DAN ARIELY

Updates

In Defense of Mistakes

April 17, 2024 BY Dan Ariely

In a world that is hyper-brutal and punishing of mistakes, offenses, and missteps – small or large – on both social media and in real life, it might seem odd for me to promote making more mistakes. Yet, I want to make the case for making more and better mistakes.

I am an expert on mistakes. Not just in the purely theoretical or academic sense, but in the real-life sense. When I was nearly 18, an accident disfigured over 70% of my body with burns, removing nearly all functionality from my hands. I spent the next three years in a hospital missing out on many of the normal experiences of young adulthood. It could have filled me with rage, depression, or regret. Instead, it inspired my life’s work studying human behavior and trying to figure out what we can do to make our lives better. (It also inspired my signature half-beard.)

In my professional life, I have conducted countless studies that just didn’t work out the way I assumed they would. I have left positions under complicated circumstances. I had startups that failed. I’ve had interactions with colleagues that I wish had gone differently. Each of these experiences, while very painful at the time, were opportunities for observing myself and human nature. They became experiences of personal and professional growth.

I have also spent the better part of the past three years reliving a set of decisions I made and actions I took over a decade ago, around a now-infamous study of human behavior using car insurance data. Working in partnership with trusted colleagues, I did what was expected and right at the time. When the findings of the original study were called into question years later, we re-tested our assumptions, publishing results that put doubt on the original findings. When issues with the original data set were uncovered, we retracted the paper. Later we re-examined and replicated the findings, and in early 2024 published two papers that show that the effects of signing first matter (links to the papers are at the bottom of this post), but also that they matter in a more nuanced and complex way. Such is the scientific process. (See link to my official statement about this event).

As I was trying to understand what went wrong with the 2012 paper, people were very quick to criticize and question my professional judgment, casting a shadow over my life’s work. “Where did it all go wrong?” I have asked myself many times a day for the last few years. I have looked long and hard, but given that so much time has passed, I have come up empty-handed, and I simply don’t know for sure what went wrong. “Should I have done things differently?” Evidently. But as I examine all my decisions, I feel that I did the best I could at the time. And I’m okay with that.

Do I wish I did not make these mistakes? Of course. And, not at all. I obviously wish I did not make these specific mistakes, but in general, I accept these circumstances and continue to believe wholeheartedly that mistakes are essential to growth and evolution. Which brings me to my argument: We should all be making more and better mistakes.

What do I mean by that? To start, there is no reward without risk. Think about venture capitalists or investors in the stock market. As they approach their portfolios, they know that getting higher returns necessarily means taking greater risk. Risk, in the context of investing, is about investing in both sure things and in long shots.

Sometimes we also take risks to invest in ourselves or try something new – moments in our lives where we take a leap of faith and hope that things will work out. There is an expectation and understanding that some things will work out and some won’t, but overall, we know that we will be better off for having tried. Succeed or fail, the secret to success is charging forward boldly in new directions.

As a professor, I teach students about the logic, or lack thereof, in taking risks. We do case studies on Amazon’s fail-fast approach. We openly analyze past mistakes to learn from them. We talk about fostering cultures that will help us avoid another O-ring disaster.

There are mountains of self-help books and countless life coaches in the world, each telling us in their own ways that it is imperative to live in service of our desires, free of judgments of others and with more forgiveness for our shortcomings. “It’s okay to fall down. You just have to get back up.”

But the case for mistakes does not end here. It is not just about trying more and accepting more mistakes as the price of learning and success.

I am also advocating for better mistakes. What do I mean by better mistakes? We need to do the wrong thing the right way in order to maximize our learning. Specifically, we should aim to make more mistakes from bold action and fewer mistakes from inaction.

Popular wisdom says that when we look at our life in general, we will feel the most regret over the things we didn’t do. And yet, asymmetrical fear of regret leads us to fear mistakes from bold action more than mistakes from inaction, making us less likely to try new things – and more likely to do nothing.

When it comes to making the case for better mistakes, it means that we should be bolder and a little more fearless, by making a particular effort to make more mistakes from action. Taking calculated risks with a clear objective and having the courage to dust ourselves off if these risks don’t pan out. And try again.

Take, for example, the recent testimony of the three university presidents in front of Congress and the rest of the world. There is no question that this was a tragic performance that set academia back years, at a cost of public opinion that will take decades to rebuild. My sense is that these three university presidents should have dusted themselves off and worked even harder to tackle head-on the violence and hatred on their campus. This of course is a tall ask, and some of their efforts, particularly the more novel and creative ones, might have backfired. Yet, they should have taken more risks and tried different and novel approaches that might have contributed to their universities and to our understanding of how to help people to live in peace and civility with each other.

Sadly, the reactions to their testimonies prompted universities to do the exact opposite. Instead, universities now seem to be working hard to do as little as possible in order to fly under the radar. They seem to be largely motivated by a hope that students, faculty, trustees, and donors will soon forget about this particular war, and maybe even stop paying attention to anything that happens in the world altogether.

If we did more of the opposite of doing nothing and instead took bolder risks, would we more frequently experience the pain of erring, hit ourselves over the head, and say, “Why did I do this?” Sure, we would. But by accepting the downsides of bold action, we also increase the chance that we will learn something useful about how to move forward. If universities took bolder risks, maybe they would have lived up to their social mission and helped all of us better understand how to reduce hate, improve dialogue, and more.

