1.) What is behavioral economics? How is it different from standard economics?

In general, both standard and behavioral economics are interested in the same questions and topics.  The choices people make, the effects on incentives, the role of information etc. However, unlike standard economics, behavioral economics does not assume that people are rational. Instead, behavioral economists start by figuring out how people actually behave, often in a controlled lab environment in which we can understand behavior better, and use this as a starting point for building our understanding of human nature. As a consequence of this different starting point, behavioral economists usually come to different conclusions about the logic and efficacy of almost anything, ranging from mortgages to savings to healthcare in both the personal and business realms.

2.) Even if consumers make mistakes from time to time, wouldn’t the market fix these?

I always found the appeal to the market gods a bit odd. Why would the market fix mistakes instead of aggravating them?  When the Chicago economists sometimes (reluctantly) admits that people make mistakes, they claim that people make different types of mistakes that will eventually cancel each other out in the market. Behavioral economics argues that, instead, people will often make the same mistake, and the individual mistakes can aggregate in the market.  Let’s take the subprime mortgage crisis, which I think is a great example (but a very sad reality) of the market working to make the aggregation of mistakes worse.  It is not as if some people made one kind of mistake and others made another kind.  It was the fact that so many people made the same mistakes, and the market for these mistakes is what got us to where we are now.

3.) Isn’t behavioral economics a depressing view of human nature?

It is true that from a behavioral economics perspective we are fallible, easily confused, not that smart, and often irrational. We are more like Homer Simpson than Superman.  So from this perspective it is rather depressing.  But at the same time there is also a silver lining. There are free lunches!

Take the physical world for example. We build products that work with our physical limitations. Chairs, shoes, and cars are all designed to complement and enhance our physical capabilities. If we take some of the same lessons we’ve learned from working with our physical limitations and apply them to things that are affected by our cognitive limitations—insurance policies, retirement plans, and healthcare—we’ll be able to design more effective policies and tools, that are more useful in the world. This is the promise of behavioral economics – once we understand where we are weak or wrong we can try to fix it and build a better world.

Take again the sub-prime mortgage crisis.  Imagine that we understood how difficult it is for people to calculate the correct amount of mortgage that they should take, and instead of creating a calculator that told us the maximum that we can borrow, it helped us figure out what we should be borrowing.  I suspect that if we had this type of calculator (and if people used it) much of the sub-prime mortgage catastrophe could have been avoided.  This of course is one idea to fix one problem, and there are many ways to think about how to improve our lives along many of the decisions we make every day. This is why I think that behavioral economics is so optimistic, useful, and important for our personal life and for society.

Irrationally yours

Dan Ariely

Update:  Thanks for everyone who participated in this study — we will post the results next week

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We have a new fun study that we need some help with….  So if you have 10 min please click the “Click to participate” button on the right..

Or, just follow this link.

Thanks

Dan

On Friday July 9th at 1:30 PM EST I will have an online office hour on Duke’s Ustream channel.to discuss The Upside of Irrationality.

You can submit questions in advance or during the session by email to live@duke.edu, on the Duke University Live Ustream page on Facebook or via Twitter with the tag #dukelive.

If this will work out maybe we will do more of these…

Irrationally yours

Dan

I personally find fruit and vegetables to be not only healthy, but also delicious. I enjoy cooking and preparing them, and try to eat them often. Sometimes I wind up spending egregious amounts of money getting the freshest local organic produce. Still, even when I empty my wallet at the farmer’s market, some of my fruit and veggies inevitably end up wilting or rotting in the fridge, leaving a fairly unpleasant sludge. A number of things could contribute to this waste – but I’d like to point out a few simple design flaws that I think we can fix.

1) I suspect that one of the main culprits is the produce drawer in the refrigerator.  Most refrigerators have a special drawer designed to hold produce, usually located at the bottom of the fridge.  The drawer is often just barely opaque and for some reason difficult to open. Because of these “features,” when you open the fridge door, you look straight ahead, to the leftover lasagna or apple pie (and their convenient position) come to mind, leaving the carrots and nectarines hidden and forgotten in the vegetable drawer.  If the design of the produce drawer is one of the barriers for eating the fruit and vegetables we have already purchased, what can we do about it?  For one, instead of using the crisper to store fruit and vegetables, we could put them on a higher shelf so that they are more inviting when that door is opened. We’ll smile and say to ourselves: “oh, right, I now remember I have blueberries and I want to eat some of them.”

