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The Upside of Irrationality

A successful publication calls for a follow-up. The Upside of Irrationality is the successor to Dan Ariely’s successful Predictably Irrational, one of the best selling popular behavioral economics books of the last few years.

Despite its title, the book is not a thorough exploration of instances where irrationality leads to better decisions: As in his previous book, Dan reports here mainly on his own academic research relying on laboratory and field experiments covering topics ranging from the adverse performance effects of high powered financial incentives to the impact of empathy and emotions on decisions. More than before he interweaves his narrative with personal anecdotes that illuminate his choice of research topics; he reveals how his experience of being a burn patient in his youth shaped his future career and how normal day-to-day annoyances and more pleasant experiences led him to devise testable hypotheses about human behavior. This is perhaps also the most surprising aspect of the book. Dan’s highly personal way of sharing his thoughts and knowledge is also highly unique. This is not a dumbed-down version of academic research for the masses to make a quick buck [in case it is intended as such a thing it’s execution is brilliant]; this is something very personal. It is not only for the reader, rather, it seems to be also something important for the writer, a way of coping maybe. (And indeed, Dan does not only share his pain, he also reveals his darker side for revenge.)

I have a few quibbles. Only a few and very minor ones.

The Upside of Irrationality is divided into two parts. The first part is supposed to relate to the work domain, the second part to the non-work domain. Yet, the first part contains a chapter on revenge that would have fitted much better to the material on emotions that Dan discusses in the end of the second part.

All but one chapter are primarily based on Dan’s own research. On the topic of empathy, he did not even have an article of his own to include in the additional readings list. Though, of course, the topic may be very dear to him, this somehow interferes with the otherwise very personal exposition.

In the chapter on revenge, he mentions that he would not want people to live by the biblical rule “an eye for an eye”. Why not? This is a rule of moderated response. If you do not punish those who hurt you, you may invite further harm. This, Dan himself discusses in this chapter. If you punish in moderation, that is “not more than one eye for an eye”, you avert inefficient escalation. So, why not?

The title of the book and the subtitles of chapters promise more than Dan finally delivers. Where are the benefits, you wonder. Why do we do that? Dan demonstrates very compellingly behavior that is inconsistent with utility maximization and identifies behavioral quirks that lead to counter-intuitive recommendation for improving our overall happiness. He does not really explain why we do what we do. He does not really show benefits of irrationality. OK, the last is not entirely true. Our irrationality makes us human, he reveals at last.

In spite of the above, a great book. I would not dare to say that it is better or worse than Predictably Irrational. It is different.

Read: Experimental Economics - Rethinking the Rules

In contrast to what some economist today still say and believe, economics is an experimental science. At the latest, when the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel was award to Daniel Kahemann (a psychologist) and Vernon Smith (an economist) in 2002 they should have acknowledged it.

Economic experiments have been proven useful in informing theory and testing (new) economic institutions before their implementation on a broader scale, e. g. the design of spectrum auctions that generated unprecedented revenues for the states running them. Unfortunately even within the community of experimental economist their use and purpose is not without controversy. Some, let’s call them experimental economists in a narrower sense see the main use of experiments in economics in showing that the theory works (well) and finding instances of when it works best. The other group, let’s call them behavioral economists see the economic experiment as one method to investigate the underlying assumptions of economic theory in order to inform theory building and inspire the revision of economic theories so that they may move more towards a positive than a normative model of the world.

With Experimental Economics a group of six British experimental economists now tried to critically assess the current state of the field that constitutes an invaluable tool for research in all areas of economics.

In a series of chapters they address the method and methodology of experimental economics, the domain of economic theory (where and when does it apply?) and the limits of experimental tests in terms of what can be said about the theory and the external validity of the experimental observations; and also how experiments are used as rhetorical devices, “exhibits” that reliably show some particular behavior of their participants illustrating a specific point. Two further chapters address the important issue of financial incentives in experiments (when are they needed, how should they be implemented?) and different sources of noise in the data that requires bespoke statistical treatment.

The last point, noise in the data and heterogeneity between subjects is in my opinion a very important one as this is still often a neglected topic in most experimental studies today. Of course, a well designed experiment may allow the authors to show their main point without any fancy statistics. On the other hand, in order to move to a positive theory of economic behavior the individual and not the aggregate behavior should be the focus of the analysis. This necessarily requires a more advanced statistical treatment of the data. As well as laboratory and field experiments (and happenstance data) are complements so are theory, experiments, and statistics complements.

