Economists of all stripes find themselves, at one point or another, thinking about how to deal with scarcity. But in his new book, The Upside of Irrationality, behavioral economist, author and self-described “social hacker” Dan Ariely makes the case that we are failing to make the most of one of the most plentiful of natural resources—human folly. Short sighted, wrong-headed or just poorly thought out decisions are available everywhere, in seemingly limitless supply and variation. As Ariely continues to till the fertile academic ground that he explored in his previous book, Predictably Irrational, he’s going farther than just exploring irrationality, using the science behind the inexplicable decisions we all sometimes make to try and harness the potential power of fuzzy thinking.
In the first pages of The Upside of Irrationality, Ariely calls attention to what he terms “the basic dilemma we have in life – there’s lots of stuff that’s really unpleasant for us in the short term, but really good for us in the long term.” As he does at many points in his book, Ariely illustrates his point with an example from his own life. “I was in hospital for many years, and one of the things I got in hospital was a liver disease. I had to take this medication, interferon, which was a very nasty medication. Every time I took an injection, I was sick for about 16 hours. Imagine yourself having to take these injections 3 times a week for a year and a half, and every one will make you very miserable.”
The drug’s brutal side effects are the main cause of the troublingly low compliance rate of many interferon patients. Ariely provides his own prescription for interferon compliance via what economists call reward substitution. “…]\[On] injection days, I would go to the video store and rent a few movies that I wanted to watch, and I would carry them in my backpack the whole day,” says Ariely. “When I got home, I would give myself the injection, I would get a bucket and a blanket for the side effects, the shivering and vomiting and so on, and I would pop a video right in. By doing that, I changed the timing of the reward.” In the long run, watching a movie pales in importance to keeping one’s liver in working order. “…But because it was immediate, it was actually better able to control my behavior and got me to take my medication on time, all the time.”
Using little rewards to nudge yourself along towards bigger goals is, of course, a time tested tactic that has more uses than just ensuring that hospital patients are able to swallow a particularly bitter pill. Plenty of situations we run into make fine analogs for Ariely’s predicament. “You can think about dieting like this—not so much fun in the short term, good in the long term. Safe sex—not so much fun in the short term, good in the long term. Medical compliance, savings, all of those things share the same characteristic,” Ariely explains. “And it turns out that when we face these situations, we over-emphasize the short term and under-emphasize the long term, and because of this, we do trade offs that are actually not that good for us. And that’s a place where we are clearly irrational and we makes mistakes. The upside of irrationality, in that regard, is that we can actually do things better.” Understanding when we’re making a wrong call, in many of these situations, may be the first step towards making a right one. And that’s just one of the upsides that Ariely brings us as a potential benefit of properly applied irrationality.
But while human irrationality often looks silly from a strictly economic perspective, it helps the world go round on a day-to-day basis. Living in a world populated by the strictly selfish economic maximizers that populate the pages of so many works of economic theory, Ariely points out, would be an unpleasant matter for all involved. “One of the principles of economic theory is that people should go around the whole day maximizing their best interests, their selfish interests. How would the world look if everyone did this all the time?” Ariely asks, painting a grim picture in answer. “Could you leave your wallet in your desk and go out for a walk, and when you came back, would it still be there? Could you agree with someone that they will come babysit your kids, and if something else happens that would be better for them, would they still do that? As a waiter, why would anyone ever give you a tip unless they expect to come back to the restaurant?”
“Why do people vote? Why do people help strangers? There’s lots of stuff that people do due to irrationality,” Ariely says. And in large part, he explains, it’s stuff that the rest of us are happy that they do. “Irrationality in this sense is not something bad—it’s just not something that’s part of our natural framework of what rationality is. We have this thing called social utility, which means that we care about the world and others in some very deep way.” As obvious as this may seem, it is not an idea that dovetails nicely with much economic thought. But that may be because this social utility goes much deeper than business cycles and supply curves. “All of those things are not about maximizing your own financial outcome,” says Ariely. “They’re ways in which we are deeply different from the people we depict in economic theory. Economic theory is an ideal of a person, which doesn’t always end up being the ideal.”
Ariely also delights holding common sense notions up to scrutiny, with often surprising results. Common sense, for example, holds that the prospect of huge bonuses would help investment bankers do their jobs better than they would without the prospect of fabulous checks at the end of the year. But a series of experiments that Ariely and his colleagues conducted in India, which is detailed in The Upside of Irrationality, casts suspicion on that idea. Very high bonuses, the results suggest, may actually be detrimental to performance of exactly the kinds of workers who have become accustomed to them. Ariely explains:
“In this experiment in India, we asked what happened when people got very high bonuses. We had three groups of people, and for the first group of people we said ‘If you do well on these six tasks, you will get a bonus of one day’s salary.;” A second group could make a substantially larger bonus of up to two week’s salary, and a third group could make as much as five month’s salary for a few hours of work with Ariely’s assistant.
“This was a new type of experiment for me, when we a) go to India and b) get to play with lots of money,” says a noticeably excited Ariely, not one to shy away from the enthusiasm he has for his work. “And the results, by the way, are that when we moved from the regular bonus, from the one-day to the two-week, nothing much happened. But when we went to the five-month salary bonus, performance went down dramatically. And it went down dramatically for all the tasks that involve cognitive thinking, but it went up for tasks that only require physical activity,” points out Ariely. “So when we did this with things that are just physical, like tapping on a keyboard, more money was just better. The way to understand this is to understand that money is a two edged sword – it’s a motivator, but it’s also a stressor. The question is at what point does it become a stressor.” Ariely says. “The second thing to understand is that we have relatively good control of our muscles. If I told you that for every time you jump in the next 24 hours, I’ll give you a dollar, you’ll jump a little bit. If I told you I’ll give you $1,000 dollars, you’ll jump much more. But if I told you that I would pay you based on creativity or thoughtfulness or concentration or memory, the question is can you control the creativity muscle to a larger degree and force yourself to a higher level of creativity, and the answer is no.”
In other words, offering big bonuses to people laying bricks or digging trenches may work reasonably well, but in a situation that demands more critical thinking and analytical skill, the distractions of thinking about a potential bonus may often outweigh the motivation that bonus is supposed to provide. “People have a theory that more bonuses are a better motivator. What they don’t understand is how quickly they become stressors.”