Interview with Dan Ariely: The Upside Of Irrationality
I’m excited to post this interview with Professor Dan Ariely. I had the fortune of meeting Dan earlier in year. I was immediately struck by his humble attitude and inquisitive mind. In this interview we highlight his latest book, “The Upside of Irrationality”. We also look at the characteristics of successful scientists and wrap-up with Dan’s prescription for widespread empiricism. Enjoy!
Interview With Dan Ariely on “The Upside of Irrationality”
Miguel: Hi Dan. Thanks for taking my call and sharing your time. I’d like to start our conversation with a brief portrait of your success. You describe yourself as a scientist and a life hacker… Tell me, what questions are you (as a scientist) seeking to answer?
Dan: I like the idea of hackers. Maybe it’s because I was at MIT or because of my nature but I am interested in solving problems that are currently important. Many of my academic advisers have the ability to work on a particular topic for 30 years. They become the world expert on this topic… I don’t have that kind of motivation. The kinds of things that excite me are things where we can make an improvement in the near future. So if you say here is a project that in 30 years would shed some light on how X works that doesn’t do enough for me. Instead, I try to look at thing where I think that within 2-3 years we could learn something and be able to improve some process. Another way to say it is that I am interested in problems that are central to the way we live and lead our lives. Because I’m so focused on things that are currently happening in the world my interests can change quite frequently. For example, I am becoming very interested in researching “conflicts of interests” a topic that is very important in understanding financial systems as well as some of the problems with health care.
This is my approach. I see what’s going on in the world, I think about where we might be able to understand what’s going on (and where I can make suggestions for improvement), and then I research the topic.
Dan: If you ask me what kind of research or projects I’m currently working on I’d say… We have a big project on cheating. I’m not referring to criminal cheating but rather to how regular people cheat just a little bit and feel good about it. We are trying to understand this behavior and interfere with the underlying process. This would include illegal downloads, tax fraud, etc. We of course are also researching conflicts of interest and health care. When I say health care, I’m not trying to propose a new treatment for multiple sclerosis. Rather, I come from the angle thinking that the majority of the problems in health care are man made; meaning we don’t take our medication (on time), we don’t wash our hands, we don’t have safe sex and so on. So I would like to make progress in these types of health care decisions. It’s also about financial reasoning I want to think about how we can help people make better financial decisions. This ranges from how people decide what loans to pay, to helping people understand compound interest, and even understanding why people don’t save enough for retirement or buy annuities.
Miguel: Given the process of coming up with ideas and running experiments —what moments of the process bring you the most joy?
Dan: There are 2 wonderful moments.
First, the moment of coming up with the idea –which doesn’t happen all that often when I read academic papers. It happens when I meet people or have discussions in coffee shops, airplanes etc. (that is meet interesting people). Generating ideas is essentially about generating a new angle for looking at a problem or issue.
The other moment I really love is the moment of finding out the results. I describe in “The Upside of Irrationality” how I had an almost religious like process for receiving the results to my experiments. The best way to think about this is along these lines—-imagine having a riddle and most people work on a riddle for maybe 20 minutes or a couple of hours but academic riddles can take months. So you have this academic riddle and you have been working on it for months and all of a sudden the answer is going to reveal itself. It’s very exciting.
Dan: Sure. Let me first talk about what makes this book more personal. In the past 2 years one of the most amazing things for me has been to meet with people that read my first book. Especially people who read the book and were touched by it in a special way. For example, I sat on a flight next to a woman who told me that I convinced her to install an insulin pump. She was a type 1 diabetic and after reading my book she decided to install an insulin pump vs taking insulin every day. Of course I never talked about this decisions in my book but she basically had a discussion (in her mind) with me about what I would say to this dilemma that she was facing. She thought I would tell her to go for it and so she did (without ever meeting me or speaking with me). This is an interesting experience, I had written “Predictably Irrational” alone in my office and yet readers were having active discussions with me (through my words and thoughts). Because I have received so many emails from people and had numerous discussions, I feel very close to my readers in general. So this book is more personal because I now have an image of my readers where as in my first book I had no audience in mind ( I just assumed I was writing it for my mother). Now I have an audience with whom I’ve had hundreds of hours of discussion and this allows me to be much more personal.