In sum, even though I may not agree with some of the more specific points Bardsley, Cubitt, Loomes, Moffatt, Starmer, and Sugden make their book is an excellent text that will make it on the reading list for my courses in experimental economics.

Read: Identity Economics

In 2000, George Akerlof and Rachel Kranton published Economics and Identity in the Quarterly Journal of Economics proposing a way on how to acknowledge the influence of identity in the standard economic framework. The published paper was surprisingly non-technical, it focused rather on empirical examples that are consistent with their model than on theoretical derivations, i. e. the rigorous use of mathematics to obscure any intuition one might have. Their book Identity Economics follows in the same tradition. It is basically an accessible summary of their papers on the topic that they published so far. In a number of chapters they present first the intuition of their model and than some applications by enumerating a long list of empirical observations that are consistent with their model.

This style of presentation is both fortunate and unfortunate. It is fortunate because the book becomes consequently accessible to a non-economist audience. Though I doubt that a lay-person may actually be interested in how economists deal with the influence of identity on economic decision making and in the fact that they (the economists) did not care to do so previously. After all, identity is not really a new concept. Ask a sociologist or psychologist about this… Therefore, the general style and choice of content of the book is also unfortunate. The actual audience may rather consist of economist and researcher from fields that have acknowledged identity as an important factor long ago. This audience – and here I include myself – is certainly also interested in the underlying math. A technical appendix would have been nice. Luckily, Rachel Kranton published some material (an earlier, more technical version of their paper Identity and the Economics of Organizations) on her webpage.

In a nutshell, identity determines the optimal choice for someone belonging to a certain identity class. If the individual deviates from this “class action” her individual utility is reduced. Hence, utility is just the sum of the standard utility and an identity penalty term. The problem, of course, is then to define identity categories, to define the optimal “class action”, to assign an individual to such a category, and to determine the appropriate penalty.

All in all, the whole approach is rather interesting. I like that the individual is finally put into a (social) context. It certainly enhances the descriptive power of the standard model. Its prescriptive power is, however, rather ambiguous. There are too many unknowns. Consequently, the general reception of these ideas in economics seems rather lukewarm (as already noted in another review at whimsley worth reading). Nevertheless, others are picking up on the topic. There will be, for instance, another book on it published this winter by Cambridge University Press: Individuals and Identity in Economics authored by John B. Davis that seems rather interesting as it promises a more broader overview and also some more rigorous illustrations.

Read: Sway - The irresistible pull of irrational behavior

Recent years have seen a massive surge in popular economics books for the uninitiated masses. The list ranges from books advocating standard economics and its applications to everyday phenomena – like Landsburg‘s The Armchair Economist, Cowen’s Discover Your Inner Economist, and Harford’s The Undercover Economist – to books that tell of unexpected links of standard economics and real world behavior, e. g. Levitt & Dubner’s Freakonomics, to books that present a blend of economics and psychology, questioning the standard economics’ focus on flawed assumptions on human behavior, stressing the schism between neo-classical normative (standard) economics and positive (behavioral) economics – like Ariely’s Predictably Irrational and Thaler & Sunsteins’s Nudge.

The Brafman brother’s Sway belongs to the last category. In contrast to Ariely et al. they do not present there own original research as they are not active researchers in the field of behavioral economics. Thus they follow the current standard recipe of success of other popular economics books authors, they tell a lot of more or less connected anecdotes illustrating behavior that is not conforming to standard economic theory or an intuitive definition of rational behavior.

Sway has two main topics. About two third of the book is dedicated to the sunk cost fallacy, even if the Brafmans use different labels, most notably commitment (to a lost cause). In brief, due to being loss averse people tend to commit to behavior and opinions that are not in their best interest or rational since they already invested some resources and do not want to loose their initial investment. The remaining third is then about the interdependency of social norms and preferences and explicit incentives, the crowding out of intrinsic motivation by extrinsic incentives.

All in all, Sway is rather well written, entertaining and instructive. Indeed, once you start reading you will want to go on. Given the that Sway is just under 200 pages it may well serve as a nice teaser to the field of behavioral economics and other books and maybe academic programs that can provide more depth.