At the end of the day, the progress of society and the success of any individual is made based on the totality of actions. And the biggest enemy of progress is fearing mistakes so much that we end up doing nothing.

To be sure, society can’t function without rules, boundaries, and consequences, but they should be proportionate. We must change the way we judge one another, to allow room for rehabilitation, reconciliation, or recompense. We must promote safer environments for failure, growth, and learning. Otherwise, we will motivate subterfuge among those who try and fail, and instill fear among those who might’ve tried but couldn’t stomach the potential aftermath.

For my part, I am planning on many more years of mistakes. I don’t intend to let fear and regret drive my decisions. I want to keep learning and growing. I intend to continue to make my own mistakes, and I even hope to normalize making more of them. I am optimistic enough to believe that as a culture, we can find a way forward that encourages people to take risks, fall down, and then get back up.

In the words of the famous philosopher, Yoda: “Pass on what you have learned. Strength. Mastery. But weakness, folly, failure also. Yes, failure most of all. The greatest teacher, failure is.”

LIVE AND LEARN.

Irrationally yours,

Dan

Links to the papers

Link to the paper “How Pledges Reduce Dishonesty: The Role of Involvement and Identification“: https://tinyurl.com/ycpumrtk

Link to the paper “I Solemnly Swear I’m Up To Good: A Megastudy Investigating the Effectiveness of Honesty Oaths on Curbing Dishonesty“: https://tinyurl.com/53mbn5ws and see also a link to a discussion about this paper: https://youtu.be/AjQ58irCZGg

MISBELIEF in Russia

March 29, 2024 BY Dan Ariely

I’m very happy that my book MISBELIEF will soon be published in Russia.  Here is the Russian translation of the title:

TIME OF MISBELIEFS: Why Smart People Are Liable to Falsifications, Spread Rumors and Believe in Conspiracy Theories.

I wonder what the reaction will be in Russia, and how much the Russian readers will think about this book in terms of what’s happening in Russia, and how much they will think of it in terms of what’s happening outside of Russia.

You can learn more about the book MISBELIEF here.

The Irrational, Episode #2: Dead Woman Walking

February 29, 2024 BY Dan Ariely

The two main themes of this episode are Inattentional Blindness and Revenge.

 

Inattentional Blindness
Inattentional blindess occurs when an individual fails to perceive an unexpected stimulus that is in plain sight. The stimulus is something they would easily notice if they were not distracted.  In other words, inattentional blindness is the inability to see something due to lack of attention, not because of vision related issues.

The term was coined by Arien Mack and Irvin Rock in 1992 and is also the title of their book, published by MIT Press in 1998, in which they describe the phenomenon and the discovery story. A well-known study that demonstrates inattentional blindness was carried out by Christopher Chabris and Daniel Simons. In their study they asked participants to watch a video and to count how many times the actors in white passed a basketball to each other. Once the video was over, they asked the participants whether they noticed the person in the black gorilla suit. The results showed that by paying attention to the actors in white, the majority of participants did not notice the gorilla.

More recent research on inattentional blindness suggests that it is less pronounced for people with ADHD and that it becomes more pronounced with age.

For more information on Inattentional blindness see:

https://www.youtube.com/watch?v=vJG698U2Mvo

The Invisible Gorilla: How Our Intuitions Deceive Us

https://en.wikipedia.org/wiki/The_Invisible_Gorilla

 

Revenge
Revenge is one of the most interesting human impulses.  There is a joke where God comes down to a farmer and tells him to wish for anything he wants under the condition that his neighbor would get twice as much. The farmer just had an intense conflict with his neighbor over water rights and he replies, “Whatever I get, my neighbor gets twice as much?”

“Yes,” God answers.

The neighbor says, “In this case please take out one of my eyes.”

This sums up revenge. The fact that we are willing to sacrifice something to make our target lose even more. In the strict sense, revenge is an irrational impulse because the person who is exacting revenge often loses something (time, effort, money, etc.) for the privilege of the revenge.  Why would they make such a sacrifice instead of simply never interacting with their enemy again? When we look at revenge from a more holistic-social perspective, we see that society at large benefits when individuals are worried about acting badly because of possible revenge, keeping them on their better behavior. In this way we can think about revenge and the fear of revenge as a built-in policing mechanism embedded within our psychology. (I explore this more in The Upside of Irrationality.)

For more information on Revenge see:

https://en.wikipedia.org/wiki/Revenge

https://www.psychologs.com/the-psychology-behind-revenge/#google_vignette

 

The main social science terms used in this episode are:

 

Boasting
Boasting is a version of bragging. Bragging is when someone speaks with excessive pride and self-satisfaction about their own achievements, possessions, or abilities. Boasting often also involves a sense of proving superiority so that others feel admiration or envy.

Curiosity
Curiosity is a broad topic, but for the purpose of this episode, curiosity is a powerful motivator. When I try to make this point, I usually say something like “When I was twelve, my mother had a very unique approach to raising us and giving us a sense of autonomy.” Then I stop and wait a few seconds. And continue, “My mother is great, but I have nothing specific to say about her approach. What I do want you to think about is how curious I have made you about my mother and her approach.  Even now that I have told you this was just a trick to make you aware of your curiosity, you are probably still curious about my mother.” This is why curiosity is a motivating force that can drive people to seek more information, fostering learning and exploration.

