Tuesday, June 23, 2009

Predictably Rational - Part 1

This is not a crticism of the book Predictably Irrational by Dan Ariely. In fact, it is a brilliant book and I would recommend it to everyone. The book essentially debunks the theories of a rational economic man as preached by Standard Economics. The book is on Behavioural Economics which starts with the assumption that uman beings could be irrational also. And goes on to prove that we are not only irrational, but predictably irrational and that we demonstrate the same irrational behaviour time and again.

This series of posts will try to prove that we may be irrational but perhaps not predictable. I will take each of the chapters (not in any particular order and show that it is not a good idea to predict how someone would behave in, say, India, based on experiments carried out in United States.

To be fair to Dan Ariely and other behavioural economists, they do claim that behaviour is contextual. But I think they are way off mark when they conclude based on experiments.

Let me take an example from the book. In an experiment, Dan and his team, served four kinds of (free) beer and took orders (in a bar near MIT, I think). When order was taken aloud, people around the table chose four different beer. On taking a survey after serving the beer, the economists found that the one ordering first always enjoyed the beer and the rest didn't enjoy it that much. When the people being served were asked to write down their orders the variety of beer ordered per table was reduced. The average enjoyment however went up.

The conclusion: (as per the book) [P]eople are willing to sacrifice the pleasure they get from a particular consumption experience in order to project a certain kind of image to others. ... In Hong Kong, individuals also selected food that they did not like when they selected in public rather than in private, but these particpants are more likely to select the same item as the people ordering before them.

So in essence, people would strive to conform to an image that is driven by their respective culture.

Now is this reaaly so? India must be very unique then. Why? I have been to innumerable such gatherings. When I was younger and unmarried, we had this tradition among friends to eat out to celebrate birthdays. SO essentially the birthday boy or girl pays. The food for rest of us was therefore free. We also had to announce our choice in public for the waiter to hear what we wanted. Sometimes one person would take the initiative to write down waht we wanted and give it to the waiter. Given the scene that is very similar to the Dan Ariely experiment, my experience is very different. We always ordered different food but just sufficient for all to have a little taste of an item. So if we are 6 of us, we would, say, 2 plates of 4 items each. The idea was to taste as many items as possible. The idea was also to ensure that we are within budget. And also that we should not waste food.

Those days there were occassions when I had to eat alone - I was a bachelor, remember? I did the same. I order "thali" (a plate with assortment of food in small quantity; "thali" means a plate - so basically a platter) to taste as many different varieties as possible but still keep th bill with budget. Not always, but often.

Now I am married, but when we go out to eat we still do the same. Yes the budget has expanded, but we try to include as many dishes as possible within the budget.

Now is that being irrational? To maximize pleasure within budgetary constraints is a perfectly normal way to behave. In fact it is rational. Predictably rational.

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