Now with respect to the new book, “The Upside or Irrationality”, I think the title is a little misleading, and a better title might have been, “The Sometimes Upside of Irrationality.” So, let me explain what I mean about the upside of irrationality. The first type of upside is that there is an upside to understanding how we are irrational, which means recognizing where humans go wrong. And this is pretty easy to understand. For example, if you ask why are people obese, from a rational point of view it must be because they prefer to eat food now and die younger. If you think of this behavior as irrational you’ll say, well the reason people are eating so much right now is not because they prefer it but because it’s hard to overcome, there is an urge, and it’s difficult to think about the long term. Then you can start to think about solutions and hence this (thought process) is the first type of upside to thinking about irrational behavior.
The second type of upside which is more interesting, complex, and challenging of economic theory –is that if you could fix people (meaning turning their irrational behavior into rational behavior) you would not (necessarily) always want to do it. Here are some interesting examples:
1. Would you eliminate people’s willingness to give money to charity? If people were perfectly rational they wouldn’t give money to a charity that has no immediate bearing to their immediate emotional life. You could decide that this type of behavior is something you wish to eliminate- or you could also decide that this type of behavior is permissible and thereby worthwhile.
2. Another example is cheating. For all the research there is about cheating and (trust me) it is depressing to think about how much people cheat. People cheat much less than economic theory would predict. Imagine if everybody was behaving like the Becker model of cheating. Think about how much trust you would have that everything around you would go well. You would basically assume that every time someone had a chance to steal without being caught they would do it. Sure people are not angels but they are further away from perfect rationality than they are from being angels.
Miguel: Before we talk about the lessons from the Upside of Irrationality, I think it’s important for you to share your definition of “good decision making”.
Dan: Okay, so let me give you two definitions.
The first definition which is less controversial would be as follows: good decision making is making a decision that if analyzed and explained via logic (pros, cons, etc) without any benefit of hindsight would result in accepting the initial decision as the right one to make. In other words, if you make a decision and I give you a different perspective, and this new understanding leads you to say that you have made a mistake and wish you could change your mind –this would be an example of a poor decision on your behalf. So if we can recognize with different understanding or different emotional input that we made the wrong decision – it is a bad decision. The easy way to think about it is as an influence of pure emotion. Imagine someone texting while driving and afterward you sit with them and ask, “Was this a really good decision?” If they say no then this is a bad decision. So if I (or additional information, perspective, context, perspective etc.) can make you regret a decision then it’s likely to be a poor one.
The second definition for a good decision making – is making a decision that fits with a person’s overall goals. For example, if I want to save for retirement but every decision I make is not compatible with that goal then I am making bad decisions. We can argue that not every instance of spending is incompatible with retirement but in general a lack of saving is incompatible with your overall goals.
Finally there is an economic definition which is – if you make a decision and it is non-transitive, or revealing that you don’t have complete preferences, that would be a poor decision.
Let me say one more thing, if there are forces that influence your decision making and you are unaware of these forces this would fall under the first definition (of poor decision making). Because it means that if these “forces” were different you would have made a different decision.
Miguel: Continuing from this definition of decision making you write about the Lancelot story where he’s a fighter and claims that the key to fighting well is not worrying about the outcome but rather focusing on having perfect concentration (minimal stress). How can you relate this story to decision making?
Dan: What is interesting about this story is that by not valuing his life Lancelot became much more rational in a standard way. Basically, the way we think about it is that emotion makes people irrational. Not bad necessarily, but irrational, and if you can disassociate yourself from your emotions you can make more rational decisions. That is exactly what Lancelot was able to do—So during a sword-fight where you want to fight to the best of your ability you don’t want any stress, and to do so you don’t want to think about anything besides the immediate fight. By detaching yourself from emotions you are able to do that.
