November 4, 2013
Can you imagine being so severely burned that you are not able to speak to your nurses? You are a mute mummy, in horrible pain, wrapped in bandages with horrific burns all over your teenage body. When it comes to changing your bandages, the compassionate nurses intuitively believe that ripping the bandages off as quickly as they can will spare you some pain.
But you know that’s not the case. You know that slowly peeling off the bandages is less painful. You want to tell them but you can’t speak. So you anticipate and then experience the awful pain â€“ a pain administered by kind people who want to help you but who’s best-intentioned intuition is wrong.
This true story is hardly a typical source of economic research but in the case of Dan Ariely, superstar economics professor, New York Times best-seller and a man widely tipped as a future candidate for the Nobel prize, it is such a source. He was, in fact, so severely burned he was unable to speak to his nurses.
When asked if a general lesson for economic policy makers lies in the nurse’s well-intentioned mistake about patient pain, Ariely responds:
”Yes, I hope so! It’s all about the inability to predict the right model. So it’s all about the limit to intuition but the amazing thing is that the nurses had the certainty about what the right thing to do was. It wasn’t as if they said we don’t know’, they had this tremendous confidence. So the issue is our inability to understand whether our intuitions are useful.”
Ever since, Ariely has been asking these questions. Why do people do things? How can we be influenced? Why do we take chances? And can we rectify our mistakes to make better decisions about the world around us?
His work explores the everyday: why are some people slow to buy rounds, why do we lie, why are some countries more happy to be organ donors and others not, why do people keep smoking, why do some gay men still not wear condoms at bathhouses, why do some advertising campaigns work and others fail spectacularly, why do we buy certain things and not others, why when faced with choices in life do we act against our own interest, and why do we keep making basic mistakes?
Four years ago, an American friend grabbed me and said: ”You simply have to read this book, it will change the way you think about everything.” That book was the New York Times runaway bestseller Predictably Irrational’ by Ariely.
Ariely is the James B Duke Professor of Psychology and Behavioural Economics at Duke University. One of the world’s leading experts in the new field of behavioural economics, he has numerous scientific publications and has published two other bestselling books The Upside of Irrationality’ and his latest The Honest Truth about Dishonesty’. His TED talks have had over six million views. He is co-founder of BE Works, a Toronto-based management consultancy firm applying behavioural economics to business problems.
He chatted recently with Dr Kevin Denny of UCD (one of Ireland’s foremost experts in behavioural economics) ahead of Ariely’s keynote address at Kilkenomics next weekend in Kilkenny.
Given that Ariely is tipped as a future Nobel prize winner, Denny asked him about the recent Nobel Prize given to three economists: Chicago economist Lars Hansen; Robert Shiller, a leading behavioural economist who spotted the bubble in the American housing market before most and the author of Irrational Exuberance’ and Gene Fama, a Chicago economist credited with the Efficient Markets Hypothesis – the notion that you can leave financial markets alone and they will always be right. This was the intellectual rock upon which the spate of deregulation of the past twenty years was founded.
Ariely has a fairly critical take on the state of economics at present and thought that this was reflected in the recent Nobel award.
His scepticism is hardly surprising when so much of traditional economics believes that people act rationally, yet all Ariely’s work is based on the fundamental premise that we are deeply human, deeply emotional, irrational – and about as far from the typical rational man that economists talk about but none of us have actually met in real life!
”I am not as generous as some people. I think it’s a confused discipline. So I think it’s not a great reflection. I think Shiller should have won. The others shouldn’t have. They added a lot to economic thought and they added a lot to dangerous, destructive economic thought. So I don’t think we owe them a lot”.
This public bluntness is refreshing from an academic because academics mostly criticise each other only in private while remaining more ambivalent in public.
Denny asked him whether the award of Nobel Prizes, to the psychologist Daniel Kahneman in 2002 and now Shiller would do much to popularise behavioural economics since it seems to be ubiquitous now?
Ariely was not optimistic at all:
”It’s beneficial but I don’t think the Nobel Prize is highly important. I don’t think the economics profession is going to change much. Behavioural economics is going to remain a small area. So it depends on what you mean when you say ”everywhere”. Yes it’s a victory in terms of public opinion but not much improvement in terms of economics. Are people studying economics now really studying something different? I think the answer is mostly no”.
Denny continued asking him about this uncharacteristic academic pessimism from such a normally optimistic person:
”It’s the way academic journals work. The allure of simple theories is too high. It’s very hard to fight this. Imagine you are a PhD student: economics is partly a religion and when you go to an economics department, you get indoctrinated.”
This rigid, narrow gauge and pre-ordained route to academia is in stark contrast to Ariely’s own journey where a near death and permanently scarring experience led him to ask why people behave as we do.
Ariely’s new book is about dishonesty and at Kilkneomics he will discuss it in the context of bankers and the financial industry. Denny pointed out to him that in Ireland the narrative is that bankers were greedy and reckless, and asked if he thought dishonesty was a better way of thinking about bankers’ behaviour?
”I think it’s important to separate the person from the act so that when we say it’s a dishonest act we are not having a judgement about the person. That’s crucial that when we see conflicts of interest; it doesn’t mean the people are terrible. If you think of the financial crisis, you don’t want to point the finger and say that these were bad people. You want to understand in a deeper way why they did what they did. It’s a wishful blindness”.
In recent work Ariely had shown that financial bonuses do not improve performance despite the claims of the banking industry that they were essential to attract talent.
Did this go down badly when he presented it to financiers on Wall Street?
”Absolutely! The thing to realise is that people have tremendous blindness around their own motivations,” evoking the famous Upton Sinclair observation that ”it is difficult to get a man to understand something, when his salary depends on his not understanding it”.
Behavioural economics takes its cue from psychology by using mostly small experiments and Ariely has recently moved into areas not normally associated with economics, such as the study of obesity.
Does he think that behavioural economics has much to contribute to combating the obesity epidemic?
”I actually think it’s crucial. The things that don’t work are the things that have to do with information alone. There is a recent survey of the effects of financial literacy and sadly there is no evidence that it improves behaviour. Information alone doesn’t do anything. We need to find what does matter and it needs to be some kind of intervention. I can teach you a lot about finance and hope that you remember and apply it or I can create an electronic wallet that will do things without you having to think too much about it. This will be much more successful.”
Asked by Denny if this meant a role for the ”Nudges” popularised by Cass Sunstein and Richard Thaler and adopted by British and other governments, he affirmed: ”Yes, but these small interventions are often not sufficient: we need more powerful interventions.”
Ariely is a new breed of economist who believes that governments have an obligation to try to change the public’s behaviour. This new type of economist looks around the world and asks why people do what they do and whether we can change their behaviour in a way that will benefit not just them but all of us.
Next weekend in Kilkenny you have the chance to meet and listen to the funny, irreverent, brilliant and curious Dan Ariely, who when I asked him to come to Kilkenny in Ireland to speak at an economics conference where stand-up comedians grill the economists, he replied ”sure that sounds like fun and you’ll probably get more info out than a typical academic one. Count me in. Where is it again”?
As well as giving the keynote address, Dan is available for a more intimate economic agony aunt session where you can ask him that economic question you’ve always wanted answered but never had the opportunity to ask. Ariely will also award the first ever Young Economist of the Year prize in Ireland on Friday November 8 in Kilkenny.
Dan Ariely will be at Kilkenomics, November 8-10. Book now at kilkenomics.com