About Me

When not at work with students, I spend my time in my room either reading, calculating something using pen and paper, or using a computer. I read almost anything: from the pornographic to the profound, although my main interests are mathematics and physics. "When I get a little money I buy books; and if any is left I buy food and clothes." -Erasmus

Sunday, August 14, 2011

The Upside (and Downside) of Irrationality

I recently read Dan Ariely's The Upside of Irrationality, and started thinking about the many irrational ways I behave. Contrary to the image of humans fostered by classical economists, Ariely claims that experiments demonstrate that humans often behave irrationally, often counter to profit maximization schemes that underlie economic models.

One example he used was on compensation schemes for executives (it's also discussed by Dan Pink in one of my favorite TED talk), and the counter-intuitive result was that although low and medium levels of compensation may improve performance, for tasks that require even rudimentary cognitive skills, extremely large rewards may actually lower performance.

I suppose that's one reason why I'm having trouble writing. The ideas are there, but if I do get it published (before I'm out of my university), I will end up with a PhD, and a USD 1000 award. Surprisingly, I find it demotivational, in the same way that Mark Twain describes in Tom Sawyer.:

"He had discovered a great law of human action, without knowing it––namely, that in order to make a man or a boy covet a thing, it is only necessary to make the thing difficult to attain. If he had been a great and wise philosopher, like the writer of this book, he would now have comprehended that Work consists of whatever a body is obliged to do, and that Play consists of whatever a body is not obliged to do. And this would help him to understand why constructing artificial flowers or performing on a treadmill is work, while rolling ten-pins or climbing Mont Blanc is only amusement. There are wealthy gentlemen in England who drive four-horse passenger-coaches twenty or thirty miles on a daily line, in the summer, because the privilege costs them considerable money; but if they were offered wages for the service, that would turn it into work and then they
would resign" 

In the Philippines, USD 1000 is a large amount of money. You can buy four netbooks with that money, and it would be about seven times the monthly minimum wage. I even know of people here whose monthly wage is  USD 70. 

Ariely's research involved paying Indians different rewards and comparing performance when the reward for completing tasks (in this case, a bunch of games) was worth a day's wage, a few week's worth of wages, and five months of wages. The most surprising finding was that those offered the biggest rewards did worse! 

Later in the book, Ariely speculates on the effects of astronomical bonuses on executives in the finance industry, and I believe, post-financial crisis, that the compensation scheme was to blame for a lot of the financial system's woes. Ariely also talks about many other things, and I plan to reread his book, as well as his other book, Predictably Irrational.

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