Read: The Cult of Statistical Significance

I think my first “contact” with Deirdre McCloskey was when I got seriously interested in scientific writing and in particular in how to improve my writing. I read her Economical Writing at about the same time as Strunk & White’s The Element of Style. That must have been during the middle or shortly before finishing my PhD. Yes, that late. The Rhetoric of Economics followed very soon. Here I got a first glimpse at her battle against the evil p-value and the misuse of statistics. I have to admit even though I agree with her main critique I do not follow all her advice — I think that is one of the big problems she sees in empirical economists. They agree but still do otherwise. I also had the good luck to meet Gerd Gigerenzer, a psychologist and fellow warrior against the misuse of statistics, and discuss this particular topic with him during a sociable evening after a long day full of presentations at a remote conference venue of the Max Planck Society. Yes, there is something wrong with our (that is the economist’s) way of relying on, reporting, and interpreting statistics and specifically statistical significance.

How the Standard Error Costs Us Jobs, Justice, and Lives is not only the subtitle of Ziliak and McCloskey’s manifesto The Cult of Statistical Significance it is quite indicative of their (strong) rhetoric.

The book can be roughly divided in two parts that are devoted to different “themes”. The first is an updated and extended rehash of their earlier articles on the current practice of relying on statistical significance in various fields. If you have not read their articles so far read this and be shocked. You will see the author’s outrage in every paragraph. The second part and theme is a historical account that tries to shed light on how we ended up where we are. This part is rather filled with bitterness and repugnance for R. A. Fisher and compassion for the neglected Mr. Student, William Sealy Gosset.

Ziliak and McCloskey’s rhetoric is unique, yet it is not always to their benefit. Though, they certainly make their point and at least in private you have to agree with them. All in all, the book is entertaining and instructive. Even so, I would not assign this book to a class for reading I would rather recommend the 2004 special issue of the Journal of Socio-Economics on this topic. On the other hand, every empirical scientist and every policy maker relying on scientific research (shouldn’t they all?) should be aware that, first, size matters and that precision of measurement should not be the only decision criteria.

Read: Drive - The Surprising Truth About What Motivates Us

Pink’s Drive is about motivation in the workplace and yet I have a feeling that he does not know the typical workplace or the dominant type of jobs in the developed world. Or, that the book is not about motivation in the workplace after all.

He gets a lot of things right. There are two very different types of jobs. One type consists of mainly routine work, the other is of mainly creative (problem solving) nature. He correctly identifies the categories of motivation, extrinsic and intrinsic, that can be improved by different measures each and that can be linked more successfully to either the routine or the creative type of work. Further, he identifies three motivators that are particularly important for intrinsic motivation: Autonomy (People like to have control over their work), Mastery (People like to get better at what they do), and Purpose (People like to be part of something that is bigger than they are). 

Finally, he correctly points out that extrinsic incentives may have adverse effects on intrinsic motivation.

Pink, however, fails in several other important aspects.

Routine work still needs to be done. Outsourcing does not help. Somebody still has to do the work. Even if job growth is faster for creative jobs nowadays, routine work is a dominant part of work in public administration and public enterprises. Not every job can be re-designed to emphasize the creative part. Consequently, just for this reason alone relying on intrinsic motivation cannot be an universal solution. In short, I think he grossly overstated the relevance of creative jobs.

Second, extrinsic motivation is not just money. There is at least praise, promotion (ok this is money in the end), reputation and the admiration of peers. How do they interact with the different types of work and motivation? Not a single word. How do extrinsic and intrinsic motivation complement each other? Not a single word. In short, he grossly understated the relevance of extrinsic motivation.

Third, his exposition is very unbalanced and lop-sided. If he mentions studies he ignores results that do not support his point. Studies that show the success of extrinsic rewards are not mentioned. They do not support his point. If he concedes that certain extrinsic incentives can be effective he fails to explain to what extend and when this is true . His book is full of inconsistencies. Why do most “flow” experiences (this is something good) happen at work if the workplace is dominated by the horrid carrots and sticks, if-then rewards? Why are the free time for creativity programs only implemented for certain types of employees, i. e. the engineers? Inconvenient truths are sometimes alluded to, never are they discussed in detail.

In the end, Drive is more like a self-help book and about personal development and not about the workplace and how to implement more successful personnel strategies. Indeed, a major part of the book contains a toolkit for self-improvement and ancedotes and conservation starters. The book is about something that fascinated the author. It is not about enlightening the reader.

There was nothing really surprising (except the lopsidedness) and Pink does not offer the (whole) truth. This is really a pity as Pink certainly is a skilled author and the topic is important.