DAN ARIELY

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5 Steps to Improving Your Understanding of Behavioral Economics

April 25, 2014 BY danariely

Imageby Troy Campbell

Today, many individuals, governments and businesses are eager to use behavioral economics to improve lives, happiness, and profits. So, how can one get a good beginning handle on behavioral economics? Reading up and taking a class can never substitute for years of education in the topic, but taking these five steps can help improve your general thinking, help you better communicate with behavioral experts, and help you develop an experimental mindset.

 

So what is behavioral economics? (A quick run down)

Behavioral economics, or behavioral sciences, applied psychology, business psychology, decision making, or whatever title you prefer, is the study of human irrationality, decision making, self-control, and emotions.

This past year has served as a symbolic victory for the field. Daniel Kahneman, widely considered the founder of the field, released the book Thinking, Fast and Slow and won the Medal of Freedom, the highest civilian honor in America, to go along with his International Nobel Prize. The United States government also opened a “Behavioral Insights” team with the goal of integrating behavioral research into government policy.

Behavioral science is becoming a staple in business and public policy. Energy companies use social comparison with neighbors to reduce energy consumption and businesses help people “save more tomorrow” by having them commit to automatic enrollment in the future. Rather than just assuming that people will save energy and manage their retirement with perfect rationality, behavioral economics accepts and defends the idea that people will not always be motivated by rationality or cash alone. Instead, it examines what actually motivates people.

Alright, so most likely you don’t have time to hire your own private behavioral insights team. So, what can you do? Here’s how to improve your understanding a little bit.

#1 Accept that humans are irrational.

ImageIn his book Critical Decisions, behavioral scientist Peter Ubel concludes that humans are neither completely rational nor completely irrational, but argues that people attempt to understand others logically far too often.

For instance, how many times have you tried to logically argue with a friend or co-worker? Did it go well? Probably not. Why? Because logic does not exclusively dictate human behavior. Emotions, self-control, and a person’s life history greatly influence behavior.

One big takeaway from behavioral science is that we must continually consider factors other than rationality that can influence people’s behavior. So step one: remember people are irrational and that logic alone will rarely win the day.

#2 Think about your own psychological quirks.

ImageOne of the best ways for us to recognize irrational behavior in others is to first recognize it in ourselves.

You may have noticed that you tend to be less rational when you’re tired. You may have noticed that you sometimes act with prejudice. For instance, just think of the last time you saw someone wearing a jersey from an opposing sports team. Did you automatically assume negative things of them? Understanding how you, (presumably) a good and sane person, can commit errors in judgment will allow you to see, understand, and empathize with others’ all too human behavior.

Starting to understand patterns of irrationality or imperfect decision-making can help you understand people’s “predictable irrationalities” – the ways in which people act predictably like humans rather than rational perfect machines.

#3 Watch science on TED.com.

ImageTED.com has a collection of behavioral economics talks, which are great for understanding the mindset of a behavioral scientist. The talks cover topics such as how to think about happiness, memory, honesty, or decision-making. Start with talks by Rory Sutherland, Daniel Kahneman, or the Center for Advanced Hindsight captain, Dan Ariely, and you will start to get into the mindset. From there, click the related videos. After a couple hours of those videos, you will be ready for some reading.

 

#4 Starting reading. And here’s what to start with.

ImageBooks – To begin, start with a hit from the behavioral sciences such as Thinking, Fast and Slow or Predictably Irrational. Books with fantastic prose from authors like Malcolm Gladwell are good to check out, but it is best to start with a book that intensely focuses on the research. This will help you build a solid foundation.

Online – Next follow a blog or twitter account from at least one of these behavioral experts: @Nudgeblog, @DanTGilbert, or @RorySutherland (there’s lots more but these are three random ones to give you a good start). By following the experts, you may also have access to occasional live twitter conversations between them — another entertaining way to learn. And, of course, follow the lab @advncdhindsight‎ and @DanAriely.

Local – Locate professors at your local university who conduct behavioral economics, social psychology, or decision-making research. Follow their blogs, check out their university talks, and even get some face time with them at local events. Academics are generally pretty open, so go spend time with them!

