Why we do the stupid things we do

Posted by Barbara Kiviat Tuesday, February 19, 2008 at 3:49 pm

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It's hard to swing a dead cat without hitting a behavioral economist these days. In case you're one of those people who only reads this blog for the trivia, and you don't normally follow economics, I'll explain. Neo-classical economics (i.e., what you learned as a college freshman) assumes that individuals are rational and act in their own self-interest. Behavioral economics, which borrows heavily from psychology, holds that individuals are deeply flawed and often make decisions that to a rational observer would be considered "mistakes." Right now, it's really hip to be in the second camp.

Dan Ariely, a behavioral economist who just left MIT for Duke, has a new book out today on the subject. There are a ton of these books floating around, but if you're a beginner, Ariely's is a fine place to start. It describes a slew of experiments, many of them his own, which shed light on a variety of weird economic behaviors, like why we go berzerk over things that are free and how we overvalue the stuff that we own.

A lot of it supposedly goes back to the fundamental way we see the world, which worked all fine and good in the wilderness but trips us up now that we're in civilized society. Consider this groovy demonstration of how easily our perceptions can be manipulated, from Ariely's web site:

Earlier today I asked Ariely to talk about how that translates into, say, deciding what we should pay for the things we want to buy. He described one of the experiments in his book:

Here's the table he refers to:

It's pretty stunning. (As an aside, I should say that I am very much against ever giving anyone your Social Security number.)

Now, of course, you're not going to go to the mall having just rehearsed the last two digits of your Social Security number. But there are other ways that your decisions can be influenced by data that shouldn't be relevant -- and influenced intentionally. A number of years ago, when Williams-Sonoma wasn't selling its $275 bread machine, instead of pulling it from the shelves, it added a more expensive version. Once $275 seemed like a bargain for a bread machine, sales spiked (PDF).