Dan Ariely is probably the best known voice in the popularization of behavioural economics. Behavioural economics represents the most significant challenge to the ideas of classical economic theorists built around notions of more-or-less perfectly rational individuals who calculate and diligently pursue narrow profit maximisation. Building on the insights of behavioural psychology – especially in its focus on the use of experimentation to examine how people actually act in certain situations, rather than how the “should” behave – behavioural economics offers often surprising insights that undermine many of the basic assumptions of the prevailing classical model. Ariely’s book The Upside of Irrationality: The Unexpected Benefits of Defying Logic at Work and at Home (Harper, 2011) follows up the excellent Predictably Irrational (HarperCollins 2009). As the title suggests this book seeks to place a more positive spin on our irrationality, making the case that our irrationality represents much of humanity’s better nature. And, crucially, Ariely argues that we should construct our social, economic and political structures on the an understanding of how people actually behave rather than how we imagine they will or should behave.
To be sure, there is a great deal to be learned from rational economics, but some of its assumptions—that people always make the best decisions, that mistakes are less likely when the decisions involve a lot of money, and that the market is self-correcting—can clearly lead to disastrous consequences. (104-6)[ref]References are to locations in the Amazon Kindle edition.[/ref]
Of course, in many areas, we already assume that people behave irrationally[ref]I don’t like the use of word “irrationality” in this context because it carries with it a number of implicit assumptions about power relationships. The “rational” people are the men in suits making high-powered decisions on our behalf. The “irrational” are the people outside shouting and wrecking, they’re hysterical women and the incoherent mob. It seems, to me, to be impossible to reclaim the idea of “irrationality” from its negative connotations. I’d prefer a term like “instinctive” or “unreflexive” but I don’t suppose that would sell as many books… [/ref]. The design of cars, roads and the legal system surrounding them seek to preserve life on the assumption that people will often do things that do not optimise their chances of survival – driving too fast, drinking alcohol or texting on a mobile phone. And each new technology brings new potentials for bad decision-making to affect our lives in crucial ways.
When the designers of modern technologies don’t understand our fallibility, they design new and improved systems for stock markets, insurance, education, agriculture, or health care that don’t take our limitations into account (I like the term “human-incompatible technologies,” and they are everywhere). As a consequence, we inevitably end up making mistakes and sometimes fail magnificently. (136-40)
Behavioural economics hopes to “understand human frailty and to find more compassionate, realistic and effective” (142) ways to let us organise our decision-making, exert self-control and achieve their goals. Ariely is ambitious for this approach – he doesn’t just limit the scope of behavioural economics to financial choices, but extends it to the most personal aspects of life: “we can gain control over our money, relationships, resources, safety, and health, both as individuals and as a society” (145). He believe we can be perfect, he says, but improved understanding of the irrational forces that influence human choices could help us make better decisions and, crucially: “Inventors, companies, and policy makers can take the additional steps to redesign our working and living environments in ways that are naturally more compatible with what we can and cannot do.” (152)
Despite the negative connotations of irrationality, Ariely notes that our “faulty” decision making can have positive outcomes.
“Sometimes we are fortunate in our irrational abilities because, among other things, they allow us to adapt to new environments, trust other people, enjoy expending effort, and love our kids. These irrational forces help us achieve great things and live well in a social structure. The title The Upside of Irrationality is an attempt to capture the complexity of our irrationalities—the parts that we would rather live without and the parts that we would want to keep if we were the designers of human nature. I believe that it is important to understand both our beneficial and our disadvantageous quirks, because only by doing so can we begin to eliminate the bad and build on the good. (179-84)
Chapter 1: Paying More For Less
Why big bonuses don’t always work.
Ariely outlines an experiment conducted by Yerkes and Dodson in which rats in a maze were subject to electric shocks as an incentive to motivate them to learn. Small shocks worked to increase the speed of learning, but if the shocks were very powerful the rats performed worse than without any incentive. The experiment suggested to Ariely that incentives may be a double-edged sword. So he constructed an experiment in which he examined how people coped with simple tasks given large and small incentives.
