Behavioural finance has not yet passed the ‘so what’* test. Unfortunately this book continues that noble tradition. It is well written and interesting, although somewhat familiar to those who have done any reading in the area. You have to admire the ingenuity of Ariely as he devises experiments to isolate the irrationalities and inconsistencies that people possess. And of course its compulsory to tick off your own foibles (less vulnerable to relativism but overvalue optionality as you asked.)
I was pleased that the edition I bought was ‘revised & expanded’ with a chapter on the mortgage crisis and looked forward to this solutions Ariely brought. Alas the cupboard was pretty bare – he rightly points out several problems & issues, but is short on solutions. His best insight is essentially unproven – that mortgage customers don’t decide how much they can borrow, but rely on banks/brokers to tell them. And interest only mortgages with no capital repayment plan allow a much larger principle than capital-&-interest ones if your payment has to be 38% of income. (As an aside I’d missed this detail in the US market – in the UK even if you take out an interest only mortgage you are also expected to show you will have means of repaying it. This used to be mean start an endowment, but numerous other solutions with ISAs or other saving plans evolved before that bubble burst in the 90s. I’m horrified that not having a repayment plan was standard practice.) Small wonder there was huge house price inflation and gross over-indebtedness.
On bankers pay though, he points out how renumeration is a poor motivator/performance predictor but sees no way round the inertia of the current starting point than starting a new bank with better practices and marketing it on that basis.
Despite that its a great book, ideal for anyone new to the topic or even interested in how our own minds work. The chapters on the psychology of ownership and expectations are particularly relevant to anyone in finance and would help anyone make better financial decisions. Especially professional fund managers. Maybe there’s hope in the ‘so what’ test.
* A test that was often suggested at Inquire conferences where academics would present fascinating papers or present deep insights to practitioners who would then ask themselves what does this mean for me – so what?