29.12.08

THE CONSEQUENCES OF COSTLY INFORMATION. Daniel Ariely's Predictably Irrational: The Hidden Forces That Shape Our Decisions is a helpful introduction to work in behavioral economics, with references to recent papers, many in quality journals. I'm not as familiar with this field as I am with the partial equilibrium anomalies that add an element of fun to introductory economics, even if the recent additions to that collection are sometimes strained. Thus Book Review No. 50 highlights another work that might reward careful study, particularly among people looking for dissertation topics.

Let me note, though, that the author makes claims about traditional full-information neoclassical economics that, while true, might be explained more simply by considering the possibility of costly information. Thus the apparently quirky phenomenon of the real estate agent swaying a buyer by showing the buyer a slightly less good version of one of the houses the buyer is considering, which appears to be a violation of the independence of irrelevant alternatives axiom (this story summarizes the phenomenon) might be explained more simply. The agent provides the buyer with very relevant information about the shape of his choice set. Another story, in which Professor Ariely and a colleague sell Lindt truffles at 15 cents and Hershey kisses at 1 cent, and then reprice the truffles at 14 cents and the kisses for free, which they employ to make a case against FREE! as a marketing tool that distorts peoples' behavior, might better be interpreted as good old relative prices and marginal-utility-of-the-last-penny. Social norms, which Professor Ariely suggests are sometimes at odds with market norms, might simply exist to conserve information costs.

We thus have intellectually challenging reading, and a different look at human interaction, but not necessarily a manifesto for the undoing of neoclassical economics.

(Cross-posted to 50 Book Challenge.)

No comments: