides of the story. We don't
charge, but we need your support. HereÔŅĹs how you can help.

  • Advertise

    We have a monthly audience of 70,000 and advertising packages from $200 a month.

  • Volunteer

    We always need commissioning editors and sub-editors.

  • Contribute

    Got something to say? Submit an essay.


 The National Forum   Donate   Your Account   On Line Opinion   Forum   Blogs   Polling   About   
On Line Opinion logo ON LINE OPINION - Australia's e-journal of social and political debate

Subscribe!
Subscribe





On Line Opinion is a not-for-profit publication and relies on the generosity of its sponsors, editors and contributors. If you would like to help, contact us.
___________

Syndicate
RSS/XML


RSS 2.0

Does rationality rule?

By Andrew Leigh - posted Monday, 12 July 2010


Joshua Bell stood in a Washington DC subway station during morning peak hour. Dressed like any other busker, he took his Stradivarius out of its case, and began to play. A hidden camera recorded the reaction: would passers-by stop to hear one of the world’s finest violinists?

At the end of an hour, 1097 commuters had passed. Only 27 stopped to listen to Bell. His total takings were $32 - less than he would earn in a minute’s playing at Carnegie Hall.

In Predictably Irrational, psychologist Dan Ariely argues that the results show how strongly expectations influence our enjoyment of a situation. Just as we don’t expect buskers to be great musicians, it turns out that people enjoy coffee more if it’s served in a stylish mug than a dowdy one.

Advertisement

Expectations bias is just one of the ways in which we deviate from what “rational” people would do. By understanding these systematic deviations, Ariely argues, we can make better decisions - and better public policies.

One key distinction is between market exchanges and social exchanges. Invited to carry out pro-bono work for $30 an hour, most lawyers refuse. Asked to perform the same work for free, many are happy to contribute. Ariely recounts the Seinfeld episode in which Jerry hires an attractive maid to clean his apartment, and then begins dating her. When his new girlfriend stops bothering to clean the apartment (but keeps taking Jerry’s money), a horrified Kramer tells Jerry that he is now effectively paying for sex. Mixing market norms and social norms can be dangerous. Jerry eventually tells the woman that the relationship is over - and she’s fired.

Another form of predictable irrationality is procrastination. In one experiment, Ariely varies the assignment deadlines in his university course. One group of students has their assignment deadlines evenly spaced through the semester. Another group has all the assignments due at the end of semester. With less freedom to procrastinate, the first group hands in better assignments than the second. Just as compulsory superannuation solves the problem of deferring savings, so too fixed deadlines help university students learn more.

The flipside of procrastination is self-control. Most of us can live with our tendency to make occasional impulse purchases. But for some, an inability to control their credit balance causes major financial stress. If you’re in this category, Ariely suggests putting your credit card into a glass of water, and storing it in the freezer. That way, you’ll force yourself to spend an hour thinking “do I really need it?” while the ice melts.

Another of Ariely’s experiments looked at the role of hormones in decision-making, by presenting a series of hypothetical questions to university students in a normal state and an aroused state. (Since this is a family journal, I’ll let you guess the precise methodology.) When aroused, students were one-quarter less likely to say that they would engage in safe sex. Young adults who opt not to carry a condom in their wallet might be deluding themselves about their self-control in the heat of the moment.

Marketers understand many of our predictable irrationalities. An “endowment bias” leads us to become overly attached to items we already own. Recognising this, companies delight in offering “money back guarantees” and “trial periods”, since they know that few customers will be willing to part with something they already own.

Advertisement

Firms also know that zero is not just another discount. As a succession of experiments have demonstrated, customers over-react to free offers (which explains the proliferation of “buy one, get one free” and “free shipping”). There may be little you can do to avoid being tricked by such offers, but Ariely suggests one way that we can capture the benefits of this in our own lives. If you regularly go out to dinner with the same group of friends, you should take it in turns to pay rather than splitting the bill each time. The average cost is the same either way, but taking it in turns to pay means that you get to enjoy the pleasure hit of a “free” meal.

We should not lose track of the fact that the rational model does pretty well in most situations. Humans typically buy more when the price goes down, work harder when the tax rate falls, and choose the job we think will make us happiest. But as Predictably Irrational shows, the rational model isn’t perfect. Biases such as expectations, procrastination, self-control, hormones and the power of zero are virtually hard-wired into our brains, and understanding them can help us live happier lives.

  1. Pages:
  2. Page 1
  3. All

First published in the Australian Financial Review on July 6, 2010.



Discuss in our Forums

See what other readers are saying about this article!

Click here to read & post comments.

4 posts so far.

Share this:
reddit this reddit thisbookmark with del.icio.us Del.icio.usdigg thisseed newsvineSeed NewsvineStumbleUpon StumbleUponsubmit to propellerkwoff it

About the Author

Andrew Leigh is the member for Fraser (ACT). Prior to his election in 2010, he was a professor in the Research School of Economics at the Australian National University, and has previously worked as associate to Justice Michael Kirby of the High Court of Australia, a lawyer for Clifford Chance (London), and a researcher for the Progressive Policy Institute (Washington DC). He holds a PhD from Harvard University and has published three books and over 50 journal articles. His books include Disconnected (2010), Battlers and Billionaires (2013) and The Economics of Just About Everything (2014).

Other articles by this Author

All articles by Andrew Leigh

Creative Commons LicenseThis work is licensed under a Creative Commons License.

Photo of Andrew Leigh
Article Tools
Comment 4 comments
Print Printable version
Subscribe Subscribe
Email Email a friend
Advertisement

About Us Search Discuss Feedback Legals Privacy