TED Speaker Dan Ariely On Why Human Behavior Is Utterly Irrational
Today on the Blinkist podcast Ben speaks with behavioral economist, bestselling author, TED speaker extraordinaire, and all around cool guy Dan Ariely.
In this episode, Ben and Ariely get into some of the nuts and bolts of behavioral economics, like, why it’s different from standard economics, and what Ariely’s time away from his wife and children teaches us about short-term vs. long-term motivation.
And that’s it for interviews for 2016! Thanks so much for following us this year, it’s been a blast. There are a few more fun podcasts in the hopper for the turn into 2017, and then we’ll be back at it in 2017. Hit us up at firstname.lastname@example.org if you want to share some feedback or if you’re itching to hear something in particular next year.
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Ben Schuman-Stoler: Thanks for coming onto the Blinkist podcast, nice of you to make the time.
Dan Ariely: My pleasure, nice to be here.
BSS: So a lot of people are really excited when they heard that I was going talk to you. You have a lot of fans in Berlin, I guess! The interesting thing was, that not many people really understand what behavioral economics actually is. Everyone’s kind of like, “Oh he’s the guy who does that like TED talk!” or “Didn’t he wear shirt with his name on it?”
DA: I like that. Do you know the story about this?
BSS: Let’s start there actually. That’s good. What is the deal with the shirt with your name on it”DA: Yeah so it’s actually a long story. I’ll try to make it short. I gave a talk at a women’s magazine called Harper’s Bazaar, and it was the first time I was exposed to the fashion world. It was just fascinating. I don’t know how much you know about fashion, but when you talk to a fashion expert, like the editor of that magazine, and they tell you all the nuances and so on – for example, we were sitting there in the cafeteria of that building and she analyzed every woman who was coming off the escalator in terms of her clothes and so on. It was fascinating.
Anyway, I finished the talk and they gave me this big Prada bag. You know, an overnight bag, big black leather with the big Prada sign on the side. It’s the first fashion item I’ve ever owned. And I walked around the streets of New York and I asked myself: Do I show Prada to the outside world or do I turn the bag around, with the Prada sign is against my leg, and nobody will know I have a Prada bag? Well, I decided to have it so nobody else knows I have a Prada bag. But nevertheless I felt different.
I was asking myself: When we think about fashion in general we think about what’s called external signaling, that we use fashion to communicate to the world who we are. I drive a BMW, I drive an Audi, I drive a Subaru, I wear Calvin Klein. I thought, you know, here I was walking with a Prada bag and nobody else knew what I was doing but I felt differently about it. And I thought, you know, what if I was wearing Ferrari underwear? What if it was something completely private that nobody knew. Would I still feel different? I thought yes.
So we decided to run an experiment. We wrote on people’s shirts the word “stingy” or the word “generous,” and we and told them to run around campus for a few hours. And when they came in we said, okay you finished the task, but we have one more thing to do, don’t take your shirt off. And we gave them some task that gave them the chance to be either generous or stingy. What we saw was that people with the word generous were generous, people with stingy were stingy, as you might expect.
But in that experiment we also had half the people wearing the shirts with the print on the inside. So they were kind of in the Ferrari underwear condition. Nobody else knew that they were wearing this. They were the only one that knew. And the effect was actually slightly bigger for them. So that suggests to me that the effect of internal signaling of what we learn about ourselves and how we think about ourselves when it comes to fashion is substantial, maybe even bigger than the effect of signaling to others who we are.
Now all that is the story about the research. The shirt has two sides as well. The shirt I got from the PhD student who did her project, this was one of of her research papers. She gave me a shirt as a thank you. On one side it has my name, on the other side it says something really nice about me.
I decided to wear it with my name and have the thing that is really nice, the real nice compliment she wrote about me, on the inside.
BSS: And you won’t say what that compliment is”DA: I am not going to say. It makes me feel nice and warm and actually it’s nice that she thought about me this way. But it’s a little too arrogant to say.