#5: How to read. – This one is important!

ImageDo not binge and forget. Instead, spread out your reading. Due to the availability bias in human reasoning, things that you learn and even know deep in your memory may not be “on top of the mind.” Just because you learned something once doesn’t mean you’ll be in the state of mind to always use that knowledge.

Reading a little but often keeps behavioral economics on the top of your mind. So, when you encounter a situation where someone is acting odd, the behavioral economist inside of you will always be primed and ready to interpret the situation.

 

A final reminder

However, we remind you that even a person with Ph.D in behavioral economics can’t always predict what exactly will happen. Science is about consist using hindsight to improve foresight. Not matter how much advanced hindsight you’ve paid attention to life, there can never be enough. That’s why it is also important to always put your hypotheses to a test. If your in a business try an experiment or use online survey polls (e.g. Mechanical Turk) to get some initial data or feedback. Thinking like a scientist means being comfortable with the fact you don’t know everything.

Those who realize how much they don’t know will end up knowing the most.

 

 

The High Cost of Procrastination

April 15, 2014 BY danariely

Procrastination (from the Latin pro, meaning for; and cras, meaning tomorrow) is one of our most common, but least welcome, partners in life. In its most common form, procrastination takes place whenever we promise to finish a project by the end of the week, just to watch deadline zoom by. But, more broadly, procrastination is also why we decide to start saving more money, exercise more regularly and watch our diet—but fail to follow through time after time.

To consider procrastination in a general way, imagine I asked you to smell some amazing chocolate and then gave you the following choice: would you rather have half a pound of chocolate right now or one pound of it in a week from today. When asked the question this way, most people take the smaller amount of chocolate right now, implying that it is not worthwhile to wait a week for another half a pound of chocolate. But, what if I focused on the distant future and asked you if you would rather have half a pound of this chocolate a year from now or a pound of the same chocolate in a year and a week from today? When asked the question this way, most people say they would be happy to wait the additional week. Both setups are really asking the same question: is it worthwhile for you to wait a week for another half a pound of chocolate — but they don’t feel like the same question. In the first scenario we can almost taste the chocolate and want it right now, but in the second scenario we are not emotional and just think about the value of the larger amount of chocolate relative to the cost of waiting a week.

This is what procrastination is all about. When we think about our life in general we see the benefits of getting our work done on time, saving for retirement, eating better and other good habits. Yet when we face the decision about right now, we get tempted and too often follow our immediate desires and not what it is good for us in the long-term.

Why am I discussing procrastination? It’s never more apparent than on April 15, which should really be called Procrastination Day, when hoards of people finally file their tax returns. Tax Day is a natural celebration of procrastination. I hope we will use the lessons from this day to reflect on procrastination, and hopefully learn something.

One such lesson is the link between procrastination and diminished productivity. Imagine it is the first of April, and you have to work on your taxes. You have an amount of paperwork that would take you 15 days to complete if you worked on it for one hour a day. On the first of the month you are not that excited about looking at all the receipts and forms so you direct your attention to something else. The next day you work on your taxes a bit, but at some point you open Facebook, and the hour you dedicated to the task is gone. The next few days have their temptations, and on the 13th of the month you realize that you have made very little progress so far. Now, if you worked on your taxes for an hour every day, it would take 15 hours of your time, but the nature of productivity is such that we get a lot of output in the first hour on a task, less during the second hour, less in the third hour and so on. (This is what is called diminished productivity.) So now, the amount of work that you could have done in 10 sessions of one hour each would take you not 10 hours but 20. You spend most of the day on the 13th, 14th and 15th working very hard and making slow progress. You finish at some point late on the 15th and rush only to spend hours in the post office to mail your taxes to the IRS. You promise never to do this again, to start early next year and not procrastinate – but will you?

So, let’s take advantage of this massive experiment. (You can’t convince me that the US tax system and Tax Day are not part of a large scale experiment by some evil social scientist!) Let’s make a promise to be better about our finances, taxes and procrastination in general. Let’s make a pledge to put time on our schedules to start large tasks earlier and stick to our plans. (And while we are at it, let’s also remember that we are often overly optimistic about what we can achieve, and buffer our plans by 20-25% to compensate for this bias.)

