In a recent article in the Seattle Times, Teri Cettina interviewed Dan Ariely about his new book entitled Predictably Irrational.
Airely is a behavioral economist at MIT and Duke who has done wonderful research which helps to describe the ways in which people behave irrationally especially where money is involved.
I love this type of research but at the same time have a big problem with assumptions researchers such as Airely ultimately make specifically with regard to prescription.
In the article Airely is quoted thusly,
“Whenever you see the term ‘free,’ consider it a warning to slow down and consider your choice very carefully,” Ariely says. Do the math and always consider what you are giving up when you choose the item attached to something “free.” Usually — but not always — there is a real cost to something touted as “free.”
Such advice, while it might sound great, is preposterous.
People behave irrationally with regard to money for complex and deeply seeded reasons which are immune to rational consideration. If they were not immune, people would not have acted irrationally in the first place! People will not do the math just because you tell them they should…
As I have said before on this blog,
Look there is no simple answer here. During periods like this you will come across armchair shrinks on the cnbc or in the wsj who will spout all kinds of behavioral finance 101 jargon at you and then simply say something like ‘well dont do this’ but i assure u they have no clue what they are talking about… They might as well be saying to the suicidal depressive ‘yo buck up guy snap out of it.’
The bottom line is that while Airely and his bretheren have done a brilliant job describing irrational economic behaviors, they have done a poor job researching and then prescribing solutions. They guys are not experts in the area of human change processes.
So what is really needed is not more descriptive models but solid prescriptive ones.
As we now find ourselves in a period of extreme disequilibrium accompanied by lunatic market participant behavior, I will begin to flesh out on this blog a comprehensive prescriptive model of investor behavior that integrates the descitpive research of Airely and others and the prescriptive work of guys like Aaron Beck.