Freakonomics and Predictably Irrational
From time to time people ask me about the relationship between Predictably Irrational and Freakonomics.
To start with, Freakonomics has a single-word title, and one that is the authors’ own creation — which clearly shows that Levitt and Dubner are more imaginative and creative.
Titles aside, the fundamental difference is that whereas Freakonomics shows how the world works according to the principles of rationality, particularly in places where we don’t expect it (real-estate brokers, Sumo wrestlers, teachers, etc.). Predictably Irrational is about our irrationalities — the places where people think they behave rationally but, in fact, don’t. From this perspective, you might want to consider Predictably Irrational to be a stepbrother of Freakonomics — examining how the world works (in places where we expect rationality), according to the principles of irrationality.
Despite this sharp difference, I think that the two books are more complementary and compatible than one might initially expect. In Freakonomics the main point is that incentives matter and that people react to these incentives (real-estate brokers treat their own homes and the homes of their clients differently because it is in their best interest to behave this way, teachers cheat if their financial future depends on it, etc). While there is no question that people are influenced by their incentives, the perspective in Predictably Irrational is that there are other forces in addition to incentives that are involved (emotions, social norms, expectations, inferences, etc.), and that only by incorporating these elements into the picture as well, will we be able to understand and predict human behavior.
While Freakonomics describes some of the motivations for human behavior (while leaving some out), so does Predictably Irrational.One perspective is to look at whether there is any water in the glass, and the other is to test whether there is more space in the glass — when in fact the glass is partially full (or empty). This is why I consider the two books to be complementary.
Of course the larger question is: Which of the two approaches (standard economics or behavioral economics) explains more of human behavior? This is not a question that we have a satisfying (or even remotely satisfying) answer for at this point in time.
My latest book, The Upside of Irrationality, explores some positive and some negative ways that irrationality plays out in our lives.
I don’t think economics can reform itself because it’s impossible for an adult economist to rewire his or her brain to see human behavior as anything other than the result of a complex-base_10-math operation. But like the computer on your desk, the evolved human brain (indeed, all life) is not a base-10 math processor — it’s a binary logic processor.
It’s NOT MATH, it’s LOGIC (boolean algebra is not decimal arithmetic). Economists will NEVER get it because they literally don’t have the brains for it.
Dan;
I think that both books are in the empirical tradition. Levitt/Dubner examine incentive based reasoning, and find clever social “experiments” which shed important light on our theorizing. Tim Harford, Tyler Cowen, and others are essentially building upon the numerous thought experiments in Schelling’s work and finding neat data to support, challenge or disconfirm some of those ideas.
I see your book, which I will bet will be less popular but more enduring than any of the above texts, is the tradition that challenged the economic notion that all reasonable behaviour is maximization of some utility function.
For example, chapter 1 is a good demonstration that the choice function property known as beta is not necessary for reasonable behaviour. The challenge for the economists, largely met in this case, is to construct a preference relation from a choice function which doesn’t satisfy beta.
The experiments in your book are less open to question than what we find in Levitt et. al. But both traditions are asking questions with empirical content, instead of just assuming a maximizing individual with a known functional form.
I think that your book is the better book because the experimental basis is sounder; but both new empirical developments are to be welcomed by everyone -even Jay Hanson.
I am a little less than half way through the book.
First, I am an accountant, a CPA, and we are supposedly trained to see the world in black and white with the debits always equaling the credits. Well, I also have a degree in sociology and one in Public Administration, so I have a broader view than most in my profession.
Something hit me today while reading about “free” and social contracts. Commuting is an experiment in social contracts. One drives down the highway at 60-70 mph, feet from other vehicles (many of them huge trucks) for many miles a week. Only a tiny fraction of the time do we have accidents or collisions. Why? Because of the social contract we have with other drivers, an etiquette and code of conduct, that delineates our actions. When someone violates these rules they are risking sanction and the embarrassment of being in an accident. There is no money changing hands here, but we all know that by cooperating and being considerate and polite to other drivers we make everyone’s commute safer and quicker.
Just another example, a positive one, of how social contract can benefit society.
As a real estate broker who hs sold both commericial and residential real estate for 25 years, the decision making process is more irrational in home buying and more rational in commercial transactions.
Context determines or influences the decision making process; in the case of a home, many irrational reasons drive the decision making process, with affordability as the boundary.
In commerical transactions, the banks enforce rationality by insisting on a business plan with a range of reasonable assumptions to see how they will be paid back.
So both approaches are useful in their appropriate context.
Well,
Both books are great reads, though trying to run 180 degrees to one another along rational /rrational economic lines. But I think that there might be rational arguments for one or 2 of the things presented in Predictably Irrational, or ‘PI’!
For example, take the gift card offer on page 58, even though I chose to accept the free $10 Amazon gift card rather than pay $7 for the $20 gift card, I think that’s rational. I stand to lose nothing on the free card in case of fraud or, as has been explained in the media, in case of any of the myriad reasons that billions of dollars of gift cards go unused. I could lose $7 cash if I do not or cannot use the other card. Gift cards themselves seem like an irrational investment!
I think that one of the last examples is also telling, if ordering your choice of drink or food out loud causes us to use social norms over personal preferences, that may not be so irrational either.
Wonderful, wonderful book, fun read too!