Rethinking
Economics and Human Nature
When it comes
to many of
our economic
decisions, are
we predictably
irrational?
Can a nudge
in the right
direction help?
By James Guszcza
IN HIS RECENT BOOK, Predictably Irrational:
The Hidden Forces That Shape Our Decisions, the behavioral
economist Dan Ariely describes an ad for The Economist that
offered the following three subscription options:
1. Internet-only access: $59
2. Printed edition: $125
3. Printed edition plus Internet access: $125
This seems strange. Why would the marketing “boffins”
at The Economist offer an option that clearly offers fewer
benefits for the same price? Wouldn’t offering Options 1 and
3 achieve the same results?
Not necessarily. Ariely had a theory about this that he
put to the test. He offered 100 of his students at the Massachusetts Institute of Technology the choice between Options 1, 2, and 3 and found that most were inclined to take
Option 3:
■ Option 1–16 students
■ Option 2–0 students
■ Option 3-84 students.
Of course, nobody chose Option 2. Next, Ariely dropped
Option 2 and offered the students the choice between Options 1 and 3. Removing the obviously inferior Option 2
should have had no effect on the students’ choices. But Ariely’s result was striking:
■ Option 1–68 students
■ Option2
■ Option 3–32 students
Even though Option 2 was a decoy that no one would
select, its mere presence apparently had the powerful effect
of “nudging” buyers to opt for the more expensive Option
3. Option 2 provided a basis for comparison against which
Option 3 looked good; but no such basis for comparison was
provided for Option 1.
Surprising? The burgeoning field of behavioral economics
has a number of such surprises in store for us, many of which
are particularly relevant to decisions involving insurance.