Miguel: A corollary being if you are the executive of a financial company and you’re stressed about your bonus. Perhaps you’re not going to be making the best decisions.
Dan: That’s right and I don’t think there is a simple way out of this problem. Bonuses are created “to incent people to go towards a particular path because otherwise they would not do so (lacking a large incentive)”. So a bonus is basically like putting money on a path and you do what I want — not because you want to do it but because of the amount of money laying on the path. Inherent to this argument is the idea that you are going to think about the money not the task.
The basic idea inherent to bonuses is that you are going to be distracted by having one. So in essence it is a motivating distraction. Most people would not argue that it is easy to distract people when performing tasks. Financial decisions and incentives are not much different. If I put many financial distractions around you —you will lack focus and good decision making.
I’ve talked with a lot of people on Wall Street. The truth is that they privately recognize this problem. They tell me that many months before bonus seasons they sit everyday with excel and compute how much bonuses they think they will get. The issue is that we get people to focus too much on salary. If 80% of my salary was bonus based I would be very curious about it as well. I would probably spend lots of time thinking about what I would receive at the end of the year.
Miguel: Can you give us any examples of businesses which are striving to properly align compensation with worthwhile goals, etc.?
Dan: I can’t say much (with respect to any company in particular). But I can tell you that every company I speak with says that bonus season is a miserable season. I haven’t met anyone who says thinks of it as a period of high productivity with everyone jazzed and excited. I can also tell you that everybody (without exception) who gives small bonuses (say 5k-6k) believes that its most likely more trouble than it’s worth. Meaning someone who gets $5,050 is upset because he didn’t get $5,175 and so on. Everyone recognizes that no one is happy with bonus season and people who pay small bonuses talk about a pickup in misery because people compare themselves to others.
The only people that seem to be happy with bonuses are two groups:
First, people are happy with companies that give bonuses as tokens of appreciation. These appreciation bonuses can be very small things like a meal to a restaurant or a trip to Hawaii. The goal is appreciation vs. financial compensation.
The second group (and I can’t confirm this for sure) are people who are in sales and they know the exact equation for what they are getting/earning. Meaning if I sell 20 more gadgets I make 20 more grand that is incredibly motivating and rewarding for them.
What’s also interesting (and I have heard this from technology companies and office supply companies) is that with financial incentives you can easily distract people from attaining their goals. So for example people at these companies tell me they can put a tiny amount of people’s compensation directly connected to one activity and what will happen is that people will try to maximize that particular activity regardless of whether this will optimize their whole income for the year.
So this brings us back to the issue of distraction. Just think of anything you do whether it’s your blog or your day job…imagine if I created a very clear parameter and I would compensate/appreciate you based on that parameter. Wouldn’t that parameter get over-attention and focus and therefore you would be more likely to neglect other things?
Miguel: So what does this say about our understanding of motivation?
Dan: Motivation is very complex. Imagine if you were trying to write an equation such as effort = x+b1×1 +b2×2 + etc. So salary would clearly be one of the variables (because if you don’t do well you will get fired), but the real question is, what else you would put in the equation? Your blog for example, how many hours do you put in every week working on it?
Miguel: Too many [laughter]
Miguel: Probably a good part time jobs worth.
Dan: Okay, how would we write an equation for your willingness to work as a blogger?
Miguel: You would have to measure how crazy I am. I’m convinced that would be the only metric in my case.
Dan: [Laughter]. Yes the point being that you couldn’t write an equation with financial variables in this case. And it is the same for many jobs where clear financial metrics would not capture all the underlying factors of motivation. In many cases the proper variables are also related to meaning, a sense of contribution, and a sense of what we are doing with respect to society, sense of pride, belonging etc. All of these things motivate us.
