Dissecting People's 'Predictably Irrational' Behavior

Dan Ariely

hide captionBehavorial economist Dan Ariely is the author of Predictably Irrational.

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When Dan Ariely was 18, an explosion — of a large magnesium flare — left 70 percent of his body covered with third-degree burns. He spent three years in an Israeli burn unit.

As a behavioral economist, Dan Ariely studies the way people make economic decisions.

His conclusion? We don't do it the way economists typically say we do.

Instead, he finds, humans are "predictably irrational," which is also the title of his latest book.

Predictably Irrational explains how the reasoning behind those decisions is often flawed because of the invisible forces at work in people's brains: emotions, expectations and social norms.

"Our willingness to pay, it turns out, is not just a function of the utility of the pleasure that we expect to get from [the item], it's also influenced by all kinds of irrelevant factors that change our psychology but not our economic reasoning," Ariely says.

Ariely is on the faculty of the Massachusetts Institute of Technology; he's currently on leave and teaching at Duke University.

He talks to Robert Siegel about his experiments, which involve activities such as mock auctions, trick-or-treating and selling chocolate to college students. He also explains how he discovered that the "allure of free" tempts people to give up something better and why behavioral economics is important for policymaking.

Excerpt: 'Predictably Irrational'

Cover of 'Predictably Irrational' by Dan Ariely

So we live in two worlds: one characterized by social exchanges and the other characterized by market exchanges. And we apply different norms to these two kinds of relationships. Moreover, introducing market norms into social exchanges, as we have seen, violates the social norms and hurts the relationships. Once this type of mistake has been committed, recovering a social relationship is difficult. Once you've offered to pay for the delightful Thanksgiving dinner, your mother-in-law will remember the incident for years to come. And if you've ever offered a potential romantic partner the chance to cut to the chase, split the cost of the courting process, and simply go to bed, the odds are that you will have wrecked the romance forever.

My good friends Uri Gneezy (a professor at the University of California at San Diego) and Aldo Rustichini (a professor at the University of Minnesota) provided a very clever test of the long-term effects of a switch from social to market norms. A few years ago, they studied a day care center in Israel to determine whether imposing a fine on parents who arrived late to pick up their children was a useful deterrent. Uri and Aldo concluded that the fine didn't work well, and in fact it had long-term negative effects. Why? Before the fine was introduced, the teachers and parents had a social contract, with social norms about being late. Thus, if parents were late — as they occasionally were — they felt guilty about it — and their guilt compelled them to be more prompt in picking up their kids in the future. (In Israel, guilt seems to be an effective way to get compliance.) But once the fine was imposed, the day care center had inadvertently replaced the social norms with market norms. Now that the parents were paying for their tardiness, they interpreted the situation in terms of market norms. In other words, since they were being fined, they could decide for themselves whether to be late or not, and they frequently chose to be late. Needless to say, this was not what the day care center intended.

But the real story only started here. The most interesting part occurred a few weeks later, when the day care center removed the fine. Now the center was back to the social norm. Would the parents also return to the social norm? Would their guilt return as well? Not at all. Once the fine was removed, the behavior of the parents didn't change. They continued to pick up their kids late. In fact, when the fine was removed, there was a slight increase in the number of tardy pickups (after all, both the social norms and the fine had been removed).

This experiment illustrates an unfortunate fact: when a social norm collides with a market norm, the social norm goes away for a long time. In other words, social relationships are not easy to reestablish. Once the bloom is off the rose — once a social norm is trumped by a market norm — it will rarely return.

The fact that we live in both the social world and the market world has many implications for our personal lives. From time to time, we all need someone to help us move something, or to watch our kids for a few hours, or to take in our mail when we're out of town. What's the best way to motivate our friends and neighbors to help us? Would cash do it — a gift, perhaps? How much? Or nothing at all? This social dance, as I'm sure you know, isn't easy to figure out — especially when there's a risk of pushing a relationship into the realm of a market exchange.

Here are some answers. Asking a friend to help move a large piece of furniture or a few boxes is fine. But asking a friend to help move a lot of boxes or furniture is not — especially if the friend is working side by side with movers who are getting paid for the same task. In this case, your friend might begin to feel that he's being used. Similarly, asking your neighbor (who happens to be a lawyer) to bring in your mail while you're on vacation is fine. But asking him to spend the same amount of time preparing a rental contract for you — free — is not.

Excerpted from Predictably Irrational by Dan Ariely. (c) Copyright 2008 by Dan Ariely. Reprinted with permission of HarperCollins Publishers. All rights reserved.

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The Hidden Forces That Shape Our Decisions

by Dan Ariely

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