Predictabily Irrational | Dan Ariely | Talks at Google

I'd like to introduce Dan Ariely he studies as most of you probably know behavioral economics which means looking at the way people actually act in the marketplace as opposed to how they would act if they were behaving completely rationally he's a professor of behavioral economics at Duke University's Fuqua School of Business this is a new role as of today previously he was a joint professor at the MIT Media Lab and the MIT Sloan School of Management his latest book predictably irrational cover some of his research findings including those that look at how people behave in in everyday situations where they're predictably operating in irrational ways so with that please join me in welcoming Dan Ariely so thanks so much and it's nice to be heroes in your New York office a few days ago which was also nice I'm having a two weeks of Google and I want to tell you a little bit about behavioral economics and if you have question in the middle feel free to ask and and I want to start by telling you why I chose this title of predictably irrational because while people sometimes economists acknowledge that people make mistakes they think that those mistakes will cancel each other in the market so you make one kind of mistake I make another kind of mistake and in the market they will cancel each other out when what I mean by predictably irrational is not that it's that we have the same type of mistakes that we all do repeatedly and in fact in the market they could aggregate and I think if we think about the subprime mortgage crisis we can get some indication of how how this mistake could actually become worse and but but irrationality is also something a very individual and personal that touches us individually and now and I want to tell you how I how I started getting I guess interested or introduced to irrationality and it it happened to me when I was in hospital which is a place where you would see many irrational behaviors if you ever get to spend some time there so I was a I was burned in an explosion many years ago about 70% of my body and I spent three years three years in hospital and you know hospital is terrible in many ways but the thing that that was most difficult in the burned apartment is the process of removing bandages so if you ever had the bandage removed you must have wondered what's the right strategy should you rip it off quickly right show duration but high intensity or should you take it off slowly take a long time but have a low intensity well for me this was the most important question I could think about it's it's it's one thing when you have banded and you still have skin and just a little bit of glue it's a completely different thing when you don't have skin and a bandage bandages adhere to the to the flesh and become incredibly painful to to take them off so every day the nurses would come to my room they would take me a little forklift and put me into a bath of water with iodine they would soak me a little bit to release the some of this thickness of the bandages and then it would start ripping them off and and the nurses basically had the belief that the right way to do this is to rip the bandages one after the other as quickly as possible right today would they would start at my seat and an hour later they would finish it's my head and I hated this intense moment of ripping that just to just all right I mean it's very hard to describe how painful it is thankfully we don't have good memory for pain in this intensity and I used to argue with them how good is kind of a polite word they used to scream and beg and and requests and and say can we can we try something else can we try and take it off a little slower maybe take an hour and a half maybe two hours but just don't have this incredible sensations and and the nurses told me two things they told me that they were right that this approach was the one that would minimize my my pain and they also remind me that the word patient doesn't mean getting involve and disturbing them in the process it's the same word in Hebrew basically that says sit there quietly and just be patient so um three years later I left the hospital I started studying at University and I learned about the experimental method I learned that if you have a question sometimes you could bring it to the lab you can manipulate something and maybe you find an answer to what you were doing and I was still very puzzled by this question of if you have an experience a negative experience you have to give to somebody what's the optimal way to give it in order to create the least amount of negative effect so I didn't have much money in the beginning so I went to a hardware store and I bought the carpenter's vise and I would bring people to the lab and I would crunch their fingers a little bit and I would crunch them for longer periods and shorter periods and increasing pain and the increasing pain remember the pain suit I developed years later anyway then I would ask them so how painful was this oh how painful was the previous one and which one would you rather do if you have to choose one of those to do again and then like all good academic projects I got more funding I moved to electrical shocks and and sounds I even developed a pain suit in the Media Lab which was particularly critically interesting and at the end of this whole process what I learned was that the nurses were wrong I learned that I would have had less pain if they would have had longer treatment with lower intensity I learned it I would have had less pain if they would have started from my head which was more painful it moved slowly toward my feet which was less less painful decreasing trend and I learned that I would have been better off if they gave me breaks in the middle the question was I went I talked to them we had all kinds of discussions that's a separate story but the thing that bothered me in a more general way is how could the nurses be wrong this was something that was quite important was important to me but was also important to them this was a real big issue it was something that they had plenty of experience with and they had very good intentions it's not as if they were trying to figure out the worst way to remove my bandages and the question is how can it be that in high-stakes situations with good intention plenty of experience people nevertheless get things wrong and