The point is that when it comes to the different types of procrastination, we are our own worst enemies. We are paying a high price for this behavior, and it is time we start controlling this beast.

Happy Procrastination Day.

The Returns of Giving

April 14, 2014 BY danariely
GivingTimesigned
Illustration by M.R. Trower

When I moved to Durham for graduate school, I wanted to immediately start volunteering. As a student, I’m aware that time is a relentless constraint. Getting enough sleep, doing work, socializing, and having time to decompress are all priorities. So it’s hard not to feel overwhelmed and resistant to the idea of giving up more precious spare time to help others, even if the cause is important.

However, I knew that if I waited I would use my busy schedule as an excuse not to get involved. By pre-committing, I would be obligated to continue even as the semester became busier . I wanted to volunteer as a way to connect to my community and keep perspective that sometimes gets lost in the minutiae of research.

But what I didn’t realize was that I was inadvertently helping my future self feel less stressed when things got busy. Research finds that ironically, giving time to others actually can make us feel as though we have more of it ourselves.

This benefit of spending time on others seems counterintuitive. From a completely objective perspective, spending time on others reduces the minutes you have in a day—those don’t change. And indeed, we are actually less likely to take the time to help others if we’re short on time. However, if we do volunteer, our subjective perception of how much time we have can increase and affect our productivity and well-being.

Mogilner, Chance, and Norton (2012) found that giving time (volunteering or helping a friend) was more effective in increasing perceptions of future time than were wasting time, spending time on oneself, or unexpected free time. Moreover, they found that those who gave their time were more likely to commit more time and follow through on additional surveys. The mediator of this effect was self-efficacy. People feel more capable after taking the time to help others. Spending time on others may implicitly signal extra time, but also increased self-efficacy may make us feel that we can accomplish more with our time, effectively expanding it.

Sometimes, how much time we feel we have is actually more important than how much time we actually have. Because within a range, our feelings about time affect our happiness, stress levels, and productivity more than the actual number of hours.

Does this mean we shouldn’t indulge in TV, Facebook, or relaxing with friends? Of course not—the benefits of giving time aren’t infinite. Given the objective constraints, giving too much time will increase stress and won’t make use feel like we have more time.

Nevertheless, this discrepancy between how we expect volunteering to affect our sense of time, and how it actually does, is important for better budgeting our time. I have noticed that when I get home after volunteering, I immediately respond to all the emails that have been piling up, focus better on my work projects, and feel more accomplished by the end of the night. Despite having less time, I tend to use it more effectively.

Indeed, this mismatch between prediction and results applies to budgeting money as well: although people predict that they will be happier spending money on themselves, they actually feel better and wealthier spending on others.

When we are feeling the constraints of money, time or something else, we may actually help ourselves by giving to others. Moreover, for those who care less about the fuzzy concept of well-being, there are hints in the research suggesting that not only does giving to others affect our outlook, but it also might actually make us more efficient and productive.

~Dianna Amasino~

Ask Ariely: On A Midlife Cliché

April 13, 2014 BY danariely

Here’s the missing Q&A from my Ask Ariely column yesterday…

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Dear Dan,

I am a middle-aged guy who’s doing OK financially, and I’m thinking about buying myself a sports car—perhaps a Porsche 911. But I’m also a bit disturbed by the obvious midlife cliché. What would you do?

—Craig 

Tesla designs cars for people with your exact conflict. The Tesla is a sports car, but it has an environmental image, and those who buy it can look at themselves as green, not gray.

______________________________________________________

See the original article in the Wall Street Journal here.

Ask Ariely: On Superstitious Toasts and Exploring the Unknown

April 12, 2014 BY danariely

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,

At a dinner party a few years ago, we were raising our glasses to our hosts’ health. The person on my right said that every time you make a toast, you need to look straight into the eyes of the person you’re toasting as your glasses touch—and that failure to do so inevitably results in five years of bad sex.  I don’t think anyone around the table believed in that superstition, but we found it very amusing and, for the rest of the night, looked into each other’s eyes while toasting.  I don’t think of myself as superstitious, but since that dinner party, I find myself looking very intently into peoples’ eyes whenever I toast.  I know I am being irrational, so why can’t I shake this superstition?

