Economists of all stripes find themselves, at one point or another, thinking about how to deal with scarcity. But in his new book, The Upside of Irrationality, behavioral economist, author and self-described “social hacker” Dan Ariely makes the case that we are failing to make the most of one of the most plentiful of natural resources—human folly. Short sighted, wrong-headed or just poorly thought out decisions are available everywhere, in seemingly limitless supply and variation. As Ariely continues to till the fertile academic ground that he explored in his previous book, Predictably Irrational, he’s going farther than just exploring irrationality, using the science behind the inexplicable decisions we all sometimes make to try and harness the potential power of fuzzy thinking.
In the first pages of The Upside of Irrationality, Ariely calls attention to what he terms “the basic dilemma we have in life – there’s lots of stuff that’s really unpleasant for us in the short term, but really good for us in the long term.” As he does at many points in his book, Ariely illustrates his point with an example from his own life. “I was in hospital for many years, and one of the things I got in hospital was a liver disease. I had to take this medication, interferon, which was a very nasty medication. Every time I took an injection, I was sick for about 16 hours. Imagine yourself having to take these injections 3 times a week for a year and a half, and every one will make you very miserable.”
The drug’s brutal side effects are the main cause of the troublingly low compliance rate of many interferon patients. Ariely provides his own prescription for interferon compliance via what economists call reward substitution. “…][On] injection days, I would go to the video store and rent a few movies that I wanted to watch, and I would carry them in my backpack the whole day,” says Ariely. “When I got home, I would give myself the injection, I would get a bucket and a blanket for the side effects, the shivering and vomiting and so on, and I would pop a video right in. By doing that, I changed the timing of the reward.” In the long run, watching a movie pales in importance to keeping one’s liver in working order. “…But because it was immediate, it was actually better able to control my behavior and got me to take my medication on time, all the time.”
Using little rewards to nudge yourself along towards bigger goals is, of course, a time tested tactic that has more uses than just ensuring that hospital patients are able to swallow a particularly bitter pill. Plenty of situations we run into make fine analogs for Ariely’s predicament. “You can think about dieting like this—not so much fun in the short term, good in the long term. Safe sex—not so much fun in the short term, good in the long term. Medical compliance, savings, all of those things share the same characteristic,” Ariely explains. “And it turns out that when we face these situations, we over-emphasize the short term and under-emphasize the long term, and because of this, we do trade offs that are actually not that good for us. And that’s a place where we are clearly irrational and we makes mistakes. The upside of irrationality, in that regard, is that we can actually do things better.” Understanding when we’re making a wrong call, in many of these situations, may be the first step towards making a right one. And that’s just one of the upsides that Ariely brings us as a potential benefit of properly applied irrationality.
But while human irrationality often looks silly from a strictly economic perspective, it helps the world go round on a day-to-day basis. Living in a world populated by the strictly selfish economic maximizers that populate the pages of so many works of economic theory, Ariely points out, would be an unpleasant matter for all involved. “One of the principles of economic theory is that people should go around the whole day maximizing their best interests, their selfish interests. How would the world look if everyone did this all the time?” Ariely asks, painting a grim picture in answer. “Could you leave your wallet in your desk and go out for a walk, and when you came back, would it still be there? Could you agree with someone that they will come babysit your kids, and if something else happens that would be better for them, would they still do that? As a waiter, why would anyone ever give you a tip unless they expect to come back to the restaurant?”
“Why do people vote? Why do people help strangers? There’s lots of stuff that people do due to irrationality,” Ariely says. And in large part, he explains, it’s stuff that the rest of us are happy that they do. “Irrationality in this sense is not something bad—it’s just not something that’s part of our natural framework of what rationality is. We have this thing called social utility, which means that we care about the world and others in some very deep way.” As obvious as this may seem, it is not an idea that dovetails nicely with much economic thought. But that may be because this social utility goes much deeper than business cycles and supply curves. “All of those things are not about maximizing your own financial outcome,” says Ariely. “They’re ways in which we are deeply different from the people we depict in economic theory. Economic theory is an ideal of a person, which doesn’t always end up being the ideal.”
Ariely also delights holding common sense notions up to scrutiny, with often surprising results. Common sense, for example, holds that the prospect of huge bonuses would help investment bankers do their jobs better than they would without the prospect of fabulous checks at the end of the year. But a series of experiments that Ariely and his colleagues conducted in India, which is detailed in The Upside of Irrationality, casts suspicion on that idea. Very high bonuses, the results suggest, may actually be detrimental to performance of exactly the kinds of workers who have become accustomed to them. Ariely explains:
“In this experiment in India, we asked what happened when people got very high bonuses. We had three groups of people, and for the first group of people we said ‘If you do well on these six tasks, you will get a bonus of one day’s salary.;” A second group could make a substantially larger bonus of up to two week’s salary, and a third group could make as much as five month’s salary for a few hours of work with Ariely’s assistant.
