Making Decisions

Sunday, November 2, 2008

What is it

When we make decisions we think we're in control, making rational choices. But are we? This is the central question posed by Dan Ariely, Professor of Behavioral Economics at Duke University, in his book Predictably Irrational.  Ken and John discuss irrationality, its dangers, and perhaps also its benefits, with this philosophical and fascinating economist.

Listening Notes

John begins the discussion by proclaiming that he is totally rational. Ken is understandably skeptical, and points out that most people are a bit less rational then they think. Their preferences are unstable, they’re bad with risk, and nobody really seems to know a whole lot about why they do what they do. Think about the “sellers and choosers” game. One person has a mug and they get to think up a price for what they’d sell it for. Another person wants that mug, and gets to think up what a fair price would be. It turns out that sellers and choosers don’t agree, and sellers often think it’s worth twice as much.

Dan Ariely, an expert in behavioral economics joins in the discussion. He relates a story about when he was recovering from severe burns in a hospital. The nurses insisted that the best way to remove bandages was to rip them right off, but he was not convinced. He later conducted research and discovered that the least painful way, after all, is to remove the bandages slowly. The truth was, though, that the process of fast bandage removal was preferable to the nurses, who had other things to do.

So, what’s a good definition of rationality? Technical definitions aside, we might settle for this: rationality is how we tend to think that we would behave in a given situation. We are irrational when we behave in ways that we would not expect ourselves to. Are we at all rational then? Well, for the most part, no. But how should we respond? Should we try to be more rational, or should we strategically manipulate ourselves? Maybe a bit of both, but we should certainly be aware that human irrationality always seems to be a factor, and that irrationality is the basis for some of our most cherished social norms.

  • Roving Philosophical Report: (seek to 5:44) Zoe Corneli chats with Ori and Rom Brafman, co-authors of the best-selling book Sway: the Irresistible Pull of Irrational Behavior. Why can’t we be better decision makers? Why do we experience financial losses so much more intensely than financial gains? Why do losses tend to make us feel inadequate, and how do we try to improve our sense of self worth? Does the current economic crisis have anything to do with these issues? Groups can become especially irrational, so it seems best to make sure that dissenting opinions are always heard. Can people make intelligent decisions on the spur of the moment? Well, maybe, but there are definitely times when they shouldn’t. 
  • 60 Second Philosopher: (seek to 49:30) How did the stock market get to be as crazy as it is today? A while back, the behavioral finance movement took over, and people started trying to predict and understand irrationality on a large scale. Eventually this gave way to the system of derivations where everyone’s betting on bets about bets, and nobody knows exactly what they’re investing in anymore.
 
 

Dan Ariely, Professor of Psychology and Behavioral Economics, Duke University

 
 
 

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