Dan Ariely (Predictably Irrational) belongs to a wave of authors doing well in airport bookstores with tales of offbeat psychological experiments and “I told them so” observations on the Great Meltdown.  But while Black Swan and Blink tip a hat to the dismal science (the “invisible hand” of Taleb's fractal mathematics and surprising precision of Gladwell's subconscious), Ariely demands a tabla rasa on economics.

The raison d’etre of behavioral economics per Ariely is that traditional or neo-classical economists mistakenly assume rational economic actors, whereas neuroscience just can’t stop discovering ways primordial wackiness gets the best of cool headed calculus. Whereas certain emotional traits may be adaptive for a nomadic tribesman spearing both dinner and enemies, they are just so much baggage when calculating costs and benefits in a modern market economy.  

And thus it follows that all kinds of hell --  from Enron to Subprime Mortgages -- can break loose without "regulation" (whatever that might entail). If there is any utility in classic economics, Ariely does not let us in on the secret. There is a Da Vinci Code-esque allusion to the lost meaning of Adam Smith and other seminal economists, but if you follow Ariely to his logical conclusion, even the good old supply/demand intersection should be tossed on the scrap heap, along with all the apparently illusory trades on Wall Street.

In fairness, there are several fascinating observations in Ariely’s book, and I would recommend checking out one from the library or borrowing one from a friend.  Putting methodological quibbles aside, the problems begin when Ariely uses his amalgam of idiosyncratic observations to generate policy suggestions.   Despite his prowess examining judgment and decision making related to chocolates, black pearls, basketball tickets and aroused libertarians, he rivals the most hide bound and assuming economist when it comes to his parenthetical hope for government actor benevolence and competence.  

If market actors act irrationally with something valuable at stake, why on earth would you assume that a government actor with (a) nothing at stake, (b) benefiting from sovereign immunity and tenure, and (c) imbued with a monopoly on the legitimate use of force would be anything other than an id-driven psychopath.  Not that I believe all, or even a majority of, government actors are as I just described.  But if you are building a matrix of possibilities, there's plenty of evidence to fill in at least one such quadrant (Idi Amin, Stalin, Saddam Hussein, Hitler, Caligula, Katherine the Great, not to mention "Going Postal" at the lower echelons).   

Ariely's recounting of the financial crisis mysteriously evades reference to existing regulations or the pressures banks faced to make uneconomic loans from those well-intentioned regulators.  He also avoids the big question:  would Countrywide have made so many low down payment loans if Fannie Mae and Freddie Mac -- two hyper-levered government creations -- had not "nudged" the market by buying bundled versions (RMBSs) in the secondary market, while overlooking shaky default insurance (CDSs)?  And this without going in to problems of regulatory capture and evidence of out and out fraud and corruption.  Yes, I'm talking Senator Dodd and Freddie Mac board member Rahm Emanuel.  A refresher with J.C. Scott might remind Ariely of the cognitive fallacies (and often fantasies) that inhabit the minds of our public servants.

Behavioral economics is a valuable addition to the intellectual landscape, but it has a long way to go before public policy makers should throw away classic economics or just assume their own benevolence. Well-functioning markets have been shown time and again to be good at their main task:  price discovery.  Like democracy, the genius of a market is not that its makes the best choices, but that it delivers a method to eject the really bad ones.  

I also found it probative that many of the experiments Ariely cites deal with status and luxury choices amongst a leisure-imbued set of college students facing little actual consequence or criticism.  Perhaps more mundane studies, such as the price of corn tortillas, dishwashers, fasteners or bauxite, and hard penalties for bad choices, would be additive to the overall body of work, if less amusing for undergrads.  I am thinking of the opening scene of Ghostbusters where false answers elicit an electric shock.  Further, at what point does manipulation and failure to meet SEC-style total disclosure (including omission of material facts) come in to play with these many experiments?  Three card monty probably not, but still ...

Bottom line:  I would like to see more effort put in to reputation theory by Dan Ariely and economists like him.  It IS bad social science to assume markets automatically work (or that they are "free").  But what skews a market?  What trust mechanisms are needed to create honesty and transparency?  How do you get information in to the market and who pays for that?  How do you best police misrepresentation?  Ariely teases us with a few trust mechanisms (Chapters 11-12) and mentions transparency in passing, but he does little other than pull a few pedestrian thoughts of the Newsweek genre.  Ironically, he heartily acknowledges the failure of the stilted behavioral rules of the kind his regulators traditionally rely upon.  I'm not sure the NYT would have permitted him on the best sellers list if they realized his most productive advice would appear to be using the Ten Commandments as a screensaver ...

So let's move on from the playing cards, Hershey kisses, Harry Winston baubles, and busty magazines, and start to get serious about fixing our real markets.