We found that those who could earn a small bonus (equivalent to one day of pay) and the medium-level bonus (equivalent to two weeks’ worth of work) did not differ much from each other. We concluded that since even our small payment was worth a substantial amount to our participants, it probably already maximized their motivation. But how did they perform when the very large bonus (the amount equivalent to five months of their regular pay rate) was on the line? … the data from our experiment showed that people, at least in this regard, are very much like rats. Those who stood to earn the most demonstrated the lowest level of performance. Relative to those in the low-or medium-bonus conditions, they achieved good or very good performance less than a third of the time. (382-88)
And, Ariely’s research found, that the more complex the task the greater the negative impact of very high incentives. This has very profound implications for the highly-charged issue of executive pay and bonuses.
The conclusion was clear: paying people high bonuses can result in high performance when it comes to simple mechanical tasks, but the opposite can happen when you ask them to use their brains—which is usually what companies try to do when they pay executives very high bonuses. If senior vice presidents were paid to lay bricks, motivating them through high bonuses would make sense. But people who receive bonus-based incentives for thinking about mergers and acquisitions or coming up with complicated financial instruments could be far less effective than we tend to think—and there may even be negative consequences to really large bonuses. (448-54)
Perhaps not surprisingly, when Ariely presents these findings to bankers and highly-paid executives they tend to claim that they are “super-special individuals” who work better under stress and have little interest in working out how the bonus system might be made more effective. Designing appropriate reward systems is difficult but it is necessary, especially if as Ariely’s book suggests, high bonuses may not just fail to deliver higher performance but may actually make things worse. Ariely suggests a number of possible solutions – straight salaries, smaller but more frequent bonuses, or spreading the calculation of bonuses over a number of years – reducing the importance of individual deadlines and so reducing stress.
CHAPTER 2: The Meaning of Work
What Legos can teach us about the joy of work
Classical economic theory assumes that work is something that we do only under duress and solely with the purpose of maximising our potential economic gain. But, as Ariely notes, this notion conflicts with the way many of us actually relate to the idea of work. “Children think of their potential future occupations in terms of what they will be (firemen, teachers, doctors, behavioral economists, or what have you), not about the amount of money they will earn” (696-97). And this idea about work isn’t limited to our childhood fantasies, work is central to our identity: “if work also gives us meaning, what does this tell us about why people want to work? And what about the connections among motivation, personal meaning, and productivity?” (700-703)
Ariely constructs his argument from the notion of “contrafreeloading” – a termed coined by animal psychologist Glen Jensen who found in experiments that animals (from fish to chimpanzees) will frequently prefer food that they have to work for to food that is made freely available to them (cats, perhaps predictably, are the exception).
THE GENERAL IDEA of contrafreeloading contradicts the simple economic view that organisms will always choose to maximize their reward while minimizing their effort. According to this standard economic view, spending anything, including energy, is considered a cost, and it makes no sense that an organism would voluntarily do so. Why work when they can get the same food—maybe even more food—for free? (810-13)
Classical economists have dismissed the notion contrafreeloading amongst human subjects but it leads Ariely to consider what apart from monetary reward, confers meaning on work. This resulted in a number of experiments. One involved paying students the task of building Lego Bionicle figures – some subjects saw them immediately deconstructed to be rebuilt, others saw them set aside whole. Contrary to the notion of work solely being driven by a desire for financial reward, those who worked under “Sisyphean” conditions quickly tired of their task – constructing 7.2 Bionicles on average compared 10.6 built by those whose work appeared valued.
What this analysis tells me is that if you take people who love something (after all, the students who took part in this experiment signed up for an experiment to build Legos) and you place them in meaningful working conditions, the joy they derive from the activity is going to be a major driver in dictating their level of effort. However, if you take the same people with the same initial passion and desire and place them in meaningless working conditions, you can very easily kill any internal joy they might derive from the activity. (941-44)
Ariely notes that the conditions in factories often resemble the “Sisyphean” condition of working, removing meaning from tasks. Another experiment in which some subjects saw their work shredded immediately after completion while others simply had it viewed with a minimum of courtesy and set aside led Ariely to conclude:
…sucking the meaning out of work is surprisingly easy. If you’re a manager who really wants to demotivate your employees, destroy their work in front of their eyes. Or, if you want to be a little subtler about it, just ignore them and their efforts. On the other hand, if you want to motivate people working with you and for you, it would be useful to pay attention to them, their effort, and the fruits of their labor. (994-99)
Human motivation is complex, Ariely argues and work can’t reduced to a simple trade-off between inherent resistance to labour and the desire for cash. Too often the modern workplace, in reducing labour to meaningless, mechanical tasks exacts a human costs (as Marx predicted in his theory of the “alienation of labour”).
