What should we be asking ourselves?

Dan Ariely: I would . . . I would ask them to ask the questions of what in life . . . How much happiness are they getting from different aspects of their lives?  And is this the right amount of happiness to arrive . . . to achieve from all of those?  So in some sense it’s to take stocks of your actions, and your returns in terms of happiness of each of the actions, and see which one of those are misaligned – that we invest too much in and we don’t get enough out of, and focus on the things that actually give us more happiness.

Recorded on: Feb 19 2008 

                        Are faith and religion irrational? 

Dan Ariely: So I think it’s a very helpful belief.  So from that perspective I think it’s very useful.  Thinking about dying is very unpleasant.  It’s something that actually causes us not to take care of our savings and so on, so it’s very helpful.  I also think that our research shows how wonderful religious beliefs are for morality in society, and for people’s decisions to behave . . . to behave well.  So from many ways, I would say that religious beliefs are very helpful, are very positive, are very good ___________ individual and society.

Recorded on: Feb 19 2008 

How can we overcome procrastination?

Dan Ariely: So procrastination . . . As a university professor, procrastination is one of my favorite things, of course because I view it every time. And every semester I see the good intentions of my students. And toward the end I see, you know, that relatives, and fevers, and all kinds of creative excuses. So . . . And procrastination is not just about procrastination. It’s about a fundamental dilemma between what is good for us now and what is good for us in the long term. So right now I feel like watching television, not working. So I delay work for tomorrow. And tomorrow comes I again feel like watching television and not working, so I delay it again. That’s the same thing about savings; about healthcare. It’s the same thing about drug abuse, right? I want to do what’s fun now, not what’s necessarily good for the future. So one year . . . or actually a couple of years I offered the following treatment to my students. I said, “This semester you owe me three papers. You can hand it to me anytime you want, but you have to commit today when you’re going to submit each of them. If you’re late, you’ll lose a point of grade for each day you’re late. So there’s a huge penalty for that. And now please submit your dates.” Now what would the rational student do? The rational student would say, “I’ll submit everything at the end. I can always submit early. There’s no problem. Why should I commit to this costly . . . potentially costly deadline?” But what if a student knows they have a self-control problem? And if they keep all of the papers until the end, the last week of the semester would just be hell. They wouldn’t be able to sleep. They will . . . They will produce bad work and so on. If the students know that they have a self-control problem and they understand it, they might pre-commit to earlier, spaced deadlines, and they might actually do better. And the experiments we’ve done in this show that this is the case. When you give people a mechanism to do it, they actually do it better. Now it’s interesting that in the years after that, I’ve given students in my class the paper. None of these people ever come to me and say, “Professor Ariely, can you please make the deadlines earlier? And here is my pre-commitment for this and deduct it.” People on their own behalf don’t come and propose these mechanisms. But the good news is if you give them the mechanism, they seem to be taking it. Think about something like fat farms. I’m not sure what’s the politically correct way to say it. People can eat lettuce at home basically for free, but they go to expensive places to force them to eat only lettuce. Why? Because they know at home they’ll be tempted to do other things. Now I don’t think that somebody would go to somebody and sat, “Look, I’m paying you $200 a day to take everything away but lettuce from me.” But if we create this mechanism, people would recognize it under some condition and accept it. And that for me is the opportunity for free lunches, and here is how I view it. In standard economics, everything is at equilibrium. Everything is perfect. There’s no reason to change anything. The world is fine. Everybody is pursuing their ideal. In behavioral economics, the sad news is we’re irrational. We make mistakes. We’re foolish, myopic, emotional, and so on and so forth. With this bad news comes good news, and the good news is free lunches. It means that if people are mistaken, myopic, and so on, we can also offer mechanisms and solutions that would actually get them to behave better. And Weight Watchers and those kind of things are examples of those; 401k another example of those. How much money do you think people would save if we left it to people’s own decision at the end of the month to decide how much they are going to send to their retirement plan? Very little. But the fact that it comes out automatically from your paycheck at the beginning of the month really helps move it along. And that’s really the easiest way to improve our well being – is to understand what the opportunity are for free lunches, and to encourage businesses and the government to do more of that.

Recorded on: Feb 19 2008

Do we need to change how economics is taught?

