Monday, July 7, 2008

Book Club -- Sway

I just finished Sway: The Irresistible Pull of Irrational Behavior by Ori and Rom Brafman. A fascinating book that details the psychological forces that keep us from making good decisions. There are dozens of great examples, but my favorite is the “twenty dollar auction”. One the first day of class, a Harvard business school professor plays a game with his students auctioning off a twenty dollar bill. The highest bidder gets the bill, but the second highest bidder also has to pay his bid and receives nothing. Bargain hunting students quickly move the bidding up to $12 or $16, when the contest slows down and only the two highest bidders continue. At $17 for instance, the second highest bidder can spend another $2 and go to $18 hoping to win the bill or risk losing his entire $16. The students “roar with laughter when the bidding passes $20”; the record is $204. The professor has never lost money in the game; all proceeds go to charity. Students are caught “chasing the loss” – the deeper the hole, the more they dig. This illustrates loss aversion, one of several psychological forces that drive our irrational behavior. Thankfully, the authors do not just describe these traps, but provide guidance to avoid them – critically important in policymaking. For more book reccomendations, go to the CT Health Policy Project Book Club.
Ellen Andrews