Predictably Irrational – why putting your credit card in the freezer is rational behavior.

In Dan Ariely’s fantastic new book, Predictably Irrational, he describes how traditional economics has failed us. Economic theory makes formulations and predictions based on an erroneous assumption – that human beings behave rationally.

The book is full of small scale social experiments done with his students at MIT that prove his point repeatedly. Not only do these rather smart kids behave irrationally – against their own self interest – they do it in a predictable way.

What I took away from reading this book, is a feeling of relief. My own behavior is often not in accordance with my stated desires. For example, I want to loose weight, and yet I eat candy bars. I want to save money, and then I buy books instead of using the library. This leads to a lot of shame and guilt. Yet this seemingly irrational behavior is completely normal according to Ariely. Now that I understand how it works, I can stop beating myself up for lack of willpower, and start focusing on what I can do about it.

Let’s take credit card spending for example. Ariely describes an old method of preventing over-use of a credit card – the ice glass method. You put your card in a glass of water, and freeze it. This prevents you from using it impulsively. He then goes on to update this method for the modern age. He pitches the “Self-control Credit Card.” In this personalized system you determine your budget and program it into the card. Only want to spend $1000 a year on clothes? No chocolate before 5 pm? The card can help. This is within the ability of current technology, and it would provide exactly what we predictably irrational humans need: an external constraint to our own self-destructive behavior. You can even program your own punishments. Either have your card declined, or you could simply tax yourself. The charge would go through, but so would $5 to your savings account. Or, even worse, it would trigger an email to your spouse, that you had overspent the entertainment budget for the week. Ouch.

Since Dan Ariely is an MIT professor, he managed to get in front of some big NYC bank honchos and describe the card to them. They of course immediately said “But hey – we get billions of dollars from charges and fees! Why would we encourage people to spend less?” He had a (rather feeble) marketing argument for them. This “Self-Control Credit Card” would be a competitive difference in the rather cut-throat credit card marketplace. Increased customers would balance decreased value per customer, he claimed. The banks didn’t go for it.

But the idea here is still useful. High tech is all well and good, but low tech is easier. How about just don’t bring your card with you? Or tell your bank to put a very small limit on the card, perhaps limit it to a month’s worth of spending, forcing you to pay it off every month. If you want to make a big purchase, defrost the high-limit credit card that you kept in your freezer. Or really crazy – pay everything in cash. People hate watching the money leave their wallets, and spend 50% less on average when paying cash. The moral seems to be: plan ahead for irrational behavior. It’s the only rational thing to do.

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