interestingly enough one of the the insights for why they got things wrong came to me when I went to talk to them so when I went to talk to the nurses one of my favorite nurses said what about my pain I mean hurts she said you know it was very unpleasant to do to remove the bandage for me and she said it may be what she was doing is not willing to listen to me to try out something different because it would have caused her unpleasantness now clearly it's not the right approach they should have reduced my pain and not her pain was secondary but but she basically said that maybe her reluctance to try it out maybe her reluctance to try something else was that she just did not want to expand this duration in which she was wanting it to be over as well anyway so from then on I started thinking about all kinds of other cases in which people with good intentions and plenty of experience nevertheless get things wrong and and I want you to to give you some examples of those today now I'm not going to hurt you I should say I did I did one study where I hired this eye friend it was a very attractive woman who would go ahead and recruit subjects for this pain for these paint experiments and I this was not what I told her to do but this is what she did she would come to me and she would say can I hurt you and inevitably we got a lot of subjects so so to give you some some ideas about irrationality I want to start with a couple of visual illusion so if you look at these tables and ask you what's longer the vertical axis on the table on the left or the risotto axis on the table on the right how many people here see the horizontal axis on the right being longer you really see this one as being longer now you know it's a trick right I wouldn't shown if it wasn't the trick but in fact it's very very hard to see this as as being longer now with visual illusions I can show you it's a mistake how can I show you I can put a couple of lines on the board I can animate them and to the extent that you believe me that I didn't shrink them you can say that oh yes these two tables are are actually the same but but interestingly enough with visual illusions it doesn't help in the sense that if I take the lines off and you look at this you could always of course now I see that they're exactly identical but in some sense it doesn't help you know they're identical but it doesn't help you see them as identical here's another one of my face which illusions this is by their purpose what you see is the color of this brown one brown right I just a brown what about this one kind of yellow orange can you see them as the same it turns out they're identical anybody here see them as as identical right it's it's basically impossible now what I can do again with visual illusion is hide the rest of the cube and just leave these two squares and when I do that you can see that they're actually actually identical but again it doesn't it doesn't help because if I take it off you can't you can't see them as being the same it doesn't it doesn't help right so so we have this system that make us have mistakes in the same way repeatedly and it doesn't really matter by the way I have people always think it's not correct I have a printed version so can I ask you so just check you see these two okay believe me thank you but what is the point of this the point is that our visual system is maybe the best system we have we have more forebrain dedicated to vision than to anything else we're evolutionary designed to do it and we do more hours of vision a day than we do anything else nevertheless we have the systematic repeatable mistakes in vision and you will never be able to see these tables without seeing it wrong you'll never able to see this cube and while I've cured you of the gorilla illusion in the sense that you will from now on every time you'll see this clip you will see the gorilla by no way if I cured you from there your ability to ignore information that passes in the middle of your visual field and you're just not thinking about it at the moment and if we have such mistakes in vision which is such a good system what are the odds that we don't have worse mistakes in other systems for example financial decision-making that are not as practice that we don't have evolutionary reason to do and the Audis it's very very low so what I want to show you is some examples of your rational behavior in other domains now I'm offering you do you want the blue pill or the red pill do you want to think that you're reasonable and rational and Noble or do you want to realize what kind of mistakes we make no assume we'll take the blue pill so I want to show you a couple of decision illusions mistakes people make in a regular way and to start a I want to show you this plot Eric Johnson and then Goldstein collected this data it's one of it's probably my favorite plot in all of social science and what you basically see here is the percentage of people in different countries that are willing to give their organs to donation okay and basically you see two types of countries you see countries on the right who give a lot by the way I rounded the numbers up nothing is really a hundred could be ninety nine point six and you see countries on the left that give relatively little and the question is what separates that what makes some countries give so much in some countries gives relatively little and when you ask people this question they think it has to be something substantial big it's maybe or maybe it's culture or maybe it's how much people care about each other it has to be something kind of substantial but if you look at these countries you see very similar countries you see parents Canada are very similar but nevertheless behave differently Sweden is on the right Denmark very very similar countries in many ways is on the left the Netherland is on the Left Belgium again very similar countries in many ways is on the right by the way the Netherlands got to 28% after asking every person in the country sending them a letter asking them to join the program right so so begging only gets you up to 28% Germany is on the left Austria is on the right depending on your view of European history or culture and you don't want to tell this to the French and British but you can either think of France and Britain that a similar culturally or not but but in terms of organ donation they are very different so what what could explain