2) Another obstacle that keeps us from eating our vegetables before they’ve gone rancid is the sense of immediacy and gnawing hunger that compels us to open the fridge in the first place. We usually go to the fridge when we are already hungry, and are looking for something to pop in our mouths right away. Because there are usually a few steps between raw vegetables and ready to eat food, we shy away from them in favor of something faster and more convenient. One way to solve this would be to wash, cut or cook them in advance so that they are already prepared at the pivotal moment of hunger.

3) In addition, these perishables don’t come with any indication of an expiration date. Until we discover the point-of-no-return, it is hard to tell how far the produce are from the end of their useful lives. We know that when we buy fish, we should eat it within the next couple of days. With milk, there is a date stamped right on the container, undisputable and in plain sight. Because we are averse to losing money (even money already spent), these expiration dates compel us to make sure that we use that pound of Mahi Mahi, eat that yogurt, and finish the milk. By leaving the produce’s expiration date ambiguous, it is hard for us to plan when to eat our produce, and we often discover that we have missed the expiration date after it’s too late. If we were to make our own expiration dates and stick them on our celery sticks, we would be more likely to use them before they’ve turned into a mushy mess.

This type of waste worries me because I think that it also prevents us from future purchases of fruit and vegetables. Imagine this scenario: You buy a bag of grapes for $7.50, throw them in the crisper drawer, and forget about them. A couple weeks later, you open the crisper on a whim and are alarmed to find that the former bag of grapes has now turned into a moldy pile of muck. You feel awful, not only because you have to clean up the mess, but because you paid seven dollars and fifty cents for this. You grumpily go for the sponge and think to yourself, “Well, I’ll never do that again.”

My general point is this: There are all kinds of reasons why we eat badly, but some are more fixable than others if we only look at our behavior and undercover the nuanced forces guiding our actions. Instead of throwing the bag of grapes into the dark drawer in the bottom of the fridge, we can save that drawer for the cupcakes and instead put some grapes in a tray on the top shelf with some mixed greens and pecans, ready to grab and go. The rest of the grapes can be prewashed and stamped with a homemade expiration sticker. If we make plans to eat them within a few days and mark them as such, we are more likely to stick to our goals. This way, we can eat more fruit and veggies and avoid wasting money or creating a mess – benefits all around!

Irrationally yours

Dan

Sometimes comedy has a lot of reality in it — this is one of these cases

What are the effects of high prices, packaging, and fancy descriptions?  often they lead to higher evaluations and higher willingness to pay ….

What would you think if someone told you: Do the right thing because your life may depend on it. Or more accurately, that you better start making better decisions because it is a matter of life and death. This may sound like something an overprotective parent would tell their child) but in reality it’s the way most of us should start to think about our day to day decisions and their potential to lead to harmful habits and fatal consequences. It is hard to believe that this is true, but recently, researchers have done some interesting analysis on this topic and the results support the idea that personal decisions, and often fairly mundane ones, are a leading cause of premature death in the United States (and I suspect that similar numbers are also the reality in the rest of the developed world).

One of the most interesting analyses on the ways in which our decisions kill us is one by Ralph Keeney (Operation Research, 2008), where Ralph puts forth the claim that 44.5% of all premature deaths in the US result from personal decisions – decisions that involving among others smoking, not exercising, criminality, drug and alcohol use, and unsafe sexual behavior.  In his analysis Ralph carefully defines the nature of both the type of personal decision and what is considered premature death. For instance, dying prematurely in a car accident caused by a drunk driver is not considered premature in this framework because the decision to drive somewhere is not one that can logically be connected to the premature death. Unless, of course, the person who dies is also the drunk driver, in which case this counts as a premature death caused by bad personal decisions.  This is because the decision to drive drunk, and dying as a result, are clearly connected.  In this way you can examine a large set of cases where multiple decision paths are available (the drunk driver also has the option to take a cab, ride with a designated driver, or call a friend), and where these other decision paths are not chosen despite the fact that they won’t directly result in the same negative outcome (i.e fatality). As other types of examples, consider the decisions to smoke (when not smoking is an option), to overeat (when watching our weight is an option), or for people with long term medical conditions to skip taking insulin or asthma medication when these are important to their ongoing health.

Using the same method to examine causes of death in 1900, Keeney finds that during this time only around 10% of premature deaths were caused by personal decisions. Compared to our current 44.5% of premature deaths caused by personal decisions, it seems that on this measure of making decisions that kill ourselves we have “improved” (of course this means that we actually got much worse) dramatically over the years.  And no, this is not because we’ve become a nation of binge-drinking, murderous smokers, it’s largely because the causes of death, like tuberculosis and pneumonia (the most common causes of death in the early 20^th century) are far more rare these days, and the temptation and our ability to make erroneous decisions (think about driving while texting) has increased dramatically.