Modern IT infrastructure allows us to break projects into very small, discrete parts and assign each person to do only one of the many parts. In so doing, companies run the risk of taking away employees’ sense of the big picture, purpose, and sense of completion. Highly divisible labor might be efficient if people were automatons, but, given the importance of internal motivation and meaning to our drive and productivity, this approach might backfire. In the absence of meaning, knowledge workers may feel like Charlie Chaplin’s character in Modern Times, pulled through the gears and cogs of a machine in a factory, and as a consequence they have little desire to put their heart and soul into their labor. (1039-51)
And yet Ariely’s work demonstrates that it takes relatively little effort for work to be made meaningful and it can “exert a huge influence on satisfaction and productivity” (1059) – indeed in many cases it simply requires that managers (and teachers and parents) simply don’t sabotage the process of labour.
CHAPTER 3: The IKEA Effect
Why We Overvalue What We Make
Ariely begins by considering the relationship he has with a piece of IKEA furniture he constructed and notes that while it is probably not the best piece of furniture he could afford and he didn’t design it or demonstrate complex skill in its construction it meant something to him. “I suspect that the few hours I struggled with the toy chest brought us closer together. I felt more attached to it than any other piece of furniture in our house. And I imagined that it, too, was fonder of me than my other furniture was.” (1100-1101) Ariely notes the case of the sale of cake mix – originally these came containing dehydrated egg and condensed milk as part of the mix, but they did not sell. The process was too easy, too impersonal. Removing the egg and milk and demanding a minimal effort from the consumer resulted in a successful product. But how much effort does it require to build such a bond?
To study “the IKEA effect” Ariely studied how much people valued their own creations by getting subjects to make and then bid for origami models. Creators consistently valued their own work far higher than noncreators, even against high-quality, professional products. “In summary, these initial experiments suggest that once we build something, we do, in fact, view it with more loving eyes. As an old Arabic saying goes, “Even the monkey, in his mother’s eyes, is an antelope.” (1220-25)
We see companies respond to this tendency in the growing provision of opportunities for customers to customise and personalise products, though striking the right balance (between effort that encourages investment in the object and driving people away by asking too much) is delicate. However as Ariely notes:
The results of this experiment suggest that the effort involved in the building process is a crucial ingredient in the process of falling in love with our own creations. And though tailoring is an additional force that can further cause us to overvalue what we have built, we’ll overvalue it even without tailoring. (1255-57)
Ariely notes that we don’t have the same relationship with incomplete creations – the IKEA effect is reliant upon the successful completion of the task, but it can be very powerful and that the power of the effect is linked to the degree of effort we put into the task.
This leads Ariely to posit four principles of human endeavour:
The effort that we put into something does not just change the object. It changes us and the way we evaluate that object. Greater labor leads to greater love. Our overvaluation of the things we make runs so deep that we assume that others share our biased perspective. When we cannot complete something into which we have put great effort, we don’t feel so attached to it. In light of these findings, we might want to revisit our ideas about effort and relaxation. The simple economic model of labor states that we are like rats in a maze; any effort we put into doing something removes us from our comfort zone, creating undesirable effort, frustration, and stress. If we buy into this model, it means that our paths to maximize our enjoyment in life should focus on trying to avoid work and increase our immediate relaxation. (1351-60)
Again this challenges traditional economic views of the way in which subjects should rationally value objects and the work they invest in them.
CHAPTER 4 The Not-Invented-Here Bias
Why “My” Ideas Are Better than “Yours”
If we invest deeply in objects that we physically build, do we also overvalue the ideas that we come up with ourselves. Is the “Not-Invented-Here-Bias” a genuine phenomenon and how does it influence our decisions? In a study that asked people to evaluate a problem, look at suggested solutions and then come up with their own, Ariely found that participants always rated their own ideas higher than those generated by others. To rule out the possibility that the subjects’ ideas genuinely were better – or at least better fitted their particular worldview (providing an “idiosyncratic” fit) – Ariely refined the test. In the new version, subjects had to develop a solution from a limited range of words and phrases that only really allowed one possible outcome.