Dan Ariely: So this goes back to the question of, “What’s the role of economics?”  And economics has two roles.  One role, it’s a field of study.  It’s a fantastic, wonderful field of study.  It shouldn’t be changed, right?  It’s just lovely.  The same way that philosophy is lovely, and sociology and so on.  And the field should keep . . . keep on going.  The second part where economics is different from all social sciences is that it has prescriptions for social policies.  It tells us how to behave.  It tells policies what to do.  It tells business people what to do.  And this is the place that worries me.  This is the place that I think we should include more in the discussion than just standard economics.  So for example my idea would be to create a new field that would be called “policy research”.  So imagine that we do a tax cut for $800 billion just for example.  What is the right way to do it?  Is it just the right way to take economic principles, and based on that decide how much to give and who to give to and so on?  Or is it better to take Iowa and give some people in Iowa some discounts, and other people other rebates and so on, and check which one works better?  You see as a scientist I have ideas about what will work better or not.  But I don’t have the confidence or the audacity to suggest that I know everything and I can predict the real right approach.  I can suggest experiments, and the result of the experiments could tell us what to do.  And that’s actually my hope.  My hope is that economics will join psychology, and sociology, and behavioral economics to create a field where everybody proposed experiments.  We test them out and we learn the most about what we should be really doing.  Now I’ll give you one example for (46:04) this on some committee that is looking at the No Child Left Behind Policy . . . That’s a policy that gives schools money . . . to schools, and principals, and teachers based on performance of kids.  We all have ideas about it.  Is this right?  Is this wrong?  I personally think there’s a lot of things wrong with it.  Most of teachers also think it’s very wrong.  But with the billions of dollars that go into it – and I’m not sure what percent of GDP education; let’s say it’s about 15 . . . With the billions of dollars that go into it, nobody is creating good studies that are testing the efficacy of this.  For me this is just unbelievable.  And here is just a list of questions that we have no ideas about.  What’s the right age to start studying?  We don’t know.  I mean for each topic we don’t know.  How many minutes should a class session last?  We have no idea.  What is the ratio between teachers and kids that are ideal?  No idea.  I sat next to the head of UNESCO a few weeks ago and had lunch with him.  And he said there’s one thing we know about education, and that’s the quality of the teachers really matters.  I said fine.  What does it mean – “quality of the teachers?” “I don’t know." I mean it’s unbelievable that we spend so much money based on our conceived notion about what’s right and what’s wrong.  As a scientist I say we know some things, but we don’t know so much.  Let’s just create a system where we do more experiments and test more things out.  I think businesses should do it more, and I think the government should do it more.  And one good case is medicine.  You know medicine before the FDA was just placebos.  We would put leeches, and bleach people, and all kinds of ointments.  It was useless.  And as a burn patient, you know I suffered through some treatments that were just placebos.  What the FDA is doing is forcing people to work against their natural tendency, and forces people to do experiments.  If you’re a physician and you think Ointment A is good, you’re not going to deprive half of your patients from it just to test if it’s working.  You would give everybody this.  If you’re a businessman and you think this is good for your clients or for your stockholders, you’re not going to deprive half of the population of it.  You’re going to give it to everybody.  The FDA is forcing people to do something that’s not natural – experiments.  And by doing that we’ve advanced medicine in a fantastic way.  But I think the same discipline is important for other things – for policies and for business.

Do supply and demand dictate the market?

Dan Ariely: Yeah. So the standard economic approach is that demand . . . or aggregated demand is the aggregation of what people willing to pay for a product . And the supply has to do with the production cost, and they meet at equilibrium. And this meeting point is being used as a standard starting point for any welfare analysis. And from that you can calculate what would happen if we increased tax, decreased tax, and so on. But these two forces are independent. Now what our experiments show – in particular the experiment in social security numbers and the influence of external forces on decisions – that supply and demand are not independent, but they are dependent. So imagine the following. Imagine that tomorrow they double the price of milk and half the price of alcohol. I would argue that people would start going to work happier and with less calcium, okay? The prices from yesterday would be settled in our mind and we’d change our shopping behavior. But imagine that this change in pricing would also be accompanied by complete amnesia – so any prices you ever paid for milk and for alcohol. Under those conditions I don’t think there would be much change in how we consume milk versus . . . versus alcohol. You know milk is kind of a good deal now at $4.00 per gallon. I think it would still be a good deal at $8.00 per gallon. And wine is a good deal at $20.00 per bottle. I’d say it would be good at $10.00 per bottle. What this suggests – but we have a lot of research to show; it’s not just an anecdote – is that what we based on decision is not just what we . . . the benefit and cost and hedonic pleasure; but also what we did in the past, and the past prices that we encountered. So what does it say about supply and demand? It says that demand depends on supply. If I was born into a world where the MSRP or the suggested price for milk was $4.00, that would be fine. If I was born into a world where it was $8.00, it would be fine. And those are not unique demand curves. They are demand curves that move as a function of what the supply curve is and what the prices are. Now if that’s the case, it means that welfare analysis should be thought of very, very differently. Because it means that when the prices change, people would react vigorously to those. So again if price of gasoline jumped from $1.00 to $4.00 per gallon, people would react vigorously in the beginning. But if it was $4.00 from the start of it, it wouldn’t have even close to the magnitude of effect of the day after the change.

