Monday, December 27, 2010

The upside of irrationality


Dan Ariely has been at the forefront of studying behavioral economics. This study has had a significant change in the way we look at economic decisions and how information is processed. Nevertheless, how all of these decisions are incorporated in models is still unclear. We have a lot of studies which suggest that pure rationality does not apply to our thinking, but there is not a clear alternative theory.

In his new book, The Upside of Irrationality: The Unexpected Benefits of defying Logic at Work and at Home, Ariely explores some of the positives of our irrationality. This research can have an influence with how we make investment decisions because it again addresses the lack of pure rationality that exists in our everyday thinking.

Ariely provides some interesting insights in irrational patterns of behavior in both the workplace and at home. For example, big bonuses do not often make us work better. The threat of loss or failure actually can cause poorer work performance. Our work is also affected by whether it has meaning. The type of work and whether it seems useful ill have an impact on our productivity. Similarly, we overvalue anything where we are closely involved with the production. It is called the IKEA effect which is associated with valuing furniture which we create. We have a strong attachment to what we create which explains the not-invented-here bias in the workplace and home. If we have invested in an idea which we consider our own, we will overvalue it.

At the home, we will get used to the same thing, so an object will have less value to us over time. We need to have something new to get a rush of happiness.

This research is telling because it again shows how biases exist in almost ay environment. We can get away from our lack of rationality. Is this an upside? I don't think so, but the lack of rationality provides for a more interesting environment for dealing with others.


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