Again, we found that participants appreciated their own solutions more. Even when we could not attribute the increase in perceived brilliance of the ideas to objective quality or to their idiosyncratic fit, the ownership component of the Not-Invented-Here bias was still going strong. At the end of the day, we concluded that once we feel that we have created something, we feel an increased sense of ownership—and we begin to overvalue the usefulness and the importance of “our” ideas. (1482-86)
“Not-Invented-Here Bias” is a broad problem. In science, it is sometimes referred to the “toothbrush theory”: “The idea is that everyone wants a toothbrush, everyone needs one, everyone has one, but no one wants to use anyone else’s” (1507-12). In business companies “tend to create cultures centered around their own beliefs, language, processes, and products” (1544) that tends to subsume employees and undervalue ideas from outside.
Regardless of what we create—a toy box, a new source of electricity, a new mathematical theorem—much of what really matters to us is that it is our creation. As long as we create it, we tend to feel rather certain that it’s more useful and important than similar ideas that other people come up with. Like many findings in behavioral economics, this, too, can be both useful and detrimental. On the positive side, if you understand the sense of ownership and pride that stems from investing time and energy in projects and ideas, you can inspire yourself and others to be more committed to and interested in the tasks at hand… There’s also a negative side to this, of course. For example, someone who understands how to manipulate another person’s desire for ownership can lead an unsuspecting victim into doing something for him. (1563-75)
CHAPTER 5: The Case For Revenge
What makes us seek justice?
Pursuing revenge can come at a very high cost – as Ariely notes, anyone who has gone through a bad break-up or divorce can attest to this – but it the urge to pursue justice is deeply engrained and it can “serve as an effective enforcement mechanism that supports social cooperation and order. Though I’m hardly recommending taking “an eye for an eye and a tooth for a tooth,” I do suspect that, overall, the threat of vengeance can have a certain efficacy” (1603-7). Ariely notes that animal experiments show that the idea of fairness is found in chimps, who will respond angrily to other animals who do not play nicely, and that PET scans of humans show that the punishing others for infringements lights up the parts of the brain linked to pleasure.
The result is that, when subjects play trust games they tend to demonstrate far higher levels of trust and fairness than predicted by strictly rational models of human behaviour and, by the same token, when, in these games, someone betrays trust the offended subject will often go to extreme lengths – and enduring personal cost – to get revenge and inflict punishment.
Revenge and trust are, in fact, opposite sides of the same coin. As we saw in the trust game, people are generally willing to put their faith in others, even in people they don’t know and will never meet (this means that, from a rational economics point of view, people are too trusting)… Trusting societies have tremendous benefits over nontrusting societies, and we are designed to instinctively try to maintain a high level of trust in our society. (1650-55)
As Ariely notes, this goes some way to explaining the continuing public anger at the bankers and businessmen whose greed caused the recent economic crisis. We trusted them with our retirement funds, savings and mortgages and they broke that trust. And the fact that those culpable were “bailed out” without having any costs imposed on them probably increased the anger.
Ariely goes on to consider the role revenge might play in our consumer society. Reflecting on his experience with poor customer services when is new Audi broke down and the common sense of irritation we feel in dealing with businesses. To study whether even low levels of irritation might affect how people react, Ariely constructed a study in which a young actor approached subjects in a coffee bar and asked them to complete a simple test for a fee. In some instances the actor stopped, without apologising, during the explanation of the task to answer a call on his mobile and in others he was not interrupted. At the end of the task the subjects were overpaid and asked to sign a receipt.
Those who had been mildly annoyed were far less likely to return he overpaid money (14% compared to 45%): “a twelve-second phone call vastly decreased the likelihood that the participants would return the cash to the point where just a small minority of people made the honest choice” (1822-25). The implications of this study suggests that lack of civility in society may be self-perpetuating, unfocused and ever-escalating cycle of “annoyance, frustration, and revenge” (1881).
It seems that at the moment we feel the desire for revenge, we don’t care whom we punish—we only want to see someone pay, regardless of whether they are the agent or the principal. Given the number of agent-principal dualities in the marketplace and the popularity of outsourcing (which further increases these dualities), we thought this was indeed a worrisome result. (1922-25)
But, tweaking the study, Ariely found that apologies can have a powerful effect. If the actor put the phone down and said sorry, the simple act of apologising completely counteracted the effect of the annoyance.