Recorded on: Feb 19 2008

Whom do you want for President?

Dan Ariely: Well first I don’t want a rational candidate.  I want a candidate who understands the irrationality of people.  Again if you talk about healthcare or anything, I think you have to take people’s abilities and inabilities into consideration.  And Obama looks to me like he’s the guy who understands people’s limitation to . . . in the best way right now.  He’s also been using principles from behavioral economics more than anybody else.  So he had one early approach in his campaign when he used the lottery.  The lotteries are so interesting because the expected value is tiny, and people nevertheless flock to it.  And Obama at an early point had a dinner.  But instead of having a lot of people at the dinner, it was a lottery to have dinner with him alone.  And I think he raised . . . I think it was like $8 million for one event, which is very successful.  So I think he understands this better.  So if I hope that there will ever be a behavioral economist on the economic council, I think he’s probably the best candidate to be willing to do that.

Do we know enough about Obama?

Dan Ariely: Yeah I . . . There’s something that worries me about Obama, and that’s the fact that we don’t actually know much about him.  And interestingly enough some of our research shows that when you don’t know something about somebody, you fill the gaps in an optimistic way.  So if you think about all the excitement around Obama, it looks like he’s – outside of JFK – like the most amazing person that has the potential to be a president.  Like if you would have a distribution of abilities, he would be like out there.  How can it be that people expect so much?  I mean we had a lot of presidents, a lot of good people in the past; but the expectations are so high.  And I think part of the expectations being so high is because we know so little.  The best way, by the way, to think about it is dating.  If somebody tells you on an online dating site that they love music, people automatically assume they like the same music they do.  Only later they meet them and they discover that’s not the case and they get disappointed.  I think that’s one of the things that worries me about Obama, is that the expectations are so incredibly high.  And they’re so incredibly high because they’re based on so little information.

Recorded on: Fep 19 2008 

Should the government be responsible for universal healthcare?

Dan Ariely: Absolutely. So the . . . As you start realizing – and I’m realizing more and more over the years – our inabilities, mine included, you realize more and more that somebody has to take a role. Somebody has to take responsibility. So think about healthcare. Is this really the right system for a free market? If you’re . . . If you’re a free market fanatic, of course you will say yes. But how many people, for example, are going to shop when they have heart attacks? Not many. Seventy percent of the income for any hospital comes from the ER. These are not people who are shopping and comparing prices. Should these forces, when there’s actually a monopoly, be left for people . . . people’s decision? Well the other thing. Preventative healthcare is so crucial. It’s so crucial. I mean we can talk about diabetes, asthma. There is no reason for anybody to go to ER anymore about asthma. The medications are fantastic. But ER visits to the hospital for asthma are in charge of about 97 percent of the cost. I mean if you just take your inhaler on time everything will be fine. But people don’t. They fail repeatedly. Now diabetes is the same thing. Early detection is incredibly crucial because you can control it. If you don’t detect it early you have to cut people’s limbs off. I mean there’s blindness. There’s all kinds of consequences. Now we as a society are paying these consequences many times. Is it . . . Is it the case that you should just leave it for people to do what is the best for them? If you understand that people can’t do it, then you have to think about a different system.

                    Irrational Healthcare Policies

Yeah.  So . . . So I think that, you know, healthcare is crazy the way we do it.  And just give you some numbers.  Hospitals don’t recover about a third of their bills, okay?  That means that we have the most expensive national healthcare in the world.  Why?  Because people who are sick and don’t have money can’t go to a doctor.  So what they do – they wait until they’re very sick and they go to the ER.  That’s a crazy system.  Now in some sense we’re all paying through it from insurance, but a third of the bills of hospitals are never paid?  That’s an incredible subsidy, and something that could have been done much cheaper under a national healthcare.  So that’s one.  I think savings . . . retirement saving is a big problem, and in many ways.  One . . . One approach in which it’s very difficult is that the government is giving us clues about what’s the right amount of saving.  They tell us if you put $15,000 in your 401K, you’re fine.  If you put $3,000 in your Roth IRA you’re fine.  You are not fine.  If you’re my age – 40 – and you just start saving, you will never make it.  You will never make it.  So in some sense it’s very hard to figure out how much we need to save.  But the government is giving us hints, and these hints are wrong.  That’s . . . That’s another . . . another thing.  And then, you know, there’s all kinds of other small things, but I think those are two of the big ones.

