Sunday, January 8, 2012

Predictably Irrational: Chapter 12

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.

Employees tend to steal supplies from work, but they will not steal equivalent amounts of money from petty cash. Customers will wear clothes with the label and return them, but they will not steal cash from the cash register. Users of communal fridges will steal food/drinks but will not steal cash placed in the fridge. (Ariely actually did run such an experiment.)

Ariely reasons that this is because we rationalize our thefts. When we steal, we trick our minds into believing there is justification, and this is a lot harder to do with cash. As a result, we find it much easier to steal non-cash objects.

Unfortunately, as we move to a cashless society, this is something that we need to understand. Credit card rates, stock options and frequent flier points are all non-cash but valuable areas by which businesses can steal from the public, and the optics don't appear to be as bad as if they stole cash. But the effect is the same!

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