Ask Ariely: On Interesting Incentives and Buying Bitcoins

Here’s my Q&A column from the WSJ this week  and if you have any questions for me, you can tweet them to @danariely with the hashtag #askariely, post a comment on my Ask Ariely Facebook page, or email them to AskAriely@wsj.com.

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Dear Dan,

Ratings systems for different services often aren’t driven by incentives. One example: Instead of just rating Uber and Lyft drivers after they drop us off, what if their ratings were based on the size of the tips they got? In such a system, drivers who consistently received larger tips would get higher ratings; those who were penalized would be seen less favorably. Wouldn’t this be better than the current rating system?

—Ruoxi 

Would you really give a bad tip to an annoying driver who had just dropped you off at home and knows where you live? (I am partially joking here, but I do wonder whether tips for taxis are higher when people are coming back home.)

Like other pay-for-performance approaches, your proposal for a tip-based ratings system would raise a lot of problems. First, discretionary payments such as tips reflect satisfaction, but they also reflect wealth and price sensitivity. Basically, some people care less about money and are likely to give higher tips than more price-sensitive people. Since the wealth and the price sensitivity of the passenger aren’t a precise reflection of the quality of the driver, your suggestion would just replace one flawed system with another. A second, even more serious problem: Drivers would get an incentive to drive more in areas where people are less bothered by high prices, thereby providing worse service to other people who might need transportation more. Finally, what would stop drivers from giving cash back to passengers who gave them larger tips—returning some of the extra money but gaining reputation points in the process?

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Dear Dan,

Some time ago, I bought some bitcoins. In just a few months, their value increased by 1,000%. They’ve just kept rising and are now about 4,000% higher than when I originally purchased them. My original investment is now worth more than $100,000—a substantial amount of money for me. Should I sell or hold onto them and hope for further increases?

—Geoff 

It is hard for me to say whether this is a good investment or not, but here’s a more rational perspective for examining the question: Simply ask yourself if you would buy these bitcoins now, at their current price. If your answer is yes, you should hold onto your investment and maybe even buy more. But if your answer is no, it means that you don’t really think that the expected increase in value is worth the risk, and you should sell.

The more general point here is that our investment decisions should be about what we think the future will hold (hard as that is to predict), and we need to work hard to overcome the influences of our past actions. No matter what you purchased a given investment for, and regardless of what it is worth now, you should make your decisions only about where you think this investment is headed.

One last piece of advice: If you do decide to sell your bitcoins, don’t look up their value afterward. Yes, if the value drops, you’d be a bit happier that you sold, but if the value rose, your misery would be much higher—so resist the urge to check.

See the original article in the Wall Street Journal here.