The Upside of Irrationality: The Unexpected Benefits of Defying Logic at Work and at Home

The Upside of Irrationality: The Unexpected Benefits of Defying Logic at Work and at Home Dan Ariely HarperCollins, 2010 Recently, I spoke with a investment banker in the midst of a career change. I suppose that the recent financial crisis took you guys by surprise, I asked. Yes, she replied, rolling her eyes, the standard economic models were all wrong. Well, I said, maybe the models were logically coherent, it was just that the consumers were not acting according to the models? In the Upside of Irrationality, Dan Ariely, Professor of Behavioral Economics at Duke University, once again pokes holes at the "standard model" of economics. The standard model predicts that people will make decisions based on their best interest. The rational decision-making process includes careful weighing of cost vs. benefit, pros vs. cons and thinking about potential long-term consequences of actions performed today. Instead, almost all economists and finance ministers as well as investment bankers were sucked unaware into the recent global financial tsunami, demonstrating a fundamental weakness in the standard model. At the individual level, if the standard model is valid, then people should be able to make correct choices regarding their health, such that there would be no obesity and associated health problems, there would be few or no traffic accidents and no random acts of violence. How would the standard economic model predict or explain the recent murderous rampage in Arizona by an apparent sociopath? Rather than rationality, irrationality, such as the tendency to ignore long-term commitment in favor of immediate gratification, plays a greater role in decision-making than economists would like to admit. As in his earlier book, Predictably Irrational (2008),8 Ariely describes a number of behavioral experiments that not only challenge conventional wisdom but also prompt selfreflection. The current book has a more personal feel to it than the previous one - topics range from the strong emotional attachment people place on their own work, the "adaptive" nature of both happiness and sadness over time and long-lasting consequences of decisions influenced by transient emotions. Despite our irrational nature, Ariely suggests that we may be able to improve our lives if we recognize the effect our irrationality on everyday behavior and strive to alter it. Behavioral economics, in contrast to the standard economics, does not assume that humans are "perfectly sensible, calculating machines". Ariely indicates were are more like Homer Simpson than Mr. Spock. Assumptions about human behavior need to be experimentally validated - intuition or gut-feelings alone just don't cut it and more often than not, assumptions are demonstrably proven wrong. Indeed, decisions in business and public policy that impact the lives of millions of people should be based on data obtained from a "few small experiments... [and] maybe a few large ones as well." For example, Ariely tested the assumption that there is a positive linear relationship between incentive and performance. Results indicated an inverted U-shaped curve, wherein increasing monetary gain correlated with successful completion of cognitive tasks. However, past a certain dollar amount, performance decreased. For optimal performance, there appears to be an optimal level of reward - no less and no more. It is highly unlikely that one could increase creativity by increasing reward, as if one had an infinite amount of creativity. It has been assumed that compensation packages for business executives need to be several hundred times that of the average worker's in order to "attract the best talent." This needs to be seriously re-evaluated. Undoubtedly, business executives are quite comfortable with current arrangements so there is no chance that an experiment testing performance with incentives could be performed on Wall Street. Perhaps a contrasting scheme could be applied to welfare. …