The Encyclopedia of Ethical Failure…

December 1, 2012 BY danariely

Wondering whether you can ask someone to give you a PhD in exchange for a kickback? Curious whether you can get away with stuffing ballot boxes? Allow me to introduce you to the Encyclopedia of Ethical Failure. Every couple years the Department of Defense publishes the Encyclopedia (Word doc), which is likely the most sarcastic government document out there. Interestingly, golf and taxes seem to turn up a lot.

Of course, ethics for U.S. government employees and military includes a number of rules that most citizens don’t have to abide by, such as not endorsing candidates for office while in uniform. However, it doesn’t take a law degree to recognize the problems with many of these incidents. Here’s a tiny sample:

– “For a period of several years, two top executives at the Naval Undersea Warfare Center had an astonishing work record—they took nearly no vacation time at all. The reason, investigators soon discovered, was that the executives had been taking “religious compensatory time” instead. Curiously, the executives’ absences seldom fell on any traditionally observed religious holidays. Instead, investigators found that the pair’s so-called religious observances took place on days when they had medical appointments, sightseeing trips, and golf tournaments. Asked whether golf tournaments could be considered religious observances, one executive replied, “They could be for some people.”

– A Forest Service employee decided that while she was fulfilling payments for the Service using government checks, she would write a couple to her boyfriend, who had contracted with the Forest Service once upon a time. The checks she wrote under the guise of payment for firefighting services totaled over $600,000, and apparently went to pay for general expenses and, fittingly, for gambling.

– And in the quintessential story of government corruption, two VA employees are in jail for accepting more than $100,000 in kickbacks for red tape. Yes, actual red-colored tape.

The Encyclopedia shows not only that cheating (in all its myriad forms) is wrong, but also that it carries substantial repercussions; the size of the document serves as an indication that getting caught is fairly probable. The question I have is whether over time readers of the Encyclopedia will remember the instances as examples of what people do, forget where these examples came from, and perhaps start thinking of them more as clever and daring schemes than cautionary tales….

Celebrating April 15th (17th)

April 17, 2012 BY danariely

When I first moved to the U.S. for graduate school (which was a long time ago), I was very intrigued by and excited about the tax system and tax day. I envisioned it as a matter of civic engagement, a yearly ritual where citizens reflected on their contribution to the common pool of resources—for better and for worse. I imagined that people would consider the benefits of taxes—being able to fund schools, build roads and bridges, care for the poorest members of the community, and fund the defense of the U.S.—while at the same time watching for wastefulness and protesting against it.  And indeed this is how I looked at tax day for my first few years here.

Fast forward to when I finished graduate school and started making a real income, then I began to see April 15th the way most other people do. I realized that the tax code is so complex and aggravating that instead of making people consider values and social issues, their contribution to society, and government waste, it is mostly a season of shared grumbling and annoyance trying to get all your records together in time. With all of this complexity and ambiguity (is taking your sister for dinner while she’s in town and discussing work projects a legitimate business expense?  What if she gives you a good idea that you later use?), the only bonding we have on tax day is over the tedium of figuring out how much we owe and over the continual worry of whether we have done things correctly or not. So instead of promoting civic mindedness, the way the U.S. tax system is structured now highlights the small details of filing taxes. As a result, all of our attention is directed toward ending the irritating procedure, and in the process trying to find as many loopholes in the tax code as possible in order to minimize how much we pay.

So how can we fix this problem?  The first step is to simplify and clarify the tax code to make the process less confusing. The process of figuring and filling out tax forms is so exasperating it’s hard not to direct that feeling toward someone or something—and generally speaking, that something is the agency that seems responsible for your suffering, which in this case is the IRS. After all, it’s difficult to maintain a cheerfully civic-minded outlook, or even an even-keeled neutral outlook, in the face of such frustration.

Now imagine the simplest, least irritating approach to taxation. The least bothersome way of paying taxes is to have it done for you; for instance, in Israel, the government takes taxes out of people’s income before they even receive their salary. This means that in Israel, no one really knows their gross pay, but they do know their net pay, which makes them much more realistic about what they make. Generally speaking, the opposite is true in the U.S., where people know their gross but not net pay.

