Book Review - Predictably Irrational by Dan Ariely

The primary principal of economics is that people are rational. However, anyone who has ever interacted with people knows this principal does not hold at all times. Economics does not recognize that people make decisions out of guilt, spite, loyalty, desire to be an individual, desire to fit in or any other number of emotions.

Here's a game to test how rational you are:
You are Player A. I am Player B. We start with $1,000,000. As Player A, you get to decide initially how to split the money. Make me an offer. As Player B, I will decide whether to accept or reject your offer. If I accept, the game is over. If I reject, I get to make you an offer, but now we have only $900,000 to split.

If this game were being played by 2 economists, (and I first played this game with another Econ student), Player A would make an offer that resulted in Player B getting close to $900,000 and keeping around $100,000.

In a rational world, Player A would accept any positive offer since something is better than nothing. Therefore, since Player A should accept any amount, Player B would make an offer giving him almost nothing and keeping nearly $900,000 for himself. If Player A wants more money, he needs only to offer Player B nearly $900,000.

(If anyone has nearly $1,000,000 and would like to play this game with me, please let me know. I'll even accept being Player A!)

Dan Ariely is a behavioral economist who sits in both the Business and Media schools at MIT. His book discusses many situations when the 'people are rational' pillar breaks down. He has conducted numerous experiments that revel that irrationality runs rampant - but that people are consistently irrational in some of their behaviors.

By understanding the causes of irrationality and why people do things that economists would say don't make sense, people can better understand why certain decisions are made. There are numerous beneficial results from deeper understanding of irrationality. Additionally, by understanding irrationality, it doesn't seem quite so strange.