How Behavioral Economics Can Boost Your Bottom Line

Question: Are businesses rational?




DAN ARIELY: But there’s a general assumption that businesses are smarter. That they know better, and I have to say that as long I was in kind of, academia with no connection to business I assumed the same as well. But in the last two years I had some instances where I got to observe companies. I got to see what they’re doing and I think companies are actually much less rational than people, and it’s not because they’re bad. It’s because they are working in a more complex environment. Imagine that you don’t know if you like brussel sprouts or not. How difficult would it be for you to test it out, quite easy right? You spend a dollar fifty, you try it out. Imagine that business doesn’t know if one of their business processes is optimal or not. How will they test it out? Very, very tough. Not only that, but they’re testing depend on how consumers react to it.


So when they change something it’s not only that they change something, the competitors could be changing something as well. So it’s a very, very hard environment to learn something about. So we as individuals have a relatively easy time to vary things in our lives. You know, sometimes we tell this joke we see if people laugh, sometimes we tell that joke, we see how people react to it, we see what works. Businesses actually have a very hard time; they work in a competitive environment, static environment. They have a very hard time doing any experiments and because of that businesses are mostly stagnant, they’re mostly doing the same thing over and over, and they mostly work on intuition. On top of that they do one of the things I hate the most which is to use focus groups. In which part of your life would you invite 12 people that have no idea about the question in mind, to come and tell you what they think and then adapt to a decision? Would you ever do it in any domain of your life? Of course not! It sounds crazy, but for businesses it’s their way of operation, and they do it because it’s so hard to do. So, businesses I think have a huge problem, and I wish they would do more experiments.






Question: How can companies use behavioral economics to their advantage?




Dan Ariely:     So I think businesses are starting to learn something about behavioral economics. I can tell you a couple of examples. Procter and Gamble for example is facing a very interesting dilemma. They tried to create more and more concentrated laundry detergents. It’s good for everybody, it’s less plastic, it’s less shipping, it’s less space, easier to carry. But if you have this big bottle, with 90 loads, or this little bottle that’s supposed to be 90 loads, people are just not willing to pay the same amount for it. Technology is different; it’s actually more complex to do and so on. But you see this little bottle and you say, well I used to pay the same amount for this big bottle, I’m not willing to do it for the little bottle, and that’s really about consumer perception, and their association of size with value and their inability to do it. So Procter and Gamble had just started doing all kinds of experiments to try and figure out how they overcome it.


Another company is Express Scripts, they basically send you your medications in the mail and they try to get people to take generic rather than take a branded medication and to get people to be compliant with the drug and so on, and they have done recently a very nice experiment. So we know a lot about the power of default. If you had a particular way in which you’re doing something, deviate from that is going to very tough, right. If you basically saving a thousand dollars a month and I say, why don’t you settle for a thousand and ten and here’s a form for it. You’re not going to do it. So what happen is, people have branded medication and you said, you want to switch, they say no, right. It’s good for everybody, it’s good for the patient, it’s good for the company, it’s good for the insurance company but people don’t do it.


So instead of basically tempting people with switching, they said, it’s over. We don’t asking you if you want to switch. Your prescription is over, now we asked you want to go for the branded at this price or for the generic at that price? So no way you could do is just keep only what you had, you had to fill a form and you had to make a decision. They call this active choice, and they increased dramatically the number of people who are using generic medications.


So in one of our experiments we found out that when people sign an honor code in a beginning of the test they don’t cheat. But if they sign at the end of the test, it’s kind of too late, they finished cheating, and you can think about your taxes, right,  if you sign in the beginning of your taxes you might think, ‘ooh, how do I want to be, how important is honesty.’ If you finished filing all your taxes and now you’re signing something, you’re not going to go and change what you’ve cheated. You kind of made peace with it anyway. So we got an insurance company to mail people a letter asking them to report how many miles they drove last year. They do it every year, they mail these to people, but we changed the form, some people sign at the top, I declare that everything I say it will be the truth and then they reported the mileage, some people reported the mileage and then said, I declared that everything I’ve said here is the truth. The difference was 15%: the people who signed first reported to be driving 2700 miles more.




Recorded on: July 29, 2009

It’s a challenge for companies to get feedback that allows them to make changes, says Duke economist Dan Ariely.

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Politics & Current Affairs

Political division is nothing new. Throughout American history there have been numerous flare ups in which the political arena was more than just tense but incideniary. In a letter addressed to William Hamilton in 1800, Thomas Jefferson once lamented about how an emotional fervor had swept over the populace in regards to a certain political issue at the time. It disturbed him greatly to see how these political issues seemed to seep into every area of life and even affect people's interpersonal relationships. At one point in the letter he states:

"I never considered a difference of opinion in politics, in religion, in philosophy, as cause for withdrawing from a friend."

Today, we Americans find ourselves in a similar situation, with our political environment even more splintered due to a number of factors. The advent of mass digital media, siloed identity-driven political groups, and a societal lack of understanding of basic discursive fundamentals all contribute to the problem.

Civil discourse has fallen to an all time low.

The question that the American populace needs to ask itself now is: how do we fix it?

Discursive fundamentals need to be taught to preserve free expression

In a 2017 Free Speech and Tolerance Survey by Cato, it was found that 71% of Americans believe that political correctness had silenced important discussions necessary to our society. Many have pointed to draconian university policies regarding political correctness as a contributing factor to this phenomenon.

It's a great irony that, colleges, once true bastions of free-speech, counterculture and progressiveness, have now devolved into reactionary tribal politics.

