This is a short video from a talk I gave on June 7th at the Booksmith in SF.

The question here, is who cheats more and who cheats less….

Before you watch the video, think about a country that you have family or social links to (not the US) and ask yourself if people in that country cheat more or less than Americans.

A) People in that other country cheat more than Americans
B) Americans cheat more than the people in that other country

Next, try to predict if you think that bankers cheat more than politicians or if politicians cheat more than bankers.

C) Bankers cheat more than politicians
D) Politicians cheat more than bankers

Now if you don’t mind post your 2 answers to Twitter together with the name of the country that you have selected. Please use my username (@danariely), and I will collect the responses from Twitter.

Now, you can watch the video and get the answers

Here is an email that I got last week from a financial planner:

Dear Dan.

My hourly model lets clients use whatever retail custodian they like.  For various reasons, I tend to recommend the two best as Vanguard and Fidelity.  I go over the pros and the cons for each and, as soon as I mention Fidelity gives 25,000 frequent flyer miles, most clients stop me and choose Fidelity.  Some will move tens of millions to Fidelity in order to get frequent flyer miles that might have a $200 economic value (and I may be generous).  That would be the equivalent of 0.001% on a $20 million portfolio and .01% on a $2 million portfolio.

Any idea why this seems to have more impact than traditional economics might explain?

Curios.

XXX, CFP^®, CPA, MBA (name hidden)

Here is my (short) response

Dear XXX,

This phenomenon is what we call “medium maximization.”

The basic idea is that often people focus on near term concrete goals (such as frequent flyer miles), and while trying to maximize these immediate and clear goals they forget or discount the real reason for their actions — which in your case is maximizing their financial outcome. (For a great paper on medium maximization see this paper by Chris Hsee)

Why do people engage is such medium maximizations?  Because it is easy.  It gives people a clear direction for behavior — and just having something measurable within reach can redirect our motivation.  Another reason for the efficacy of medium maximization is that such immediate and concrete goals by which to measure ourselves against give us  a sense of progression ….

I am not sure whether this should make you more or less appreciative of your clients, but hopefully you can now understand them a bit better.  Or maybe it means that you should start offering them frequent flyer miles?

Irrationally yours

Dan

There are a few topics that Mother Teresa and Joseph Stalin agreed on, other than the cause for human apathy. So I suspect that both would be surprised – as I am — about the reaction to the BP oil spill.

If six months ago someone were to describe to me a tremendous oil spill and ask me to predict our collective reaction to it, I would have said that we would be highly interested in this disaster for a week or two and, after that short time, our interest would dwindle to “mildly interested.” After all, we (the public) appear only vaguely interested in a whole slew of environmental issues. The destruction of the Amazon rainforest, for example, has been going on for decades. Since 1970 we’ve managed to destroy about 600,000 square miles (www.mongabay.com/brazil.html), but we’re so used to these kinds of statistics that no one seems to care much.

So, why is it that we care so much about the BP oil spill than what happens on a daily basis in the Amazon? Here’s what we know about human caring and compassion.  First and foremost, it is based on our emotions rather than our reasoning. Joseph Stalin said, “One death is a tragedy, a million is a statistic.”  Mother Teresa said, “If I look at the masses I will never act, but if I look at the one I will.”  In oil spill terms: We see pelicans and turtles mired and dying in oil, and we want to cry. We hear about families who have had their homes ruined and their livelihoods horribly affected or even destroyed, and we sympathize with their helplessness and want to do something to help them recover.  Our compassion isn’t necessarily proportional to the magnitude of the catastrophe. It depends on how much of our emotion is invoked.

Perhaps I’m mistaken about human apathy, but it is also possible that there are particular features of the BP oil spill that influence how much we care, and that if these features were different, we would care substantially less, even if the magnitude of the disaster were the same.

Here are a few characteristics that might differentiate the BP oil spill from the destruction of the Amazon. First, it is a singular event with a precise beginning. Second, while the tragedy was ongoing (and we are not yet sure if it has ended or not) it seemed to become more desperate by the day. Third, we have a single organization that we can villainize. In contrast, in the Amazon, there are many organizations and individuals at fault, both in the countries where deforestation is occurring and abroad. And fourth, the Gulf is so much closer to home (at least for Americans).

The BP oil spill is, of course, a hugely devastating tragedy. At this stage, we don’t fully understand the magnitude of its consequences, which will likely last for decades. At the same time, it might be worthwhile to take this moment in history as an opportunity – when are caring about this tragedy is still high – to reflect on our larger relationship with the oceans, and the apathy with which we generally greet the less dramatic, but perhaps equally devastating, environmental consequences of overfishing and “everyday pollution.”

I suspect that, because our abuse of the oceans is commonly the result of many small steps by many people, we fail to become enraged with either the process or the outcomes. But we should be. And we should do our best to take better care of our oceans, and not only when the pollution is caused by a single large, easily villainized organization.

Maybe this is another case in which we want to make sure that we don’t waste a really good crisis (for a related missed opportunity see financial crisis). Maybe it is time to look more broadly at our interactions with the oceans and make it a better long-term relationship, and maybe we need to do this while we still care, and before our interest in the oceans dissipates.

…

You might remember reading in Predictably Irrational that it turns out that when we are choosing between two or more very similar options, we tend NOT to take into account the consequences of not deciding. For example, in the parable of the donkey, the unfortunate creature is placed in the middle of two identical stacks of hay. Unable to decide which stack to go for, the donkey starves and dies.

In another example, a friend of mine spent three months choosing between two different cameras, only to miss countless photo opportunities that he will never get back. And given how similar the two cameras were, he might have been better off simply flipping a coin.

To remedy this situation, I had the idea of creating Procrastinator for iPhone. This application allows you to set deadlines for your hard decisions so that when time is up, if you haven’t chosen an option, Procrastinator chooses for you. Thus, no more endless deciding back and forth, and no more lost time. Procrastinator is really easy to use, and you can have as many decisions as you would like running at the same time. You can find Procrastinator here.

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.