The rationality behind irrational decisions

Irrationally Rational: Ten Nobel Laureates script the story of Behavioural Economics

Author: V Raghunathan

Publisher: Penguin

Pages: 318

Price: Rs 599

Until the 5th century BCE, Pythagoreans believed that numbers could exist either in fractions or as whole numbers. But then Hippassus of Metapontum is said to have discovered the square root of 2. The story goes that the gods were displeased with the discovery of irrationality in a society that took pride in its rationality. The seas devoured Hippassus after his discovery. While economists in the 20th century did not meet such tragic ends by challenging assumptions of rationality, they were still ostracised for disturbing the status quo. The crisis and breakdown of neo-classical economics and Keynesian structures led researchers to foray into newer fields. A shift away from macroeconomic assumptions and towards microeconomic theory led to a further breakdown of consumer behaviour and the emergence of the field of behavioural economics.

The purpose of V Raghunathan’s work Irrationally Rational: Ten Nobel Laureates Script the Story of Behavioural Economics has been to trace the field’s history from the works of winners of the Nobel Prize in economics, starting with Herbert Simon to Robert Shiller. The book is divided into nine chapters, with seven detailing the works of Nobel-winning economists related to behavioural economics and challenging the assumptions of rationality. Dr Raghunathan, who has contributed extensively to the field, starts his book with an introduction to the field, explaining in detail what led to a breakdown of assumptions of rationality. He begins with the assumption of Homo Economicus, deconstructing the arguments on rationality and then ends with a discussion on Homo Culturalis. Dr Raghunathan also introduces the ideas of the mathematician Pierre-Simon Laplace and presents his reasoning for the selection of Nobel-winning economics related to the field.

The rest of the book follows a similar design, except for the last chapter, which rushes through the achievements of other (non Nobel winners) economists in the field of behavioural economics. The seven chapters on Nobel-winning ideas start with an explanation of the simple basic assumptions of the field, the life story of the economist, ultimately leading to his ideas and how they challenged existing notions. Dr Raghunathan frequently introduces examples along the way to keep the reader engaged. He also focuses on explaining things in the Indian context by using examples such as non-performing assets in the banking sector. Each chapter is designed in a similar manner. Although that makes for monotonous reading through the seven chapters, the examples lend some variety each time a new subject is introduced. But there is also a problem of oversimplification. In explaining such complex topics to a lay audience Dr Raghunathan overdoes it, which makes the reader lose perspective.

The concept of asset price volatility and Dr Shiller’s contribution to the issue could have been dealt with better. Similarly, Daniel Kahneman’s chapter does not do justice to his contribution and the author only touches on his famous book Thinking, Fast and Slow. The last chapter on economists other than Nobel laureates that have worked in the field could have been a book in itself.

Dr Raghunathan keeps his narrative fast and pacy while explaining their contributions, though the lack of examples makes matters difficult just as much as the writer’s penchant for simplification helps in this case.

Had Dr Raghunathan tried to cover fewer Nobel laureates and explained issues more in detail, it would have made for a better read. But for his target audience— people who want to understand the issue —the book does provide a useful overview of the field and what each of the Nobel winners has tried to solve. Dr Raghunathan’s achievement lies in making complex economic concepts understandable and relating them as much to the cultural zeitgeist as possible. The book is a good read for people trying to foray into behavioural economics. It is also a must-read for those trying to understand why neoclassical economics could not capture the complexities of the 21st century and an entry point into understanding consumer patterns, especially when technology is trying to make the irrational side of rational beings apparent.