BSS: Okay, that’s kind of a cool experiment to go into the question of, what is behavioral economics”DA: So, if you think about the story, it’s unclear that it’s about behavioral economics. It’s just about trying to understand human nature. It’s about living our lives and observing the kind of things that we do with a slight sense of puzzlement, and asking, why do we do that? Even looking at how we drink coffee or how we wear fashionable items. We ask questions about what we know about this and what we don’t know about this and then we do experiments. And from that perspective, I don’t care if people think about this as behavioral economics or not. It’s just about kind of a study of trying to figure out who we are.
But in terms of behavioral economics, I would say that there are two versions of behavioral economics, two definitions, that I care about.
The first one is just the opposition to standard economics. So, in standard economics, people have preferences, they know their preferences, they act on these preferences, they make good decisions, they don’t have emotions, they think about the future in the same way they think about the present, and so on and so forth. I care about that definition because both companies and, more importantly, governments have adopted that definition of human behavior. Because of that, we use that definition to design different things. I’ll just give you one example: Think about the death penalty. In the U.S. we have some states that have the death penalty and some states that don’t. And the theory is that people who have like a big punishment – the death penalty is a huge punishment – will say, “Oh my goodness, I don’t want to commit that crime.” The logic is, let’s create such a big punishment that people would think in advance about it and then they will not commit the crime. Something like, you come home at night, you’re pissed off at your significant other, you go to the kitchen, you take out the big knife and then you say to yourself: Oh, I forgot we have the death penalty in this country, let’s do something different instead. Now, if you think about this, here is a policy where we kill people every year with the theory to deter crime. But there is no evidence for that. When when they look at the crime rates of states that have the death penalty and states that don’t, there’s just no difference. So this is an example. It’s an extreme example, but it’s one example of saying that if we have the wrong theory of what drives human behavior and then we create policies based on that, we are likely to create wrong policies.
The second definition I care about for behavioral economics is not about policy but about individual behaviors. So imagine that you try to predict what drives your behavior. If there are things that you don’t understand that drive your behavior, but in fact they do, then you might get into trouble. You might make mistakes, you might be vulnerable, you might not do things in your best interest. And I want to reduce mistakes. I guess this is the central theme for me: I’m trying to use social science as a way to make our lives slightly better. Both in terms of how policymakers think about it, and also how we think about this as individuals; trying to figure out what we can do to improve things. Sometimes a lot, sometimes a little. But even a little is good.
BSS: Is this how everybody sees paper economics? Is that like the two sides of behavioral economics or are there many other ways to kind of think about it”DA: So you know I think that the standard one is the one about policy. Because economics is such an interesting discipline from the perspective that it took on a public goods perspective of saying, how do we think about the welfare of society? And how do we optimize it, and therefore how do we create institutions and so on? Sadly, it’s just a partial perspective. It doesn’t tell you the answer. But the move has been very important. The second definition, about saying, I care about the places where individuals make mistakes, I think is more me.
There is another popular view which is basically applied social science. Standard economic theory, you can think about it as applied theoretical framework. So you can take something in game theory that has no application and then you can also think about how it applies to, designing tax systems or optimizing something or another. The behavioral economics perspective is saying, you know what, let’s do – that’s the third definition – let’s not just rely on economics. Let’s take all social science into account when we come to create policies. Economics is one perspective but there’s also psychology sociology, anthropology, philosophy, medicine; and let’s be more inclusive and let’s be experimental. And that’s another important part of it.
In standard economics, you assume that just by theoretically analyzing something you will have the answer. Whereas in the rest of social science you say we just don’t know and we have to run some experiments to figure out what’s right and what’s wrong and what’s exactly going on here. So economics, because the level of generalizability is so high, it’s very easy for economists to say, “I know the answer. All incentives are just the same. All situations are the same, all people are just the same. Therefore I can just tell you the answer.”
Whereas psychologists, for example, have much more nuances. They say, “Not all people are the same, not all incentives are the same, so we don’t know exactly what it is. But we can tell you what experiments to run to try and improve the situation, to figure out what’s going on, and suggest some improvement.”
BSS: We talked a little bit about what behavioral economics is, the various definitions out there and why you like it, as you hinted at. Now I would really like to talk about your new book Payoff. When does it come out exactly”DA: It’s coming out on November 15.
