Monday, September 6, 2010

The Upside of Irrationality

Dan Ariely

There's a lot being written about behavioural economics these days.  Dan Ariely is one of the leaders of the crowd.  I mentioned his latest book, The Upside of Irrationality, was a recent TED Book Club selection.  (He's also been a TED speaker).

In this book, he describes many experiments, usually introduced by describing what sparked his curiosity about the effect, which makes it a rather chatty and breezy read.

Some experiments prove what we intuitively believe - how we adapt to either extreme happiness or extreme pain, with both losing intensity over time.  Well, we knew that - something can smell very strong when we first enter a room, but, with time, we no longer are conscious of it. .  When I was leading a business, I would often ask new employees what they thought was stupid about the way we did things.  You have to ask such a question within their first few weeks; after that, our stupidities had started to appear sensible to them.   Even though some of Ariely's research seems obvious, many things that we intuitively 'know' turn out to be false, so it's still useful to scientifically test their validity.

Another experiment showed that moderate bonuses motivate people to excel more than very small bonuses do.  But, perhaps counterintuitively, the experiment also demonstrated that very large bonuses result in poorer performances than moderate bonuses.  This experiment was carried out in rural India so that they could afford to offer bonuses that were significant relative to their total annual salaries.  Ariely often speaks to audiences in the financial industry, who greet these experiments with a stolid disbelief.

From the first book, and from a couple of times I've heard him speak, I knew a bit about Ariely's horrific accident as a teenager which left him with third degree burns over 70% of his body, but this book delves more deeply into this period of his life, and the very lasting influence the incident has had on his life.  Experiences from that time have inspired his research into reactions to pain, for instance.

I really enjoyed Ariely's first book Predictable Irrational (see this post for my reaction to that book), but in the last couple of years since reading it, I have read enough about behavioural economics that this book, if not redundant, was not very startling.

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