What this analysis means is that instead of relying on external factors to keep us alive and healthy for longer, we can (and must) learn to rely on our decision-making skills in order to reduce the number of dumb and costly mistakes that we make.

The question then becomes how to help people become better decision-makers. Or at least better at making decisions where their health is concerned. If nearly half of premature deaths in the US can be avoided by making better decisions, it is clear to me that it would be worthwhile to spend much more time and effort to disseminate the knowledge we have gained in social science about the main ways in which people fail to make good decisions.  It is of course over-optimistic to expect that just helping people to see what mistakes they are likely to make will fix the problem, but personally I would be happy even if it only slightly reduced the number of catastrophic decisions.  The next step we need to take is to expand upon the research that examines what kind of methods encourage healthier decision-making and conduct much more research in areas that could help us limit our mistakes. For example, based on research about how people make different decisions when they are sexually aroused we might concentrate on providing comprehensive sexual education that teaches teenagers how to make decisions while in the heat of the moment.  Similarly, by understanding how people think we might be able to teach people to enjoy eating fruit and vegetables; how to make exercise part of their ongoing lifestyle; and develop effective smoking cessation programs. And it would also help to remember, in light of this, that every decision counts.

How are bonuses influencing performance?

Often people expect that higher bonuses will yield higher level of ability and performance — but do they?

Here is a talk I gave on this topic (see also Chapter 1 in “The Upside of Irrationality”)

The thing about habits is that for good and bad they require no thinking. An established habit, whether getting ready for work in the morning or having a whiskey after, is a pattern of behavior we’ve adopted—we stick to it regardless of whether it made sense when we initially adopted it, and whether it makes sense to continue with it years later.  From a human irrationality perspective this means that something we do “just once” can wind up becoming a habit and part of our activities for a longer time than we envisioned.

To get some insight into this process, consider the following experiment:  We asked a large number of people to write the last two digits of their Social Security number at the top of a page, and then asked them to translate their number into dollars (79 became $79), and to indicate if in general they’d buy various bottles of wine and computer accessories for that much money. Then we moved to the main part of the experiment and we let them actually bid on the products in an auction.  After we found the highest bidders, took their money and gave them the products we calculated the relationship between their two digits and how much they were willing to pay for these products.

Lo and behold, what we found is that people who had lower ending Social Security numbers (for example 32), ended up paying much less than people who had higher ending Social Security numbers (for example 79).  This is basically the power of our first decisions: if people first consider a low price decision (would I pay $32 for this bottle of 1998 Cote du Rhone?) they end up only willing to pay a low amount for it, but if they first consider a high price decision (would I pay $79 for this bottle of 1998 Cote du Rhone?) they end up willing to pay a lot more.

So this is the double-edged sword of habits, they can save us time, energy and unpleasant thinking, but on the other hand, it’s all too easy to start down an unwholesome path. Now onto “ The 7 Habits Of Highly Ineffective People”…

1) Procrastination. Joys untold attend this particular bad habit. And it’s one people indulge in all the time, exercise, projects at work, calling the family, doing paperwork, and so on. Each time we face a decision between completing a slightly annoying task now and putting it off for later, battle for self-control ensues. If we surrender, procrastination wins.

There’s nothing inherently wrong with delaying unpleasant tasks at work from time to time in order to watch a (crucial) football game at the pub with friends.  But, the problem is that as we get close to our deadline we start thinking differently about the whole decision.  As we stay up all night to finish a task on time we start wondering what were we thinking when we succumbed to the temptation of the football game, and why didn’t we start on the task a week earlier.  Moreover, as with all habits one procrastination leads to another and soon we get used to watching deadlines as they zoom by.

2) The planning fallacy. This is more or less what it sounds like; it’s our tendency to vastly underestimate the amount of time we’ll require to complete a task. This hardly needs illustration, but for the sake of clarity, recall the last time you delegated time to a complex task. Cleaning your flat from top to bottom (couldn’t take more than two hours right? Wrong.); finishing the paper or project at hand (who knew the people in department X could be so impossibly slow?). The problem is that even if we try to plan for delays, we can’t imagine them all. What if the person you’re working out a deal with gets hospitalized? What if an important document gets deleted or lost? There are infinite possible delays (procrastination of course being one of them), and because there are so many, we end up not taking them into account.