For more information on Curiosity see:

https://www.sciencedirect.com/science/article/pii/S2352154620300875

https://www.sciencedirect.com/science/article/abs/pii/S0079612316300589

Family estrangement
Family estrangement is the loss of a previously existing relationship between family members, mostly through emotional distancing, often to the extent that there is negligible or no communication between the individuals involved for a prolonged period. Estrangement is often unwanted, or considered unsatisfactory, by at least one party involved.

For more information on Family estrangement see: https://en.wikipedia.org/wiki/Family_estrangement

Social alienation
Social alienation refers to a feeling of disconnection from a group or society that someone identifies with. This disconnect can lead to a sense of isolation, estrangement, and lack of belonging. Social alienation goes beyond simply being alone. It’s more about the quality of one’s social connections and the feeling of not truly fitting in.

For more information on Social alienation see: https://en.wikipedia.org/wiki/Social_alienation

Hope
The psychology of hope delves into the mind’s perspective on the future and its belief in positive outcomes. It encompasses an attitude that good things will come, combined with the agency to make it happen. The key aspects of a hopeful mindset are: Goals (having clear and meaningful direction; Agency (the belief that a person has the ability to influence their future); Pathways (identifying multiple ways to reach the desired goals); and Optimism (a positive mindset that the goals are achievable).

For more information on Hope see: https://en.wikipedia.org/wiki/Hope
Quotes related to hope: https://en.wikiquote.org/wiki/Hope

Misdirected attention
In psychology and in everyday life, misdirected attention refers to any situation where someone’s focus is unintentionally shifted away from something important. This can happen due to distractions, irrelevant information that pulls attention away from the task at hand, cognitive biases that cause us to overlook important details, or emotional arousal that narrows our focus so much that we can’t concentrate.

For more information on Misdirected attention see: https://en.wikipedia.org/wiki/Misdirection_(magic)

Power of free
The word “free” has a remarkable psychological power that can influence our decisions and behaviors in ways we might not realize. This phenomenon, often referred to as the “zero-price effect” has been extensively studied and documented within the realm of marketing and consumer psychology.

To start with, the word “free” triggers a positive emotional response, making us feel happier and more inclined to accept an offer. This emotional hook bypasses our rational thinking, making us less likely to carefully weigh the pros and cons of whatever is being offered.

In addition, free items are perceived as having a higher value than their actual cost, even if it’s minimal. This is because when free is concerned we avoid losing money, and free eliminates much of the perceived risk that is inherent to any exchange. Even if the item itself might not be valuable, the “free” label makes it seem like a good deal we shouldn’t miss.

For more information on Power of free see: Predictably irrational https://predictablyirrational.com

Memory Triggers (with smell)
There are many times in which we know we have specific memories, but we have a hard time accessing them. When we encounter a cue that was present during the original encoding of the experience, this can help to bring up the memories from that event into our awareness.  For me, when I revisit the burn department, the smells of the hospital and the ointments, always brings up a very strong set of emotions and memories. Although I have been back to the burn department many times, the flood of these emotions and memories always catches me by surprise.

In this episode Alec uses smell to try and trigger his memories. What is interesting is that scents bypass the thalamus and go straight to the brain’s smell center, known as the olfactory bulb. The olfactory bulb is directly connected to the amygdala and hippocampus, which explains why the smell of something can immediately trigger a detailed memory or even intense emotion.

For more information on Memory triggers (with smell) see:

https://www.discovery.com/science/Why-Smells-Trigger-Such-Vivid-Memories

https://www.scientificamerican.com/article/why-do-smells-trigger-memories1/

Unexpected loss
Bad things that happen to us are bad on their own. But bad things that happen unexpectedly are much more psychologically damaging than the same bad thing happening expectedly.  Expected loss is no exception.  To be clear, loss is always bad, but when the loss is unexpected dealing with it is much more complex, takes longer, and is harder to accept.  Unexpected loss can also include elements of self-blame, even if there was no way to know or to have changed anything.

For more information on Unexpected loss see:

https://www.psychologytoday.com/intl/blog/healing-trauma-s-wounds/201504/dealing-unexpected-loss

Pride
Pride is “the quality of having an excessively high opinion of oneself or one’s own importance.” Pride may be related to one’s own abilities or achievements, positive characteristics of self, friends, family, or even one’s origin and country.

Pride is one of the most interesting emotions because some view it as positive and some as negative: Aristotle and George Bernard Shaw, for example, both considered pride a profound virtue. Others, including most religions, view pride as negative and even a sin. In Judaism, pride is even called the root of all evil.  Catholicism views pride as one of the seven deadly sins. When viewed as a virtue, pride in one’s abilities is known as virtuous pride, greatness of soul, or magnanimity, but when viewed negatively, as a vice, it is often known to be self-idolatry, sadistic contempt, vanity, or vainglory.

For more information on Pride see: https://en.wikipedia.org/wiki/Pride

Narcissism
Narcissism is a self–centered personality style characterized as having an excessive preoccupation with oneself and one’s own needs often at the expense of others.

In my experience, more and more people are now interested in narcissism, particularly when they break up with someone and they blame the failing of the relationship on their ex’s narcissistic tendencies.  My view is that romantic relationships with narcissists are very captivating, and that being in love with a narcissist is very fulfilling and all-consuming in the short term (because, after all, they encourage endless engagement with them), but it is difficult to maintain such a relationship in the long run.