A personal example of this inability to define motivation in financial terms would be that I get invitations to give talks in front of groups. I receive at least 1-2 invitations like this every day. It’s always a substantial amount of time and effort and the question (at the end of the day) is do I do it or not? If you took this decision it would be impossible to write a model (or equation) that would assume that I only maximize my wealth or my recreation. In fact, any purely financially driven equation (that is for defining motivation) would describe a very small percentage of my work life. For example, it’s 9:30pm on a Sunday night and
I’m in the office speaking with you. So what we need to do is understand (in a much more general way) the complexity of human motivation. Only by doing that can we develop tools to increase motivation and to identify what drives people. Clearly money is just one motivator but it isn’t the best answer every time.
Miguel: You touched on my next question which relates to your chapter on meaning. Tell us about your findings on the importance of meaning in the workplace. What’s your advice for people trying to attach meaning to their jobs?
Dan: I think it’s very hard to have meaning if you are working for someone and don’t have much autonomy. But the upside is that with a little work we can create work environments that provide people with autonomy and are more likely to lead to feelings of meaningful work. Let me tell you a story that happened to me three weeks ago.
Three weeks ago I was in Seattle where an ex-student of mine who works for a big software company. She contacted me six weeks prior and I agreed to meet with her team. Something happened at that company in the weeks before I gave the talk. The background being that my student and a small team of people had discovered an idea which they thought was the best innovation in the “computer world.” They worked very hard on this idea for two years and the CEO of the company looked at it and said I’m canceling the project.
So here I was sitting with a group of highly creative people, who were completely deflated- In my life I’ve never seen anyone (in the high-tech industry) with a lower level of motivation. So I asked them, “How many of you show up to work on time since the project has been shut down?” Nobody raised their hand. I asked them, “How many of you go home early?” Everyone raised their hand. Lastly, I asked them, “How many of you feel that you should have taken the opportunity to fudge on your expense reports?” In this case, no one answered the question — rather everyone sat laughing to themselves—in a way that makes me think that they would have fudged their expense reports. So here you have a case of people who worked incredibly hard on a project and basically got rejected. Which leads me to ask how could the CEO have behaved differently if he was also trying to create a more positive feelings for the team members. So I posed this question to the team and they came up with different answers:
1. They said senior management could have allowed the team to present the project to the entire company.
2. Management could have gone a step further and allowed the team to build a prototype.
3. Management could have taken the time to understand the technology and see the possibilities of applying it to other areas of the firm or product development.
4. They could have asked the team to write about the process of developing the idea.
So there are many approaches senior management could have taken to boost the morale of the research team. But the key is that most ideas for boosting morale require a significant amount of time. If you think of people as rats working in a maze that then there is no reason to help their motivations or explain why you said “No!”. But if you think of people as driven by internal motivation then you want to worry about internal motivation then you might want to spend some time and effort increasing internal motivation. That is something the executive did not do, and I suspect that because of this the research team will eventually dissolve.
Miguel: So you mention that it’s difficult for people to make their work more meaningful and that autonomy is one of the most important characteristics for knowledge workers. What else can you say about this?
Dan: It’s harder to find autonomy at the lower levels of the corporate structure. If you are a low ranking employee it’s very hard to have autonomy and meaning. But if you have some degrees of freedom (and most knowledge workers have these types of freedom) then there are many things you can do to find work more meaningful. Then the question becomes, “How do you get the project completed in a way that aligns with your goals/values?”
I do have to say that humans have an incredible ability to find meaning. Just look at people in varying industries. Yes it’s easy to say teachers can find meaning in their work because they are teaching future generations. But in general meaning is present in many jobs and professions (regardless of how easy it is to think of them as meaningful). People can find meaning in almost every industry. The capacity for finding meaning is not lacking, rather what is important is giving people the opportunities to maximize their internal meaning and motivation.
Miguel: Let’s jump to another topic: the ownership of creativity. That is the feeling that you personally created something even if you are not the most qualified person to do so. The example being people who build IKEA furniture are very satisfied with do-it-yourself projects (and overvalue their creation).
