John’s Blog

Great, fun, behavioral economics book along the same lines as Stumbling Upon Happiness (itself a great, fun book). Ariely goes through a bunch of experiments that show that while people very often behave irrationally (relative to economic models of self-interest & such), most of the time they do it in predictable ways, for predictable reasons — and so he’s really arguing that behavioral economics — theorizing about what people will do based not just on rational analysis, but also based on the rational flaws inherent in communities of people — is a powerful way to model real world phenomena.

Here are a few gems from the book:

“…the sensitivity we show to price changes might in fact be largely a result of our memory for the prices we have paid in the past and our desire for coherence with our past decision — not at all a reflection of our true preferences or our level of demand.”

That’s in the part of the book that explains why we pay $3.50 for a cup of coffee. 🙂

But more meaningful to me in some of the things I think about lately:

“This experiment illustrates an unfortunate fact: when a social norm collides with a market norm, the social norm goes away for a long time. In other words, social relationships are not easy to reestablish. Once the bloom is off hte rose — once a social norm is trumped by a market norm — it will rarely return.”

And more succinctly: “Money, as it turns out, is very often the most expensive way to motivate people. Social norms are not only cheaper, but often more effective as well.”

Great book, lots of great stuff in it.

This entry was posted on Tuesday, April 15th, 2008 at 8:56 pm and is filed under Books. You can follow any comments to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.