BSS: Okay, so by the time this comes out people will already have it. I had a chance to read it over the weekend. I want to get into the details of it. For example, this concept of a time scale shows up in it a lot. What I mean is, you can’t judge motivation based on how you feel right now for example. You have to look a little longer on the time scale. Can you talk a little about what this time scale idea is and why it plays such a big part in this book”: First of all, I think it’s very nice that you observed that the time scale is such a big, important part, that it comes through. Because I never say it explicitly. I think that the real notion is that, from a time scale perspective, when we think about motivation, it’s mostly a tit-for-tat approach. You do X, I do Y, and so on. But the problem with that approach is that it leaves a lot of things out. You pay me, I do X. It’s a short-term contract and all the rewards are within this short term. But if you think about the really large things that motivate people, you think about scientists working in the lab for years, you think about startups being successful; you look at meaningful relationships, either friendships or marriages or parenting. You look at a lot of things and they don’t necessarily have a tit-for-tat relationship, and they have a very different time scale.
So if we look at the motivation in terms of, here is what you do and what I do within the same hour, within the same day, in the same time frame, you might miss a lot of the picture. The same thing goes for marriages right? If you took marriage as an example and say, let me just look at what’s going on there on a daily basis, it will not give you a good picture of what marriage is all about, how solid the relationship is, how much people are willing to do for each other, and so on.
By the way, just talking about marriages, I haven’t seen my wife and kids for a while. I’ve been traveling like mad. But you know it is interesting if I think about my wife and kids and how long they haven’t seen me, and hopefully they still miss me! But it is a different kind of recognition of our role in the world, our relationships, what are we willing to do, what are we willing to sacrifice. It’s clearly not something that we can do on a day-to-day basis.
One of the stories I tell in this book is a story about a woman I met who decided to be single parent, together with her gay neighbor. Do you remember that story”BSS: Yeah.
DA: She basically had this idea that she was going to revolutionize marriage. Because she said, most marriages end up in divorce, about half, so why don’t we start being divorced? She told me that she and her next-door neighbor were in the perfect position. She lived there, he lived next to her, they had two apartments. The odds that they would continue like this were high. Plus, she would have the kid three or four days a week, he would have the kid three or four days a week. They would be able to be single for the rest of the time. They would be able to sleep half the week. The whole thing sounded perfect to her. And then they went to a lawyer.
This is not a lawyer joke, or trying to say anything bad about lawyers, but the lawyer started bringing up all kinds of low-probability events. The lawyer said, what if one of you wants to move to a different town for a better job. And all of a sudden they started having a discussion about this. The lawyer brought up lots of scenarios and they started debating those things very passionately, so passionately that, this was four years ago, they haven’t talked since.
But I think it’s kind of a good representation of the issue. If you think about two people having a kid together for convenience reasons, but don’t tie their futures together, what kind of sacrifices are they willing to make? Versus if you are tying your futures together and you are planning to be together for forty years – whether it ends up working out or not, but we’re planning on this working out – the level of give-and-take and sacrifice and willingness to adjust and so on is much higher. That I think is why, if you look at motivation, like deep motivation, it’s so important to look into different time frames because if you don’t you’ll just get the the wrong picture of what’s going on.
BSS: The other study I wanted to talk about with the time scale and motivation is this intrinsic motivation versus extrinsic motivation in the moment versus thinking about it before. Right? That comes up in the book, for example, regarding going to the gym. Well, you should explain it in case I get something wrong.
DA: No, no! Why don’t you try it, let’s see.
BSS: Well I’ll try to do the one-sentence recap.
DA:I clearly can’t make one sentences, let’s see if you can do it!
BSS: I think about it like this: the benefit that you get while working out, in the moment of working out, even if you’re in physical pain, you’re happy and you feel motivated and would go back. You feel this intrinsic motivation of the genuine pleasure of pushing yourself, of physical exertion. Whereas beforehand what you’re actually thinking about is just finishing the workout, being done, having gone, maybe even telling somebody, “Oh, I went to the gym for the third day in a row,” or something. And you don’t think about the physical pain that you’re going to have to go through or the challenges. You’re just motivated by the external effect of, for, example telling somebody.
