IRRATIONAL MAN (via Michael Herdegen):

The Why of Buy: Theory says we are rational about money. But brain-probing scientists are discovering otherwise (ERIC ROSTON, 3/08/04, TIME)

Pioneer "neuroeconomists" around the country are ready to knock out the centuries-old model of Homo economicus, or "economic man," the perfectly reasonable, largely imaginary being who day in and day out maximizes his utility and gains and always clearly seeks the right thing to do. It's the foundation for Wall Street's "efficient market," which holds that every trade neatly reflects all available information. In theory, the saying goes, practice and theory are the same. But in practice, they are different.

The trouble with Homo economicus is that he has really very little to do with his emotional, dim-witted half brother Homo sapiens, who bought Petsmart.com on a hunch. It's difficult to imagine Homo economicus upset and off to the mall for some "retail therapy." He doesn't make impulse buys. And he doesn't always know or care what he wants, let alone what he can afford. "The bursting of the Internet bubble may have been the final nail in the coffin of the efficient-market hypothesis," says Richard Thaler, a professor at the University of Chicago.

Research from fMRIs and other machines bears all this out. Gerald Zaltman, a professor at Harvard University, says 95% of consumer decision making occurs subconsciously. Read Montague, a professor at the Baylor College of Medicine, gave subjects the "Pepsi Challenge" in an fMRI scanner. Result: people found Pepsi more pleasing to the palate — their reward center lit up — but Coke's branding hit literally at the core of their sense of self, a much stronger bond. This affirms what we all suspected: brands are so powerful that we are sometimes more likely to buy something we identify with than something we like better or that is better for us.

NHPR's Front Porch had a terrific interview with Tuck Business School professor Sydney Finkelsten last night, about his book Why Smart Executives Fail. The general discussion of the causes of failure was fascinating, but one really interesting point came up when the host asked him about Cabletron, the company NH's current governor founded, and why it hit the wall. Mr. Finkelstein noted that their big problem was that they stayed focussed on making the highest quality product possible, whole Cisco Systems offered folks lower quality, but bundled entire network systems to create a one stop solution. As he said, it's not that people aren't interested in quality, but that they're more interested in having their problems solved. If you can get their network running, the quality is automatically high enough for them. It's its own kind of instant gratification.

Posted by Orrin Judd at March 3, 2004 9:49 AM