this this big difference yes very good now it turns out it's the form at the DMV right and here's what happens in countries where it says check the box below if you want to participate what do people do they don't check and they don't participate in countries where they says check below if you don't want to participate what do people do they again don't check but now they participate think about the responsibility of the person at the DMV who decided how the form is going to be phrased right they had the billions of dollars the responsibility on their shoulders without them realizing the extent of this now you might say you know what people just don't care after all this is what will happen to me after I die I can't be bothered to lift a pencil and make a decision because the cost in terms of effort is is higher than what I can gain from it one who cares but but in fact it's the opposite it's because we do care it's because we don't know what will happen to us when we die and how it will reflect on our families in our funeral and what kind of 3rd year student will going medical students will get their hands on our organs it's because it's so difficult it's because it's complex it's because we don't know what we want to do we just take what advice was suggested to us now you might say well you know this isn't a one-time decision there not many decisions we make one time maybe we don't have any of these problems in repeated decisions so here's another experiment by reddleman interfere in which they try the same thing with physicians so they went to a big group of physicians and they describe to them a patient you have this patient the 67 year old farmer has been suffering from hip pain you've been treating these patients for a while nothing seemed to be working so you decided to send this patient to hip replacement ok nothing seems to be working hip replacement now they haven't had the hip replacement yet but if you they're on the process to do it they're going to meet a specialist and move forward and then they told half of the physicians yesterday when you went through the formulary you looked at all kind of medication you realize there was one medication you didn't try out you forgot to try ibuprofen somehow what do you do ibuprofen or hip replacement now you'll be happy to know the majority of the physicians thought that ibuprofen is a is a better choice after all hip replacement is dangerous expensive irreversible and so on to the other group of the physicians they make a decision slightly more complex it basically said yesterday when you went through the formulary you discovered there were too many you didn't give then try ibuprofen and you didn't try to Roxy Ken what you do ibuprofen peroxy chem or hip replacement and basically what happened was that they just made the decision slightly more complex and here is what happened and I'm not saying this is what exactly physicians thought but they basically said ibuprofen paroxetine might be profit back I don't know send him to hip replacement now now the majority picked it it was enough to make the decision slightly more complex for physicians who are experts well paid practice in this thing that this actually send them again to the default option final study was was done not too far away from here anybody here in those draggers it's a very nice grocery store sheena anger and mark clapper did this study in which they got people to taste some jams and sometimes they set a jam tasting booth with six jams and sometimes doing 24 jams and the first thing they asked people is they wanted to see how many people would be would come and look at the jam tasting booth and as you would expect more jams were more exciting so when people saw 24 jams more of them approached the jam tasting booth the next thing they measured was how many jams when people actually taste turns out it doesn't matter people try gem a gem and a half now I should usually I tell my students of course nobody tried to jam and a half some people try John some tried to just the average Abbe the most important thing of course was how many people bought gems they gave people a coupon for Jam that was good for every Jam in the store not just the six and not gentleman for anyone in the store now who do you think was more likely to to buy Jam people who saw six channel 24 jams six very good so it turns out that people in the sixth Jam condition 30% of them bought Jam how many of them you think bought jam in the 24 Jam condition 10 15 3% now basically the issue is that jams are not complex it's it's sugar and some fruit but but it turns out that 24 jams are too much now generally speaking a few people have jam on the shopping list to 3% and those people were not overexcited with Jam and they were going to buy Jam and they kept on buying Jam but all the extra people who got excited over Jam but there were few of them basically lost all of this excitement when this happens and you know I you can think about what this means for search and getting a lot of fair responses here the question a they will not always selected at random but they were not more desirable than 24 good question okay so what is the point of all this the point is that we have this view of human nature what Shakespeare what what a piece of work is man how noble in reason and so on and and while we see often irrationalities in our bosses and spouses though you know tom is getting married soon and it's when we think about the market in general people think about people as being rational and we think about the products that we offer and as as for rational people now behavior economics doesn't assume that people are rational instead our model of human being is more like this and in many ways this is a sad perspective of human nature it means we're myopic easily confused we don't know what what we're doing in all the people here in the room we're doing email at the same time as listening you know we think we can do two things at the same time only later realizing we really can't and so in some sense it's a very it's a very sad view of human nature but but in a very important way it's also optimistic and the way it's optimistic is I like to think about his thing about free lunches and here is the idea when you in standard economics there are no free lunches if you start from the idea that everything is at equilibrium everything is optimal what can you do to better yourself