Predictably Irrational:The Hidden Forces That Shape Our Decisions by Dan Ariely. Harper Collins, 280 pages, $25.95.
Nudge: Improving Decisions About Health, Wealth, and Happiness by Richard Thaler and Cass Sunstein. Yale University Press, 293 pages, $26.
Reviewed by George Scialabba
Near the beginning of The Hidden Persuaders (1957), Vance Packard quoted from Advertising Age magazine the first principle of the new science of Motivation Research: "In very few instances do people really know what they want, even when they say they do." Fifty years later, this astounding revelation has begun to penetrate mainstream economic theory. Better late than never.
American political ideology since around 1980 can pretty much be summed up in four words: markets good, government bad. Unregulated competition, in this view, is optimally efficient; governments need only enforce contracts, tend to national security, and then step out of the way. Neoclassical economics demonstrates with mathematical elegance that, if not interfered with, supply and demand, production and consumption, will glide smoothly toward a stable equilibrium.
But any proof is only as good as the assumptions it rests on. According to conventional economics and political science, consumers and voters can be counted on to make rational choices. "The assumption that we are rational," writes MIT economics professor Dan Ariely, "implies that in everyday life, we compute the value of all the options we face and then follow the best possible path of action." It also implies that we have sufficient information to make a wise decision, and that the context in which we decide doesn't matter - deciders are always calm and objective, uninfluenced and unpressured. It implies, as Harvard law professor Cass Sunstein and
We're not, of course, as wise humans (and wily advertisers) have always known. A new sub-discipline called "behavioral economics" has begun to quantify this perennial intuition and assess its implications. Two engaging and enlightening new books divide these tasks between them. Predictably Irrational describes some of the research that has led economists to modify many standard assumptions. Nudge turns these insights to account, suggesting improved strategies for individual decision-making and public policy.
Dan Ariely studies people's apparently peculiar choices and tries to make sense of them. Case 1: The first company to manufacture a bread-making machine offered one model, priced at $275. Virtually no one bought it. The company then added another, larger model, priced at $400. Overnight, the sales of the $275 model took off. Case 2: A restaurant offered a fine wine at $50 a bottle. Hardly anyone ordered it. The restaurant then added a mediocre wine for $70. Immediately, diners began ordering the $50 wine. Case 3: A group of business-school students were presented with an ad for the Economist magazine offering an online-only subscription for $60 and a print-plus-online subscription for $120. Two-thirds of them chose the online-only subscription. Presented with another ad that offered the online-only sub for $60, a print-only sub for $120, and a print-plus-online sub for $120, four-fifths of the same, presumably savvy group chose the print-plus-online subscription.
None of these results makes sense - if you assume that "people really know what they want." But we only know or want anything in some context. Contexts shape decisions - this is the message of behavioral economics. The above cases illustrate the principle of "relativity": we are far more likely to choose something - whether or not we actually want it - if it seems like a bargain in relation to something else. Ariely's other cases illustrate (often amusingly) the principle of "arbitrary coherence," the "zero price" effect, the "endowment" effect, and the "keeping options open" trap, among others.
Richard Thaler is one of the founders of behavioral economics. Along with Cass Sunstein (the most widely-cited law professor in
To "nudge" is to frame a choice, to arrange its context, using what the authors call "the emerging science of choice," so as to make one or another result more likely. To those who object, knees jerking, that this is an infringement on liberty, Thaler and Sunstein reply that choices always appear in some frame or other - there is no such thing as a frame-less, context-free choice. Knowing this, we can either leave the framing to chance (or, more likely, to advertisers), or we can consciously, democratically decide on it.
This means, above all, paying close attention to default settings. The most powerful influence on decision-making, it seems, is inertia; the most likely choice is no choice, at least when choice involves actually doing something. So if there's reason to think people would like to save enough money for retirement, conserve energy, be registered to vote, belong to a union, and save lives by donating their organs when they die, then we should offer "Save More Tomorrow" (ie, automatically increasing) pension plans, cost-disclosing thermostats, voter registration simultaneous with driver's license renewal, postcard authorization for unions, and "opt-out" organ-donor instructions on ID cards. We should, that is, make it easier for people to do - ie, by default rather than by making a special effort - what they would probably, on reflection, like to do. Thaler and Sunstein propose many more such nudges, some of which will please liberals and some conservatives.
If behavioral economics and "choice architecture" sound like common sense rather than cutting-edge social science ... well, better late than never.
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GEORGE SCIALABBA is a regular contributor to the Globe Books section.
