Today, I spoke with Dan Ariely, who is a professor at MIT and Duke University, as well as a New York Times bestselling author. This made for a very interesting interview and it’s in both podcast and written form below. You will learn about some of the irrational behavior we do on a reoccuring basis and how to become smarter about your actions.
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What interested you in behavioral economics and what is the single most significant thing you’ve learned?
I have a personal interest in it and was burned a few years ago. If you ever had a bandage removed, you wonder what is the right way to take it off. Should you do it fast or slow? The nurses in my department thought the right way to do it was fast. I begged them to try it differently; a little slower. They said the patient shouldn’t butt in. I started to do experiments with this in a laboratory and what I learned in the process was that they were wrong. If they gave me breaks and there was a longer duration, there would have been less pain. When that happened, I started to think about this a lot more.
One of the things that is the most profound is the research on “Cohort Arbitration.” I go to students and show them six products and then ask them to write down the last two digits of their social security number on the page to describe these products. I ask them if they would pay the price of the products as represented by their social security number. When they finish this exercise, I tell them to do it for real. They bid and took the products home. I found out that people with high end social security numbers tend to pay more. I think this maps to a lot of decisions we make in life. In economics there are two forces, supply and demand. What these experiments suggest is that the price that enters our head is the supply number and not demand.
How did you pick the name “Predictably Irrational“?
The publisher wanted two words and started to talk about the finding in the book. People started using the expression “predictably irrational.” The fact that people were starting to use it suggesting that it was a good name.
What are some example of irrational things in your book?
In my book there are many examples of irrational behavior. There is one way to be rational and many ways to be irrational. It has to do with revenge, procrastination, emotions and the difficulty to compute.
The trust game is an example. We both get $10 and you are the first mover. If you decide to pass your $10 to me it becomes $40 or you could walk home with the $10. I can split the money to give you and I $25. The trust game says that you will never give me your money, but interesting enough people will reciprocate. What if I walk away with your money? Now, with the trust game of revenge, you have the opportunity to go home and spend some of your money to make me suffer more. Would you spend money to take money from me? People will do it and take pleasure when they do this. The brain center is the same for revenge and pleasure (sex, heroine, etc). The people in wall street have walked away with our $50 and we feel revengeful and we’ve lost trust in them. Most of the intervention by the government isn’t taking this into account.
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How did writing this book build your personal brand?
I don’t’ think I had one before. Writing the book was amazing because people are reading my book at airports, send me emails and I get to speak a lot. As a consequence many people know me. As an academic that has been writing the same things over and over again, it’s interesting how using this general language has allowed me to be recognized. Overall, I’m really enjoying making a linkage between science and the outside world. Now I have a chance to do it for more people then just my students.
What opportunities do we have by learning about our predictably irrational behavior?
First of all, we have to acknowledge that we all make mistakes. I hope people who read the book see that they will be able to recognize themselves in a few chapters. Hopefully they will read about it and stop their behavior. In addition, we as a society should do something about it. When we design the physical world, like chairs and computers, we understand people’s irrationality, but when it comes to the mental world, we assume that people are perfectly rational.
Imagine we took someone who designing the stock market and let them design something physical, such as the roads. How would the roads look like? The stripes would be gone because no rational people who go out of the lines. The people that make roads know that people make mistakes, so they accommodate. Unless we understand that in the mental domain we are as faliable as in the physical domain, I don’t think we can get over these mistakes. If we take behavior economics seriously, we have a bright future.
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Dan Ariely is the New York Times bestselling author of Predictably Irrational. He is the Alfred P. Sloan Professor of Behavioral Economics at MIT, where he holds a joint appointment between MIT’s Media Laboratory and the Sloan School of Management. He is also a researcher at the Federal Reserve Bank of Boston and a visiting professor at Duke University. Ariely wrote this book while he was a fellow at the Institute for Advance Study at Princeton. His work has been featured in leading scholarly journals and a variety of popular media outlets, including the New York Times, the Wall Street Journal, the Washington Post, the Boston Globe, Scientific American, and Science.