This is one idea, and it certainly would simplify things, but it would also nullify the idea of tax day as a day of citizenship and a time of reflection. So while we want to minimize the procedural pain of tax day, we don’t necessarily want to eliminate the possibility of thoughtful and critical participation in government that it provides. To make it a more beneficial experience, I think citizens should be asked how they want the government to spend their tax money. I don’t mean in the larger sense of voting for a political candidate and his or her economic ideology, nor do I mean the total amount that an individual pays in taxes; rather, I think there should be a section on tax forms that prompts the taxpayer to decide how to allocate 10% of his or her taxes. The choices could be among education, clean energy, health care, defense, roads and infrastructure, and so on. Not only would this give taxpayers a more apparent role in deciding where their money goes, it would avoid the problem of missing the forest for the trees.

With a less frustrating and more participatory tax system, it’s possible we could remake tax day into a more constructive and less arduous occasion. And maybe (maybe) we could get the government to be more responsible.

For now though, we should all look around at what our taxes pay for—the roads, the streetlamps, the police and fire stations—and remember that paying taxes is just part of life.

Happy tax day!

TSA: Wasteful and Insecure

April 5, 2012 BY danariely

I travel a great deal so I frequently find myself in the company of TSA agents who check my boarding pass, remind me to remove my shoes, jacket, belt, laptop, liquids, and all items from my pockets (including the previously inspected boarding pass), and then screen these things, as well as myself. Every time I find myself standing in line, in my socks, I inevitably contemplate the efficiency of the system. It’s only half an hour or so per flight, but when you multiply that number by all the people traveling in the United States, it’s a tremendous amount of time, effort, and money. And this comes not only from the TSA, but also in the form of lost productivity of all the people standing in line in various states of undress. One has to wonder whether it’s worth it.

It’s likely that on an individual level, we’re merely annoyed by the time and hassle of the present security routine, after all, it’s difficult to imagine how many resources are being used as you hurry through the lines. Lucky for us, this organization made a fantastic flowchart to help us see how much time and money we’re spending collectively on TSA, and, more importantly, what kind of results that investment is yielding. Judging from the price (over $60 billion) versus results (very few that are discernable), the question is: what do we do? Clearly we want to be safe and we want to prevent any terrorist activities, but it doesn’t seem that the current system is working, to say nothing of efficiency.

Perhaps in this situation, more is less. That is, maybe if we’re willing to give up more information about our travels and our lives, we’ll have to endure less time-consuming and haphazard scrutiny at the airport. For example, I recently had an interview with U.S. Customs and Border Protection as part of the Global Online Enrollment System (GOES), which preauthorizes approved frequent travelers to enter the US more quickly. I allowed them to do a background and credit check, and then met with an officer for an interview so that he could determine whether I posed any security risks (I’m happy to say I do not). Essentially, I opted for a reduction in privacy in return for not spending half an hour several times a week in line. For now it only applies to in-bound international flights, but I hope it will become more widespread.

At bottom, we have to give up some freedom and information in exchange for security. There’s no avoiding it. So the question is whether we want to do that in half-hour, invasive (not to mention ineffective) increments, or to go through a longer process once that looks further into our lives. Because the cost of the former comes is in small, redundant bits, we tend to overlook it, but in terms of hassle and time spent collectively, the second is a far better option.

That said, similar approaches to cutting time and money spent on security checks for domestic travel might be worthwhile. If individuals could agree to being tracked to a higher degree in order to gain quicker passage through security lines, it would allow TSA (or perhaps another group in charge of security) to know more readily who is and is not on flights. That way we could stop the inanity of having to take off our shoes, being x-rayed, and limiting liquids to theoretically non-explosive amounts.

After all, when you consider the approach to security so far, who knows what the next step might be—will we have to wear certain clothes only, carry only certain kinds of luggage, or no luggage at all? Instead we need a comprehensive approach that addresses concerns more fully, rather than the reactionary, piecemeal approach we have at present.

Bob Frank vs Fox news

May 8, 2009 BY danariely

An interesting argument between Bob Frank and Fox news about the role of luck (and some about taxes as well)

What is amazing to me is how little evidence we have to support any side of this debate and yet how certain each person is in his position.

