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Book report: "Predictably Irrational"
Old 07-05-2008, 06:44 PM   #1
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Book report: "Predictably Irrational"

Tough to pick a category for this review, but I think Young Dreamers have the most to gain from it.

This looks like a vegetable book (nutritious "good for you" reading) but instead of Brussels sprouts I unexpectedly discovered chocolate-chip fudge brownie ice cream.

The more I learn about investing, the more I need to learn about investor psychology-- and these studies explain why we're so good at creating cognitive dissonance.

The author's an MIT professor at their Sloan School of Management, where he studies "behavioral economics". His unique contribution to explaining what people already know is designing the experiments to isolate the factors causing the behavior. It's as entertaining to read about the experiments as it is to analyze their findings.

In the first chapter, he explains that value & price are relative. We don't know what we want until it's compared to something else, and we don't know how much to pay for it until we learn what our wife's brother-in-law paid. We claim to know that we can't compare apples to oranges, but we think we can compare them both to a rotten apple. Our irrational assessments have spawned a whole field of extremely pragmatic marketing. Restaurants raise revenue by adding a dish so expensive that no one will order it... but customers will happily order the "value" dish that's been re-priced at just $5 less, even if that's more than they paid last month for the same food. Salesmen & realtors know to offer "decoy" appliances or houses to steer their clients into buying other (overpriced) merchandise. There's a whole chapter on how we're led astray by the "FREE!" offer.

One solution to relative thinking is to consider the pricing difference in terms of percentages-- or in terms of how many hours you'd have to work to afford the "difference". You have to get your own data-- step outside the parameters you've been given and look at other comparisons.

The author continues with other examples-- rationalizing purchase decisions (whether they were good decisions or not), anchoring prices, and making the same repetitive decisions even for different situations. He also explores the difference between a social norm (asking a neighbor to help move furniture) and a market norm (hiring a moving company). Companies go to great lengths to establish social norms with their customers ("You're in good hands!") and their employees ("Great benefits!") but they fail to appreciate the hostile backlash that can result when they ditch the social norm in favor of business constraints. ("Thank you for holding. Your call is important to us, and will be answered by the next available script reader in approximately... 30... minutes.") People (and businesses) have to carefully consider which relationship they want to establish, and then they have to be aware that they change the terms at great peril.

He has a very illuminating study of what guys are thinking when they're sexually aroused. Of course we all know the answer ("They're not!") but it's frightening to see how quickly the morals & standards evaporate. I'm not quite sure that our teen is ready to read the gory details, but she's certainly going to need to know about the effect.

Finally, the author explains why it's easier to steal office supplies (or to backdate executive stock options) than it is to rob banks, and why we order a brand of beer that we really don't want in the first place.

He makes boring topics interesting while poking a lot of fun at MIT, professors, researchers, students, and other Ivy League schools.

The truly rational consumer will, of course, borrow it from the library instead of paying actual money. Experts should buy it on their expense accounts and then read it during working hours. Regardless of your technique, read it before you make a major purchase-- or before you order a restaurant meal in front of your friends.
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Old 07-05-2008, 09:40 PM   #2
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I heard of this book, made a mental note of it, then forgot it. Thanks for bringing it up. It appears to be an enjoyable book just like "Freakonomics", which you probably have read.

Another book which readers of the above two books may enjoy is "The Myth of the Rational Voter". It is written in a bit more scholarly manner, hence a bit tougher to read. I enjoyed that too, but not in one seating like "Freakonomics".
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Old 07-06-2008, 07:47 AM   #3
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Thanks Nords. I heard an interview on the radio the other day and the author seemed down to earth and humerous. I think I'll try to read it.
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Old 07-06-2008, 11:17 AM   #4
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Another book which readers of the above two books may enjoy is "The Myth of the Rational Voter". It is written in a bit more scholarly manner, hence a bit tougher to read.
I'm #3 in the queue for this one. 332 people ahead of me for "Predictably Irrational". Using the public library develops one's patience.

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Old 07-06-2008, 02:53 PM   #5
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I'm #3 in the queue for this one. 332 people ahead of me for "Predictably Irrational". Using the public library develops one's patience.

Ha

Sometimes I get too impatient with the library and I just buy it from Books a Million with my discount card and then I sell it on Amazon when I'm finished . Total cost usually about $3.00 . No waiting Priceless !
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Old 07-06-2008, 02:58 PM   #6
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I just checked and our library has it on the shelf . It was the same with The Ultimate Cheapskate book . Are Floridans not concerned with money issues or are they only interested if it includes a free lunch ?
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Old 07-06-2008, 06:53 PM   #7
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Thanks Nords! I like your book report. Sounds very interesting.
I will put it on my reading list.
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Old 07-06-2008, 06:56 PM   #8
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Thanks Nords! I like your book report. Sounds very interesting.
I will put it on my reading list.
Ditto. I reserved it at the library. I'm something like #50 on the list for four copies At least I should get it before Ha.

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Old 07-06-2008, 08:34 PM   #9
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It appears to be an enjoyable book just like "Freakonomics", which you probably have read.
Dang, wish I'd thought of that. Very apt comparison. I really enjoy Gladwell's articles, too.

I don't know if other states give their branch librarians the discretion, but ours has a budget to spend on local book-buying. If a book develops a long request list, she'll go across the street to Borders and buy it for our branch-- where of course our requests have a higher priority than requests of the other branches.

Our state library website also has a "hot picks" list that runs four-five months ahead of publication. When I see a favorite author I'll reserve it months before it's in stores, and sometimes I'm still #253. But the advantage of such a big wait list so long in advance is that the library will buy extra copies of the book, so the actual wait after publication is shorter than it otherwise would have been.
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Old 07-07-2008, 12:44 PM   #10
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I have read the Predictably Irrational and the Myth of the Rational Voter. The Myth of the Rational Voter really isn't in the same vein as personal finance, as it is more a broad macroeconomic indictment of people, without much explanation. I found it very entertaining and personally agree with almost all of their points, but it definitely is NOT a personal finance book. Predictably Irrational is another book, similar to Freakonomics, that is trying to link economics with many other aspects of financial decisions in life. On a similar note, anything by Gary Becker would be good reading if you like Freakonomics or Predictably Irrational.
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Old 07-07-2008, 12:53 PM   #11
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Thanks for the recommendation, Nords. I've added it to my library list.
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Old 07-07-2008, 04:11 PM   #12
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The Myth of the Rational Voter ... definitely is NOT a personal finance book.

Very correct. The author puts forth several premises about the voter's psyche, not the investor's.

I mentioned it since it belongs in the same genre of interesting non-fiction books as the other two.
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