I would just like to add that as I was reading the chapter I had an idea regarding this “ownership of creativity” and the financial crisis. Perhaps one of the reason’s people were so confident in their financial models is because they created them- that is to say they spent many hours modeling complicated financial products. And as a result it was very hard to accept or even see that they could be wrong (or less qualified than expected to invest in them).
Tell us about this psychology of do-it-yourself… what are the implications?
Dan: Actually this is a great observation. Mike Norton and I started brainstorming a very similar idea several weeks ago. We want to give people some text and ask people to create a mathematical model. For another group of people we want them to create a diagram regarding the text. In essence we are trying to study:
The act of creation and,
The level of abstraction
The goal is to try to investigate where these two processes help you believe more in the idea presented in the original text. As I was saying earlier, I think that this idea is very important for the financial industry. But the idea is much broader than that, many engineers create simulations. What happens when you take something (an airplane for example) and you create a model of it (and the model is very realistic)—does this salience alter your perception of the models overall accuracy and validity?
Miguel: I’m fascinated by this idea of modeling (and the idea that if we create something we tend to overvalue its significance)…but I’m even more fascinated by the intersection of this effect and the limits of our cognition. If you take our ability to overvalue our own creations and then our illusion of unlimited attention (mentioned in The Invisible Gorilla) you wonder what the trade-offs are between the accuracy of models and our ability to perceive models in the first place.
Dan: By the way The Invisible Gorilla is a great book and people should read it.
Miguel: Both The Invisible Gorilla and your book, The Upside of Irrationality, have an ability to put readers in the driver’s seat of being a scientist. It’s a lot like having a grand kid you don’t have to take care of it. You just get to play with it on the weekends. When I read your books I don’t have to feel the pain of experimentation. So I must thank you for that.
Miguel: At a macro level people were very disappointed with the recent failures of the financial system (because of a lack of trust). Interestingly, there’s another concept in your book that perhaps explains why people are still upset. Perhaps it is because people did not have an outlet for their revenge.
Dan: Yes, there was a huge betrayal of trust and at the same time there has been very little recognition that this occurred. And of course there have been very few repercussions for the perpetrators. I think it’s incredible what American executives can do and get away with…
I was in Brazil a couple of weeks ago. If you manage a company in Brazil and you’re the CEO and the company is a fraud or your decision making is poor, people will sue you personally. In the US there was no public apology. This lack of apology puts us in a very difficult situation. We were happy participants in the stock market and now we (the public) are reluctantly participating because there isn’t too much else to do. In general the US public seems unhappy in participating in the stock market but they have few alternatives.
When the recession started two things happened: initially I had many meeting with bankers and they seemed interested in improving decision making, conflicts of interests, etc – that is to say they were interested in change. I was pleased about this and I even thought that perhaps we understood how to behave better. Unfortunately, this motivation toward changing financial behavior (on behalf of bankers) disappeared very quickly. There were also many people that wanted to create new banks. They understood that large financial institutions are expensive and very risky. So these people were very interested in changing the banking sector. But the new regulations make it much harder to start a bank. So if responsible people wanted to start a new bank (with transparency, proper incentives, etc.) it would be very difficult for them to raise the money to do that. In fact it’s much more difficult than before the recession.
Miguel: In The Upside of Irrationality you write about poor decision making. A particular quote of yours comes to mind, “People are often the most irrational and act the most undesirable when the decisions are most important.” Give us some examples.
Dan: The most vivid example is having kids. I met someone who is doing research on how women decide to have kids. She’s done this research for poor people in Africa as well as people in the US. If you’re going to decide to have a kid and you are in Africa. Think of the types of questions you must implicitly answer; whether your husband will stay with you, how much it will cost to raise the kid, and so on. So being poor in Africa (and deciding to have kids) is a big decision. In the US it is also a big decision, including a big financial decision.
The most common answer when asked how they decide to have kids is, “If I was thinking about it I would never do it (that is have kids), so I’m not going to think about it”.
So let me ask you a question, how old are you?
Dan: And you have a significant other?
