Objective reality is more illusion than substantive. Every magician knows that how we perceive something is often determined less by what we see and otherwise sense than by what goes on in our brains. Neurologist V.S. Ramachandran’s engaging book Phantoms in the Brain brilliantly supports that claim. He cites numerous examples showing how the brain generates illusory renderings of reality.
One of the most common examples of illusory reality is the phantom limb problem that amputees experience. When a legless person feels an itch on an ankle he no longer has it’s because certain neurons in the brain devoted to the missing limb haven’t noticed its absence.
Ramachandran tells of one patient whose brain injury from an auto accident prevents him from recognizing his parents even though he has no trouble remembering and recognizing anyone else.
Another patient does who suffered a right brain stroke denies the paralysis of the left side of her body caused by the stroke. When asked to raise her left arm resting inertly in her lap she said it wasn’t her arm. It belonged to mother who left it in the hospital years ago. Oddly, however, when several drops of cold water were deposited in her left ear, she became fully aware of her paralysis: “Doctor, I can’t raise my left arm because I had a stroke,” she protests when asked to raise it. She remains fully aware of her paralysis for two to 30 minutes after receiving the water drops. Then, she loses all awareness of her paralysis as well as the brief interlude of awareness after the cold water was deposited in her ear.
So you might say that such cases bear no relationship to how you or any other normal person internalizes reality. However, those cases are merely extreme examples in support of the proposition that normal or otherwise our perceptions are fundamentally subjective, meaning our brains ultimately determine what we see.
Take the optical illusion shown here. You perceive the inner
circle in the cluster of small circles as larger than the inner circle in the cluster
of large circles. The reality is that the inner circles are equal in size. But
because the brain relies on comparisons for much of its work, it reckons the size
of the inner circle as a proportion of the size of the individual circles in
the cluster that surrounds it.
We can draw from this visual illusion an important principle: The brain’s rendering of an object, condition, concept or idea is influenced by comparisons it makes as part of its efforts to understand what it processes.
This principle has been demonstrated in countless research studies. Economist Dan Ariely tells of a number of such studies he has conducted. In one study Lindt chocolate truffles were sharply discounted from 35 cents to 15 cents and Hershey kisses were more modestly discounted to one cent in reflection of significant qualitative differences between the two candies. About 73 percent of the study’s participants chose the heavily discounted higher quality Lindt. But when the Hershey kisses were offered for FREE! against the Lindt truffle now priced at 14 cents, 69 percent of participants chose the qualitatively less impressive Hershey kisses. They apparently figured that FREE! was a better deal than a 14 cent Lindt truffle despite the fact that the effective price difference was no different than when they had the option of a 15 cent Lindt truffle or a one cent Hershey kiss.
This experiment and many more are discussed in Ariely’s provocative new book, Predictably Irrational: The Hidden Forces that Shape Our Decisions. I enthusiastically recommend Ariely’s book to anyone involved in product pricing in any category. You will likely come away from this read with a better handle on how to price products.
Classical economics has rested on a premise that Ariely shatters to smithereens. For well over two hundred years economists have based their thinking on the premise that marketplace trends are determined by the rational behavior of people acting in their own interests. This in fact is the keystone of Adam Smith’s book The Wealth of Nations, the Old Testament of capitalism.
Ariely is not the first to challenge the rational man premise of classical economics. A whole new subfield called behavioral economics has taken root because some brave-minded stalwarts in the dismal science decided the emperor was stark naked. The notion that marketplace trends reflect the outcome of human reasoning in an objectively fathomable world is every bit as illusory as the appearance that the earth is more or less flat.
Michael Mandel, writing in BusinessWeek, says about another book debunking the rational man theory of classical economics, Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism by Nobel laureate George Akerlof and Yale economist Robert Shiller who is well-known for the Case-Shiller Home-price Index:
“The two superstars have produced a truly innovative and bold work that attempts to show how psychological factors explain the origins of the current mess and offer clues for possible solutions. At a time when plummeting confidence is dragging down the market and the economy, the authors' focus on the psychological aspect of economics is incredibly important.”
The cat is out of the bag, so to speak. I would expect to start seeing more accurate economic projections in the future now that such prominent economists as those who wrote the books I’ve cited in this post have revealed just how naked the rational man theory is.