Dan Ariely is the James B Duke Professor of Psychology and Behavioral Economics at Duke University. He is the founder of The Center for Advanced Hindsight and co-founder of BEworks, which helps business leaders apply scientific thinking to their marketing and operational challenges. His books include Predictably Irrational and The Upside of Irrationality, both of which became New York Times best-sellers. as well as The Honest Truth about Dishonesty and his latest, Irrationally Yours.
Ariely publishes widely in the leading scholarly journals in economics, psychology, and business. His work has been featured in a variety of media including The New York Times, Wall Street Journal, Washington Post, Boston Globe, Business 2.0, Scientific American, Science and CNN.
Question: Will the recession change our saving habits?
Dan Ariely: Well, I'm not sure on anything, but I think in the financial domain, we suffered the great blow to our trust and to our relationship with the financial system. Look, we had a very long run of about 25 years. If you think about people who are my age, we never saw a market that was not just getting better all the time. All of a sudden, we got the big lesson about what could actually be happening. So, I think there will be a lesson that will stay with us for a long, long time.
There is another question here, which is what will happen to consumption? There is something economists call "positional goods." Positional good is something you don't care about how much you have, you just want more than the other guy. And as an example, think about sea lions. Sea lions want to be big because if they are big, they get more females. So, imagine in all the sea lions, everybody is trying to get a little bit bigger than the other person, the other sea lion, and in the process, all the sea lions becoming so big that they then die at an early age from all kinds of diseases. And you can see a metaphor for American consumption.
We don't really want a huge house, but we want the house to be slightly bigger than our neighbors, and a car that is bigger than our neighbor’s, and they're going on vacation that's slightly more expensive, and this escalation happens that things got out of hand.
Recently, I went to one of my kids' birthday parties. And you know, all the kids are there and there's this float and a clown, and this, and sushi for the adults and wine and cake and all kinds of stuff is happening. One of the parents came to me and said, “You know, I think we should scale down. I think we should all, the parents, agree to go down to have a simple, fun birthday parties.”
Now, this is exactly the problem. The problem is that the kids don't care what party they have, right? They want cake and they want to run around. Nothing else matters. But in this escalation, all the kids want parties like their friends. So, if all the friends have an amazing, expensive party, they all want the same thing. If we all got to scale down as a coordinated effort, all the kids would have been just as happy.
And I think that's actually an interesting case of whether there will be kind of social mechanisms that will organize people to scale down back. Scaling down individually is very hard. Imagine that if you go to a place where everybody is dressed nicely, and you are the only one who doesn't dress nicely. Everybody goes on vacations to a great place and you go to the Jersey shore. It's very hard to do these things without an organized mechanism, but it looks to me like there might be some organized mechanisms.
Topic: Money talk
Dan Ariely: Another interesting thing that is happening in American society is that people are starting to talk about money. I don't know how you feel about this, but for a long time, nobody was talking about money. It was a secret. And it's kind of very interesting because we do lots of stuff to portray to people about how much money we have, the clothes we wear and the cars we have and the house -- they all kind of depict to other people, signal how much money we make, but we don't talk about it specifically.
And now, there's much more discussion about it. People are willing to say, what are you doing with your money?" What are you saving? What is happening? And I'm actually quite optimistic that these discussions might actually continue because these discussions are about social norms. And once you break the social norm and create a new social norm, all of a sudden it can stay with us for a long time.
Recorded on November 16, 2009