of nothing everything is optimal if you think about people as having all kinds of mistakes then you can also say well it's a sad thing about human nature but it also means there's a lot of things we can do to improve things there's all kind of mechanisms we can actually get to build to be the better world I'll come back to this later so next what I want to do is I want to show you some other examples of irrationality and the next idea I want to present in slightly more detail is the idea that we don't actually have well-defined preferences so you know we wake up every day we open the closet we decide what to wear then we open the refrigerator we decide what we want to to eat we decide how to drive to work we have this feeling that we make these decisions all the time which was this of this and these are kind of reflection of our preferences we have this internal preferences and we act on them in life what if we don't have such well-defined preferences what in fact we don't really know what we want and what we don't want that this belief that we have direct access to our brain to feel our preferences it's actually more illusory than real let me show you a couple of experiments I will come back to this so imagine I divided we divided into two groups and I asked the group on the left to write three reasons why you love your significant other and ask people on the right to ten reasons why you love your significant other and now I give you some time to write don't do it now but if if we're doing the real experiment you would write it down and then I would ask you how much do you love your significant other how like you to stay together in six months a year to maybe this is California in one month in two months and three months how likely to have an affair I ask you how much do you love that person will the fact that I present ask you to think about three reasons and ask you to think about ten reasons should change how much you love that person it should and I didn't tell you anything new about them right if I told you hey I met your significant other here some new piece of information there would be one thing but I didn't tell you anything new but of course it does matter who do you think have greater love to their spouse people came up with three reasons or ten reasons 3y y three okay they'd have to think as much it's easier that's right they're very good are you married I hope your wife can see you on YouTube at some point it turns out it turns out what's your name it turns out is exactly correct people run out and is they struggle to come up with reason number six and number seven they say how much possibly can I love that person if I can't come up with ten reason but the interesting thing is that you know our spouse is the person we know the best in the world what what should we know better and if the process of thinking about our spouse shall dramatically change how much we love them what what else can we have trust in by the way turns out the same thing goes for BMWs I don't know if anybody here has willing to admit they have a BMW but it's the same thing you ask people to think about ten reasons to get a BMW and they're less likely to do it it's also very good in teaching if I ask my students to think about fifteen ways in which my class could be improved I usually get higher teaching ratings so it is practical as you can see so and here's another example of the same principle imagine I asked you how often do you floss and I ask you to give me on a scale from zero to nine a day I'll ask you in a scale from zero to nine a month now then I gave you a number for a hygienist and I said should you call her up right to make an appointment what happens is that if you got the top scale you would answer summer on the left and if you got the bottom scale unless you don't floss at all you would answer someone more to the right but then you would go a step further and you would say my goodness I'm only flossing once or twice a day are way below the norm or in this case you would say my goodness I'm flossing eight nine times a month I'm perfectly perfectly fine and therefore be much less likely to call the hygienist again your hygiene practices is something you should know and this by the way works on everything how many hours of television do you watch a week and how much do you work and how good is your social life it works and other things it turns out we just don't know and this scale that will be given to think about something can dramatically change how we think about it as a consequence the scale designers have a big influence on our lives the next example I want to give you for from this it's about the choices that we encounter so we often depict examples of choices in this way some multi-dimensional space now imagine I gave you an option I say would you like to have a weekend in Rome all expenses paid when would you rather have a weekend in Paris all expenses paid Rome and Paris are different different food different culture different art how to decide I mean some people might have a strong preference but for many people it's hard to decide what if I added a choice that nobody wanted what if I said we can enroll more expenses paid we can Paris all expenses paid or having your car stolen now now this is a not exciting offer nobody should want it and of course it shouldn't change your preferences between Rome and Paris but what is the option of having your car stolen was not as extreme and in fact it was quite similar to one of the two options so you have Rome Paris or you could have Rome without coffee in the morning okay now if I said if I say Paris all expenses paid or Rome all expenses paid without the coffee the coffee doesn't really make a big difference right not well you could pay for it it doesn't mean you can't drink coffee just means you have to pay for it didn't include it see I bought a heckler with my previous comment but the thing is but the thing is that the contrast the contrast between Rome with coffee and Rome without coffee makes it clear that Rome with coffee is better than Rome without coffee and interestingly enough it makes it appear not better only from Rome without coffee it makes it appear even better than Paris so when you introduce Rome without coffee to the set Rome Paris people start choosing Rome and if you introduce Paris without coffee people start choosing choosing Paris now here's his and here's another