Narcissism exists on a continuum that ranges from normal to abnormal personality expression. While many psychologists believe that a moderate degree of narcissism is normal and even healthy, there are also more extreme and less healthy intensities of narcissism. When people become excessively self-absorbed they are defined as having a narcissistic personality disorder (NPD), where the narcissistic tendency is so powerful that it becomes difficult to function.

For more information on Narcissism see: https://en.wikipedia.org/wiki/Narcissism

And, again, for fun, here are a few pictures from the set.

The Irrational, Episode #1: The Pilot

January 27, 2024 BY Dan Ariely

The Irrational is a TV show on NBC that is loosely based on my life and my research (very loosely). See a link to the show HERE.

Each episode is based on some basic psychological forces, and here I will elaborate on the psychology that is part of the action in Episode 1: The Pilot.

The main theme of this episode is: False Memories

The main psychological principle in this episode is memory; specifically, false memory.  As Elizabeth Loftus has shown, we tend to think that our memory represents our experience in a perfect way. That it works like a camera and that it records events exactly as they took place. But, in fact, our memory includes not only things that happened to us, but also things we imagined, things that other people told us happened, and things we learned about in other ways – and all of these can become mixed with the things that happened to us.

In this episode Alec says one of my favorite sentences: “Memory is the great con man of human nature.” This sums up the idea that we overestimate our memory’s accuracy despite its unreliability.

For more information about False Memories see: https://en.wikipedia.org/wiki/Elizabeth_Loftus

 

The main social science terms used in this episode are:

The cocktail party effect
The cocktail party effect takes place when the brain zeroes in on a specific stimulus, typically auditory, while disregarding other stimuli. The standard case is when a partygoer engrossed in one conversation amidst a lot of chitchat can suddenly hear their name (or the word fire, or sex) when it comes from a discussion that they are presumably not hearing.

Surprisingly, the cocktail party effect suggests that this selective attention takes place after the meaning of the auditory signal is processed which means that at some level we hear the words, but actively suppress them before they arrive at our full consciousness.

For more about the cocktail party effect see: https://en.wikipedia.org/wiki/Cocktail_party_effect

Guilt
Guilt is an emotion that takes place when a person feels badly about compromising their own standards of conduct. It is an outcome of first internalizing the standards of society (don’t litter, don’t lie, etc.). Next, we judge ourselves relative to these social standards, and finally we feel bad — guilty — when our own behavior falls short relative to these social standards.

It is also interesting to contrast guilt and shame. The main difference is that shame takes place only when someone else is watching (or might be watching), and the shame comes from the feeling of being judged by another person.  Guilt on the other hand is independent from anyone watching, which means that guilt means that a person is their own judge.  From this view, we can think about guilt as a more evolved and more desirable emotion, where a person internalizes the values of society and judges themselves relative to those standards independent of anyone else watching or not watching.

For more about Guilt see: https://en.wikipedia.org/wiki/Guilt_(emotion)

The identifiable victim effect
The identifiable victim effect is the tendency of individuals to offer more help when a specific, identifiable person (“victim”) is in need of help, as opposed to a large, vaguely defined group with the same need.

This idea is captured by quotes from both Mother Teresa and one attributed to Joseph Stalin.

“If I look at the mass, I will never act. If I look at the one, I will.” ― Mother Teresa

“A single death is a tragedy; a million deaths are a statistic.” ― Joseph Stalin (possibly)

The identifiable victim effect is based on two components. The first is that people are more inclined to help an identified victim than an unidentified one. The second is that people are more inclined to help a single identified victim than a group of identified victims.

Although helping an identified victim is commendable, the identifiable victim effect is considered a bias, because it causes us to take less action when we don’t know much about the person in need, and because it causes us to act less as the number of people affected by a tragedy increases.

For more about The identifiable victim effect see: https://en.wikipedia.org/wiki/Identifiable_victim_effect

Memory
Memory is often thought of as an information storage and retrieval system. But we should think about it more like an informational processing system with explicit and implicit functioning consisting of a sensory processor, short-term (or working) memory, and long-term memory. Importantly, while we often place a lot of trust in the accuracy and validity of our memory, the reality is that memory is an imperfect repository of information, and its constructive processes change memories over time. In short, memory is less reliable than we think it is. Of course, with the increase of Alzheimer’s disease diagnoses, we are made more aware of the importance of a good functioning memory. We also worry more about losing this very important part of ourselves – a part that is at the core of who we are.

Paradoxical persuasion
Paradoxical persuasion starts with the very simple observation that convincing anyone of anything is incredibly difficult. Just think about the last five years and ask yourself how many people have you been able to convince during that time? Similarly, ask yourself how many times over the last five years somebody else has convinced you that you were completely wrong about something? The reality is that when we engage in an argument we start counterarguing even before the other person has finished their sentence (they of course do the same thing), which is why at the end of a conversation in which two people try to change the other’s opinion, they are often even more steadfast in their own opinion because instead of listening, they have been engaged in arguing for their opinion. Paradoxical persuasion approaches arguments differently by asking people to think about the minute details of their argument. With this approach people often realize that they have not thought carefully about their own opinions. While the person that has considered their position more carefully doesn’t become convinced that they were completely wrong, they often realize that they shouldn’t be as committed to their original opinion as they were before.

