Prof. Dan Ariely explores in his latest book why people consistently make foolish economic choices.
PHOTO: ED QUINN
There hadn’t been one offer on the $1.5 million mansion for months. One morning the man turns to his wife and says, “We’ve got to rethink the asking price.” So he hikes the cost to $2.5 million. The house sold within 24 hours.
In the traditional economic model, which revolves on rational buying decisions, this turn of events defies expectations. But from the perch of Dan Ariely, the Alfred P. Sloan Professor of Behavioral Economics, its irrationality is totally predictable. In his provocative, breezily written New York Times bestseller, Predictably Irrational: The Hidden Forces That Shape our Decisions (Harper 2008), Ariely plumbs the surface of everyday decisions to explore why people consistently make foolish economic choices.
He probes the power of preconception, context, emotion, and social norms to disrupt motivation and distort rational decision-making. His experiments move across a quirky and variegated landscape: He explores and explains why beer laced with vinegar tastes better than the beverage unlaced; why a $2.50 pill gives people more relief than the same pill priced at 10 cents; why the word ‘free’, with its large emotional charge, has massive marketing sway contrary to people’s interests or desires; and why, next time you go to a party hoping to meet a date, you should bring along someone slightly uglier than yourself to boost your chance of success.
Ariely’s approach to the dismal science is anything but. “We often think the mysteries in life are stars and molecular biology,” he explains. “But there are so many mysteries about ourselves — every cup of coffee or bike ride can be a topic for research.” The most compelling piece of the mystery for him is data analysis.
“This is the point where I figure out whether the hypothesis is correct. It’s an incredible moment for me, almost a religious experience,” he says, adding, “it’s hard, but not heart-breaking, to realize when the hypothesis is incorrect. (It means) the puzzle isn’t yet solved.”
NOT RATIONAL
Ariely’s mindset, real-world and solution focused, puts him at odds with the traditional market-knows-best model, which posits that people are consistent, coherent, and rational. His calculus calls for including our irrational biases, along with our rational ones, into a different model of human decision making.
“Sometimes we make incredibly expensive mistakes. If we understand our cognitive limitations, we could build a better world. To read some of the warning signs would be a great achievement,” he says, pointing to the subprime lending crisis as an instructional case in point. “It’s one thing to say people will pursue their best interest, but in the case of mortgages it’s very difficult to figure that out. If we understood people’s limitations and designed products to fit that, we’d be much better off.”
This thinking suggests a vastly different — some say “revolutionary” — approach to an array of social and economic policies. In Ariely’s worldview, “the more you believe in irrationality, the more you believe in benevolent government intervention.” Consider Chile’s recent policy towards savings, where people are now mandated to pay 11 percent of their income (deducted automatically from their paychecks) to a retirement fund they can manage; when they retire, the fund transforms automatically into an annuity. His thoughts on health care have a similar tilt. “Should we let people take care of their own health when they’re not good at it and as a consequence become a public burden?” he asks. “We need to help people behave better because they don’t behave well on their own.”
NOT CAPITALISM
At its core, Ariely’s approach is antithetical to capitalism, which he terms “suspect, because it relies on a rational economic model. It would be nice if we could fly, but I’d rather have transportation.” In the worlds of health care and financial savings, for example, “the heroic assumptions are tantamount to people having no physical limitations, to people being able to fly.” How would people deal with the mandates implied by this strategy? “Initially people would be upset by being told what to do. But think about driving: We’re told exactly how to drive — it’s an incredible infringement of our personal privacy — but you don’t see people outraged, because we understand the benefits of these limitations.”
This submission to rules is an amusing study in contrast to Ariely’s passionate embrace of Burning Man, the wild, week-long community in the Nevada desert where thousands of people converge every year. No rules, no money, and rampant, radical self-expression are the ruling principles. It’s there that the economist Ariely feels elatedly at home. “The lesson of Burning Man,” he explains, “is the joy of giving. You can stop people on the street [at Burning Man] and give them a compliment or a riddle. I try to do this in life … give people gifts, compliments, initiate conversation, and not think of everything as a transaction. But it’s hard — outside of Burning Man the social pressure of violating someone’s private space is way too strong … Life with fewer market norms and more social norms would be more fulfilling, creative, and fun.”