CHAPTER 6: On Adaptation
Why we get used to things (but not all things, and not always)
As a young man, Ariely was badly injured when a phosphorous flare burned him over large parts of his body. His experiences of coming to terms, over many years, with his injuries caused him to reflect on our ability to adapt. Physically, for example, Ariely notes research that found that people who had suffered extreme injuries were better able to withstand discomfort in experiments (2147). Ariely suggests that those who have been through unpleasant treatments aimed at rehabilitation may come to associate pain with hope for improvement and so were psychologically conditioned to withstand greater discomfort.
We don’t just adapt to suffering, we also adapt to pleasure. Hedonic adaptation is a “type of emotional levelling out—when initial positive and negative perceptions fade” (2203) so while “life-altering event such as a bad injury or winning a lottery can have a huge initial impact on happiness, this effect can, to a large degree, wear off over time” (2233-34). This process can be problematic because we are relatively poor at anticipating the process of hedonic adaptation: “we don’t end up being as happy as we thought we’d be when good things happen to us, and we are not as sad as we expect when bad things occur” (2246). We usually forget to take into account the fact that life goes on and that, in time, other events (both positive and negative) will influence our sense of well-being. “The bottom line: even if you feel strongly about something in the short term, in the long term things will probably not leave you as ecstatic or as miserable as you expect”(2310-12).
Our ability to adapt is deeply seated and operates “at deep physiological, psychological, and environmental levels, and it affects us in many aspects of our lives” (2370-72).
Ariely suggests a number of ways we can get adaptation to work for us. For example, though we often seek to put off unpleasant tasks and interrupt them with breaks, actually we quickly adapt to pain or discomfort and so should aim to complete them as quickly as possible. By contrast, pleasure usually fades, so we should seek to interrupt pleasant tasks – stretching them over longer periods. Transient experiences (short holidays, a concert) are fleeting so you can’t adapt to them so a small number of these is likely to deliver more pleasure than a single large purchase.
In the end, we are all like the metaphorical frogs in hot water. Our task is to figure out how we respond to adaptation in order to take advantage of the good and avoid the bad. To do so, we must take the temperature of the water. When it begins to feel hot, we need to jump out, find a cool pond, and identify and enjoy the pleasures of life. (2482-85)
CHAPTER 7: Hot or Not?
Adaptation, assortative mating, and the beauty market
Badly scarred from his accident, the young Ariely was forced to reconsider his place in the “market” for romantic partners. This created an interest in “assortative mating” – the process by which people tend to become partners with those who are at a similar “level” in terms of physical attractiveness. Assortative mating “is not just about beauty; money, power, and even attributes such as a sense of humor can make a person more or less desirable. Still, in our society, beauty, more than any other attribute, tends to define our place in the social hierarchy and our assortative mating potential” (2567-69).
Thinking about it in economic terms, Ariely things of assortative mating in terms of how people adapt their expectations. Using data from the website “Hot or Not”, Ariely is able to dismiss the idea that people have wildly divergent views of physical beauty but that people who are rated lower in terms of physical attraction do adapt their expectations and over who they might approach as potential partners. The changed the things they valued in others.
In terms of what they were looking for in a romantic partner, those who were more attractive cared more about attractiveness, while the less attractive people cared more about other characteristics (intelligence, sense of humor, and kindness). This finding was our first evidence that aesthetically challenged people reprioritize their requirements in dating. (2704-7)
This process of adaption is profound. People who score lower on the attractiveness scale recognise beauty in others, but it is important to be clear that they are not “settling” when they chose a partner (it is not that they are spending their time secretly yearning for better-looking partners) they are genuinely developing a different set of criteria in the people they seek out. It is a powerful example of the ability of humans to work around even very fundamental drives.
we have the ability to discover and love the characteristics of our partner. Instead of merely settling for someone with scars, a few extra pounds, buckteeth, or bad hair, we really do end up changing our perspectives, and in the process increasing our love of the person who is behind the mask of their face and body. Another victory for the human ability to adapt! (2755-57)
CHAPTER 8: When a Market Fails
An example from online dating
Dating is problematic. In the modern era the traditional mechanisms which helped people get together have disappeared and without actors to coordinate opportunities (such as traditional matchmakers) meeting a partner can be very difficult. “In fact, without exaggerating too much, I think that the market for single people is one of the most egregious market failures in Western society” (2785-86). This market failure has led to the development of online dating, but Ariely is unimpressed, conducting research that has revealed that it requires a high investment of time for a very poor return.