—Kathleen

If you were going to design a superstition, this one is as close to perfect as you’re likely to get.  For starters, the cost of the ritual (looking into each other’s eyes) is low, and in fact pleasurable.  On the other hand, the cost of ignoring the ritual is very high (years of rotten sex). It’s certainly not worth risking such a large consequence for such a small act. And like all good superstitions, the outcome in question occurs far into the future and is difficult to evaluate objectively.

The only thing I might add would be a method to make things right after a missed opportunity. Perhaps if someone forgets to make eye contact, they should have to close their eyes and have the person next to them hold a glass to their lips and help them drink? With this addition, you would have a perfect ritual and superstition to make any party a bit more fun.

Incidentally, I told a friend about this five-year deal, and his response was, “Only five years?”

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Dear Dan,

As summer finally gets closer, we are starting to plan our family vacation. The past few years, we have gone to Florida for two weeks. Should we stick to this familiar plan or try something different?

—Michael

In general, sticking with something well-known is psychologically appealing. Our attraction to the sure thing explains why, for example, we often frequent the same chain restaurants when we travel—and even order the same familiar dishes.  Sure, we might enjoy something new more than the sure thing, but we also might not. And given the psychological principle of loss-aversion (whereby we dislike losses more than we enjoy gains), the fear of loss looms heavy, and we decide not to risk trying anything new.

That’s a mistake, for three key reasons. First, if you think about a long time horizon (say, 20 more years of vacations and eating out), it is certainly worth exploring what else may be out there before settling into a limited set of options. Second, variety really is one of the most important spices of life.  Finally, vacations are not just about the two weeks you are away from work; they’re also about the time you spend anticipating and imagining your trip, as well as the time after you are back home when you replay special moments from your vacation in your mind.  Among these three types of ways to consume the vacation—anticipation, the trip itself and consuming the memories afterward—the shortest amount of time is spent on the vacation itself.

Given all this, the short answer is: try something new.

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See the original article in the Wall Street Journal here.

$100,000 and 1,733 of you

April 9, 2014 BY danariely

I’m thrilled to announce that we’ve made it to 100k just in time for the halfway point of the 60-day kickstarter campaign for my documentary-in-progress, (Dis)Honesty: The Truth About Lies. Please help spread the word to keep this amazing community growing.

 

dishonestyproj 100k

 

See the Kickstarter here: https://bitly.com/dishonestykickstarter

(Dis)Honestly Yours,

Dan

The 3 Costs of Multitasking

April 7, 2014 BY danariely

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Are you a task switcher? This is the quintessential rhetorical question, because we all switch between tasks, and we do so often.

While the answer to this question is predictable, clear and almost universal — a more complex and important question is how much time do you think you lose when you engage in task switching?  Like many of our daily challenges, here too there are three different factors to consider.

1. The first factor to consider is the direct time that we spend on our secondary task.  For example, imagine that you’re busy working on some complex description of a problem, and you hit a particularly challenging point.  You are stuck in a slight mental block, unable to make any real progress for a few minutes. So you think to yourself, “Let me take a quick five minute break and use this time to catch up on email.” Twenty minutes later, you are still responding to email, feeling that familiar unjustified satisfaction we all feel when we managed to clear some of that email backlog in our inbox.  Ten minutes later, you are finally back to working on your complex task, and if you bothered to look at your clock, you would realize that the last thirty minutes were a direct cost of the switch.

2. The second factor to consider is the delayed cost of switching, which is the cost of switching once we are back to our main task.  Now, you probably think that the delayed cost of switching is negative.  That switching actually helps you.  That once you get back to your main task, you are hyper-energized and ready to really get down to business.  This belief in “switching helps” is the reason that many people switch so often. Unfortunately, this is unlikely to be the case.  Most likely, once you are back, for the next ten minutes or so, your engagement with your complex task is only partial, and you are not yet fully back into it.  The reality is that even when you are back working on your main task — for a while longer — you keep on paying a low-productivity-price for your task switching.

