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Dan Ariely on the Upside of Irrationality

Book Review: The Upside of Irrationality: The Unexpected Benefits of Defying Logic at Work and at Home

According to economists human beings are rational and can make rational decisions that will maximize benefit. However, given the most recent financial crisis, the political and cultural chaos we see around us, we know that this is not the case. Human beings are irrational often choosing actions or making decisions that are detrimental to us and others. Can there be a positive outcome from our irrationalities? Dan Ariely certainly thinks so. In his book “The Upside of Irrationality – The Unexpected Benefits of Defying Logic at Work and at Home“, Dan advocates the need to be aware of our imperfections, find ways to make them work for us or limit the impact of others.

The book is divided into two sections one focused on irrationalities encountered in the work place and the other focused on decision biases in our personal settings. However, the book in general would be useful tool or rather eye opener to those in any sphere of life. It certainly got me thinking of the decisions I have made and whether any of them (and I am sure most after reading this book) would be victims of the biases Dan has highlighted. Some of the conclusions discussed seem like pure common sense, but that could just be hindsight or the biased wisdom of an observer, but it is interesting to see the types of tests and behavioral experiments that were conducted and how the results confirmed or refuted held beliefs.

He emphasizes the importance of experimentation and the need to repeatedly question actions and behavior as a necessary step to making important decisions, including decisions made in business. As decisions are prone to errors in judgment, limitations with regard to human reasoning and thought processes, and emotional influences, they needed to be systematically tested and monitored either on a small or large scale. When they do not work, responsibility for those failed decisions need to be taken and new decisions need to be experimented with, monitored and tested all with the intention of finding better ways to live, work, manage and govern.

The irrationalities that Dan talks about that I feel are particularly relevant to those working in the finance and business world are:

  • Larger bonuses do not necessarily lead to improved performance. After a point the larger the bonuses are the more detrimental the impact on performance as the stress of obtaining that bonus overwhelms one’s ability to perform well. This is particularly true for fields where work is dependent on using one’s mind and thinking processes, i.e. the ability of being creative or in environments that are highly stressful. The most obvious evidence is the large scale failure we’ve recently witnessed of investment banks, managed by individuals who received huge bonus packages. There is a need to study and realign payment structures to influence performance in a positive way.
  • People are more willing to work when they feel that they are making a meaningful contribution. It is important not to underestimate or avoid another’s contribution as it can be highly de-motivating. Opportunities for increasing motivation, such as providing regular feedback, acknowledging effort and enabling completion of goals helps increase production. This is particularly relevant in a knowledge- or service-based economy where imagination and creativity play a major role.
  • Human beings have a tendency to overvalue their own creations or ideas. For a business, employees who feel that they are vested in the success or failure of its operations because of the ideas that they have contributed, or at least where they believe that the ideas are theirs, are more likely to invest their efforts whole-heartedly for its benefit.
  • Humans are generally trusting beings. When this trust is broken however the need for revenge is great even if there is great personal expense. Revenge may be directed to a company even if a single employee is at fault. It is important for businesses, especially service-based organizations, to invest in quality customer support services. A key to diffusing a potentially revenge triggering situation is to admit fault and apologize but beware of overusing (and hence not meaning) apologies.
  • As mentioned above, revenge is often taken at great personal harm. Recognizing this irrational tendency, people should direct their vengeful feelings in a more constructive manner. For example, if one business has been wronged by another, instead of putting time and effort in finding ways to bring the other business down, sometimes at the expense of ignoring one’s own business, that time and effort should be invested in finding ways to improve one’s products and services where the motivation is putting up something that in better than those of the rival firm.
  • Decisions made when under the influence of emotions can be misattributed to a particular situation and hence can have lasting impacts even when the emotions that triggered them have subsided. This is because humans will relate that decision to the situation rather than to the emotion and then will use that decision as a guide for future similar or parallel situations. Dan reiterates something that we have come across in self-help books before: do not make a decision when you are feeling emotional (positive or negative) because it has the potential of causing short- and/or long-term harm.

Using systems that do not account for the irrational behavior of human beings, and that instead focus on simplifying processes so that they can be translated into workable computer algorithms can make the whole system less useful. It is important to factor in human limitations when designing products so that the products meet the requirements of the people they are meant for.

Dan states that we “need to doubt our intuitions” and ask questions, in order to stop repeating our mistakes, learn from them and find ways to use or overcome our irrationalities and imperfections.

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