The fundamental problem is that online dating sites treat their users as searchable goods, as though they were digital cameras that can be fully described by a few attributes such as megapixels, lens aperture, and memory size. But in reality, if prospective romantic partners could possibly be considered as “products,” they would be closer to what economists call “experience goods.” Like dining experiences, perfumes, and art, people can’t be anatomized easily and effectively in the way that these dating Web sites imply. (2839-43)
To address the problem , Ariely attempted to design an online dating system that more closely reflects the actual (time-honed) “experiential” nature of dating. The result was a system that seemed much more effective.
At the end of the day, people are the marketing-terminology equivalent of experience goods. In the same way that the chemical composition of broccoli or pecan pie is not going to help us better understand what the real thing tastes like, breaking people up into their individual attributes is not very helpful in figuring out what it might be like to spend time or live with them. This is the essence of the problem with a market that attempts to turn people into a list of searchable attributes. (2977-80)
When designers create physical products they take into account people’s physical limitations and attempt to understand what they can and cannot do.
But when people design intangibles such as health insurance, savings plans, retirement plans, and even online dating sites, they somehow forget about people’s built-in limitations. Perhaps these designers are just overly sanguine about our abilities; they seem to assume that we are like Star Trek’s hyperrational Mr. Spock. Creators of intangible products and services assume that we know our own minds perfectly, can compute everything, compare all options, and always choose the best and most appropriate course of action. But what if—as behavioral economics has shown in general and as we have shown for dating in particular—we are limited in the way we use and understand information? What if we are more like the fallible, myopic, vindictive, emotional, biased Homer Simpson than like Mr. Spock? This notion may seem depressing, but if we understand our limitations and take them into account, we can design a better world, starting with improved information-based products and services, such as online dating. (3004-14)
Markets can be useful “but to get them to achieve their full potential, we must structure them in a way that is compatible with what people can and can’t naturally do” (3021-23) – the online dating market demonstrates a failure of product design but we can change how such markets work to get them to take into account our true needs and natures.
CHAPTER 9: On Empathy and Emotion
Why We Respond to One Person Who Needs Help but Not to Many
It is easier to motivate people to act to help an individual whose is suffering than it is to react to bigger problems. In one experiment Ariely showed the subjects two films. One concentrated on a single girl, Rokia, who was suffering, the other offered statistics on a much wider crisis providing facts and figures about a disaster. Those who were shown the film about the young girl gave twice as much as those who were presented with the facts about the wider crisis. This is the “identifiable victim effect” (3120).
There are three psychological factors that influence our decisions about who we help.
- Proximity to the victim: “Closeness doesn’t just refer to physical nearness, however; it also refers to a feeling of kinship—you are close to your relatives, your social group, and to people with whom you share similarities” (3149-53).
- Vividness: “If I tell you that I’ve cut myself, you don’t get the full picture and you don’t feel much of my pain. But if I describe the cut in detail with tears in my voice and tell you how deep the wound is, how much the torn skin hurts me, and how much blood I’m losing, you get a more vivid picture and will empathize with me much more” (3159-62). The opposite of vividness is vagueness.
- The drop-in-the-bucket effect: “…it has to do with your faith in your ability to single-handedly and completely help the victims of a tragedy. (3166-68)
These factors mean that the way we respond to big issues, like global warming, do not reflect their relative importance. And research shows that responding to such issues by providing people with lots of facts and encouraging us to think rationally does not result in greater action to address problems but, instead, turns us into “equal opportunity misers” (3210) – calculation tends to crowd out compassion.
Simply put, it turned out to be extremely difficult for participants to think about calculation, statistical information, and numbers and to feel emotion at the same time. Taken together, these results tell a sad story. When we’re led to care about individuals, we take action, but when many people are involved, we don’t. A cold calculation does not increase our concern for large problems; instead, it suppresses our compassion. So, while more rational thinking sounds like good advice for improving our decisions, thinking more like Mr. Spock can make us less altruistic and caring. (3223-27)
These problems mean that we sometimes don’t step in when we should and “at other times we act on behalf of the suffering when it’s irrational (or at least inappropriate) to do so” (3234), for example during the Exxon Valdez oil spill money flooded in to help affected animals but was the money well spent? Rehabilitating a single bird cost $32,000 and an otter $80,000 – their vivid misery prompted people to act, but is it cost-effective or a sensible prioritisation of funds. By contrast, getting people to act on issues such as global warming – where individual actions can seem too small to have meaningful effect – is very difficult.