Dan: So eventually you will have to decide whether to have kids. And it will be an incredibly hard decision. Do you think it would be possible to fully analyze all of the details and costs? Most likely not.
Now think about a different type of decision such as what type of car to buy. My guess is that you could spend much more time thinking about what car to get versus whether to have kids or not. You might delude yourself thinking that you have spent many hours thinking about having kids. But regardless of the conversations, and cost and benefit type talks. Your ability to weigh pros and cons isn’t likely to improve by discussing the topic. Nor would your conversations reveal much about your preferences.
The same thing happens with housing. What a difficult decision it is to buy a house (to live in). Many people visit a town for a weekend, look at 20 houses and decide to buy one. If you’re going to buy a house (such a big financial purchase) shouldn’t you move to a city rent for a year and figure it out? But because it’s such a big and complex decision that includes price but also lots and lots of other aspects — people just don’t take the time.
So I think that in decisions regarding, whom to marry, whether to have kids, where to live, and of course financial decisions it is very difficult to make good decisions. I almost forgot to list financial decisions….Have you ever visited a financial planner’s office? They ask you to enumerate your risk tolerance so you says, “5.6” that’s it—shouldn’t we spend at least a couple of weeks trying to understand what a risk tolerance means. If I’m going to optimize your portfolio and I’m going to change an allocation in stocks versus bonds this can have huge implications for your life – so your answer to what is your risk tolerance will have huge implications. But it’s so hard to figure these things out that people just pick an answer and move on. Another difficult task is picking a financial adviser. How many people shop around? Which brings me to research we are conducting on second opinions. People don’t go for second opinions. Most men who are diagnosed with prostate cancer make the decision of what treatment to get within that same hour.
Miguel: I didn’t know that.
Dan: It’s terrible. Imagine if you just got really bad news. You’re not equipped to deal with it and it’s very hard to make the decision. So you just try to make it go away by making a quick decision.
Miguel: And then of course (while making the decision) you can’t forecast how you will feel afterward.
Miguel: I find your housing example interesting because we seem to forget the importance of society, of being connected, of a peer group, of social networks when making decisions. For example, if you have kids the influence of peers in their local area as they develop is a big determinant of future behavior (and outcomes). What I’m suggesting is that it’s more important to know who your neighbors are (and to pick the right neighbors) than to know whether you want 4 bedrooms and a shingle roof.
Dan: That’s exactly right. I’m meeting tomorrow with a Duke architect. I’m trying to build a dorm for the faculty. My idea is that undergrads have a great time in their dorm. I want to basically do the same thing for faculty. I want to take over a building in downtown Durham and I want to create apartments with common space and places for people to eat together. Because I do think, that the American dream/ideal of giving people lots of private space so that everyone can have their own basketball hoop is a big mistake in terms of maximizing happiness.
Miguel: I think so as well. It doesn’t seem rational. For example, if each person has a BBQ but does not rent it (when it’s not in use) they are being irrational. Not to mention the negative effects of isolating yourself from loved ones, friends, etc.
Dan: One way to reconcile this behavior is to reason that perhaps people prefer space as a mechanism for managing loss aversion. That is, having a great neighborhood and great neighbors is wonderful. But having bad ones is awful – and perhaps the potential for an awful experience overwhelms the good. Maybe people want distance because they are protecting themselves from bad things happening—like having a bad neighbor that always drops by at the worse possible time.
Miguel: Sure, but then they are giving up the happiness that comes from comparing yourself to that misfit (of a) neighbor.
Miguel: Jumping ahead, there is another section in your book on human incompatible technologies. That is, technology where the user cannot relate/connect with the offering. Another way to describe this situation is a technology that ignores a human being (full of biases and decision making shortcomings) as its user. You cite online dating as an example of human incompatible technologies. What are some of your favorite human incompatible technologies?
