DAN ARIELY'S POWERS OF PREDICTION

Behavioural economics was the new black last year. Publishers seemed to be leaping over each other to release the latest book about how and why we make dumb choices. If traditional economists presume we act with logical self-interest--and craft policies accordingly--this new breed of economist has been busy revealing how silly we often are, how irrational. We are swayed by circumstance, we are emotional, we don't read the fine print and we have trouble delaying gratification.

But last summer, when behavioural economics seemed to reach a fever-pitch, we were in a very different place. We had it all--houses, stocks, credit. If we could only ensure we lived mistake-free lives (full of happiness and undampered by the paradox of choice), we would truly be sitting in the cat-bird seat. But really, these ideas seemed like thought experiments or clever parlour tricks.

How things change. The real consequences of our irrationality, even when it comes to big important decisions about money, are all too plain. We have some excitingly unwieldy new case studies to refer to, which is why Dan Ariely has decided to re-release "Predictably Irrational", his excellent book from last year (perhaps the best of the lot). He has expanded the volume with new chapters and more insight on the markets. As he explains in his introduction:

Before the financial crisis of 2008, I’d hit a lot of roadblocks when trying to expand on the implications of our ideas, experiments, and findings. For example, after I gave a presentation at a conference, a fellow I’ll call Mr. Logic (a composite of many people I have debated with over the years) buttonholed me.

“I enjoy hearing about all the different kinds of small-scale irrationalities that you demonstrate in your experiments,” he told me, handing me his card. “They’re quite interesting—great stories for cocktail parties.” He paused. “But you don’t understand how things work in the real world. Clearly, when it comes to making important decisions, all of these irrationalities disappear, because when it truly matters, people think carefully about their options before they act. And certainly when it comes to the stock market, where the decisions are critically important, all these irrationalities go away and rationality prevails.”

Oh, how quaint.

Dan Ariely sat for an audio interview with The Economist last year, in which he describes how he came to the subject of irrationality, and the rewards of writing for a general audience. It's worth a listen.