Tuesday, 24 September 2013

Will the real economics step forward?

Traditional economics is a fantasy. It is about as relevant to the real world as orcs, wizards and fire-breathing dragons. Which makes it a trifle worrying that politicians put such dependence on it.

The big problem with old-style economics is that it thought of human beings as perfect actors who always took the best possible action to maximise return. It is only ridiculously recently that some economists have realized that this is not a realistic picture and have launched the discipline of behavioural economics, which makes the rather more realistic assumption that people will make decisions based on all whole host of factors, not just maximizing return - and that they often get things wrong. Really, behavioural economics should be renamed 'economics' while what used to be called economics becomes 'fantasy economics', but I think economists are too embarrassed to do this (especially as they would have to rename a lot of their Nobel prizes 'fantasy Nobel prizes').

Most of the books on behavioural economics to date have been either textbooks or popular science books like Dan Ariely's Predictably Irrational, but what businesses are crying out for is practical business books that help a company make use of behavioural economics - exactly what Enrico Trevisan sets out to do in The Irrational Consumer (noticing a trend in the titles here?). It is subtitled 'applying behavioural economics to your business strategy' just to underline this.

The result is a partial success. Trevisan does tell us lots of interesting things about behavioural economics within the context of business transactions. But this title doesn't work as a practical business book. There are three reasons for this. One is that it is written like a dull academic textbook. You often have to read a sentence two or three times to grasp what it is trying to say. Here's a sentence genuinely picked at random: 'Many critical aspects of this approach to the market and to the client are now widely known, such as the balance between dis-homogeneity and tractability of the various segments, the instability of these over time, their responsiveness to external deciding factors, the limited duration in time of the characteristics, and so on - these are some of the more evident methodological questions.' Still awake? I thought not.

It's a shame because when Trevisan is talking about real world examples he suddenly becomes lucid and readable, but unfortunately the majority of the book is written in that verbose, difficult to digest style.

The second problem is that there is no real attempt to make this a practical how-to book. He describes the impact of behavioural economics on, for instance, the decision a customer makes in choosing a product. But there is no practical guidance on what to do about this, how to use it to make your business better. So there is really no delivery on that subtitle - it doesn't give any guidance on business strategy.

Finally there is a questionable assumption. Trevisan tells us that this approach could be use either to help customers to make better decisions or to make use of the understanding of their economic processes in order to maximize profits from them. He decides rather arbitrarily that we should be doing the selfless thing and helping the customer to get it right for them, because this will lead to better long term relations. While in principle with some customers and some products this is true, it is a big assumption, and it certainly isn't aways the case. So I am afraid we really do need the missing chapter 'How to screw every last penny out of your customers using behavioural economics.'

Overall, then, you will learn a lot by reading this book, but sadly it will be considerably harder work than it should have been, and what you learn will not include direct, practical things to do.

You can see more at Amazon.co.uk and Amazon.com.

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