Recorded on: Feb 19 2008

A Different Way of Looking at the Sub-Prime Mortgage Crisis 

Dan Ariely: So . . . So the first thing is, you know, I think the world would be a better place if I was a benevolent dictator.  I think there’s a lot of these things that we just don’t see – that we’re unaware of.  I think it is one of the wonderful things about behavioral science in general is that it can reveal facts about ourselves that we don’t usually understand or comprehend, and the force that really shapes us.  That’s the first step, right?  It’s just a journey to discover and find out things about ourselves.  But the most important one is what do you do with these findings, and how do you shape policies to take them into account.  And the first step is we need to recognize that we make this mistake.  And I mean it’s amazing to me that we don’t recognize it more.  In fact you can say what is more amazing about rationality is that we are . . . or this book, or irrationality?  Is it the fact that we’re irrational?  Is that more amazing?  Or the fact that we’re irrational but at the same time believe that we are rational?  And in some sense, the surprising thing is how much economics is still driving policy.  Let’s reflect for a second on the sub prime mortgage crisis.  Think about the following issue.  What we want people to do is to figure out for themselves how much money they can borrow.  Frankly I’m a relatively educated guy.  If I had to sit down and calculate what is the optimal amount of money for me to borrow, that’s an incredibly difficult exercise.  I don’t know how to do it.  You know I can think about my current salary, my future salary, the fluctuation in the stock market, the housing market – what’s the right answer for me?  I don’t . . . I don’t know.  Now the banks tell me it’s 28 percent of salary.  That I understand.  Now 28 percent of your salary is an average answer across a lot of people.  It can’t possibly be the right answer for everybody.  But I can’t calculate it, and now the bank tells me it’s on my shoulder to repay the loan, but I don’t have the tools to figure out how much I can borrow.  So even if I wanted to be rational, the first ingredient, which is to figure how much I can borrow, is missing.  Now form the behavioral economics perspective, we should change the role of the banks a little bit and mandate that they help people figure out how much they could really borrow, okay?  So this suggests a different responsibility on the individual and on the establishment.  If you don’t help me to figure out how much money I can borrow, why should I be responsible for ___________?  And here is another kind of interesting perspective.  You know when we make products for people, we take into account their physical abilities.  Nobody is ever saying let’s design a laptop, a pen, an iPod or something for Superman; for like somebody with ultimate strength, and power, and ability, and no limitations.  Everything we do we say let’s figure out people’s limitations and think about the products we can do.  People are weak here and weak there.  And their keyboard has to be like (34:19) this, and like that, and so on.  Why don’t we do the same thing about products for the mind?  Why all of a sudden when we talk about products for the mind – healthcare, retirement, insurance, mortgages – we all of a sudden assume that everybody in terms of their mind is Superman?  That there is no limitations?  Once we make this analogy clear, I think it’s actually quite self-evident that you need to take the same approach and design products for the mind that take our limitations into account.

Recorded on: Feb 19 2008 

What is morality?