example of this a while ago I went on the website for the Economist and they had the following offer you could get an online subscription for $59 son quite reasonable you could get the print subscriptions 125 again sound reasonable or you can get both 125 now independently the idea of getting both 125 seems very reasonable but it makes this middle option seems very strange right why would anybody get this option of getting part of what you could get for the same amount of money so I called up the economist and I said you know tell me what what was going on in your minds when you when you were doing this and they didn't tell me and they took it offline so I never I never learned what they were thinking but I did run the experiment and ideally I would have liked them to run with me I printed this often and gave it to a hundred MIT students and this would the market share few people wanted the online vast majority wanted the combo deal nobody nobody picked the dominated option right good for admission of this right we eliminated all the people who so so since nobody took this offer I said let's take it away by why would you waste space and an offer that nobody wants so another hundred students got the same offer but without the middle option they only got the top in the bottom now what happened is that the most popular option became the least popular the least popular became the most popular you see while while the middle option was useless in the sense that nobody wanted it it wasn't useless in the sense of helping people figure out what they wanted this basic option screamed hey look at me compared to me this one below me is fantastic in fact in fact you're getting the web for free relative to me if you look at it this way and this this all goes back to the difficulty of figuring out how much we like those things how much is this package of print and web worth together I have no idea and therefore I rely on cues in the environment including irrelevant ones to help me figure out what I'm willing to pay for things and how much how much they are worth and I also did this with a sexual attraction so often we think that when we meet somebody we know immediately if we're attracted to them or not kind of a basic idea maybe that's the reason for the you know the two minute dating speed-dating ideas so I took pictures of MIT students and I kind of paired them up I will not show you the pictures of MIT students this will be computer images to protect their privacy but I basically took pictures of MIT student to MIT okay very good there's a lot of good MIT jokes on these things but well well and and and I paired them up to be kind of like generally similar in their attractiveness okay so I would take somebody in let's call him Tom and I would take somebody let's call him Jerry and I would ask people who who do you who do you want to date now what I would do is with Photoshop I would make an uglier version of one of them so some people would see Tom Jerry and ugly Jerry and and other people will see a Tom Jerry an ugly ugly tom and and basically and basically the question is will the same thing happen and the answer is absolutely yes the the ugly similar friend always made the other person look better so ugly ugly Jerry made Jerry look the most popular ugly Tom made Tom made Tom looks more popular okay now I want to do one he's going to do an experiment would let me actually talk to you a little bit about one other one other topic so the next topic I want to talk to you about is cheating so I became interested in cheating when Enron came to the to the field and a few things kind of bothered me about this one is that some of the architects of Enron while they were in many ways evil people who stole billions of dollars from the US economy at least some of them seem to be upstanding citizens in a community they're weaving money they were volunteering the other thing is a lot of people work to the N one how could it be that they kind of collected all these evil people to to work it the same at the same time now we had this belief that it's all about the few bad apples but what if it's not about the few bad apples what if there was something about the structure of Enron that allowed otherwise normal people to cheat to that level if that's the case then we might as well learn about it and figure out what was it about the structure so I will tell you about some experiments that we did on cheating so like we usually do we start with very simple experiments so I created a sheet of paper with 20 simple math problems that everybody could solve given enough time but I didn't give people enough time so if you were in my experiment I would pass you the sheets of paper when the five minutes were over I would collect them back and I would pay you by your performance turns out the average students we tested solve about four of these problems and we pay them four dollars that's the control condition then for another group we pass the sheets of paper but when the five minutes were over we said please shred the piece of paper and tell us how many questions you got correctly okay now interestingly enough people solve seven problems of course they didn't become smart and just cheated and it wasn't the cases if a few people cheated a lot it was the case that a lot of people cheated just by a little bit now why do people cheat in standard economic thinking cheating is basically a function of how much money do we stand to gain what's the probability of being caught and how much we will be in prison so every time you pass by a gas station that's the question you should be asking yourself in this how much money is in the teal what's the chance to catch me how much time will I get in prison so we played with those how did we play with those we paid people different amounts per question some people got ten cents per correct question twenty-five fifty eight dollar two dollars five dollars ten dollars per question turns out it doesn't matter still across all of these quite large range of reward a lot of people cheated but just by a little bit then we played with the probability of being caught some people shredded the whole sheet some people shred only half the sheet so there was some evidence left some people shred the whole sheet left the room and paid himself from a ball of money that had over a hundred dollars these guys could have really walked out with a lot of money nothing