Many years ago, one could count on the fact that universities would be the first places where you could espouse and debate any controversial idea without consequence. The decline of staple subjects that deal with the wisdom of the ancients, historical reference points, and civic discourse could be to blame for this exaggerated partisanship boiling on campuses.

Young people seeking an education are given a disservice when fed biased ideology, even if such ideology is presented with the best of intentions. Politics are but one small sliver for society and the human condition at large. Universities would do well to instead teach the principles of healthy discourse and engagement across the ideological spectrum.

The fundamentals of logic, debate and the rich artistic heritage of western civilization need to be the central focus of an education. They help to create a well-rounded citizen that can deal with controversial political issues.

It has been found that in the abstract, college students generally support and endorse the first amendment, but there's a catch when it comes to actually practicing it. This was explored in a Gallup survey titled: Free Expression on Campus: What college students think about First amendment issues.

In their findings the authors state:

"The vast majority say free speech is important to democracy and favor an open learning environment that promotes the airing of a wide variety of ideas. However, the actions of some students in recent years — from milder actions such as claiming to be threatened by messages written in chalk promoting Trump's candidacy to the most extreme acts of engaging in violence to stop attempted speeches — raise issues of just how committed college students are to
upholding First Amendment ideals.

Most college students do not condone more aggressive actions to squelch speech, like violence and shouting down speakers, although there are some who do. However, students do support many policies or actions that place limits on speech, including free speech zones, speech codes and campus prohibitions on hate speech, suggesting that their commitment to free speech has limits. As one example, barely a majority think handing out literature on controversial issues is "always acceptable."

With this in mind, the problems seen on college campuses are also being seen on a whole through other pockets of society and regular everyday civic discourse. Look no further than the dreaded and cliche prospect of political discussion at Thanksgiving dinner.

Talking politics at Thanksgiving dinner

As a result of this increased tribalization of views, it's becoming increasingly more difficult to engage in polite conversation with people possessing opposing viewpoints. The authors of a recent Hidden Tribes study broke down the political "tribes" in which many find themselves in:

  • Progressive Activists: younger, highly engaged, secular, cosmopolitan, angry.
  • Traditional Liberals: older, retired, open to compromise, rational, cautious.
  • Passive Liberals: unhappy, insecure, distrustful, disillusioned.
  • Politically Disengaged: young, low income, distrustful, detached, patriotic, conspiratorial
  • Moderates: engaged, civic-minded, middle-of-the-road, pessimistic, Protestant.
  • Traditional Conservatives: religious, middle class, patriotic, moralistic.
  • Devoted Conservatives: white, retired, highly engaged, uncompromising,

Understanding these different viewpoints and the hidden tribes we may belong to will be essential in having conversations with those we disagree with. This might just come to a head when it's Thanksgiving and you have a mix of many different personalities, ages, and viewpoints.

It's interesting to note the authors found that:

"Tribe membership shows strong reliability in predicting views across different political topics."

You'll find that depending on what group you identify with, that nearly 100 percent of the time you'll believe in the same way the rest of your group constituents do.

Here are some statistics on differing viewpoints according to political party:

  • 51% of staunch liberals say it's "morally acceptable" to punch Nazis.
  • 53% of Republicans favor stripping U.S. citizenship from people who burn the American flag.
  • 51% of Democrats support a law that requires Americans use transgender people's preferred gender pronouns.
  • 65% of Republicans say NFL players should be fired if they refuse to stand for the anthem.
  • 58% of Democrats say employers should punish employees for offensive Facebook posts.
  • 47% of Republicans favor bans on building new mosques.

Understanding the fact that tribal membership indicates what you believe, can help you return to the fundamentals for proper political engagement

Here are some guidelines for civic discourse that might come in handy:

  • Avoid logical fallacies. Essentially at the core, a logical fallacy is anything that detracts from the debate and seeks to attack the person rather than the idea and stray from the topic at hand.
  • Practice inclusion and listen to who you're speaking to.
  • Have the idea that there is nothing out of bounds for inquiry or conversation once you get down to an even stronger or new perspective of whatever you were discussing.
  • Keep in mind the maxim of : Do not listen with the intent to reply. But with the intent to understand.
  • We're not trying to proselytize nor shout others down with our rhetoric, but come to understand one another again.
  • If we're tied too closely to some in-group we no longer become an individual but a clone of someone else's ideology.

Civic discourse in the divisive age

Debate and civic discourse is inherently messy. Add into the mix an ignorance of history, rabid politicization and debased political discourse, you can see that it will be very difficult in mending this discursive staple of a functional civilization.

There is still hope that this great divide can be mended, because it has to be. The Hidden Tribes authors at one point state:

"In the era of social media and partisan news outlets, America's differences have become
dangerously tribal, fueled by a culture of outrage and taking offense. For the combatants,
the other side can no longer be tolerated, and no price is too high to defeat them.
These tensions are poisoning personal relationships, consuming our politics and
putting our democracy in peril.

Once a country has become tribalized, debates about contested issues from
immigration and trade to economic management, climate change and national security,
become shaped by larger tribal identities. Policy debate gives way to tribal conflicts.
Polarization and tribalism are self-reinforcing and will likely continue to accelerate.
The work of rebuilding our fragmented society needs to start now. It extends from
re-connecting people across the lines of division in local communities all the way to
building a renewed sense of national identity: a bigger story of us."

We need to start teaching people how to approach subjects from less of an emotional or baseless educational bias or identity, especially in the event that the subject matter could be construed to be controversial or uncomfortable.

This will be the beginning of a new era of understanding, inclusion and the defeat of regressive philosophies that threaten the core of our nation and civilization.