Secrets hidden in luxury and loss:A new book offers lessons from Nobel laureates

Currently adjunct professor of strategic management at the Schulich School of Business, Toronto, his latest book, Irrationally Rational (April 2022; Penguin Random House India) offers lessons in behavioural economics from the works of 10 Nobel laureates. (These include Herbert Simon, Gary Becker, Richard Thaler and Elinor Ostrom.)

“Standard or neo-classical economics was always clinically removed from human psychology. It assumed that decision-makers are utterly rational,” says Raghunathan. Behavioural economics marries economics and psychology to “focus on how real people actually take decisions, complete with their emotions, subjective characteristics and biases.”

How are advances in this field affecting decisions you make every day? Excerpts from an interview.

Our choices are not necessarily driven by cold, calculated or consistently rational considerations. There are a myriad emotions constantly at play, including greed, fear, anger, love, compassion, ego, altruism. There are also biases, preconceived notions, the impact of herd behaviour, and other such factors. Understanding how our biases and our histories impact our decision-making can improve our choices.

* What are the most surprising things about human behaviour that the Nobel laureates in your book have theorised about?

At some level, practically every finding set before us by behavioural economics is surprising. For example, in the assumptions of the standard economists, humans prefer more of a good thing (say profits) to less, or less of a bad thing (losses) to more. But even this most basic of the assumptions may not hold true in every situation.

Consider this. If you ask someone, “Would you rather lose ₹50 or gain ₹50?” the answer in neoclassical economics is obvious. You would be entirely irrational at any time to prefer a loss of ₹50. Now suppose you have a local fruit vendor who has increased prices by about 40%, amid a transport strike. The hike seems excessive. There is another vendor a distance away who has increased prices by only 10%, which feels fairer. Your usual purchases would have cost ₹500, for which the local vendor will now charge ₹700. Going to the other vendor means the purchases will cost only ₹550, but say it costs ₹200 to get to this vendor. Would you still go, even though you may end up paying ₹750 in all? While the uber-rationalist may stick to the local vendor, there are many who would wish to send a message to the local vendor, underlining how unfair his hike felt. To do this, they would be willing to incur an additional cost of ₹50. And so some individuals choose a loss of ₹50 over a gain of ₹50…

* What are the most obvious and least obvious ways in which behavioural economics is being used to influence buying decisions?

Most advertisements for luxury products dwell on the “irrational” pride or ego boost that comes with buying their product. Why do you think airlines charge disproportionately more for business class seats, often several times what the true ratio could be?

Think, for example, of when you buy a car. You have just concluded the deal, and then come the accessories. The car salesmen are often able to sell a lot of accessories at an exorbitant price, though they know and you know that if you drove just a short distance, you could buy the same accessories for much less. They have figured out that, when compared to the price of your car (the anchor price), all the other prices will look low. Plus, you’ve become comfortable with paying a much larger sum in that moment. They know you will not immediately make the readjustment in your mind.

Read an excerpt from Irrationally Rational here

* Have you changed your own habits or ways of thinking as a result of what you’ve learnt in your years studying this field?

I do try and avoid herd behaviour, for instance in stock markets. I never buy accessories from fancy car dealerships.