Dan: It ranges from very simple to very complex technologies. For example, describing insurance products is very human incompatible. Insurance experts have PHDs, and know advanced statistics but when they explain these concepts to average people the terminology is completely useless. How do you know how much liability to have, what does $300,000 mean? It’s completely useless because it doesn’t tell you anything about the real risk you are taking with this insurance. The goal of buying insurance is to reduce all risk. In many cases (when you buy a policy) you still have some risk but you don’t have an idea of what it is. So buying and selling insurance is very human incompatible—because people just cannot connect/relate with it –the descriptions and terms are certainly useful for industry participants but not average users.
Another example is in health care. Many doctors talk with patients in ways that are incompatible with what patients understand. Many physicians recognize that if they give people bad news, people don’t hear anything that happens in the next hour. Nevertheless, people continue to have a discussion (with their physician) and often make decisions under these circumstances.
The same thing happens with financial advisers. With many financial advisers there is a huge bias (and I’m interested in doing research on this) – towards optimizing a portfolio. Financial advisers think that their greatest contribution for a client is optimizing their portfolio. But in reality an advisers ability to optimize a portfolio is quite limited or at least not very different from other financial advisers. Now, what an adviser could do is help people think about money. For example asking questions such as “How long do you think you will live?”, “What are the trade-offs between now and the future?”, and so on — but of course no one is doing these things because they are very difficult to implement.
Miguel: I’d like to zoom in on this idea that criteria can be irrelevant. Are you implying that much financial communication is irrelevant? For example, if you tell me XYZ will cost me $500, that doesn’t mean much unless I can value the quantity (according to my own preferences). For example, $500 is the price for 2 plane tickets to visit Dan Ariely and I really enjoy visiting Dan. So I decide it’s best not buy a $500 suit…. What can you say about this need to find ways of communicating about money in manners that match our own preferences and understandings?
Dan: Yes that’s right. If you describe something in this manner (that is to say in terms of what you might generally give up) it is less complete and less accurate but more useful. So if I ask you to think about purchasing a car and I tell you what you must forgo in order to buy it (300 books a year, 2 vacations, and 20 bottles of expensive wine) I’m helping you make a decision by giving you partially complete yet very concrete information. So what I am saying is that describing a financial transaction in an intangible manner will likely results in poor understanding and decision making.
Miguel: One of the things that strikes me about your book is your ability to test intuition –meaning we often think we will behave one way and behave in a different manner. What have you learned by testing human intuition? Can you recommend us anything to improve our perception of human behavior?
Dan: I would say two things:
First, I call my research center the center for advanced hindsight. And we use this name because often once I finish explaining to someone a particular aspect of behavior, they in retrospect say “Yes, I knew it all along” but of course most likely they didn’t know this before I described it to them.
Second, I think that we view our own actions differently than those of other people. We also view the specific behaviors of others differently than the behaviors of entire populations. So, I suspect, (I don’t know this for sure) that if you look at those three elements (yourself, others, and large populations) of behavior differently, then you are more likely to arrive at conclusions about behavior that are closer to the truth.
For example, if you think about the question, “How do I behave?”, most people feel they are behaving wonderfully. And what this reveals is that it’s very hard for people to see what influence their behavior. If you ask “How are people behaving in general?”, the same thing occurs (where it is difficult to see underlying behaviors). But if you ask, “How is my significant other behaving?”, that is if you focus on identifying a specific person, then you might be able to get better intuition (of underlying factors and motivations).
One of my main advantages in researching intuition and behavior is that I feel separated from other people. Because, I was in the hospital for so long- I started feeling separated from others. And I suspect that this created my predisposition to looking at things differently — which has become a very useful strategy for my research.
Miguel: One of my favorite chapters is about the long term effects (and consequences) of short term (emotional) actions. You present the idea that a past action can create a precedent for future behavior.
Dan: That’s right, here is a simple example:
Imagine that you are in a financial advising context. I am your financial adviser and you need guidance. You would like to decide about portfolio allocation. So now imagine that I have a discussion with you and I try to manipulate your mood (that is either make you happy or depressed), and once you are in the desired mood state I ask you about your risk tolerance on some scale from 1-7. If you were happy and optimistic (because I made you so) you would probably take on more risk than if I made you depressed and pessimistic (again because I made you so).
