What’s The Upside, Doc?

Interview with Behavioral Economist Dan Ariely

by Ian Chant

6 October 2010

Portrait of the Economist As A Young Man In A Bee Suit 

There Are Many More Irrationalities In Companies Than In Individual’s Lives

The timing of the experiment, which took place at the height of the worldwide financial meltdown, made the results even more intriguing to Ariely and his fellow researchers. “[One of the reasons] that this became really interesting is that it was just in time for the financial crisis and the discussion of bonuses, and because of that I got to have a lot of discussions with bankers about whether they deserve or don’t deserve the bonuses they get.” And how did those meetings go? “Well, you can imagine, right?” Ariely chuckles. “I spoke to a group of bankers about it and the first thing they said was that they love the results, but it doesn’t apply to them. They say ‘These results were about regular people, not about super special people.’ And basically, they said I don’t understand—there’s not enough money in the world to get them over-stressed. They need the stress to be more productive and creative and thoughtful and effective. And I’m an empirical guy, right? I told them ‘That’s possible—give me enough money and come to the lab and we’ll see.’”

To date, no one has taken Ariely up on this generous offer, though it does seem he is making some progress. “People tell me, first of all, that they think bonuses affect other people adversely. If you go into a room of bankers, and you give a talk like this, and you say ‘Who here is negatively influenced by bonuses?’ nobody raises their hand. But if you ask ‘Who thinks other people are negatively affected by bonuses?’ they raise their hands. The other thing they do say in private discussions is that during the months of October, November and December, they are very preoccupied because they’re constantly computing how much of a bonus they think they’re getting. So what they do is open an Excel spreadsheet and make an assumption and compute how much money they could get. And a few hours later, they do it again with a slightly different assumption… And so even though they won’t say that this stresses them out, they do admit that it takes a lot of their time.”

But it’s not that Ariely is on a crusade to change the way corporate bonuses are structured and handed out—that’s a little too small of a ball for his taste. What Ariely wants is at once simpler and almost infinitely more daunting – he wants to give people the tools to think smarter and make better decisions. There’s no arguing that it’s a noble goal, but there is a lot to it—not that the immensity of the task at hand is enough to intimidate Ariely, who explains what motivated him in penning his latest book. “It’s a book that says ‘Here is what we know about the science, and here are some steps you might want to take.’ I’m trying not to be prescriptive and say ‘Do these things.’ But I think there are definitely some lessons to take from it.”

Ariely’s laid back attitude about how best to help people make better decisions is reflected in the unique style of The Upside of Irrationality, which blends Ariely’s scientific research with anecdotes and stories from his own life. From taking his medicine to exploding at his superiors, Ariely uses himself as an effective example of not only how to make good decisions, but also the consequences of making bad ones. “This book has been, in some sense, a step further than the first one,” Ariely says. “I talk about myself to a much larger degree, about some of my difficulties in life and how they made me think differently. It’s very strange for popular science writing to be so personal, but I think the reason I did this is that lots of people had positive reactions to the first book.” says Ariely, who was encouraged in honing his less than orthodox science writing style by the many conversations he’s had with readers.

“A year ago, I sat next to somebody on a flight who had not only read my last book [Predictably Irrational], but who told me that through that I convinced them to install an insulin pump,” Ariely relates. “I was shocked, because I never talked to this person and I didn’t talk about insulin pumps in the book. And they went back and they told me how they thought the discussion between us through the book went, and why they thought they should put an insulin pump in. And I’ve had many discussions like this,” says Ariely. “People come to me and it’s as if we’ve already had a ten-hour discussion. I think it allows me to feel much more personal and open, because now I have faces and pictures, and even people who I think I’m writing to in the next installment… because it’s more personal, I am more invested in this book, I’m much more curious about how people will react to it.”

While Ariely’s work is personally relatable, it’s not just individuals he’s looking to reach. As anyone who has ever attended a music festival, gotten stuck at a family reunion or worked for a large company can attest, human irrationality doesn’t stop when you get enough of us together—more often than we’d like, it instead ramps up. This is as true—and as dangerous—in financial markets as it is anywhere, points out Ariely, who suggests that rather than providing a system of natural checks, markets can also serve to aggravate the consequences of common mistakes. “Imagine that we take lots of people with a biased view of the world, and we put them together in the markets, and they are the only players in the market. What will happen?,” Ariely asks. “There’s a view in which the mistakes people make are random. And if they’re random, the market can fix them, because some people will make one mistake while others will make another mistake. But predictably irrational mistakes are systematic. When we all make the same mistakes all the time and the markets aggregate these mistakes, it’s not going to help. It can actually make things much worse.”

Financial markets are not the only large entities that could benefit from a finer understanding of their own quirks and foibles. “…In the last two and a half years, I’ve gotten a chance to look at many companies…and I have to tell you that I had this view that people may be irrational, but companies would be more rational. And right now, I think this view can only be held by someone who has never worked for a company before in their life. Because the craziness that goes on in companies is just amazing. The mistakes, the lack of knowledge, it’s just crazy,” says Ariely, who is quick to point out that he doesn’t think it’s necessarily a problem of people.

Large organizations trying to make systemic changes run into the same problems as many macro-economists—as good as their ideas may be on paper, it’s very hard to do genuine experimentation on a large scale. When it comes to discovering the best policy and implementing it, Ariely observes, individuals have it pretty easy. “Imagine you don’t know if you like chicken or fish,” Ariely says. “You can try them and figure it out. Imagine if a company, though, doesn’t know whether to choose hiring procedure 1 or hiring procedure 2. It’s really hard to figure out…Companies have a situation where it’s very hard for them to learn. But because of that, I think there are many more irrationalities in companies than in individual’s lives, and it’s much harder to show them to people.”

So when can readers expect Ariely’s next work on confronting irrationality in the business sector? No time soon, says Ariely, who’s not eager to tackle the problems he sees for the same reason that businesses are often unable to. “The reason is that it would be very hard to prove scientifically. I’ve been trying to do experiments with organizations, and it’s very, very hard to get them to test anything.” Which isn’t to say Ariely isn’t looking at the big picture going forward. He very much is—just in places he feels he can make a real impact. “What I’m trying to work on next is to take this into the public policy realm,” Ariely says. “Now that we understand why people behave badly, how do we get them to take their medications on time, and care about global warming, and drive safer, and change their behavior?”

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