change still a lot of people cheated by just by a little bit so it wasn't about how much people were standing to gain it wasn't about the probability of being caught what was there so we thought maybe what is going on is that people have kind of an individual fudge factor that we have we all want to look at yourself in the mirror and feel that we're good people right so we have some utility from this image of ourselves as good people at the same time and we want to benefit from cheating and maybe what we're doing is rebalancing these two goals we cheat up the level we would have to update our image of ourselves so we cheat after the level that we can still look at yourself in the mirror and feel good about it and that's kind of a personal fudge factor now how how would you test something like that what you would want to do is you would want to think about ways to shrink the fudge factor and you would want to create ways to increase the fudge factor so let me first tell you about the shrinking we got some people to come to the lab and we said we have two experiments for you the first one is the memory experiment the second one is a simple math experiment for the memory experiment we asked half the people to recall 10 books they read in high school and we asked the other half to record the 10 commandments then we tempted them with cheating first of all you should know that nobody in our sample remember the Ten Commandments and those who wrote in things usually invented always invented a couple but interestingly enough those who were asked to think about the Ten Commandments nobody cheated it wasn't as if the more religious people the people who remembered most the commandment she did less and the people who remember the few of the commandments you did more just contemplating the Ten Commandments eliminated cheating whatsoever so we said you know what it's very hard to bring the Ten Commandments back to to school let's play with the honor code so we got people to sign I understand that this short survey falls under the MIT honor code they shredded it no cheating whatsoever now interesting enough mit doesn't have an honor code so and this actually brings us to important point because we also tested this in Princeton anybody here went to Princeton okay so Princeton as you know has a very strong honor code in fact they they drive they spend the week with the freshmen driving honesty into them the first question is the prince on experiment working when you meet the average Princeton student on the streets of Princeton on the average MIT students on the streets of Cambridge do they cheat very differently know that you just the same level now you could theorize that this Princeton started from the worst perspective and this education brought them back to the same level but most likely this week-long attempt to create a culture of honesty just doesn't seem to be working very well the same at the same time when either the MIT students or the Princeton students sign the honor code nobody cheats so it wasn't so much about the size of the punishment which is usual Princeton and nothing at MIT it is about contemplating your own morality so so we saw this and we went to the IRA the IRS and and we said sorry okay we went to the IRS and and we said look we found out that these people signed at the top they're less likely to cheat now when people get to the bottom of the tax form it's kind of too late they've cheated why don't we try out with getting people to sign at the top and they basically told us their bigger fish to fry than this particular one but we did we did get an insurance company to work with us so so many insurance companies send people a forms in the middle of the year asking how many miles did you drive and we all have an incentive to reduce that number of mile that we pretend to have driven because our insurance policy is based on it so some people sign at the top filled in the mouth some people fill their mile sign in the bottom turn those people who sign at the top drove much more and then the people who signed sign at the bottom so that was all about decreasing the fudge factor what about what about increasing it so so I heard this story when I was a kid that that somebody comes from school what's your name David's perfect little David comes from school with a note from the teacher that says David stole a pencil from the kid who was sitting next to him and his father is furious since David I'm so embarrassed and humiliated how we will tell your mother this is not how we raised you to steal pencils and I'm just flabbergasted and beside if you need a pencil just say something I can bring you a dozen from work now now what what is the intuition here the intuition is that there's a lot of things we can tell ourselves about pencil we can say oh yes a workplace really wants us to take a pencil home because we could get more efficient we can work at home as well or we can say well even if we give it to our kids they would leave us alone and we could check out blackberry and answer a couple of more emails there's all kinds of stories we can tell about it and maybe that's an important feature maybe taking it pencil is so easy and taking ten cent from a petty cash box is so much more difficult from a morality perspective because there's all degrees of freedom in the pencil so I'll tell you about two experiments the first one is not a great experiment but still cute so I walk around MIT and I deposit six packs of cokes in the common refrigerators and then I come back and I measure what we technically call is the half lifetime of coke how how long it lasts and you wouldn't be surprised to know it doesn't last very long and and then I compare it to a situation which I take a plate and I put six $1 bills and put it in the refrigerator and I come back I come back and I check how my $1 bills are doing now the students could take a $1 bill they could go to a vending machine they could get the coke plus change but nobody ever took money and that's kind of the pencil analogy now it's not a great experiment because you often find coke in the refrigerator and dollars is not really a common a common thing so so we went we went back to the simple math experiment and we designed another condition so I felt if the people got the sheets of paper when the five minutes were over we collected it we pay them they show four problems a third of the people when they