Dan Ariely: So there’s different ways to think about morality.  There’s mortality what we hope to achieve, what people are actually doing, and what they’re actually thinking.  And the morality that interests me is the morality that people are exhibiting.  And so let me give an example.  I’ll describe a couple of experiments we’ve done on cheating, and here’s the basic setup.  We give people a set of simple math problems.  There are 20 math problems and they get only five minutes.  And in five minutes people can solve about four of those.  One group solves them.  They give them to us.  We pay them four dollars on average, everybody goes home happy.  The other group does the same thing, but when they finish we ask them to shred the piece of paper and tell us how many they solved.  Now just because they shred the piece of paper, they don’t become smarter.  But they say seven, so they cheat a little bit.  Nobody says 20, but people increased their reporting from four to seven.  A lot, a lot of people are cheating a little bit.  Now what does it mean about morality?  So in the economic framework, people should be sensitive to the probability of being caught cheating, and the amount of rewards.  We don’t find any of this.  When we changed the probability of being caught, nothing changes.  When we change the amount of the reward ___________, nothing happens.  Instead what we theorized is that people have a threshold.  We all want to think of ourselves as honest people, and we can cheat a little bit.  There’s like a fudge factor that we can cheat a little bit and still feel good about ourselves.  So the idea that people cheat up to that level.  Now if that’s the case, what should influence the level of cheating?  We said this threshold should go down if people think carefully about honesty; and it should go up if the activity is less likely to reflect on their honesty.  So here is what we did.  We took one group of students and we said you have two experiments today.  The first one is a memory experiment.  And half of the people try to remember the Ten Commandments; half of the people tried to remember 10 books that they read in college . . . in high school.  Then they went to another experiment in which they could cheat.  Will the fact that some people try to remember the Ten Commandments influence how much they cheated?  Absolutely.  People stopped cheating.  We didn’t detect any cheating after that.  And by the way, almost nobody remembers all the Ten Commandments.  And it doesn’t matter how many commandments they remember.  The moment that they contemplated their own morality, they became more sensitive to deviations from their standards and stopped cheating. The most disturbing experiment we did was the following.  One-third of the people handed in their sheet and got paid a dollar per question.  A third shredded their sheets and told the experimenter, “Mr. Experimenter, I solved X problems.  Give me X dollars,” and they cheated a little bit.  The final third shredded their piece of the paper, came to the experimenter and said, “Mr. Experimenter, I solved X problems.  Give me X tokens.”  Then they took the tokens, they walked 12 feet to the side and exchanged the tokens for dollars.  Now in a sense these are all the same conditions.  Before I give you the results, think about the following.  Would you take 10 cents from petty cash box?  Don’t answer.  And would you take a pencil from work home?  Most people feel much better about the pencil than the 10 cents, and the question is why?  And in some sense the token experiment is trying to explore that.  In our experiment people doubled their cheating when it was about the token.  What is happening here is that when you do something that is a step away from money, some of our moral shackles are released and we’re able to commit more crime and still feel good about ourselves.  This is, by the way, why I think that _________ stock options is so easy.  It’s not money.  It’s so many steps removed from money.  It’s not money; it’s stocks.  It’s not stocks; it’s stock options.  It’s not cheating; it’s backdating, making it incredibly easy.  Now from . . . Going back to your original question about morality, this is the kind of morality I am interested in.  I’m interested in the morality that we shape . . . that our mind shapes for us.  These are not ideas about what morality should be.  It’s the morality that people experience and the conditions under which this morality plays a role – a bigger role, a smaller role and so on.

Is there a pattern to human reason?

Dan Ariely: So you know there’s one way to be rational, and there’s a lot of ways to be irrational.  And that’s part of the issue with this field – is that we show many ways to be irrational, but it’s not just one system.  It involves a lot of different things that come to play in different areas of our lives.  And the way to understand it and to think about how we fight again them is to think about what particular rationalities working in each particular aspect of our life – whether it’s emotion, or relativity, or the influence of initial decisions, or the role of expectations – all of those can have input on us, and we have to understand exactly which irrational forces are working in each particular case. 

Can we predict our own irrationality? 

Dan Ariely: So again it’s . . . I know it’s unsatisfactory, but there’s no single silver bullet.  The kind of things I’m hoping people will get out of the book is to recognize some early warming signs for some of those things.  So for example I have a chapter about free that shows that when something is for free we jump on it too much, and in fact sometimes end up paying a high price.  What can you do as a consequence?  You can just slow down.  You can say I know free is tempting.  But when I see it in the future, what I should be doing is just slow down and think carefully about whether this is the right or the wrong thing.  It turns out that real estate brokers can really change how we view houses if they show us houses that are outside of our reach.  They might say look, let’s look at this house.  It’s $200,000 more than what you were planning to buy.  I don’t think you should buy it, but just have a look.  There’s no “just have a look”.  Seeing that will change your reference price and the way you think about houses.  Don’t let them show you this house.  So there’s some warning signs that we could get.  The other thing is there are some things we can’t help.  So have you ever gone hungry to a supermarket and bought too much food?  Everybody does.  Have you learned after one time never to repeat this again?  Nobody ever does.  What is the issue here?  When emotion takes over – hunger in this case – our stomach seems to grow with it.  We seem to be very hungry and we don’t think this hunger will end.  So what can we do?  When hunger takes over we will become different people that are not connected to our non-aroused, non-emotional self.  So what can we do?  We can make a rule for ourselves.  We can say I know I make this mistake.  And if these emotions are aroused in me I will behave badly.  So either go to the supermarket . . . Never go hungry.  Or make a list and never, never, never deviate from the list.

Recorded on: Feb 19 2008 

What inspired you to write “Predictably Irrational”?

