In “What was I thinking?” Elizabeth Kolbert reviews a new book by MIT economist Dan Ariely, “Predictably Irrational: The Hidden Forces That Shape Our Decisions” (Harper, 2008). Kolbert begins her piece by describing a seemly irrational act of purchasing an additional book from Amazon simply to get free shipping. Throughout her review, she describes the history of behavioral economics – a branch of economics that began nearly twenty-five years ago which demonstrated that humans were not simple calculating machines as classical economics would have them.

In class, we covered the Ultimatum Game, a situation in which an individual is given a sum of money to be shared with another player. Traditional economics would predict that the receiver should accept any offer, since even the smallest offering is better than no deal at all. And yet, few individuals are willing to engage in an unfair deal, and are willing to punish their colleague for not behaving fairly.

Is this irrational behavior? It would be better to think of behavior as being predictable or not. If we imagine that for most of our human history we lived in small communities, what may be considered irrational behavior makes a whole lot of sense. One-off games of sharing money simply do not describe the complex social and historical nature of how we live and interact with others. Make a bad deal in a small community and you are likely to be shunned by other potential business partners. Fair trading, as a strategy, becomes a completely predictable behavior.

Instead of looking at humans in the classical economic view of resource maximizers, it may more informative to look at humans as risk minimizers. Minimizing risk does not mean the same as maximizing payoff. For instance, a subsistence farmer may resist planting a different crop (even though it may potentially yield larger payoff) simply because of the risk. A bad year for a subsistence farmer may mean losing his land, moving to a refugee camp, or other highly-undesirable outcomes. I could potentially make more money if I invested my money in higher-risk annuities, and yet, I plan to retire someday and would rather minimize the chance that I may lose my savings over attempting to maximizing earnings.

In sum, economics attempts to model human social behavior, and yet many of the central assumptions about how we behave are not entirely accurate.