Friday, February 22, 2008

(Ir)rationally Fun Book

Tim Harford's latest book is probably one of the best popular books introducing rational choice (aka cost-benefit analysis) economics. But for a healthy dose for perspective from the other camp, that is, behavioral economics, I would really recommend the just-released Dan Ariely's Predictably Irrational.

The book is a good fun read -- so good that I missed the bus because I was so absorbed reading the first chapter and failed to proceed to cashier timely.

I enjoyed the way Dan set his creative experiment and most of the time got his points describing human predictably irrational behavior. My favorite chapter is on placebo effect --not to mention his practical joke about MIT's T-shirt that reads "Harvard: Because not everyone can get into MIT".

But somewhat I am bit wary with some of his suggested policy recommendation that gives a glimpse of paternalism. This is one example:
If you accept the premise that market forces and free market will not always regulate the market for the best, then you may find yourself among those who believe that the government (we hope a reasonable and thoughtful government) must play a larger role in regulating some market activities, even if this limits free enterprise. Yes, a free market based on supply, demand, and no friction would be the ideal if we were truly rational. Yet when we are not rational but irrational, policies should take this important factor into account.
--page 48
The problem: how can we find a rational government? More often than not, government is less rational than people under free market.

6 comments:

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  2. Ariely has created a couple of short, funny videos explaining his work. See http://research.duke.edu/predictably_irrational/

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  3. what about soft paternalism? libertarian paternalism?

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  4. Tirta, Ed Glaeser of Harvard made good points here (in pdf) against libertarian paternalism argument for larger role of government.

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  5. The problem: how can we find a rational government? More often than not, government is less rational than people under free market.

    This will require you to re-read the the premise of the statement: "that market forces and free market will not always regulate the market for the best"

    when it is driven by free market, there will be some conflicting interest between capital holder and consumers in needs (without capital).
    that is where government regulation will be play its part: to protect consumer without capital in free market.

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  6. In one of its February 2008 edition, Science magazine published a contribution by Steven Levitt and John List on the evolution of Homo Economicus. Here (in pdf)

    Perhaps be of any interest.

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