DA: I think that’s great. So, think about some kind of experience, like smell. Smell is one of those things that we don’t have good language for. When we experience smell, either good or terrible, it’s incredibly powerful. But we don’t truly have a good memory for smell. If you’re in a clean room environment you can’t really imagine a smell in all of it’s intensity. You can say some words like “flower” but you can’t really experience it.
And the idea is when you think about something like exercising, you think about it in a cold, calculated way. How long will it take or it’ll be a pain, or it will hurt, and so on. But the moment you’re in it, not everything, but lots of things have a kind of joy, like a smell, that you can’t predict in advance. And because of that, the difficult thing with exercising is starting to exercise.
DA: If we could all start from minute four, life would be much better. We actually did a study. We didn’t write it up yet but maybe we’ll talk about another day. We did a study, trying to ritualize putting your trainers, your gym shoes, on. And the idea was that when you start running it’s just miserable, but what if we could get something before you start running to be pleasurable?
So we ritualized things by giving people instructions of what to say as they put their sneakers on. To say things like, “I’m taking care of my body and soul for the purpose of my health and my well-being.” People said something kind of new age, a little bit aloud to themselves as they were putting their sneakers on. And we said, why is it that the first moment of exercising has to be so painful? Why can’t we make the pre-exercise a little bit better? And therefore people might put their sneakers on, and if they put their sneakers on, they will probably continue exercising. And indeed we got people to exercise by about one time a week more with this approach.
Another kind of a interesting thing was this approach worked better for people who are not religious and worked a little bit less for people who were religious.
I think it’s because the non religious people were willing to accept the ritual to a higher degree but for the religious people it just seemed to be like nonsense. There was no religion in this ritual and they were much more used to religious rituals. But anyway, we’re going to continue working on this notion of how we ritualize behavior.
And talking about time scales, rituals and religion are also very important. Imagine something like recycling. If you wake up every morning and think to yourself, “Should I recycle today or not” every decision is one decision and every time you consider it only as one decision. But if you say to yourself, “Recycling is something that good people do,” and it’s part of your daily routine and you connect it to what you think nature and god and whatever, then you don’t ask yourself the question every day. And if you violate it you’re not just offending that day, you’re offending the whole principle.
So there is something about rituals, particularly religious rituals, that define ourselves. They make each daily action a part of a much bigger collection and therefore make it much more powerful.
BSS: That would’ve been a good one to end on, but I have to ask you one more. Let’s say there’s a parallel universe where you don’t worry about course work or how many hours you have to teach or whatever promo tour you have to do for the book or whatever research you have write up. You can do one study, you have limitless funds, limitless time, limitless help, and perfect conditions. What’s that one study that you’re dying to work on? The one thing that you would like to look deeper into”DA: That’s a that’s a great question. To give you a good answer I need a couple of days to think about it. But I will tell you my initial answer: You know I study a lot of conflicts of interest, and I study about how corrosive conflicts of interest are, and how difficult they are, and how they basically destroy systems without people knowing. Think about banking, about politics, and so on. I think, if you would give me the funds, what I would try to do is try to open a financial institution with no conflicts of interest. I think I know how to do it. I want to see the study or the experiment that if we open a bank with no corruption, no conflicts of interest, straight salaries, no bonuses, all kinds of things in terms of reducing conflicts of interest, would people abandon their current banks? Would people understand the benefits of dealing with an institution with no conflicts of interest and switch? The second part of the study will be to see whether other financial institutions would look at it and change their own behavior.
So it’s kind of an expensive experiment. I think you need a lot of money to start a bank! We can study lots of things in the lab in terms of conflicts of interest, but to truly make an impact in the world I think we need to create some examples of how the world could work with either no or very little conflicts of interest.
BSS: Okay then we’re going to have to leave that as a cliffhanger for the next book, or the next conversation. Thank you for doing this!
DA: My pleasure. Really nice talking to you and I hope we get to do it again.