Sunday, January 1, 2012

Predictably Irrational: Chapter 9

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.

Expectations shape our experiences. Things like presentation, what we've heard about a product/service etc. actually change how we feel when we experience them. This was demonstrated in a number of experiments Ariely conducted, as well as a number of experiments he cites.

Such expectations are the reason why people choose Pepsi in a blind taste test (i.e. when there are no expectations) versus why they choose Coke in a non-blind taste test: they are influenced by the brand, which they have come to love. Such experiments conducted in MRI machines show that the participants' brains actually perceive taste differently depending on whether the participants know if they were about to receive Coke versus having no knowledge. This shows the power of marketing, which tries to provide us with information that heightens our anticipated pleasure when trying a product/service.

Ariely believes this human bias also results in stereotypes. When we expect someone to behave a certain way, we react differently to their behaviour than otherwise. Moreover, members of a stereotyped group behave in different ways depending on how cognizant they are of the expectations of them. For example, Asian women asked to take a math test were more likely to do well if they were "primed" as Asians than as women!

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