When logical choices become illogical; introducing behavioral economics ByS. McGeeTOP 500 REVIEWERVINE VOICEon January 1, 2009 Format: Hardcover|Verified Purchase
America loves its free market heroes, as Peter Ubel admits. Just think of the West Berlin Coca-Cola manager who, on hearing that the Berlin Wall was coming down, headed off to the barrier with cases of the soft drink and offered a bottle to every East German crossing the border. Ubel doesn't for a second doubt that that act was a triumph for free markets and for Coca-Cola - but was it logical or in the best interests of the rest of society? "Was Coca-Cola the very best thing that the (free market's) invisible hand could bring to people just escaping from decades of communism? And should we, then, celebrate the increase in tooth decay and diabetes diagnoses now spreading through Eastern Europe?" In a perfectly free market, obesity, dying of emphysema after a lifetime of smoking or failing to save a dime for retirement may be seen as completely logical choices by libertarian economists and policymakers. But sometimes the best outcomes for free markets are not the best outcomes for the people within those markets - and then what do we do?

The factors that lead to such illogically logical (or logically illogical?) decisions are the focus of Peter Ubel's accessible, lively and very important discussion of the emerging field of behavioral economics. While there are numerous other books out there on the topic, this serves as a much-needed primer for readers who aren't ever going to read the scholarly works on the subject and who prefer a solid introduction to the topic itself before delving into policy issues that flow from it. The `what to do' element is the weakest portion of the book, but the rest is a fascinating introduction to the nature of the conundrums that policymakers face.

Ubel identifies and describes, with an eye for what will make the concepts most comprehensible, many of the paradoxes with which behavioral economics concerns itself. Why do people continue to overeat and overspend? These are some of the most vital economic and social question we face. When investors succumb to greed instead of making a rational decision, they lose money. (Just think back to the heady days of the dot.com stocks, or, more recently, to the irrational decisions made by home-buyers when it came to figuring out how much home they could afford or what kind of mortgage was the right one to select.) We postpone saving and accelerate consumption, sending our personal debt levels soaring. We don't exercise enough; we smoke and drink too much. And we eat too much - leading to epidemic levels of obesity. We are stubborn, we react based on emotions rather than reason and we really hate being told what to do, by our parents or anyone else in authority. All of which has ramifications not just for each of us individually, but for our society.

Ubel doesn't address the financial markets often in his discussions, but the publication of this book is very timely from that perspective. Why do investors picking a mutual fund always select the one with the strongest recent track record, despite all the research that has shown that no fund manager can continue to outperform for very long and the warnings all the mutual funds are required to display on their prospectuses that past performance is no guarantee of future results? Certainly, no one can doubt that a free market was thriving during the subprime mortgage boom - why, then, were home buyers purchasing more house than they could afford and then financing those purchases (sometimes unnecessarily) with risky mortgage structures?

Ubel's perspective on behavioral economics is different from that of others who have written about it; he has to deal, day by day, with the fallout of many of the poor choices made by his own patients. No one sets out to become obese or addicted to tobacco or alcohol. Yet one of Ubel's alcoholic patients, he recounts, was so desperate for a "fix" that he drank the contents of three of the hospital's dispensers of hand-sanitizer and collapsed: an utterly irrational act. He shows how our innumeracy hinders our ability to correctly understand risk (most of us worry more when told we have a 130 in 1,000 chance of death than 13 in 100 - even though the risk is numerically identical). And when we do make rational decisions, these can lead to what most of us would admit are irrational and unintended outcomes. For instance, a family living near the poverty line and struggling to pay for groceries would actually fare better if they bought cookies instead of carrots with their scarce dollars; the former contain more calories per scarce dollar. Ubel even offers examples of supposedly rational individuals, from eBay auction participants to economists, behaving irrationally.

Unlike the handful of other accessible tomes revolving around decision-making and behavioral finance, Ubel is diagnostic rather than prescriptive. Were it not for the existence of books like Nudge: Improving Decisions About Health, Wealth, and Happiness, that would be a bigger weakness than it is. (The reality? That is primarily a policy book -- and a brilliant one -- while this is more general in nature. Works by Daniel Kahneman, some of which I have read, would logically replace Ubel's work for the specialist reader familiar with economics and scholarly writing, but they will be harder sledding for all but the most committed general reader.) Still given the relative newness of much of this material to the same general reader, I would recommend Ubel's work as a lively and knowledgeable general introduction to the many conundrums posed by unbridled free markets, as written by a passionate non-economist. Anyone interested in understanding the policy implications more deeply can then move on to Nudge.

I shared this book with two highly economics-resistant friends over the holidays and their comments ("oh, NOW I get what you're talking about....") earned it its four-star rating. I'm willing to bet that it will be hard for anyone who reads this book to not stop and think about its arguments whenever they next confront the temptation posed by a Krispy Kreme donut.

Recommended primarily for those new to the subject, or who aren't ready to tackle the nitty-gritty of the policy implications.