Our intuitions about how people will respond to a crisis and the forces that motivate human behaviour are frequently flawed and, indeed, attempts to encourage people to prioritise problems might actually supress compassionate responses. Since we cannot trust our intuitive responses we need to design institutions that will take into account our failings. “If we can’t trust our hearts to always drive us to do the right thing, we might benefit from creating rules that will direct us to take the right course of action, even when our emotions are not aroused” (3302-4). It is easy to get support for issues that arouse our emotions, but the easy causes are not always the one that deliver the best outcomes. Preventative health care, for example, prevents future suffering but it isn’t easy to get people to donate money to a nebulous cause. Here we need governments and NGOs to step in and redress the imbalances caused by our inherent biases:
…we should realize that we are simply not designed to care about events that are large in magnitude, take place far away, or involve many people we don’t know. By understanding that our emotions are fickle and how our compassion biases work, perhaps we can start making more reasonable decisions and help not only those who are trapped in a well. (3323-28)
CHAPTER 10 The Long-Term Effects of Short-Term Emotions
Why We Shouldn’t Act on Our Negative Feelings
Emotions are usually fleeting – brief bursts of anger or joy that quickly fade – but Ariely finds that taking decision in moments of heightened emotion can shape behaviour over the long-term. An important factor in this process is a behaviour called “self-herding” – in the same way that we tend to follow the example of someone we respect, if we see ourselves make a decision we assume it was reasonable and so we are more likely to repeat it.
Ariely conducted an experiment to test the effect of mild, temporary emotional baggage on individual’s decision-making. One set of subjects watched a cheerful video clip from a sitcom and the other set watched an angry clip from a drama, they then asked them to make a decision. Then, later, after their emotions had settled, they were asked to make further decisions to test whether there was an “emotional cascade” into their later choices.
“The ultimate game” involves two players. One is given a sum of money, say $20, which they must split, in some ratio with the other player. If the offer is accepted both players keep the money, if rejected both lose the money. A “rational actor” would accept any split – even $19-$1 on the basis that even $1 is better than nothing but this is not what happens when the game is conducted in reality: “people make decisions based on a sense of fairness and justice. People get angry over unfairness, and, as a consequence, they prefer to lose some money in order to punish the person making the unfair offer” (3458-66). Generally people are aware of how others react so, usually, people offer fairer splits ($12-$8) and these are usually accepted<ref>”I should note that there is one interesting exception to this general rule of caring about fairness. Economists and students taking economics classes are trained to expect people to behave rationally and selfishly. So when they play the ultimatum game, economic senders think that the right thing to do is to propose a $19:$1 split, and—since they are trained to think that acting rationally is the right thing to do—the economic recipients accept the offer. But when economists play with non-economists, they’re deeply disappointed when their uneven offers are rejected. Given these differences, I suspect that you can decide for yourself what kinds of games you want to play with fully rational economists and which ones you would rather play with irrational human beings” (3470-80).</ref>.
In Ariely’s experiment, after showing the videos that stirred mild emotions, he found that those who had been irritated were much more likely to reject unfair offers than those who watched the cheerful clip.
our experiment showed that the retaliatory response didn’t spring just from the unfairness of the offer; it also had something to do with the leftover emotions that arose while the participants watched the clips and wrote about their own experiences. The response to the films was a different experiences. The response to the films was a different experience altogether that should have had nothing to do with the ultimatum game. Nevertheless, the irrelevant emotions did matter as they spilled over into participants’ decisions in the game. (3506-10)
And, crucially, these decisions did tend to cascade into later decisions. Allowed to calm down and then asked to repeat the exercise those who had previously made a decision when annoyed remained more likely to reject unfair offers. Self-herding seemed to play a part in these decisions.
But the influence of the general version of self-herding suggests that decisions we make on the basis of a momentary emotion can also influence related choices and decisions in other domains even long after the original DECISION is made. This means that when we face new situations and are about to make decisions that can later be used for self-herding, we should be very careful to make the best possible choices. Our immediate decisions don’t just affect what’s happening at the moment; they can also affect a long sequence of related decisions far into our future. (3569-3575)
CHAPTER 11: Lessons from Our Irrationalities
Why We Need to Test Everything
While we take pride in our ability to make objective decisions – and sometimes we are logical – it is “it is also the case that our cognitive biases often lead us astray, particularly when we have to make big, difficult, painful choices” (3650-3655). Ariely considers the decision he had to make during his convalescence. His doctors recommended that he have his arm amputated, but he refused. Did he make the right decision? He concedes on a strict cost/benefit analysis, it may have been a mistake but there were a number of cognitive biases that influenced his decision.