So, how do we overcome this problem?  How do we make sure that when we think we want to take a five minutes break, that this is really what we want to do, and that it is only for five minutes?  To achieve such increased discipline, we either need more discipline ourselves (which is very hard to do), or we need some better productivity tools that will help us with such increased accountability and discipline.

p.s.  in full disclosure, I should point out that I checked email multiple times while writing this, which is most likely the reason that I did not get to the 3rd factor of time wasted.  Maybe next time.

p.p.s.  And in even more full disclosure, I should point out that we have recently co-founded a company to address such challenges.

 

 

 

Last Night's Dishonesty Debate

April 4, 2014 BY danariely

Last night, legendary philosopher Peter Singer, distinguished psychologist Paul Bloom, and our very own expert behavioral economist Dan Ariely had a cross-Coursera “debate” on the ins and outs of dishonesty, morality, and ethics. Watch the fun and insightful discussion below, and skim the highlights on our twitter account or under the hashtag #dishonestydebate!

Cross-Coursera Dishonesty Debate

April 3, 2014 BY danariely

Today, at 7:30pm Eastern time, watch the legendary moral philosopher Peter Singer, the distinguished psychologist Paul Bloom, and the expert behavioral economist Dan Ariely (me) as we join hands to discuss our views and research on dishonesty, morality, and ethics. This is our attempt to bring our respective disciplines (and coursera classes) together on topics that we all find very interesting.

Watch the recording below.

Ask Ariely: On Late-night Raids, Home Improvement, and the Magic of Memory

March 29, 2014 BY danariely

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,

Whenever I work the night shift, I wind up raiding the fridge—and ruining my diets one after the other. During the day, I manage to resist the temptation, but at night, my self-control seems to stop working. What should I do? 

—Meni

What you describe is a well-known phenomenon called “depletion.” All day long, we face small temptations and do our best to resist them. We maintain control over ourselves so as to be productive, responsible people and stop ourselves from caving in to our urges to shop, procrastinate, watch that latest cat video on YouTube and so forth. But our ability to resist urges is like a muscle: The more we use it, the more tired we become—until at night, it just becomes too weak to stop us. (This is one reason the temptation industry—bars, strip clubs—operates mostly at night.) One way to overcome this problem is based on the story of Odysseus and the sirens. In this story Odysseus told his sailors to tie him to the mast as they sailed near the island of the sirens and not to untie the ropes under any circumstances so he couldn’t be tempted to jump into the water and swim toward the sirens’ seductive voices. The modern equivalent of this tactic? Keep all tempting things out of your house. You can hope that your future self will be able to resist temptation, buy the chocolate cake and eat just a sliver of it every other day. But the safer bet is not to keep chocolate cake in the fridge in the first place.

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Dear Dan,

At work, I have no problems giving my subordinates feedback about their performances and suggesting improvements. But it is harder for me to give feedback to the woman who cleans my home. So I’ve adopted an indirect approach: Instead of giving her pointers in person, I leave her a note. Is there a better way? 

—Galia

Leaving notes isn’t ideal. Would you leave notes for your kids on how they fell short on their chores? Would you give your husband written feedback on his performance in bed? In general, when results matter, communicating while the task is being performed (or immediately after) is the way to go, and communicating face to face makes quick communication much more natural. It may not always be fun, but it makes clear to the person performing the task what the feedback is about—and offers a greater chance for learning. The second part of your question involves the different ways you treat people at work and your cleaning lady. I suspect this difference comes from your general discomfort about having someone else cleaning your house (maybe it is something you may feel you should be doing yourself). But you’re not really helping your cleaning lady by withholding timely feedback. My suggestion: tidy the house up a bit before she shows up (as many people do), leave a generous tip but also start be more diligent about pointing out the dust bunnies she missed.

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Dear Dan,

My 10-year-old daughter wonders: If a child has been really mean to her best friend (for example, by tattling on her) and their friendship falls apart, how do they manage to become best friends again after only a couple of days? 

—Aviel

That is the wonder of bad memory. We enjoy this benefit when we’re young and then again when we’re old. In between, we’re unhappy and vengeful.

See the original article in the Wall Street Journal here.