Irrational Economics

Last Updated Mar 20, 2008 10:56 PM EDT

Economists aren't rational, because they assume people are.

It's a flaw that's become obvious in economics, and opened the door to a more reasoned approach, based on experiments, not theories that try to match data. One of the economists leading this wave is Dan Ariely, a behavioral economist at MIT and Duke, who has written a book called Predictably Irrational: The Hidden Forces that Shape Our Decisions.

There's a nice little profile of Ariely in the Boston Globe (free registration required), Author Dan Ariely puts rationality to the test. It even includes a couple of his tips on how to avoid behaving irrationally:

He says he tries to be alert to early-warning signs of irrational behaviors and have a plan to avert them. Examples: "Did you ever say things to your wife in the heat of anger that you regretted? Did you learn after doing it never to do it again? It's very hard. But you can say, 'When I get angry, I'm going to go away for an hour.' 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."

I haven't read his book yet. Will those who have please comment, especially on what it changes about the nature of business?
  • Michael Fitzgerald

    Michael Fitzgerald writes about innovation and other big ideas in business for publications like the New York Times, The Economist, Fast Company, Inc. and CIO. He’s worked as a writer or editor at Red Herring, ZDNet, TechTV and Computerworld, and has received numerous awards as a writer and editor. Most recently, his piece on the hacker collective the l0pht won the 2008 award for best trade piece from the American Society of Journalists and Authors. He was also a 2007 Templeton-Cambridge Journalism Fellow in Science and Religion.