3) Texting while driving. Let me start by saying that in my class of 200 Master’s students, 197 admitted not only to doing this regularly, but also to having made driving mistakes while doing so. Also, one of the three abstainers in the class was physically blind, so we should not really count him as a saint, and who knows maybe the other two were liars. Texting while driving is clearly very stupid.  If we were not intimately familiar with our own Texting behavior, we might think that it’s insane to think that anyone would knowingly increase their chances of dying 10 fold rather than waiting a few minutes to check email, but this is the reality.  Moreover, the issue here is not just Texting, it is much more general than this particular bad habit.  The basic issue has to do with succumbing to short-term desires and foregoing long-term benefits.  Across many areas in our life, when temptation strikes we very often succumb to it (think about your commitment to always wearing a condom when you are not aroused and when you are).  And we do this over and over and over.

4) Checking email too much. If it seems that there’s too much about email on this list, I assure you, there isn’t. Checking email is addictive in the same way gambling is. You see, years back the famous psychologist B.F. Skinner discovered that rats would work much harder if the rewards were unpredictable (rather than a treat every 5 times they pressed a bar, one would come after 4, then 13, etc). This is the same as email, most of it is junk, but every so often, it’s fantastic: an email from the woman you’ve been chasing for instance. So we distract ourselves from work by constantly checking and checking and waiting to hit the email jackpot. And to be perfectly honest, I’ve checked my email at least 30 times since starting writing this article.

5) Relativity in salary. The fatter a sea lion is, the more sea lionesses he has in his harem. He doesn’t need to be immense, just slightly bigger than the others (too fat and he won’t make it out of the water). As it turns out, it’s the same for salaries; we don’t figure out how much we need to be satisfied, we just want to make more than the people around us. More than our co-workers, more than our neighbors, and more than our wife’s sister’s husband.  The first sad thing about our desire to compare is that our happiness depends less on us, and more on the people around us.  The second sad thing is that we often make decisions that make it harder for us to be happy with our comparisons: Would you prefer to get a 50,000 pound salary where salaries range from 40,000-50,000 or a 55,000 pound salary where they’re between 55,000-65,000? If you’re like almost everyone, you’d realize that you would be happier with the 50,000 pound salary, but you would pick the 55,000.

6) Overoptimism. Everyone, except for the very depressed, overestimates their chances when it comes to good things like getting a raise, not getting a divorce, parking illegally without getting a ticket. It’s natural—no one gets married thinking “I am so going to be divorced in 4 years”, and yet a large number of people end up getting divorced.  Like other bad habits, overoptimism is not all bad.  It helps us take risks like opening a business (even though the vast majority fail) or working to develop new medicines (which take many years and usually don’t pan out). Ironically overoptimism often tends to work out well for society (new restaurants, cures for disease) while endangering the individuals who take them (financial ruin, stress-induced insanity).  Sadly we are often overoptimistic – my most recent example of this was just a few hours ago when I sat down to write an essay entitled: “The 7 Habits Of Highly Ineffective People.”  If I only didn’t go out last night…..

Irrationally yours

Dan

From the NYT Sunday Book Review:

STUFF YOUR BRAIN SAYS: “The Upside of Irrationality,” Dan Ariely’s follow-up to his 2008 best seller “Predictably Irrational,” hits the hardcover list at No. 12 this week. Ariely, a professor at Duke, is a leading researcher in behavioral economics. One of the field’s concerns is the way we tend to misjudge future pleasure — for example, by imagining that a new Ferrari will make us feel much happier than it actually does. But making The New York Times best-seller list, it turns out, really does feel good. “When my first book reached the list, I called my wife to tell her and I was just not able to talk from excitement,” Ariely said by telephone. “This was very interesting to me because I was very happy to hear the news, but somehow sharing it with someone I love intensified it to an extent that was just too much for me, and I was just able to say a word here and there and almost cry in between.” The differences in our experience of emotions when we are alone versus with others, he added, might be a fruitful avenue for future research.

So — how did I feel this time?  About the same as the first time….

Irrationally yours

Dan

A few months ago, I had the idea to create an iPhone app that would give me (us) compliments. It turns out that as humans, not only are we sensitive to rude remarks from strangers, but we are also very excited when we get kind words, even if they are just random; they just make us feel much better, even if these strangers don’t know us very well.

At a boy! is a completely free app, and you can find it here.

HOW TO USE: when you open the app you get a compliment and if you want a new one simply tap the screen.  To get a new compliment, simply tap the screen. I do want to encourage you to use the thumbs up/down to let me know which compliments make you feel the best — this way we will be able to figure out what kinds of compliments work better and worse.

Most important, users of At a boy! can submit their own compliments for other users to read: just tap the pen icon and type one in.

Here, for example, is a compliment that a French-speaking user of our app submitted (if you can please submit compliments also in English):

Doesn’t that make you feel good to read? We’ve had a few dozen great compliments already submitted, and we could always use more!

By the way, did I tell you that you look very nice today and that you are very clever?

Irrationally yours

Dan