For more about Paradoxical persuasion see: https://www.pnas.org/doi/10.1073/pnas.1407055111

Post-traumatic stress disorder (PTSD)
Post-traumatic stress disorder (PTSD) is a disorder that develops in some people who have experienced a shocking, scary, or dangerous event. While it is natural for people to feel afraid during and after a traumatic situation, PTSD is a disorder where the “fight-or-flight” response that was evoked during the initial traumatic event keeps on appearing in the person’s life a long time after the event has passed.  People with PTSD have intense, disturbing thoughts and feelings related to their experience through flashbacks or nightmares and they continue to experience a version of the trauma and are unable to put the traumatic event behind them.

For more about PTSD see: https://www.psychiatry.org/patients-families/ptsd/what-is-ptsd

Reciprocity
Reciprocity is a fundamental driver of human behavior. It is the idea that individuals tend to respond to the actions of others in a manner that mirrors the positive or negative nature of those actions. When other people are nice to us, we feel a need to be nice to them back. When other people are mean to us, we feel the need to act in kind. Reciprocity is also a social norm, meaning that beyond our need to reciprocate, we also feel a kind of social pressure to reciprocate.

What reciprocity means is that in our daily lives we are frequently much nicer and much more cooperative than the self-interested view of human nature would predict.

For more about Reciprocity see: https://thedecisionlab.com/reference-guide/psychology/reciprocity#

Sense of control
How much control do you feel you have over your life? You may feel we have a lot of control, or you may feel you have very little. Having the right amount of feeling of control is what helps keep us balanced. Feeling that we have no control can lead to anxiety, depression, and learned helplessness. And, as I argued in Misbelief, feeling out of control is a main driver that leads us to seek out stories that blame someone else for our problems as a way to help us make sense of our situations.

For more about Sense of control and its damaging effects see: https://misbeliefbook.com (Chapters 3 and 4)

 

My favorite quote from this episode: “Memory is the great con man of human nature.”

My favorite psychological advice from this episode: When we have a negative experience that stays in our memory and we just can’t shake it out, one approach is to try and replace it with something else. We can try to imagine that something else – something specific – happened and do this every day for 100 days. Eventually, the bad memory will fade and be replaced by the better one.

And for fun, here are a few pictures from the set.

 

 

 

 

 

 

Inherent Goodness or Badness: A Reflection

January 16, 2024 BY Dan Ariely

An ancient question has been whether human nature is inherently good or inherently bad. From as early as I can remember, I thought that the right view is that human nature is inherently good. Over the years, my professional experience in social science gave me further support for that view. Why? Because if you consider that the main lesson from social science — that the environment matters! — you have to also believe in a deep disconnect between the potential of people and their ultimate behavior. You put people in one environment and they behave as angels, but put them in another environment and the same people can act in much much worse ways.

What this means is that behavior, good and bad is not a direct reflection on the goodness or badness of human nature and instead, it is to a large degree an outcome of the environment.

As someone who has internalized social science into everything I do, including my basic beliefs and approach to life, my conclusion was ended up being that people are inherently good and with the right environment this goodness can come out. Everything we see that is not great is an outcome of mistakes, bad information, a bad environment, and so on.

Recently, however, the images and stories from the brutal attacks of Hamas on Israel forced me to stop, think, and reflect, and that’s precisely what I have been doing. Should I change my belief about the basics of human nature? Should I update it?

I went over all kinds of evidence in the news and in social media — information that is impossible to reconcile with the idea that people are inherently good. But, even though I struggled with lots of evidence, at the end of the day, I decided that I’m not yet ready to accept that human nature is evil, and I am going to keep on holding onto the belief that people are inherently good.

Yes, it’s true that the evidence for people being inherently evil is much more powerful than I had imagined, and every day I see more and more examples of unbelievable brutality. But, I’m not yet ready to make this shift. Much like Jean Piaget’s approach to child development and their stages, I think that for me too, the evidence is there, but I’m not yet ready to move to a different developmental stage and to admit that maybe people are not as good as I once believed.

Or, maybe I just need to hold on to the goodness view for the sake of my own motivation. I know that we will all keep on revisiting this question over and over in the near future and I hope that in time we will find more reasons to view the world and the people in it in a more hopeful and positive way.

The human catalyst

December 28, 2023 BY Dan Ariely

A strong Human Capital Factor ignites growth.

“I only want to invest in fundamentals.” Such is a common statement from financiers. Yet these self-proclaimed ‘fundamental investors’ are people who regularly ignore a key aspect of a successful business.

The term ‘fundamental’ is used to describe financiers who back companies only when the hard financial data available to them looks positive. While the approach might sound sensible, it is limited – because the available data is insufficient and inadequate.

One of the fundamental predictors of growth that goes largely unquantified is human capital – the people power within a firm that drives it forward. Human capital is a sort of free energy for businesses. When harnessed, it acts like a perpetual motion machine, igniting growth by making companies more innovative, creative, productive, efficient and agile. But, because analysts have struggled to measure it, it is challenging to consider as an input for investment decisions. Irrational Capital is trying to change that with a new metric: the Human Capital Factor™(HCF).