Dan Ariely: So I don’t know how much academic papers you read, but they’re not exciting to read, and they’re not exciting to write. They’re very formulaic. They aren’t interesting. You can’t tell jokes. They’re unflexible. So a few years ago I decided to write something more flexible that would let me just write for fun. And I decided to write a cookbook, and my cookbook was going to be titled “Dining Without Crumbs: The Art of Eating Over the Sink”. It was going to be a decision-making kind of perspective on the kitchen. You know the kitchen is where we create, and destroy, and experiment, and take care of people, and fail. It’s kind of a wonderful place to take risks. And I was going to analyze decisions in the kitchen and try to suggest some lessons for life, but also give recipes. And I have two types of recipes. I had single meal dishes __________; and meals to ___________ – if you want to have somebody for dinner, what you do. And I wrote like a book proposal and I took it to MIT Press. And I took it to some book agents, and everybody said you can’t . . . You can’t possibly sell this book. It’s not a cookbook. You’re not a comedian. It’s not a decision making book. We don’t know what to do with this. And eventually one book agent suggested to me that what I should do is I should write a book about my research. And once I publish my first book and somebody knows me, then I could publish my cookbook. So I decided if that’s the cost I have to bear, that’s the cost I have to bear. And I started writing a book about my research, and this is what I wanted to avoid. I wanted to avoid the formulaic, kind of standard, soulless writing. And what happened to me was incredibly fortunate. I met this book agent called Jim LaVigne, and he liked my research. And he asked me to write a chapter, and he thought the chapter that I wrote was just not exciting. And he . . . The next time he helped me, and he wrote with me together a chapter. And he showed it to people and they thought it was not sufficiently exciting. And for four months we went back and forth. We draft ideas and how to write it. It took a while, and finally we found a voice and a language. And we found something that is actually much closer to how I speak about my research rather than how I write about it, but it took me a while to get there. And from that point on it was a pure pleasure to write it. In fact I didn’t expect how much fun it would be to write it, but it turns out to be fantastically fun.

What is your favorite part?

Dan Ariely: So you know these chapters . . . Each chapter describes a research project. And all of these research projects are like kids in a sense, right? They’re all my offspring, and I love them all, and I don’t want to . . . to say . . . For me there’s a couple of chapters that I love . . . I particularly love the research behind them. The first one is maybe this experiment we did on social security numbers and what people were willing to pay for things. And here is the basic setup. We take a big class of students and we ask each of them to write down the last two digits of their social security number. So mine would be 79. I would write 79 next to each of six products. And then you would say 79, let’s make it $79. Would you pay $79 for each of those products? And I would say yes, no; yes, no; yes, no. And I would say now let’s do it for real, which means you’ll submit a bid for an auction where the highest bidder would pay, and they would get the auction, and get the stuff and so on. Everybody does it. Everybody submits their bid. We input it into the computer. We find the highest bidder. People pay and get what they . . . what they got. And now I go back to the office and I compute the relationship between people’s social security numbers and their willingness to pay in the bid. Now it sounds like a strange idea that these numbers will be connected. And in fact they are not connected. It’s not that somebody who was born with a high social security number is doomed to pay more for things. But what we did was to make the first decision about social security number. And then the question is will the second decision take the first decision into account? And we found that this was indeed the result in a big way. So people with high social security numbers – let’s say ending in 90 or something like that – were willing to pay at the end of the day hundreds of percent more than people who had the social security number ending in 10, let’s say. Why? Because those people answered the first question – would I be willing to pay $90 for this? And they say yes or no. And when they came to say the second answer, they took the first one into consideration. They said I just said no to $90, so how much would I be willing to pay? Maybe $80. Whereas the people who started with $10 said yes I’ll pay $10. And they say okay, the second question, how much would you pay? Well, I just said yes to $10. Maybe I’ll go up to $15 or $20, and they stayed too far from converging. Now the reason I like that experiment is first of all I think it’s a cute demonstration. But more importantly I think it tells us something very important about the way we actually make decisions; and a way in which initial decisions have incredible power on us to create habits. And to illustrate this, let me give you a story about Starbucks, okay? So imagine the following scenario. It’s 10 years ago. You walk down the street. You are tired. You are thirsty. You need caffeine. You’re on some errands. You hate what you’re doing. You want some coffee. Dunkin Donuts is six blocks away. You stumble on Starbucks. You never tried it before. You go in. You go in, you buy a cup of coffee. You are surprised by the price, but you buy a cup of coffee. You leave. The coffee is fine. Three days later you walk by again. What do you remember? Do you remember how thirsty you were? How caffeine-deprived you were? How tired you were? How tired you were with your tasks? No. We don’t even remember how we felt yesterday. What you do remember is your actions. You remember I was here before, and I made a decision to go into Starbucks. And then you say something else to yourself. You say that must mean that going into Starbucks was the right decision for me, so you go again. And the next time you go you say, “Oh my goodness! I’ve gone twice. It must be a really good decision for me.” And you go again, and again, and again until it becomes a habit. And until you no longer consider whether Starbucks gives you enough value for the money, you just say, “That’s the kind of person I am. That is what I do.”

