Behavioral economist Dan Ariely brought a big crowd to a sold-out Town Hall appearance on Tuesday night. He was wearing a black, Nehru-collared shirt; jeans; and red sneakers, and the crowd seemed hipper as well, than you might get at a typical economist's talk.
His new book, The Upside of Irrationality, is just out, and both New York Times reviewers and NPR reporters have fastened upon his claim that we're less like the cerebral Spock of Star Trek fame and more like the "fallible, myopic, vindictive, emotional, biased Homer Simpson."
Out of context this isn't news, because of course Spock was supposed to stand in contrast to humanity, while Homer Simpson is the de facto everyman. What Ariely is challenging, though, is that traditional economics is built on the fiction of a "rational" or "optimizing" actor, who in theory makes very Spock-like judgments on the basis on self-interested cost/benefit and utility analyses.
In other words, economists tend to think that everyone is just like them--or that enough people are--that it's close enough.
Ariely's adventures in behavioral economics, in contrast, provide a fundamental correction. It's rooted in the neuroscience of the last few decades, which has rewritten and resolved some old dichotomies. Joseph LeDoux's research into emotions and thought, for instance, that we're all emotionally driven, whether we're aware of it or not. Reason divorced from emotional impulse is simply the capacity to plot out decision trees, not to rate which one is preferable. The moment we evoke cognition, Ariely argues, people stop caring. Emotion propels us to action, not thinking.
Ariely had finished his last book, Predictably Irrational (Here's my recap of his 2008 Town Hall talk) just as the subprime meltdown was arriving. Finally, behavioral economics, which had been pooh-poohed as being too bottom-up to allow for strong theoretical claims, had an upset apple cart to stand on and shout from.
"I couldn't have hoped for a better marketing campaign," Ariely said. Those critics who said the stock market compensated for irrational behavior had some explaining to do. "All of a sudden we saw these things can actually have big consequences."
In that book, he focused a lot on the difference between social and market economies, and how adopting a pure market economics standpoint makes us, functionally, less human. (Whereas a pure social economy leads to Burning Man.) The thesis: "Social economy norms create more happiness than market economy norms."
In his new book, bankers and performance bonuses get a chapter. If you've read Daniel Pink's Drive , some of this will sound familiar (Pink reads Ariely), but the upshot is that monetary bonuses are not terribly effective motivators for knowledge workers. Becoming engrossed in a problem and developing creative solutions are not under most people's conscious control, the way physical exertion is.
In fact, the added stress that a bonus places on you may hinder your deep engagement and creativity. Bankers say no, they thrive on stress, but they have not responded to Ariely's offer to have them into the lab to prove they make better decisions in a stressful environment. His larger point is that if banker bonuses can't drive better performance, they still have an effect: People scheme to make their goals, or take more risks.
(Ariely said that statistics showed NBA "clutch" players didn't increase their shot percentage in the final five minutes of a game, just the number of shots they took.)
Another negative for bonuses is that people begin to plan on them. It's not a windfall, it's what you deserve. In this situation, you are in what behavioral economists call a "loss condition." In intensity of emotion, there's about twice as much pain in losing $10 than there is happiness in winning $10 unexpectedly. This is what drives doubling down on sunk investments (and banks holding on to distressed properties): It's not really a loss until you have to write it down.
An Ariely aside on how even loss is irrational: At the Olympics, the expressions of joy from silver and bronze medal winners are reversed, because the silver medalists tend to feel like they have lost the gold, while the bronze medalists have won the podium. "Regret is not about where we are; it's about how easy it is to think we could have been somewhere else." That's why it's more frustrating to miss a flight by two minutes than two hours, even though the consequence is exactly the same.
Ariely noted that banks violated public trust, and have so far simply tried to walk away from the consequences of their actions. "But the reason we have trust," Ariely said, "is because we have revenge." It's human nature to punish people who trade on our trust not in proportion to the instance, but in proportion to the damage to our trust. Banks may be, pragmatically, too big to let fail, but neither can you let public trust fail. Is lackluster consumer confidence due to the lack of public tarring-and-feathering?
In his books and at his talks, Ariely blends his social insights with personal observations. He began the talk by explaining how he rewarded himself into taking painful interferon shots on time, three times a week for six months. The shots made him sick (vomiting, headache), and the potential benefit (not dying of cirrhosis of the liver) was far enough in the future that it was a weak motivator.