finish we ask them to shred the piece of paper and they came to us and said mr. experimenter I solved X problems give me X dollars we pay them they claim to solve seven the third group when they finished they shredded the sheet of paper and they said Mr experimenter I solved X problems give me X tokens we gave them a token per question they walk 12 feet to the side and exchange it for money in some sense we gave them a pencil but we gave them a pencil for a few seconds these students double their cheating double the cheating now for me this is perhaps the most worrisome experiment of all we got because we're moving to be an economy that is not about money it's about things that are at least one step removed for money think about a CEO who is backdating their stock options it's not money it's talks it's not stock in stock options it's not asking for more you just change the date a little bit could it be that somebody who could never imagine stealing a hundred dollars from petty cash box could nevertheless very easily back their stock options and still feel honest about their overall behavior I think the answer is absolutely yes could it be done when people cheat on PayPal and other things that are steps in room for money credit cards it's actually easier for them to be to feel honest and at the same time cheating and and there's one more point about this if you look at me as an economy and I I ran experiments on about four or five thousand students and by the way it's not just MIT we had even students from Harvard the whole range no we had students from MIT Harvard UCLA Princeton yeah also so we had a good selection of generally good people and and nevertheless a lot of them cheated but if you look at how much money I lost in my whole sample I had about five students who cheated a lot some students who basically went all the way cheated dramatically I had thousands of students which is adjust by a little bit and I lost dramatically more now if you if you make the analogy to society and of course I'm making some leaps here but if we think about blue color criminal criminals it turns out the estimated amount that we lose for arseny thefts from homes car thefts all of those things together about sixteen billion dollars a year now that's not a small amount but let's compare it to some other things the clothing industry you know what this thing called wardrobing have you heard of this you go to a clothing store you buy some clothes you wear them to a party they get torn they get smell they smoke and you return them for a full refund the clothing industry estimates they lose 16 billion dollars a year on this one one practice insurance property theft exaggerations are twenty four billion dollars a year and by the way we took the insurance people they say it's not as if somebody invents a stolen television but if they had a 31 inch television to install it becomes 34 and if it's 34 it becomes 37 and there's kind of a slight exaggeration that everybody is willing to take and when you look at it this way we pay a lot of attention to the planned crime but I think that in society in general much like in our experiments probably the most prevalent loss to the economy doesn't come from the planned crime it comes from the little fudging that that good people do just by a little bit and for example I'm willing to to bet that the amount of money people lose for exaggerated expense reports are much higher than when we lose to the whole kind of blue color crime crime market let me tell you what I think are the big lessons from from behavioral economics the first one is that we have these irrational tendencies and we have to we have to recognize them the second thing is that our intuitions are often wrong think back to the example I gave you in the beginning with the organ donation how many people here feel that if you went to the DMV and the forum would have been phrase one way or another your own decision would have been different about whether to donate your organs or not right it's very easy to sell these funny Europeans of course they will be influenced but having having the intuition that we ourselves will be influenced is incredibly hard and this is why these these tricks are incredibly powerful because they don't play into our intuitions we don't have any intuitions about them now if we make flawed decisions and we have good bad intuitions about them what what can we do and the only answer is experiments the only answer is that we have to really think about what what we do right and what we do wrong and think about what assumptions we have these kind of things and how do we how do we test them in a systematic way the next the next implication is that if you go a bar-hopping who do you want to take with you you want to take the middle guy so so you always want to take somebody who is similar but slightly less attractive than you and and if somebody else invites you to come with them you know how they think about you finally you know are we are we a Superman or we hover Simpson you know when we when we build the physical world when we build shoes and what bottle water and we build chairs and all of those things we we kind of realize our physical limitations we understand where we fail we understand where we're short where we don't do well and we build the physical world to to work with that right we don't build chairs for Superman and but somehow when we move to the mental domain when we need to move to things like retirement annuities health care we somehow assume that people are perfectly rational and I think that while behavior economics is kind of depressing a little bit about our own nature that the big hope is for the people who are designing this world to say how do we want how do we want to design it and if we understood the cognitive limitation in the same way we understand physical limitations maybe we could build a better world and let me give you an example of one idea is to think about the subprime mortgage crisis so I also have a position the Boston Federal Reserve Bank and my job is to argue with the local economists from time to time and a few years ago we had a debate about interest-only mortgages now interest-only mortgages mean that every month you can decide just to pay the interest or pay the interest plus some of the principal from an economic perspective this is a wonderful thing because you increase flexibility the person who is