In life even the most intelligent people can make irrational decisions. Like Dan Ariely elaborates in his Ted Talk, these decisions are a product of emotion and illusion of making a decision or other decisive factors. After listening to his piece I realized that I too have been a victim of making irrational decisions. The most glaring behavior I have that many would consider irrational is purchasing coffee from places like Starbucks when I know there are cheaper options available.. I could instead make my own coffee or purchase coffee from someone else for cheaper. The more rational decision would simply be to head over to Dunkin Donuts And pay less for the same beverage. Similarly, my willingness to buy something is based off of a price I’ve established in my head. Therefore, even though I know diamonds are incredibly expensive- the price would be normal to the mind because we are accustomed to knowing that diamonds are high priced goods. After we have established a price in our heads, we view everything later through that mindset.
Harford says that we usually can be expected to make rational decisions. Rational people tend to respond to incentives. Once something gets more expensive we tend to do less of it. When it is easier or more beneficial (or cheaper) we do more of it. By Harford’s standards my behaviors would be deemed irrational because I’m choosing a more expensive option and utilizing it more. Dan Ariely, in his Ted talk- Are We In Control of Our Decisions- would say that we are generally far less rational than we think we are. We like to give ourselves the illusion of making decisions however we largely fail to comprehend the that it is humans that are used to make decisions. We tend to make the same mistakes over and over because of basic wiring of our brains. In “Predictably Irrational,” Ariely speaks about the phenomenon of Starbucks:
“Starbucks did everything in its power to make the experience feel different — so different that we would not use the prices at Dunkin Donuts as an anchor, but instead would be open to the new anchor that Starbucks was preparing for us.”
According to Ariely Starbucks succeeded in making customers pay enormous amounts of money for coffee because it changed the experience for customers. Therefore customers thought when they were buying coffee they were also investing in a high quality experience.
In one of Ariely’s other books the Upside of Irrationality, Ariely argues that we hold a naive assumption that there is a positive link between the magnitude of the incentive and the ability to perform better. I don’t think that our economic assumptions should necessarily be thrown out if irrational behavior is predictable as it is. I think it would be less efficient if rational economists ignored that accumulating data from research into human behavior and decision making. I think economists need to approach the big questions in society with the dispassion of science. I think Harford and Ariely’s arguments are in line with optimal maximization and optimal consumption. For example, when we did the cookie experiment in class because the cookies were free the student consumed the most to his satisfaction. This coincides with rationality theories. I think that the larger implications of Harford and Ariely’s theory is that our decisions will be paved by other factors besides rationality. Policy makers and business people have to take into account that consumers cannot always be expected to act rationally. Therefore the path an economy can take cannot always be so planned.