If people are irrational, how can we agree on anything?

Dan Ariely: Yeah. So it’s actually . . . From the perspective of irrationality, it’s actually very hard for people to reach agreement. If you accept the idea that my reality is different than your reality, how do we fight about the facts? The facts are not something out there. The facts are what we are experiencing. So I think about it from an Israeli’s perspective is will I ever be able to watch an event – a bomb, a terrorist activity, an assassination, anything – and will I truly be able to view it from the same perspective as a Palestinian? And my conclusion is that we wouldn’t. Let me give you a very trivial experiment that can illustrate this. So we give people two glasses of beers to try. One is a regular beer, and one is beer with balsamic vinegar, which we call the MIT brew. And people taste both of those, and we say which one do you like more? Which one do you want the full glass of? It turns out that in this condition, the beer with the balsamic vinegar tastes better to most people so most people go for it. That’s just the objective reality. Now what would happen if we introduced preconception? What would happen if we tell people, “This is regular beer. This is beer with balsamic vinegar. Drink it. Drink as much as you want and then tell us which one you want.” What will happen? Will the preconceptions overwhelm the experience? The answer is yes. Under those conditions, it doesn’t matter how much drink . . . beer people drink. They hate the one with the balsamic vinegar. What’s happening here is when you expect something to be terrible, your mouth is actually tasting it as terrible. Again our expectation changes our physiology. We see something different. You know it’s something that every sports fan always sees, right? It’s always that the referee is against your sports team. And if somebody else is sitting in the room and they are a fan of a different sports team, they are saying the referee is doing the opposite. Now if you take this seriously, what does it mean for two parties – Israeli-Palestinian, whatever it is – sitting together on a table and trying to negotiate? It means that the reality they’re going to negotiate about is going to be colored very differently for each of them. In fact so much that it is going to be impossible to bridge that. So what’s my solution? My solution is that we can’t overcome that. We can’t overcome the power of expectations or an experience. But if we recognize and we admit it, we might be willing to accept that a third party should make more decisions. And in fact instead of arguing about who is right and who is wrong, saying we understand we’re biased. Therefore we’re going to give it to a third party to make a decision for us.

Is it possible to divorce emotion from decision?

Dan Ariely: So the moment they take hold, there’s no . . . there’s no way back.  So if you think about emotions, if I sit now here and I think about the future, I create a situation where I would not be tempted.  For example I usually try not to eat dessert at restaurants.  But when the waiter comes with the dessert tray, I always fall into temptation.  Now if I right now go to a restaurant and I say to the waiter, “Don’t show me the dessert tray”, I can overcome emotion.  But it’s a trick around emotion.  If he comes anyway with the desert tray, it’s going to be very, very hard to overcome it.

Recorded on Feb 19 2008

Is there an objective reality outside of our beliefs?

 Dan Ariely: So this is a very general philosophical question.  I think that the world that matters is the world that we perceive, not the world that is out there.  So in many experiments we show that our expectations about how the world should function influences the way we actually experience the world.  So if you go ahead and you buy cold medication on discount, you expect it to be worse.  As a consequence of physiology it doesn’t take it . . . it doesn’t kick in as much, and you are not helped as much by this cold medication.  Now you can say which one is the reality – that the cold medication is the same regardless of the price?  Or the reality that actually changes your physiology?  And I actually think it’s the one that changes your physiology.  Maybe the best example is for us to think about placebo. So placebo is real.  Many people think of it as just psychology, but there’s nothing “just” about it.  It turns out that if a physician comes to you and injects you with whatever – saline water – your body expects pain relief.  And your body secretes substances that are very much like morphine.  So it doesn’t matter what you get from the injection.  You actually get pain relief from your own body as a reaction to that.  Now you can’t just close your eyes and say, “Please can I have some pain killers.”  That doesn’t work.  But when a physician injects you with anything – even saline water – you get the pain relief that is actually a substance you can’t buy over the counter.  It’s like morphine.  But what is the reality there?  Is the reality . . . Is the physician injecting you with water – saline water?  Or is the reality that the physician actually gave you pain relief?  From my perspective, the important reality is the reality people experience.  Because that’s . . . What we come in contact with, that’s what we know.  And that’s the reality we make decisions based on.

Recorded on: Feb 19 2008 

What is rationality?

