Monday, October 04, 2010

Takeaways from Predictably Irrational, Part IV

I recently finished Dan Ariely's Predictably Irrational. You can read Dan's current writing at his blog. Here is part onepart two, and part three in a multi-part series of my takeaways from the book. Here is the next and final part, focusing mostly on irrationality in our morals:

Economics is a lot like physics, if particles could think.

There are two types of dishonesty: malice and under the rug. The latter represents a much larger percentage than the first. When cheating is possible, it's not that a few that cheat a lot. It's most people will cheat a little.

Robberies in the US totaled $508 million in losses. Burglary offenses suffered $4.6 billion in lost property. Employee theft from small businesses in America equals $40 billion!

For most people, cheating isn't based on whether you will get caught, but based on whether you can justify it (at least for upper middle class college students).

Reminding people of their morals, for example having them write the Ten Commandments, greatly increases their chances of acting morally. I used this recently in the classroom when I gave my AP Micro students a take home test and made them sign an oath not to work together.

Honesty and trustworthiness are an important factors for wealth creation. It is costly to prevent immorality.

Surprisingly, the presence of cash decreases cheating. People are more likely to cheat when money is not involved. For example if you left a wallet with dollars in it in a break room few people will steal. But if you put sodas in a fridge they will get taken. One way to combat the theft of stuff is to put a price tag on it.

Non-cash cheating is an increasing problem was we move away from cash dealings. Think credit card fraud, trading online, or credit default swaps.

Like the take home test oath, clear contracts can help prevent fraud. Cash even looks like a tiny contract. In person deals can also prevent cheating. In fact, even putting a picture of human eyes nearby can decrease theft. Is this why we put pictures of trusted leaders on our dollars?

Improving our rationality can create "free lunches" by improving our decision making. This is one of the best practical applications for economics.

My summary of the book: Thinking has a cost, so we find shortcuts. Those shortcuts aren't full proof. So these are actually rational responses to the costs of mental calculations and moral reasoning. This can be helpful to people by making the "best" decision easier to make (by pre-committing to retirement savings). It can also be helpful to businesses by making the most profitable decision easier to make (example from the Economist). The way to avoid irrational habits is to constantly reevaluate what you do and why you do it. However, the benefits of getting it right may not be worth the cost of figuring it out. "The unexamined life is not worth living", but perhaps the overly examined isn't either.

Although I loved the book, I'm not convinced people are Predictably Irrational. Instead, I think they are Rationally Irrational.

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