Predictably Irrational

Original from 4/3/2010: Gestão 2.0

There’s a branch of research known as “Behavioral Economics,” a strand different from traditional Economics. Classical Economics starts from the premise that people are rational and decide based on cost-benefit analysis. Behavioral Economics factors in the social, cognitive, and emotional forces that shape our day-to-day decisions.

We like to believe we make rational decisions all the time, but most of the time we’re guessing and deciding on emotion. And that produces some fascinating results. One of the best-known researchers in the field is Prof. Dan Ariely, author of the book “Predictably Irrational.”

In the book he looks at how we see prices, why price isn’t a simple matter of “supply and demand,” why we’re dishonest, and how the placebo effect works. It’s the result of years of empirical experimentation.

Watch this excerpt I subtitled from his TED talk on the subject:

Why does this matter? Because we deal with people every day. We make decisions influenced by others or, worse, that will affect others. And we sleep with a clear conscience, convinced we picked the best rational option with the data we had on hand.

But what if our decisions aren’t that rational after all? What if we’re easily influenced by data and circumstances? Better yet: what if recognizing this fact helps us understand our limitations and actually decide better?

That’s why it’s worth understanding your own psychology. Anyone in a management position needs it more than most, because the job itself is already “managing people.”

We are irrational, predictably irrational. Use it to your advantage.