86 Academy of Management Perspectives February OFF THE SHELF

economics dismantles the assumptions of main- Predictably Irrational: The Hidden stream economics, at the center of which is a Forces That Shape Our Decisions “rational man” who has access to infinite infor- mation and is capable of separating relevant from irrelevant and integrating infinite information in By Dan Ariely, Harper, 2008, hardcover, $25.95 the best possible decision given his stable and well-defined preferences. As early as in 1957, Her- Reviewed by Natalia Karelaia, Assistant Professor of bert Simon, one of the most influential social Decision Sciences, INSEAD scientists of the 20th century and Nobel Laureate redictably Irrational by Dan Ariely is one of the in Economics (1978), coined the term “bounded most successful recent books in decision mak- rationality” to refer to the cognitive limitations of ing and behavioral economics. Ariely, the both knowledge and cognitive capacity. Psychol- P ogists Daniel Kahneman and Amos Tversky gave James B. Duke Professor of Behavioral Economics at Duke University and a visiting professor at a further impulse to the field in the late 1970s, MIT’s Media Laboratory, tackles some perplexing publishing a series of influential articles on mental questions regarding human behavior. Why do shortcuts and systematic biases in human judg- ment and decision making. For this work, Kahne- more expensive drugs give greater relief than their man was awarded the Nobel Prize in Economics cheaper analogues? Why do we go back for second (2002)1. Many other social scientists have con- helpings at all-you-can-eat buffets when we are tributed and continue contributing to the devel- already full? Are honor codes (or simply recalling opment of the field by proposing new experimen- the Ten Commandments) effective in reducing tal evidence of “predictably irrational” behavior, dishonesty in the workplace? theories that explain such behavior, and remedies Ariely’s main thesis is that people are far from to improve human decision making. rational and often act against their best interests. Predictably Irrational does not revolutionize the Oddly enough, however, people are quite predict- field: It presents experimental evidence that able in their irrationality. The author illustrates proves yet again that human behavior is irrational. his thesis by recounting his own personal experi- While some experiments presented in the book ence, anecdotes, and corporate examples, but are innovative, many ideas build naturally on the mainly by describing a series of highly entertain- earlier findings in the field. What Ariely does ing experiments with real people making decisions brilliantly, however, is introduce nonacademic about beer, chocolate, spending, procrastination, readers to the field of behavioral economics by and honesty. The predictability of human irratio- means of innovative and entertaining experi- nality is rather good news because awareness of ments and infecting the reader with his scientific our vulnerabilities is a starting point for improving curiosity. our business, purchasing, and personal decision Each chapter of the book is organized around a making. Ariely sees his main goal as helping the few experiments carried out by the author and reader “fundamentally rethink what makes you describes a force (for example, relativity and social and the people around you tick.” norms) that influences human behavior. The Behavioral economics is a relatively new but chapters are quite independent; the only common fast-growing field. It combines aspects of both

economics and psychology and is a neighboring 1 It is generally accepted that Tversky, who died in 1996, would also field of judgment and decision making. Behavioral have received the prize had he been alive.