The Human Capital Factor

Irrational Capital mines a plethora of disperse data to create the HCF. Sources include company survey data and publicly available assessments, including reviews on recruitment sites, such as Glassdoor. Some sources are relatively nascent. For example, Glassdoor is a household name now, but only came into existence in 2007. Yet it has been possible to back-test the performance of companies with a high-HCF versus the market benchmark. The results are illuminating.

To analyze the HCF, JP Morgan used the MSCI USA Index, which comprises more than 600 stocks. It formed and tested two share portfolios for the years between 2009 and 2020. As of 31 December in each year, it placed a concentrated portfolio of 30 stocks with the highest HCF scores in the long-HCF portfolio. The 30 stocks with the lowest HCF scores were assigned to the short-HCF portfolio. The portfolios were weighted and regularly rebalanced, to ensure a fair comparison.

The results tell a clear story. The high-HCF portfolio achieved an annualized return of +20.9%, compared to just +13.3% for the MSCI overall. When the high-HCF portfolio was rebalanced to make it ‘sector-neutral’ – reflecting the sectoral composition of the MSCI benchmark – the difference remained profound. The sector-neutral high-HCF portfolio showed an annualized return of +19.2%, substantially higher than the Index benchmark (see Figure 1).

Heavy hitters

One fascinating element of HCF is the way it cuts across all branches of the economy. When we set about quantifying HCF, we’d expected it to be a major factor in the so-called knowledge economy – capital-light firms such as Google and Meta. We had anticipated it to be a less important factor in sectors like manufacturing. The surprise was that HCF is as vital for capital-heavy industries as for capital-light sectors. Why is this? One example might shed some light.

I met Joe, an engineer who worked at a pipe company. The company is unable to use oil as a lubricant when manufacturing its pipes, so it uses molten glass. The raw glass was sourced from recycled car windshields from a major car maker.

The pipe-maker had a problem: a greater proportion than expected of its pipes were cracking and failing, and nobody knew why. Out of an interest in and devotion to his job – not because he had been asked – Joe took it upon himself to do some detective work.

After about two years of self-driven investigation, Joe solved the problem. Car companies were incorporating metal into their windshield glass so the windshields could double-up as integrated radio antennae. The ratio of metal to glass was tiny, but sufficient to make the pipes inordinately prone to cracking. Mystery solved.

One man’s personal mission to solve a critical problem led to huge productivity gains for his company. Its high HCF was evident.

The happiness paradox

Many would assume that the pipe-maker detective, Joe, was self-motivated because he was ‘happy’ in his job. Yet the idea of happiness is over-egged and frequently misused in business. Most humans derive happiness from leisure, not work. Many of us would be truly happy in the moment we found ourselves sitting on a tropical beach, cooled by a pleasant breeze, sipping on a well-mixed mojito. Happy, but unproductive.

Rather, a high HCF comes from a combination of task satisfaction, feeling appreciated, psychological safety, and the degree to which companies provide the conditions where employees can align their own utility with that of the company and its stakeholders. This combination is more related to meaning than happiness. Task satisfaction is the reward one gets from completing a challenge: say, running a marathon, rather than an undemanding leisure activity, such as drinking a cocktail. Psychological safety, meanwhile, is usually derived from a healthy company culture. It gives employees the confidence to challenge decisions, the agency to influence the direction of their company.

Joe expended excess time and energy on an investigation because he wanted to do it. He had intrinsic motivation – and he enjoyed the psychological safety of knowing that he would be listened to when he challenged the use of materials from a longstanding supplier.

Psychological safety is also an antidote to groupthink, a strong predictor of inertia and restricted growth. Rather than being a function of momentary happiness, it gives employees the internal strength to express their real feelings and ideas, and even their dissatisfaction with some aspects of
the company.

When Joe investigated the supply chain and found the weak point, it was not easy news to share, but, because of a high HCF at his company, he felt empowered to do something about it. His company appreciated his efforts and, by changing a policy based on his evidence, benefited commercially from them.

The motivation formula

Intrinsic motivation is like a perpetual motion machine for companies, an invisible, free fuel for growth that can be nurtured in all workers, provided the conditions are right.

Remember the last time you visited a large, branded store and the sales assistant went out of his way to help you? He might have checked the stockroom when the product you wanted was absent from the shelves. He might have called other local branches to check whether it was in stock nearby. That experience is likely to have added to your loyalty with that chain; it added indirect value to the company by making it less likely that you will choose its competitors in future. It also potentially added direct value – by making it more likely that the chain would make another sale. When we think about it, it is easy to visualize equivalent examples, where employees across the board have added value through their own acts, in every sector of the economy.

So, what drives intrinsic motivation? When we explored the factors that contribute, some key findings emerged. It transpires that absolute benefits tend to have only a marginal effect at best: for example, the level of one’s salary is a lesser factor than fairness in the salary structure; the scale of one’s retirement benefits is also a lesser factor than the degree to which those benefits are seen to be distributed equitably. Other factors, such as low levels of bureaucracy and a general feeling of being appreciated by one’s colleagues, are better predictors of intrinsic motivation than financial rewards. Together they drive a key pillar of high HCF – goodwill.

Goodwill is the range between the minimum effort required by an employee to keep her job and the maximum effort possible by that employee if she is fully engaged in her role. The most illustrative study on the factors behind goodwill (Bareket-Bojmel, Hochman and Ariely, 2017) reveals that non-monetary appreciation, such as verbal or written praise, led to productivity increases in the study group – microchip production workers. By contrast, gold did not glitter: monetary bonuses led to a long-term decline in productivity.