- Endowment effect/loss aversion: “Losses are psychologically painful, and, accordingly, we need a lot of extra motivation to be willing to give something up. The endowment effect made me overvalue my arm, because it was mine and I was attached to it, while loss aversion made it difficult for me to give it up, even when doing so might have made sense” (3700-3707).
- Status quo bias: “Generally speaking, we tend to want to keep things as they are; change is difficult and painful, and we’d rather not change anything if we can help it” (3707-3709).
- Irreversibility: “As it turns out, making regular choices is hard enough, but making irreversible decisions is especially difficult” (3711-3712).
- Judging our ability to adapt: “I wondered about whether I could ever adapt. What would it feel like to use a hook or a prosthesis? How would people look at me? What would it be like when I wanted to shake someone’s hand, write a note, or make love?” (3715-3717)
Had it been a rational, calculated decision, without emotional attachment these factors would not have influenced Ariely’s decisions. “But I was not so rational, and I kept my arm— resulting in more operations, reduced flexibility, and frequent pain” (3718-3723). Having made a decision that was wrong, Ariely asks why not remove the arm now and end the pain? Again, there are “irrational” factors that influence his decision.
- An aversion to hospitals after years of treatment.
- Though he may be aware of his biases, they still influence him.
- He has invested many years in finding ways to live with the pain and limited function of his hand and he is unwilling to write off that effort.
- Having lived with the decision for over 20 years, he has rationalized his choices.
- More rationally, his decision to keep his arm has influenced the paths he has taken in his life that fit with “my limitations and abilities, and I have figured out ways to function this way” (3740)
The moral of this story, Ariely concludes is that it is: “very difficult to make really big, important, life-changing decisions because we are all susceptible to a formidable array of decision biases. There are more of them than we realize, and they come to visit us more often than we like to admit” (3743-3745).
Ariely draws two lessons from our “wide range of irrational behaviours”:
- We have many irrational tendencies.
- We are often unaware of how these irrationalities influence us, which means that we don’t fully understand what drives our behavior.
As a result we:
“need to doubt our intuitions. If we keep following our gut and common wisdom or doing what is easiest or most habitual just because “well, things have always been done that way,” we will continue to make mistakes— resulting in a lot of time, effort, heartbreak, and money going down the same old (often wrong) rabbit holes. But if we learn to question ourselves and test our beliefs, we might actually discover when and how we are wrong and improve the ways we love, live, work, innovate, manage, and govern”(3748-3755).
Ariely also draws a lesson for policymaking – the methodology of behavioural economics, based on experimentation to test hypotheses should be used more widely. We should not rely on “gut instinct” or engrained ideological or academic prejudices. In business and politics people have “the same decision biases we all have, and the types of decisions they make are just as susceptible to errors in judgment as medical decisions. So shouldn’t it be clear that the need for systematic experiments in business and policy is just as great?” (3807-3814)
Wouldn’t it be nice if we realized that, despite all our confidence and faith in our own judgments, our intuitions are just intuitions? That we need to collect more empirical data about how people actually behave if we want to improve our public policies and institutions? It seems to me that before spending billions on programs of unknown efficacy, it would be much smarter to run a few small experiments first and, if we have the time, maybe a few large ones as well. (3825-3829)
Humans exist on a “a spectrum between the hyperrational Mr. Spock and the fallible Homer Simpson” but “we are closer to Homer than we realize” (3830). But irrationality is not always negative:
some of the ways in which we are irrational are also what makes us wonderfully human (our ability to find meaning in work, our ability to fall in love with our creations and ideas, our willingness to trust others, our ability to adapt to new circumstances, our ability to care about others, and so on). Looking at irrationality from this perspective suggests that rather than strive for perfect rationality, we need to appreciate those imperfections that benefit us, recognize the ones we would like to overcome, and design the world around us in a way that takes advantage of our incredible abilities while overcoming some of our limitations. (3830-3837)
Being realistic about our limitations in the way in which we think and reason when we make decisions, shaping the way in which we make choices appropriately and designing our social structures to take account of our shortcomings and peculiarities can deliver better economic, social and political outcomes.