Now, imagine that I take your response to the risk scale and optimize your portfolio based on it. By doing so, this random answer becomes the starting point for the allocation and investment decision I make for you. On top of that, come next year when we look again at your portfolio and think about what needs to change – in this process we start from last year’s answer, and it becomes the default. And this is how a one time trivial decision influenced by felting emotions can lead to a long sequence of decisions.
Miguel: What are the challenges facing decision making research? What are your frustrations?
Dan: My goal is to apply social science to the real world. In an academic setting it makes sense to study phenomena using a categorical approach (i.e. psychology, sociology, economics, etc.) where different disciplines tackle problems in isolation. On the other hand, when it comes to researching the real world we must be much more modest and admit more freely how much we just don’t know. Consequently in order to be modest we need to take all input from all social sciences, and beyond anything we must be empirical in our approach.
I’m envisioning a field of empirical policy – so that every time a government policy is to be enacted and impact millions of people we must run a few experiments. To do this, we will gather people from various fields to propose what the most useful experiments should be, and then we will find out which policy will work best. Can you imagine a health care policy in which you just gamble 19% of GDP on some beliefs with almost no data? This is what is currently happening in our country and given how bad our intuitions often are I suspect that this is not an ideal way to create any policy.
This is my vision. I’m not a blind defender of behavioral economics versus economics, sociology or any other field. My goal is to admit my limited understanding of behavior and the complexity of life. The world is much more complex than our models and therefore we just need to test things before we apply them.
As to my biggest frustration—it is people’s lack of desire to test anything. This occurs in the governments, companies, and even at individual levels. For example, when I visit companies I often try to push companies to test different compensation arrangements. Almost always I am met with avoidant responses—people would say, ”Everyone is so miserable about their bonuses, etc. We can’t talk about it –maybe next year.” So eventually, no one does any testing and this way it is very hard to make any progress.
Now I’m not trying to suggest that companies are stupid. For one, lawyers make it very difficult to test things. But, it seems that in general humans have an aversion to testing. Using experiments to answer questions just doesn’t seem satisfying for most people.
So in summary my vision for the future is one where we rely more on data and less on religious-like beliefs about the world.
Miguel: What traits do admirable scientists share (George Loewenstein etc.)? What makes a top scientist willing to live in ambiguity while searching for answers to questions?
Dan: Good question. I think, George Loewenstein is a great observer of human nature. He has an ability to look at things with fresh eyes. I also think it is very important to separate yourself from your results. A good scientist must not have a stake in any particular outcome or set of results. So if I have results that show that people are rational I am just as happy as if the research reveals irrational behavior. The role of science is to separate what we know from what we don’t know. I also think that people like George show how important it is to combine field and lab work. Lab work is relatively easier in that it allows you more control but it is also more removed from the real world. Social science becomes more interesting as we move towards the real world and away from pure lab research.
Miguel: How do you define success?
Dan: Years ago I would define success by publishing papers, now I define success by the people I work with. I also define success by the impact I have on people’s decision making in the real world.
Miguel: One of life’s greatest challenges is self knowledge? What advice do you have for people seeking to expand self knowledge?
Dan: I will give you a lesson from social psychology. Humans have a tendency to view their behavior as constant, stable, and unencumbered by setting or outside forces. In reality, one of the best ways to describe ourselves is me + environment = me in this environment. So I would advise people to consider the impact an environment/setting can have on who they are and the decisions they make. Maybe to know thyself is to know the effect of the environment you are operating in, and how that changes you.
Miguel: Dan I’m honored to have spent this time with you. Thank you answering my questions and sharing your thoughts with us.
Dan: I just wish we could have done this over beer and face to face.
Follow Dan Ariely at DanAriely.com
I also recommend reading his latest book, The Upside of Irrationality.
Questions or Comments about this interview email me at miguel at simoleonsense dot com