The fundamentals of HCF

Goodwill is imperative for a high HCF, yet it is just one of two key building blocks. The other is utility alignment – the willingness of employees to execute tasks that are aimed at the wider benefit of the company. An employee with high levels of goodwill will not achieve her full potential if she is unaligned with the goals of the company (see Figure 3).

 

 

Let us return to our branded store by way of an example. Imagine the chain employs several beauticians to sell its makeup. The beauticians offer free makeup consultations for customers. Their hope is that at the end of each makeover, they will sell the makeup they used.

One day, a beautician notices that the customer could benefit from a face cream that is manufactured by the company, but is unavailable at the makeup counter. It is stocked elsewhere in the store, in the skincare department.

The beautician asks the customer to wait and visits another corner of the store to bring the product in question to the customer. Because the product is stocked by a different department, the beautician gains no commission from the sale. Indeed, if the customer buys the other product they likely spend less on makeup. While the beautician makes no financial gain from the sale, it is nevertheless beneficial for the company and its customer. The beautician recognizes this and acts accordingly. This is what utility alignment is all about.

As Figure 3 shows, when either goodwill or utility alignment are lacking, value is neutral. Where both are lacking, value is destroyed. Yet, when both goodwill and utility alignment are present simultaneously, a lot of value is created. The workforces of companies with high HCF are clustered in this quadrant.

The future bottom line

Traditional accounting considers human capital an ‘intangible’ – something that cannot be measured. Yet Irrational Capital is putting a dent in this traditional practice. Not only can it be measured, it can also be invested in. Through Harbor Capital we offer three exchange traded funds that comprise high-HCF stocks: HAPI, HAPY and HAPS.

The main point is that human capital is not an ethereal factor. It is real and calculable. As we have shown, it is possible to quantify HCF and demonstrate its effect on company performance and value over time. The data that informs the quantification – both public and private – has only become available in the last few years; it is continually being expanded and should become rapidly richer and more extensive.

As it relates to measuring and reporting human capital, traditional accounting is
somewhat limited. The Human Capital Factor is the opposite of intangible. It is demonstrating the ability to make a former intangible tangible; something you can reach out and touch – and invest upon. One day, companies might start reporting on their human capital in their financial statements – and so-called fundamental investors might at last recognize the true fundamentals of business success.

Originally posted on December 1st 2023 here https://dialoguereview.com/the-human-catalyst/

The human catalyst

Corrosive information, Shibboleth, Ramaswamy and my new book: MISBELIEF

September 26, 2023 BY Dan Ariely

A few weeks ago, David French wrote a very compelling and troubling OpEd in the New York Times, under the title: “The Articulate Ignorance of Vivek Ramaswamy.”

The main point focused on a response that Vivek Ramaswamy gave during the Republican debate to the question of whether Mike Pence did the right thing by certifying the presidential election on Jan. 6, 2021. Ramaswamy’s response was that if he was in Pence’s shoes, he would have “pushed for a new federal law to mandate single-day voting, paper ballots and voter identification.”

French then goes on to explain that this is “a crazy, illegal, unworkable idea on every level,” which of course it is. French then continues to wonder how can anyone make such an impractical and impossible statement. This is where French, and I suspect most people, miss an important shift in the current political communication landscape – a shift toward shibboleth.

What is shibboleth? As I explain in my new book MISBELIEF, the modern term shibboleth is based on a biblical story where two tribes, the Ephraimites and the Gileadites, pronounced the word shibboleth differently. After a bloody war between them, when someone tried to cross the river, they asked them to pronounce shibboleth and if the pronunciation was different from their own pronunciation, they person in question was killed. The way that social scientists use the term shibboleth is as a kind of linguistic password that identifies people’s belongingness to a group. This is also the key to better understanding our modern political discourse, and within it also understanding Ramaswamy and his comment.

My guess is that when Ramaswamy proposed his new federal law, he did not really mean it as a real solution to the question. Nor was he adding facts to the discussion. No — he was signaling. Imagine that Ramaswamy would have said something of the republican-run-of-the-mill category.  Maybe he would have said that he would have gathered the Republican leadership to discuss the issue. Or maybe that he would have made sure to publicly register his protest.  Any such more modest statements would not portray him as a real true Republican leader. They would just portray him as a standard Republican. In contrast, by saying something impossible and outlandish he is using shibboleth and marking himself as a person with the qualities of a true Republican leader.

This is where French was wrong in his analysis because he mistakenly assumed that the goal of Ramaswamy’s response was to communicate a true opinion and not to signal his loyalty and identity and suitability to Republican leadership.

While I hope that this analysis of the role of shibboleth in the current political discourse, this perspective should not give us any comfort and instead it should make us even more worried. In standard communication we expect people to say what they mean, to say the truth and to add facts to the discourse. Especially when the communication is public on well accepted media channels. When shibboleth takes the center stage and these basic assumptions no longer hold, the risk of false narrative increases dramatically.

