Economist refutes rationality, proves own stupidity

Thank you Boston Globe for providing an endless stream of things to get annoyed about. This time, the Globe profiled an MIT 'behavioral economist' named Dan Ariely, who is hawking a book claiming that humans are consistently and predictably irrational. Thus the title of his book, "Predictably Irrational: The Hidden Forces That Shape Our Decisions."

He starts off with a bang, saying "I don't think people are stupid - just human," of course implying that to be human is to be irrational. To be fair, the idea of behavioral economics sounds at least somewhat interesting, in that they are trying to make mathematical models correspond better to reality by challenging the long held assumption that the "economic agents" in the model will always act rationally.

Ariely, apparently in support of this approach, uses experiments to prove that people are mostly irrational in their daily choices. The problem is, these experiments are so flawed that I have no idea how anyone could find them compelling. Here's one:

In one experiment, ...to test the power of "free," he and two colleagues set up a table in an MIT cafeteria. They offered normally high-priced Lindt chocolate truffles for 15 cents and ordinary Hershey kisses for a penny. Customers had to pick one or the other, not both. Seventy-three percent of the customers saw a good deal and went for the truffles. But when the prices were cut to 14 cents for the truffles and free for the kisses, 69 percent of customers went for the kisses, even though the truffles were an even better deal.

This supposedly proves that people are completely irrational because they passed up a 14 cent Lindt truffle. The problem with this is that it completely ignores the "pain-in-the-ass factor". Yes, I just coined a new behavioral economics catchphrase. Imagine you're walking through a cafeteria and pass a table where two guys are selling cheap chocolates. You want some chocolate, you have some change, so you might as well get a truffle for a trifle since you're already going to reach into your purse or pocket for the coins.

The next day, you pass the same table, and the prices are lower. In fact, the ho-hum Hershey's Kiss is free. I know that if I were in that situation and perhaps was in a hurry, or didn't feel like searching for pennies to make up the 14 cents, or break a dollar and be left with annoying change and another useless penny that I'd just throw away, I'd just take the free Kiss and walk away. Even though I like truffles better.

Does that prove I'm irrational? Or does it show that the "experiment" is incredibly poorly designed, and only highlights that there are many other facets to the decision-making process than Ariely seems to understand?

According to the article, Ariely also peppers his book with examples from his own life.

He tells of considering a sporty Audi vs. a Honda minivan. He chose the Audi because it came with three years of "free" oil changes. Later he computed the value of the oil changes: $150, or about 0.5 percent of the purchase price. Because he and his wife have two children, the minivan made much more sense, but "free" was irresistible.

Ariely chose an Audi, which probably cost $40,000, over the practical choice of a $30,000 Honda mini-van that was much better for his family, because of free oil changes? Seriously? That is so absurd that there are only two possible explanations:

1. Ariely truly is a complete moron, and a perfect example of the "consistently irrational economic actor" he believes predominates in our society. He doesn't take into account his family's needs or finances, and instead is lured into an irrational decision by $150 worth of free oil changes because he somehow thinks it's a better deal. Or....
2. Ariely is a snake oil salesman.

After reading the article and taking a look at the website for his book (which I won't link to here because he doesn't deserve the publicity), I think the answer is yes to both.

In the interest of full disclosure, I haven't read his book. It's even possible that the Globe's characterization of his experiments is superficial and doesn't describe experimental controls that appear to be missing. But I'd be surprised if that was the case. Every indication is that Ariely is either a charlatan, an incompetent, or both, and is trying his damnedest to propagate the repugnant notion that human beings are inescapably, completely irrational, and all we can do is to try and trick ourselves into making good decisions, in spite or our natures.

As a conclusion, I'll let Ariely's own words speak for themselves:

How has all this affected Ariely's own decision-making? He says he tries to be alert to early-warning signs of irrational behaviors and have a plan to avert them. Examples: ... "I have learned to avoid things that are 'free.' I have learned the importance of taking decisions out of my hands, like the decision to save. I don't want to have to think every month about how much money to put toward my retirement."

As Ariely speaks, new experiments and optimistic ideas tumble out of him, like water from a fountain. "It's amazing, the little secrets of life that make us a little better," he said. "Like dieting, for example. If only we got rid of elevators. . . ." [emphasis added]