The Economics Anti-Textbook: Dan Ariely on how people really make choices

Saturday, January 29, 2011

Dan Ariely on how people really make choices

The economics textbook story of 'rational choice' is both simplistic and complex. The simplistic part is found in the assumptions underlying rational choice. These include such things as the assumption that we have relatively stable and well-defined preferences about all the goods and services available to us and that we can make consistent choices that, given the resources at our disposal, allow us to maximize our utility or well-being. It's fair to call this simplistic because it ignores so much of what is known about how people actually make choices.
   The complexity of the textbook story is also evident to the student: the apparatus of indifference curves and budget lines, done in two dimensions on the blackboard, then mathematically in n dimensions (for n different goods), and later extended from choices made in one period of time to choices made over time as well, possibly into an infinite future. The technical complexity helps keep students focussed on mastering that; it's easy to forget to ask the broader questions of whether the entire framework is appropriate. After enough time working within this framework, it starts to look like the natural way to see things. People who see things in other ways are in other departments and disciplines like psychology, and contact with them is soon lost. This is part of how the process of indoctrination works.
   However, the good news is that in recent decades more and more economists have been paying attention to what psychologists know. My impression is that they're still a fairly small minority, but a growing one. To date, their work has had only a minor impact on the mainstream textbook content and students wanting a broader view will have to do some work on their own.
   The recent books by Dan Ariely of Duke University ("Predictably Irrational", 2008 and "The Upside of Irrationality", 2010) are a good place to start.