What Is Behavioral Economics?

Topic: Defining behavioral economics.

DAN ARIELY: Behavioral economists are interested in the same topics that economists are interested in: why people buy, how we make decisions, what are the right mechanisms in the market, and so on. But the starting point is different. Rather than assuming people are rational and then taking the implications of that, we have no prior beliefs. We say, let’s just see how people behave. Let’s put them in a situation in the lab, in the field, let’s see how they behave, and then as a consequence let’s make the implication, and because in those situations people often don’t behave rationally, the implications are often very different from the implications from standard economics.

Topic: Humans are out of control.

Dan Ariely: So there’re many, many examples for irrationality. There’s one way to be rational and many ways to be irrational. We exhibit lots of those. A good way to think about it is to think about emotions. So think about it. Imagine if you were in the jungle 20,000 years ago and you saw a tiger, what do you want? You want a human being in that situation to stop, to pause, to think, to take out their little Excel spreadsheet and calculate: What should I do? Should I run? Should I stay? What’s the cost, what’s the benefit? Of course not. What you want is to create a situation in which this person runs as fast as they can the moment they see the tiger, and that’s basically how emotions work.

When we see something that puts us in danger or had to do something with our sexual behavior, we turn our cognition off. It’s not that we think and we feel, we just feel. Emotion takes over and then they just execute the command, say, run as fast as you can, don’t think, don’t calculate, don’t do anything. Now, emotions still work in the same way these days even though we don’t have tigers, but now they’re evoked by other things. Somebody cut in front of us in the highway, we have some anger towards somebody, somebody in customer service upsets us, all kinds of other things happen. Emotions just work in the same way, even though nowadays they’re not as relevant to those situations.

Question: Can we train ourselves to act rationally?

Dan Ariely:     There is hope, and I think that hope basically has kind of multiple legs to it. The first thing is that I’m hoping that when people see a mistake that they know about it they might be able to fix it. So for example it turns out that “free” is a very big allure, when we see something that is free we often go for it even if it’s not good for us. But it turns out that if it wasn’t free, if it was costing us a penny, or 10 cents, or a dollar, we will not have the same allure to it.

So one of the suggestions I have to people is, when something is free, ask yourself, would I still do the same thing even if it was costing me a penny, or ten cents? It’s a range of those things. There’s a range of things in which we can read a paper, or book, or kind of have an idea about what are some irrational behaviors of other people are exhibiting and of course it’s always easy for us to see what other people are exhibiting irrationalities, and then use it as a mirror, and say, oh I can see this behavior. I see that when I date, I juggle too many options; I see that when I shop I make this mistake. I see when I make these mistakes and let me think about how to prevent it. That’s the first hope.

The second hope is for things that we would do, that would prevent us from getting into this mistake. So for example; have you ever gone to lunch when you were vowing to be on a diet and then the waiter comes with a chocolate soufflé, and you say, today I’ll have the chocolate soufflé. Of course we all do it, we all do it repeatedly, surprisingly how repeatedly. Have you ever had a situation in which you said I’m going to only practice safe sex, I really don’t want any STD’s? And then you come to the moment of temptation and the thought about condom, going to get it, and so on is just not high on your priorities, happens very often.

Now in those cases, it’s not something you could at the moment fix. You can’t see the chocolate soufflé or be sexually aroused and say, oh let me, let me fix that. I understand this is an irrational behavior. So in those situations what we need to do is to think “ex ante” and try to prevent ourselves from doing that, and there’s a whole range of those things. We could say: I know that I don’t like to exercise, so let me create appointments with friends, so that they will force me to go. I know I have a tendency to have unprotected sex, let me have condoms with me even if I don’t think it’s necessary, or let me tell the waiter at the beginning of the meal, let me ask them not to show me the dessert tray.

 

Recorded on: July 29, 2009

Duke professor Dan Ariely has little faith in human rationality.

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