"This is the standard dilemma we face," he said. "Doing something unpleasant now for something good in the future." Dieting, exercise, saving, safe sex..."not so fun now, but good in the future." Does it seem crazy to trade a bite of an apple for eternity in the Garden of Eden? "Who here has ever texted while driving?"
Another Ariely aside: "Think about global warming," he suggested. "If you tried to create a problem people would not care about, it would be global warming: It's long in the future, it will happen to other people first, you don't see anybody suffering, it's hard to see evidence, and anything you do is a drop in the bucket."
What he did was rent movies he really wanted to see on the day he took his shots, and as soon as he injected himself, pressed play--trying to associate the excitement of movie-watching with the shot, rather than the nausea that was still to come. "We call this reward substitution," he said. "So we act the right way for the wrong reasons."
One of the most successful way he's found to increase compliance with taking medication on time is a reward-regret approach. Everyone in a treatment program is eligible for a lottery prize, but the prize is can only be awarded to those who followed the treatment schedule to a T. Everyone wants to win, of course, but absolutely no one wants to be told they won, but can't receive the prize because they missed taking a pill one day.
So there is one upside to irrationality: If we understand why we behave the way we do, then we can not only minimize our bad behaviors, but steer ourselves toward better behaviors. We don't even have to have iron wills or a gift for long-range planning--we just need to know what gets us fired up (and what we'd fiercely regret).
Speaking of global warming, why did the hybrid Toyota Prius become the dominant choice when Honda's hybrid looks just as good on paper? Is the Prius somehow greener?
"This is my personal observation," said Ariely, qualifying his next statement. "When I drive and I see people driving Priuses, they look to me like they smile more than others." His hypothesis is that Toyota embraced making its hybrid look different, while Honda bet on people wanting their hybrid to look like a regular car.
But in this case, people wanted to stand out. Because Prius drivers get to pat themselves on the back every time they drive down the road, announcing they're willing to pay more to save the environment, they prefer the fact that it's clear they're in a hybrid. Really? you might ask. Honda seems to agree with Ariely: They designed the new Insight to have a Prius-y look.
The second upside is that sometimes we want people to behave irrationally. People are, irrationally, much nicer in real life than economists would tell us to act. We help each other out when there's no downside to walking away. We work hard because feel a task is meaningful, not because we're paid.
Ariely detailed an experiment where he "squeezed all the joy out of Bionicles." First he offered to pay people at a diminishing rate to create things out of the Legos, collected the results, put them in a box, and paid people when they stopped. People knew he'd take them apart for the next person, but they could see their creations as they snapped them together.
In the second part, Ariely let participants build something, and gave them more pieces. "And as you build the second one, I take the second one apart," he said, mischievously. "I put the pieces back into the box, and if you want to build another one, I give them back to you." The first finding, that people stopped much soon despite being paid the same, isn't that surprising. But a second finding was that there was no difference between how long the Bionicle-indifferent and huge fans lasted.
So, asked Ariely, what does this mean for worker engagement in general? Breaking tasks into components can improve efficiency, but it can also remove meaningful engagement. When does it become less efficient to constantly train new workers because people only last six months in management-created drudgery? (Ariely was careful to note that this isn't a question of the mechanics of menial labor; it's a question of people finding value in their work.)
Marxism's critique of worker alienation is even stronger, he added, in the realm of knowledge worker economics. If you want people to be engaged and motivated, thinking about work after 5 p.m., finding new ways to cooperate and innovate, then you can't afford alienation.
Always test to see if your intuition is merely habit, Ariely said in closing. Intuition works best in deterministic situations, where we've unconsciously put together chains of cause and effect. But we fail spectacularly to intuit our way through complex decisions, where any number of variables can affect the outcome.
We're not all that good at hiring and dating, for instance, and at least partly that's because we generally don't test our intuitions by hiring the person we have a gut feeling won't work out, or dating the person who completely turned us off. Pace Malcolm Gladwell, but there's more to using intuition than blinking.
And when it comes to happiness, avoid the conventional frame. The most important question when buying a house may not be how much you can afford--it could be who you want your neighbors to be. A good deal of happiness, after all, is derived from your social status, so finding the right group of people to compare yourself to is key. Whatever house you buy, you'll very soon get used to it, but your neighbors will likely amuse or enrage you for the whole time you live there.
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