He blames human emotion for the sinking economy.

Question: How are behavioral economics detrimental to the economy?

Dan Ariely:     So, you know, think about this economic recession. There’s a question of what is really causing us this slowdown and part of it is real and part of it is psychological and there’s no question about that. So think about somebody like me, I’m a tenured professor. There’s a very little chance I’ll lose my job, my income is basically fixed. In fact, I’m more popular now than I was before the recession because all of a sudden people realized that irrationality is more central to our life than they thought before.

What I should be doing rationally speaking is spending more money, everything is cheaper. Vacations are cheaper, good wine is cheap, there are no lines at restaurants, right. It’s a good time for somebody like me to go spending, but that’s not what I do, and the reason I don’t do it is because of the emotional component. I worry, I’m concerned, like everybody, right. We open the news and the news are designed to trigger our emotions. Trying to tell us terrible stories about individuals who lost their homes and lost their jobs, these are really touching stories that they’re really terrible, and they touch our emotional part and that really changes our behavior.

So we don’t say, “Statistically, where am I standing, what are my cost and benefits?” We look at our emotions, we’re frightened, we’re concerned, we’re worried, and we can’t bring ourselves to spend money and that basically escalates in getting the economy to become much worse.

Question: How is fear of layoffs affecting our society?

DAN ARIELY: Now the other issue is of course with individuals and their fear about their jobs, and I think people are really afraid of losing their jobs. Particularly in times like these and this is not the ultimate loss aversion. Because of that people are just not doing anything interesting and you can ask whether there’s more herding behavior, whether people are doing more what the majority is doing, whether they’re do it, taking less risk, doing less interesting stuff, because they’re kind of in a stagnation mode, catatonic mode of kind of just fear and not wanting to lose their jobs.

Recorded on: July 29, 2009