On Demand

The Upside Of Irrationality: Chapter 8

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Through a series of experiments, Dan Ariely documents the many ways in which humans behave irrationally. By understanding these human tendencies, we can both learn to behave more rationally when it is to our benefit, and better understand why those around us are behaving in the way they are.

Markets are a useful way for coordinating buyers and sellers of a particular product/service. But they can sometimes fail. Ariely argues that they fail far more frequently than we realize, because we don't even know they fail a lot of the time.

To make his point, Ariely discusses a market that almost every human being goes through: the dating market. Years ago, families would engage the help of "market makers" to find mates for their young. But as the individualistic society in the West took hold, more and more responsibility fell on the potential mates themselves to find their partners.

This system may work well for some, but not for others. The world of online dating opened up new possibilities for these "others", but Ariely argues that the market still fails dramatically. Online dating sites treat people as products like cameras, where people list pictures and a bunch of searchable attributes. But just as you can't tell the taste of a cookie from a list of its ingredients, Ariely argues that people are experiential goods.

We have evolved certain ways of becoming comfortable with a potential partner, and the dating site market does not take these into account. Ariely ran a few experiments that showed greater satisfaction (from participants) when offered online dating that more resembles real-life dating (e.g. outside objects are introduced to the conversation, as would take place while at a meal or at a movie).

Such opportunities to improve markets are everywhere, according to Ariely. Creators of intangible objects often assume their users are fully rational beings that take all relevant info into perfect account. But as Ariely has helped to show, we make our choices based on emotion and other factors, and markets need to take this into account when they are designed.

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About the Author

Saj Karsan founded an investment and research firm that is based on the principles of value investing. He has an MBA from the Richard Ivey School of Business, has completed all three CFA exams, and has an engineering degree from McGill University.

Visit http://barelkarsan.com.

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