Saturday, January 7, 2012

Predictably Irrational: Chapter 11

Dan Ariely is a behavioural economist who refutes the idea that we are fundamentally rational. Through empirical data, experiments and anecdotes, he illustrates that our irrationality can actually be predicted. He then presents ways in which we can make more rational decisions, both as investors and as people.

We are quite dishonest. Not only do robberies result in losses of hundreds of millions of dollars per year, but employees steal hundreds of billions from their employers, the insured over-claim by billions, retail customers wrongfully return billions worth of merchandise, and taxpayers stiff the IRS by hundreds of billions as well.

Stealing is considered wrong in pretty much every culture, and yet dishonesty is prevalent everywhere. Many believe a part of our brain (the superego, as Freud would have called it) enjoys it when we comply with internalized societal values, such as being honest. But sometimes our mind is able to bend reality to justify theft. Ariely suggests, therefore, taking steps to avoid putting people in such situations where they are prone to becoming dishonest. For example, doctors should not receive funds for prescribing certain procedures, and accountants should not be able to consult for their clients on the side.

An honour code also seems to discourage dishonesty. In experiments Ariely conducted, groups who were not policed cheated more on tests than (control) groups that were; however, those who were asked to sign an honour code or who were asked to recall the Ten Commandments did not cheat!

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