Maybe what we need is research directed at the beliefs that drive our political system and convictions.

How to charge $37.50 for a cup of café latte

April 3, 2009 BY danariely

Imagine that it is the last day of the month and you have $20 in your checking account. Your $2,000 salary will be automatically deposited into your bank later today.  You walk down the street and buy yourself a $2.95 ice cream cone. Later you also buy yourself a copy of Predictably Irrational for $25.95, and an hour later you treat yourself to a $2.50 cup of café latte. You pay for everything with debit card, and you feel good about the day – it is payday, after all.

That night, sometime after midnight, the bank settles your account for the day.  Instead of first depositing your salary and then charging you for the three purchases, they do the opposite – qualifying you for an overdraft fee.  You would think this would be enough punishment, but the banks are even more nefarious. They use an algorithm that charges you for the most expensive item (the book) first.  Boom, you are over your available cash and charged a $35 overdraft fee.  The ice cream and the latte come next, each with its own $35 overdraft fee.  A split second later, your salary is deposited and you are back in the black – only $105 poorer.

Overdraft plans connected to checking accounts are common at most major financial institutions, and the Center for Responsible Lending estimates that this practice costs consumers about $17.5 billion in fees every year. Given these numbers, it is perhaps not very surprising that most financial institutions currently enroll their account holders into this expensive method of covering overdrafts without the customer’s consent or knowledge and that when consumers try to get out of these programs they find it incredibly difficult.  When I called the few banks I have accounts with last week and tried to un-enroll from these programs, the most common response I got was that it was impossible. Similarly, one New Jersey columnist reported that his own daughter was charged a $35 overdraft fee for a debit card purchase of less than $2, even when he had accompanied her to open her account and asked that transactions that would overdraw the account be denied. (Paul Mulshine, ‘Courteous’ bankers in for a rude awakening, The Newark Star-Ledger, June 7, 2007, at 15)

With the current financial challenges, I suspect that the people at the lower Social Economic Status (SES) are carrying a large part of the general financial crisis in terms of jobs and housing, as well as a large part of the overdraft fees related to overdraft protection plans.  Given this, it is a good sign that the Feds are finally looking at this issue.  The first thing that the policymakers are considering is whether to require banks to let their customers opt-out of the default overdraft system.  This sounds like a no-brainer.  A far better version of the rule would require banks to obtain explicit permission from their customers before enrolling them in this program, the “opt-in rule”. So when you sign up for a bank account, you are not enrolled in this program unless you decide that you want the bank to approve debit purchases you make even if you have no money in your account.  Given what we know about defaults and behavioral economics (that most people adapt the default option as their choice, and they see it as an implicit recommendation), I suspect that with the opt-out requirements, the vast majority of consumers will become part of the program and will keep on paying these high penalties, while the opt-in approach would make consumers much less likely to join these programs. Presumably, the banks know this, which is why they are arguing for the right to put all their customers into this expensive system of overdraft coverage without asking.

But of course, this is just the first step. In addition to the pending Federal Reserve regulatory proposal, Representative Carolyn Maloney (D-NY) has introduced legislation that, in addition to requiring that banks get explicit “opt-in” permission, would require warnings at the checkout counters and ATMs to allow customers to cancel a transaction before incurring a fee. It would also stop banks from clearing transactions from the highest to the lowest in order to increase their fees.  These are useful reforms that are much needed to prevent banks from taking advantage of their customers.

The banks of course are very worried about losing this income stream, but I suspect that changing the bankers’ mindset from business as usual to one where they are actually going to start seeking their customers’ trust and products that would actually appeal to their clients is in everyone’s best interest.  Adopting such programs might in fact push the banks to further improve their overdraft protection programs so that they are truly valuable for their consumers.  For example, banks might start giving consumers better access to competitively priced short- term loans, better connections between saving and checking accounts, or at least they can start alerting consumers using SMS when they are in danger of overdrawing their account. In the meantime, the Federal Reserve Board’s “opt-in” rule would be a step in the right direction.