Copyright by the Academy of Management; all rights reserved. Contents may not be copied, e-mailed, posted to a listserv, or otherwise transmitted without the copyright holder’s express written permission. Users may print, download, or e-mail articles for individual use only. 2009 Off the Shelf 87 thesis connecting them is human irrationality. on social norms as opposed to money is not only Although Predictably Irrational is a fascinating and cheaper but can also be more effective. He pro- very illuminating book, sometimes the reader has vides colorful experimental evidence supporting a feeling that Ariely is trying to explain every- the idea that emphasizing the social side of the thing in a little more than 250 pages, from drink- company-employee relationship creates much ing coffee to choosing a romantic partner, from goodwill (as an example, he describes the consid- purchasing behavior to political conflicts. The erable goodwill Google has generated by offering absence of an explicit structure makes the book free gourmet lunches to its employees). look like a mosaic of entertaining and yet inde- The chapters on honesty are built around the pendent essays. The positive side is that the reader idea that most people consider themselves honest can focus on chapters that interest him most. and yet occasionally cheat “just a little bit” at the While most chapters unravel the mysteries of risk of being caught. It is not surprising that the consumer behavior, several focus on social norms cost of employee theft and fraud in the workplace and dishonesty. In the chapters related to con- surpasses the total cost of robberies in the United sumer decision making, Ariely shows that we can- States. Recent corporate scandals (e.g., Enron) are not resist free products even when we don’t really other examples of dishonesty. In Ariely’s experi- value them, that preconceptions are sometimes so ments, the majority of participants—students— powerful that they overwhelm actual experience, cheated on a test when they had the opportunity. that people tend to choose inferior alternatives The finding is perhaps not unexpected for those when choosing in groups, and that irrelevant an- who are familiar with Freakonomics by Steven chors and the way the alternatives are presented Levitt and Stephen Dubner. The authors show affect our choices. For his laboratory experiments, that even schoolteachers cheat to make their stu- Ariely finds inspiration in the real world. For dents’ test performance look slightly better. Ariely example, he uses the Economist’s marketing cam- goes further by suggesting that honesty can be paign to illustrate the power of relativity (Chapter “primed” by, for example, making people think 1), known in the literature as “decoy effect.” The about the Ten Commandments or making them effect consists of “helping” consumers to choose sign a simple honesty oath. The problem with this between two items, for example, subscription op- solution is that oaths and rules must be recalled tions A and B, by introducing a third “decoy” around the time that one is being tempted. Ariely item—C, which is a slightly less appealing version also concludes that dishonest behavior is observed of one of the other two, say A. The power of the especially in situations when “cheating is one step decoy item is that it increases the attractiveness of removed from cash”: It is easier to steal a pencil the similar option, making the choice easy. Sub- from the workplace than the money to buy a scription option A seems much more attractive pencil. when both B and C are presented than when only Defending the thesis of human irrationality, B is available. Unsurprisingly, the Economist’s ad Ariely is often unfairly cruel to human nature. For included a decoy for the pricier option2. example, Ariely shows that like Buridan’s ass, we The chapter on social norms contains valuable prefer to keep multiple (and unnecessary) doors ideas on how to motivate people. It also helps us open at a cost of emotional and financial distress. understand why we are affected by monetarily While it is certainly true that most of us keep too insignificant gifts a seller or our employer gives us. many doors open, identifying the most valuable (Think about what people will do to get a free door is more difficult in naturally occurring envi- T-shirt or keychain.) Ariely suggests that relying ronments than in clean experimental settings. Our often flawed intuitive judgment does not help 2 The Economist does not only use the decoy effect to increase the identify the best door. In addition, in Predictably journal subscriptions. It also publishes articles on it. See, for example, “The Irrational, “irrational” often implies “unhappy,” way the brain buys” (December 20, 2008, pp. 99–101), which discusses some of the latest retailing techniques and scientific research on consumer “depressing,” or “leading to bad outcomes.” In decision making. fact, other researchers showed that people who 88 Academy of Management Perspectives February deviate more from the traditional definition of Hogarth, and Anil Gaba illustrate “the illusion of rationality in economics are happier. Barry control” and suggest that understanding and ac- Schwartz and his colleagues came to this conclu- cepting uncertainty and unpredictability can lead sion after comparing life satisfaction and happi- to better decisions. Finally, Nudge: Improving De- ness of people who aim to make choices that are cisions About Health, Wealth, and Happiness by just good enough (“satisficers”) and those who Richard Thaler and Cass Sunstein contains sug- always aim for the best (“maximizers”). They gestions to policy makers and “choice architects” found that maximizers are generally a miserable for making people better off by gently “nudging lot, often anxious about whether they are in fact them” to improve their decision making. making the best decision (for a summary of these Predictably Irrational draws mainly on the exper- research findings, see Paradox of Choice: Why More iments carried out by Ariely and his colleagues Is Less by Barry Schwartz). and only occasionally refers to other authors. Predictably Irrational is not the only popular Although Ariely has undeniably accumulated book on the fascinating topic of decision making knowledge, having published his experimental and behavioral economics. Many other books that findings for more than 14 years, paying more at- cover ideas left behind by Ariely have appeared tention to the work of other scientists could have recently or are about to be released. These books made the book even richer (but also substantially would be good companions to Predictably Irratio- nal. For example, Sway: The Irresistible Pull of Ir- thicker). Readers who are interested in learning rational Behavior by Ori and Rom Brafman dis- more about different facets of irrationality will cusses group decision making, the irreversibility of find useful the bibliography and additional read- first impressions, and irrational escalation of com- ings organized by chapters and provided at the end mitment. Blink: The Power of Thinking Without of the book. Thinking by Malcolm Gladwell explores the qual- Having said all that, I will certainly recom- ity of snap judgments. In Fooled by Randomness: mend Predictably Irrational to my MBA students. The Hidden Role of Chance in Life and in the Mar- The book will be of interest to everyone interested kets, Nassim Taleb examines why humans misun- in understanding the nature of decision making, derstand the role of randomness in business and improving one’s own decisions, and understanding life in general and often mistake luck for skill. In the behavior of others and effectively shaping Dance With Chance Spyros Makridakis, Robin their decisions.