Predictably Irrational: The Hidden Forces That Shape Our Decisions
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Behavioral Economics is a fascinating field. It combines Psychology with Economics and can more accurately predict human behavior because it includes the Human factor.
Here's a sentence from another related book (Nudge) I'm currently reading on the difference between Economics and Behavioral Economics.
To qualify as Econs, people are not required to make perfect forecasts (that would require omniscience), but they are required to make unbiased forecasts. That is, the forecast can be wrong, but they can't be systematically wrong in a predictable direction.
In this book they use the term Econ to mean what a typical Economist thinks of an average person.
This is an emerging field of Social Science that has seen tremendous growth. As someone whose interested in both Psychology and Economics this is exciting to see.
From Wikipedia:
The Engineering of Consent" is an essay by Edward Bernays first published in 1947.[citation needed] He defines "engineering consent" as the art of manipulation of people; specifically, American citizen, who are described as "fundamentally irrational people... who could not be trusted." It maintained that entire populations, which were undisciplined or lacking in intellectual or definite moral principles, were vulnerable to unconscious influence so as make them want things that they do not need. This was achieved by linking those products and ideas to their unconscious desires. Ernest Dichter, who is widely considered to be the "father of motivational research," referred to this as "the secret-self of the American consumer."
It's almost certainly true that the heuristics built into our brains work better in practice than you'd think from a here's-how-we're-irrational description. But they still cost us sometimes, and it's good to be aware of them and look out for them in cases where we need the best answers we can get rather than the best we can get in ten seconds.
That alone explains so much ...
Hypothesis - there are klunky algorithms you can use that aren't all that good, but which are very cheap to run. Humans have a lot of tradeoffs like this built into them.
I can't think of great examples though. The strong natural link between fear and desire to destroy (rather than - for example - the desire to investigate) may be one. Yes, in the sandbox of one example the desire to investigate leads to better outcomes, but perhaps across the board that doesn't work for the amount of energy that we have available.
If I was buying a suit at that cost, I would have consumed more energy considering the decision to buy than if I'd been buying a pen, and that would influence whether I had the energy to travel for a discount.
My grandmother used to step back and analyse things by starting again and working forwards from first principles. Smart lady, but she didn't have nearly enough energy spare for things like doing the washing or cleaning her house.
Some of the things are very interesting and separate to this - particularly where the decisions we make are completely opposite by the free vs non-free. Decision tree hacking.
And I have often wished for a wallet that could prevent me from buying candy.
It explains the dynamics behind behavioral economics welll and is definitely worth 45 minutes.
I agree with the "Predictably" part of "Predictably Irrational". Of course people are irrational while they desperately maintain a proud veneer of rationality, we've known for quite awhile now. Their conclusions are pretty predictable, but I do appreciate that they've done these studies and tested it in a variety of situations.
A strong will is increasingly becoming a human being's best tool for improving their daily lives. It seems like more and more pitfalls are being deliberately engineered in society that encourage us to abandon our self-control.
Let's pretend that if I want a widget I am willing to pay $1 (but not $2) for it. That means I would prefer to have the widget over $1, but prefer to have $2 over the widget. However, if I have a widget I'm willing to sell it for $3 (but not for $2). That implies that I am would rather have the widget than $2, which is clearly a contradiction with the previous conclusion. This is irrational. (And it violates several of the key assumptions underlying classical economics).
This is probably the reason why people are unwilling to sell houses at below-bubble prices, even though they would be unwilling to buy at current prices.
If someone figures out how to arbitrage this, they will be rich.
Check out in particular the link the ball video. His book also pairs well with Tim Harford's <i>The Logic of Life</i>: http://jseliger.wordpress.com/2008/02/06/the-logic-of-life-a...
The first one, in Influence but I never connected it with market positioning until I read that.
The one about Cost of Zero is interesting in light of Web 2.0 Freemium.