So I picked the standard economic definition of rationality, because once you start incorporating all kinds of things into rationality, it just becomes a meaningless concept.  So if you say people are rational; but yes, but I also care about your welfare; and let’s add that as another component of futility to the equation; every time you’re making up another part of futility, it means that you are kind of undermining a concept of rationality.  And you know I’m a behavioral economist, which means most of my work is showing that people are irrational.  But I love economics.  Economics is beautiful.  It’s a wonderful theory.  It’s a great perspective to have.  And I don’t want to eliminate that.  I think it has incredible amount of insights.  However what behavioral economics teaches us is that economics is not the whole story.  It’s not everything.  And when you come to do policies, or inventions, or to give recommendations to people on how they want to live their life, you want to take as complete picture as you want . . . as you can.  So you take the parts of economics that are accurate, and you want to feel as much as you can about that from how people actually behave.

Recorded on: Feb 19 2008 

What sparked your interest in economics? 

Dan Ariely: So the starting of . . . For me the starting of this journey on irrational behavior started from actually being in the hospital.  So quite a few years ago I got injured in an explosion.  I got burned in about 70 percent of my body.  And as a consequence I spent about three years in hospital.  The first few months in the burn department were particularly painful, and one of the particularly difficult things is what is called the “bath treatment”.  So everybody had the bandages on, and they took it off, and it’s always a little bit painful.  Imagine there was no skin whatsoever; and it’s not a small bandage, but it’s covering 70 percent of your body.  That’s a long process and incredibly painful.  So during the procedure the nurses would put me on a stretcher and would lower me into a bath full of iodine water that would sting to start with.  And then they would go ahead and rip the bandages off one by one for about an hour.  And during that process, I would have debates over weeks about what is the best way to do it.  Here I was experiencing this incredible pain, and what I wanted to do was to minimize it.  So I would have arguments with them about what was the right way to trade off the intensity at each moment and the duration.  So think about it.  Should you have a shorter experience with a high momentary intensity? Or should you have a lower momentary intensity – tearing the bandages slower, but having longer duration?  Should you start form the least painful and move to the most painful or do the opposite?  Does it matter?  Should you give people breaks or not breaks?  And I had my own intuitions about what’s the best way to give me the least pain.  And the nurses had a different intuition.  But given the fact that I was the patient and they were the nurses, they were deciding what to do.  And when I got out of the hospital and I learned a little bit about the experimental method, I decided to test what’s the right way.  So I created lab experiments in which I would bring people in, and I would hurt them for longer durations, and lower intensities, and higher intensities; decreasing, increasing; with breaks, without breaks.  And after each experience I would ask people how painful was this?  So which one of these two pains would you prefer to repeat again?  And so I would try to infer how people actually aggregate this pain.  If you had an experience that lasts over time and change the intensity, at the end of it how do you think about the whole experience?  And to my surprise the nurses were wrong.  What does it mean?  That their intuition . . . That having the treatment being relatively short – let’s say an hour – and tearing bandages one after the other was the right approach.  They thought that high spikes and high intensity until duration was the way to go.  It turns out that it was wrong.  It’s much better to have lower intensity and longer duration; not to have spikes.  It also turns out it would be better to start from the most painful part and go down (07:01) over time.  And it would have been good to have breaks.  And when I came back to present this to them, it struck me that these were really kind, wonderful people.  They gave their life to their patients.  I mean this is not something that you would . . . Unless you felt like it was your mission, this is not a job that you would choose.  And at the same time they were wrong.  And even though they had vast experience and the best intentions in the world, they were still very wrong.  And I started wondering about what other cases are there where people have experience and good intentions, but are still fundamentally wrong?  And that kind of opened my eyes to look at many things in which people are good, well meaning, but still fundamentally wrong.

Recorded on: Feb 19 2008 

                    Who are you?

My name is Dan Ariely, and I’m the Alfred P. Sloan Professor of Behavioral Economics at MIT.

So as you can clearly tell from my accent I was born in New York City.  And then when I was very young my parents moved to Israel, and I was . . . I lived there until I came here to grad school.  And how it changed my . . . how it shaped my behavior . . . So at that point in Israel when I was growing up, things were very simple, and easy, and flexible.  I grew up in an environment where I could basically almost do anything I wanted, which was great.  The second thing that my mother always had interesting rules and regulations.  So for example I was not allowed to skip classes in school.  But every time I needed a day off I could take a whole day off.  And my mother’s logic was that one hour here and there don’t do much.  But when you need the whole day off that can actually help.

Recorded on: February 19 2008