Could it be that economists have been doing it wrong all these years?

Book Review

Could it be that economists have been doing it wrong all these years?
Image credit:

Book Review

Abstract: The Why Axis, by Uri Gneezy and John T. Cacioppo, provides an excellent analysis of the workings of human decision-making. The book discusses different aspects of decision-making such as the influence of framing effects, the decision-making process itself, and factors that influence people's preferences. The authors draw from their experiments and also from insights from fields such as economics and psychology to provide a comprehensive analysis of decision making. The book is very well-written and is packed with interesting examples that make the text come alive. They use real-world examples to demonstrate how their decisions are shaped by their surroundings and how small changes in the way they are presented can change their outcomes significantly.  The take away from the book are applicable for any discipline(especially Marketing professionals) and anyone who is interested to learn how they make decisions and why their choices are shaped the way they are.

Homo economicus—a narrowly self-interested individual who responded to incentives and disincentives in a perfectly rational way—was the heart of all theory-making in economics. However, in the past half century, various economists have added new wrinkles to the field’s repertoire. To begin with, pioneering economists such as Amos Tversky and Daniel Kahneman introduced controlled lab experiments among other things. And these experiments succeeded in adding nuance to our understanding of economic-man (he’s not quite as one dimensional and rational as he was once taken to be), as well as texture and complexity to our understanding of economic phenomenon.

Uri Gneezy and John A. List have been conducting field experiments for over 20 years, and their book The Why Axis: Hidden Motives and the Undiscovered Economics of Everyday Life details their findings. Through their research, they have discovered ways to improve everything from crime rates and school success to charitable giving and healthy living.

Gneezy and List are not your typical economists. Rather than working in the traditional sense of analyzing data and coming up with theories, they prefer to go out and observe people in their natural environment. This allows them to see how people actually behave, as opposed to how they say they behave or how economists think they should behave.

A fundamental aspect that they have learned while researching is that people are rarely rational when it comes to making decisions. We do not always make the best decisions for ourselves, and our emotions can play a big role in our choices. This may seem like common sense, but it has major implications for how we design to solve problems.

Gneezy and List's experiments on charitable giving have proven to be very effective in demonstrating how to encourage charity in an efficient way – even challenging many long-held beliefs in the charitable industry as a whole. The authors cover everything from how much seed-money is needed for a project to maximize donations, to how to approach follow-up requests made to established donors, to how to leverage raffles, lotteries and tontines for best success.

There is also a focus on the economic aspect of gender discrimination and other forms of discrimination examined by the authors. They investigate whether men are less competitive than women or whether they are socialised that way. They do this by looking at whether the competitive nature of women in matriarchal societies matches that of men in patriarchal societies. They also try to identify competitive differences between men and women by allowing them to complete tasks in a variety of ways; some of these tasks have competitive elements, while others do not. When given the option, the dominant gender (usually men, but the authors also did some research on matriarchal societies) is more likely to choose to compete, and is more successful with competition than with no competition. Women from matriarchal societies are particularly excellent negotiators, much better than women from nearby non-matriarchal societies.

After describing a wide range of such experiments, the author gets to with-profit companies.

In business, Gneezy and List emphasize how a lack of experimental research can lead to business disaster. As an example, they cite Netflix's 2011 decision to modify its business model without experimental research. This decision caused many customers to leave, Netflix's stock to plummet, and nearly destroyed the company. The lesson is that businesses should test any changes (including pricing changes) in a small market before implementing them throughout the company.

Authors point out that experiments aren‘t just for research. A lot of very successful companies use small-scale experiments in order to work things out. They suggest running small-scale experiments, with randomly selected customers, to see what does and doesn’t works to maximize whatever variable the company is most concerned with (sales, profits or retention, etc.). Companies always do pilots; it is why South Australia and Tasmania often get the first launch for a new product or service - a relatively diverse customer base that is sufficiently small so that failure won’t destroy the company.

In sum, the book provides a fascinating and insightful look at how we can use experiments to improve our personal and professional lives. It is full of practical tips, and insights from two of the leading researchers in the field of experimental economics and behavioral science.