borrowing can now decide every month what's the right thing for them to do in fact one of my friends in the bank found out that people with higher credit card debts will more likely take interest only more Edge's and he's adhesive wonderful smart people they're stuck with his bad credit card debt they're going to take the interest-only mortgage and then I going to pay back the credit card sort of assumptions there of course but that was his his idea um but I said think about how difficult it is to compute what is the optimal amount of mortgage for you to get how would you even go about computing that it's incredibly hard you have to think about your current income and future income and future market and your other expenses and you have to think about just incredibly difficult to figure out so what do people do they figure it out no they don't they go to the bank they say how much would you lend me and the bank said I'll let you 30% it's okay that's what I'll take now what the bank is telling them they would lend them is not the right question to the right answer they should asking how much do I want to borrow not how much I can borrow that's what the Mac second boer how much I should be borrowing it's not about the risk the bank is willing to take is how much you as an individual want to click but because it's so hard to figure out people just don't now we created this interest only mortgages now if people borrow the same amount they would have extra flexibility but if people all of a sudden went and borrowed more they brought the whole amount that they could they would increase they would not increase the flexibility in any way and you just expose themselves to much higher risks in fact that's what we saw but I think if we understood how difficult it is you know in instant economics we think that people would pursue their best interest but people would pursue their best interest if they know what it is that they're trying to pursue and if it's too hard to compute hardly going to do it now imagine for example that instead of giving people a mortgage calculator they told them what's the maximum they could borrow we would give them a mortgage calculator on how much they should be borrowing nobody wants to have have their house foreclosed by at the same time we have to give people tool to figure out how they how they deal with this and ok let me tell you a last thing is we do experiments all the time and if you want to register to participate in some experiments and have you now to be tested you're very welcome it's predictably rational calm and I want to end by doing a little study with you open the box so I'm going to give I have a few books I'm going to give to some of you congratulations congratulation there's not there's not promising you just you just cost the whole line I have to give you one of course modulations you want to get out of here why don't you go ahead not random it's planned goodness this cruel okay okay congratulations okay okay so now now here is what I want you to do there's there's a few people in the audience who have a new fantastic book that I particularly like and the quite a few of you who don't have it and and what I would like you to do is to think about how how valuable is this book so imagine that the people who own who own the book I would ask you how much money would you be willing to would you charge what's the minimum at you would charge to give away your book right you have you have this beautiful blue and orange book how much money would you demand to part with that and imagine I ask the people who don't have the book how much money would you be willing to spend to get such such a book think about the number for a second just think about the dollar number for people own the book how much you would need to be compensated people who don't have the book how much you would be willing to pay okay assuming everybody has a number the people who don't own the book how many of you would be willing to pay less than $2 to get this book I'm going home okay you okay so listen tell I shouldn't have never done I should have said a hundred started okay now the people who who have the book how many of you are willing to part with it for $2 now here's that's the basic story the basic story is the moment we give are you willing to listen you don't have one give me second the basic story is the following the moment we give somebody something they start evaluating more they start thinking about it as more as more fat but I gave it randomly it's not as if I saw the craving in your eyes and gave it to the people who who wanted it more but the moment you own something you think differently on it and this is why the people who own these books think they're wonderful and fantastic and the people who don't just don't see the particular attraction and this by the way we just did a study on the idea called not invented here so now if you if you know this phrase that so we took a group of people in the New York Times and and we asked them to evaluate ideas so these were kind of ideas to solve world problem idea to solve hunger to solve water problems and so on and sometimes they evaluate an idea of a week a kind of a one-line idea and sometimes we gave them 50 words and we ask them to generate an idea first and then evaluate it but we doctored the world such as we knew what they're going to generate they're going to generate the same idea that the other people just got it turns out and people generate the idea they thought they were wonderful they're willing to donate more money to the cause they're willing to work harder and the point is that there is something kind of special about everything that is ours we're special of course we're all special and the moment something is ours either given to us or own ideas we over value it and like many of these things in behavioral economics not only do we over value it but we don't understand how much we will over value at the moment it will become become ours okay so thank you very much

Channel: Talks at Google

Views: 194,626

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Keywords: talks at google, ted talks, inspirational talks, educational talks, Predictably Irrational: The Hidden Forces That Shape Our Decisions, Dan ariely, psychology ted talk, predictably irrational, philosophy ted talk, philosophy

Id: VZv--sm9XXU

Length: 56min 2sec (3362 seconds)

Published: Wed Jul 09 2008