The challenge with this analysis is that it doesn’t help us figure how to deal with a discussion that pretends to be about real information but is in fact a shibboleth kind of communication. What we need is to approach this problem in two ways: First, we need to understand this shibboleth strategy and figure out how to take some of the things that politicians say and treat them as loyalty statements, and not as informative speech. Second, we need to demand more from our politicians.  We need to start having agreed upon standards for political discussions and it is best to set these clearly and before we get too deep into the election season, and ideally before the next debate.

P.S. Obviously, the problem of shibboleth is only limited to US politicians, and in other countries (Israel, UK, Brazil to name just a few) people, politicians, and social media are immune from this problem, but even so, it is useful to understand shibboleth and think about it as we go about consuming and producing information.

–Dan

If you would like to read my new book MISBELIEF, this page includes an option to order a copy for yourself + a copy to be donated to an educator.  The book can also be found at Amazon, Bookshop.org, Audible, BAM, or Barnes & Noble.

Happy Birthday to MISBELIEF

September 19, 2023 BY Dan Ariely

Hello to All!

Today I am celebrating the release of my new book MISBELIEF: What Makes Rational People Believe Irrational Things.  I hope you will find this topic as interesting as I have, and get a book, and learn about what I describe as a psychological machine that influences people’s beliefs and changes them, sometimes in a way that is very difficult to understand. If you are curious about this book, you can learn more about it here and here.

If you decide you want to read the book, this page includes an option to order a copy for yourself + a copy to be donated to an educator.  The book can also be found at Amazon, Bookshop.org, Audible, BAM, or Barnes & Noble.

 

About my new book, MISBELIEF

August 21, 2023 BY Dan Ariely

Hello hello,

I am happy to announce that on September 19, 2023, HarperCollins will be publishing my new book MISBELIEF.

In the early Covid days, I had the misfortune to experience first-hand how it feels to be brutally attacked by people who believed that Covid was a plot designed to destroy humanity. One of the results of this experience was my fascination with the process by which people adopt beliefs that are patently untrue about other individuals, the news, and institutions. This book is partly a description of the people and experiences I encountered along my journey. But mostly it’s an explanation of the psychological machine that takes people and changes them in ways that seem difficult to understand. A psychological machine I call “the funnel of misbelief.”

You can learn more about the book here and here. If you decide you want to read the book, this page includes an option to order a copy for yourself + a copy to be donated to an educator.  The book can also be found at Amazon, Bookshop.org, Audible, BAM, or Barnes & Noble.

Here are some kind things that people have said:

“In this thoughtful, moving and well-written book, Dan Ariely narrates his personal and professional journey to understand the world of misbelievers and conspiracy theories, and offers insights and tips that will hopefully help all of us protect our fragile social fabric from being torn apart by disinformation and distrust.”
– Yuval Noah Harari, Bestselling author of Sapiens

“Misbelief is an urgent examination of the human attraction to misinformation. This timely book can provide a crucial foundation for building a more empathetic and informed society.”
– Daniel H. Pink, #1 New York Times bestselling author of The Power of Regret

Once again Dan Ariely writes in a way that gets us to think and reflect about our human nature. In Misbelief, Ariely helps us understand the nature of our opinions, how they’re formed, and how the forces of misinformation can distort them. This is an important book for those who want to understand themselves and the increasingly complex world around us.”
– Arianna Huffington, Founder & CEO, Thrive Global

“For most of us it is tempting to think that people misbelieve things because they are uneducated, unintelligent, or misinformed. But as one of the world’s leading scientists studying beliefs, Dan Ariely, convincingly demonstrates in this important book (and as he discovered first hand in being wrongly accused of leading a nefarious conspiracy!), Misbelief is a process to which any of us can fall prey. More importantly, he offers science-based suggestions on what we can do about the polarization and breakdown in trust that comes with Misbelief.”
– Michael Shermer, Publisher Skeptic magazine and author of Conspiracy: Why the Rational Believe the Irrational

 I hope you enjoy the book.

Irrationally yours,

Dan

Advanced Review of My New Book: MISBELIEF

August 15, 2023 BY Dan Ariely

David Pitt reviews my new book in this month’s edition of Booklist.

Misbelief: What Makes Rational People Believe Irrational Things.
By Dan Ariely.
Sept. 2023. 320p. Harper, $32 (9780063280427). 300.

Social scientist Ariely (Irrationally Yours, 2015; Dollars and Sense, 2017) has spent years focusing on the way we often embrace ideas that are irrational, and here he turns his at- tention to misinformation specifically. Based in part on the author’s own experiences as the target of deliberate disinformation—with seemingly rational people believing lies about him—the book is an insightful examination of the underlying psychological factors that bolster misinformation’s appeal. It covers our natural tendency to accept ideas that reinforce our own beliefs (and to dismiss those that contradict them), and the way the spread of misinformation is reshaping our society. Ariely is a persuasive writer, offering plenty of anec- dotal examples to bolster his arguments and show how misinformation alters people’s lives. It’s a rigorous but also deeply compassionate book: Ariely’s goal isn’t to condemn people who fall for misinformation, but to show the reader how easy it is to believe the irrational. The book asks us to foreground empathy to reexamine some of our own beliefs. For some readers, the results could be eye-opening. —David Pitt

Full link to Booklist: https://booklist.booklistonline.com/html5/reader/production/default.aspx?pubname=&edid=6d2991a4-9d82-4321-9c01-8a678a578755

 

My new book MISBELIEF will be out on September 19th! You can pre-order it here https://misbeliefbook.com.