“This was a new type of experiment for me, when we a) go to India and b) get to play with lots of money,” says a noticeably excited Ariely, not one to shy away from the enthusiasm he has for his work. “And the results, by the way, are that when we moved from the regular bonus, from the one-day to the two-week, nothing much happened. But when we went to the five-month salary bonus, performance went down dramatically. And it went down dramatically for all the tasks that involve cognitive thinking, but it went up for tasks that only require physical activity,” points out Ariely. “So when we did this with things that are just physical, like tapping on a keyboard, more money was just better. The way to understand this is to understand that money is a two edged sword – it’s a motivator, but it’s also a stressor. The question is at what point does it become a stressor.” Ariely says. “The second thing to understand is that we have relatively good control of our muscles. If I told you that for every time you jump in the next 24 hours, I’ll give you a dollar, you’ll jump a little bit. If I told you I’ll give you $1,000 dollars, you’ll jump much more. But if I told you that I would pay you based on creativity or thoughtfulness or concentration or memory, the question is can you control the creativity muscle to a larger degree and force yourself to a higher level of creativity, and the answer is no.”
In other words, offering big bonuses to people laying bricks or digging trenches may work reasonably well, but in a situation that demands more critical thinking and analytical skill, the distractions of thinking about a potential bonus may often outweigh the motivation that bonus is supposed to provide. “People have a theory that more bonuses are a better motivator. What they don’t understand is how quickly they become stressors.”
There Are Many More Irrationalities In Companies Than In Individual’s Lives
The timing of the experiment, which took place at the height of the worldwide financial meltdown, made the results even more intriguing to Ariely and his fellow researchers. “[One of the reasons] that this became really interesting is that it was just in time for the financial crisis and the discussion of bonuses, and because of that I got to have a lot of discussions with bankers about whether they deserve or don’t deserve the bonuses they get.” And how did those meetings go? “Well, you can imagine, right?” Ariely chuckles. “I spoke to a group of bankers about it and the first thing they said was that they love the results, but it doesn’t apply to them. They say ‘These results were about regular people, not about super special people.’ And basically, they said I don’t understand — there’s not enough money in the world to get them over-stressed. They need the stress to be more productive and creative and thoughtful and effective. And I’m an empirical guy, right? I told them ‘That’s possible — give me enough money and come to the lab and we’ll see.’”
To date, no one has taken Ariely up on this generous offer, though it does seem he is making some progress. “People tell me, first of all, that they think bonuses affect other people adversely. If you go into a room of bankers, and you give a talk like this, and you say ‘Who here is negatively influenced by bonuses?’ nobody raises their hand. But if you ask ‘Who thinks other people are negatively affected by bonuses?’ they raise their hands. The other thing they do say in private discussions is that during the months of October, November and December, they are very preoccupied because they’re constantly computing how much of a bonus they think they’re getting. So what they do is open an Excel spreadsheet and make an assumption and compute how much money they could get. And a few hours later, they do it again with a slightly different assumption… And so even though they won’t say that this stresses them out, they do admit that it takes a lot of their time.”
But it’s not that Ariely is on a crusade to change the way corporate bonuses are structured and handed out—that’s a little too small of a ball for his taste. What Ariely wants is at once simpler and almost infinitely more daunting – he wants to give people the tools to think smarter and make better decisions. There’s no arguing that it’s a noble goal, but there is a lot to it—not that the immensity of the task at hand is enough to intimidate Ariely, who explains what motivated him in penning his latest book. “It’s a book that says ‘Here is what we know about the science, and here are some steps you might want to take.’ I’m trying not to be prescriptive and say ‘Do these things.’ But I think there are definitely some lessons to take from it.”
Ariely’s laid back attitude about how best to help people make better decisions is reflected in the unique style of The Upside of Irrationality, which blends Ariely’s scientific research with anecdotes and stories from his own life. From taking his medicine to exploding at his superiors, Ariely uses himself as an effective example of not only how to make good decisions, but also the consequences of making bad ones. “This book has been, in some sense, a step further than the first one,” Ariely says. “I talk about myself to a much larger degree, about some of my difficulties in life and how they made me think differently. It’s very strange for popular science writing to be so personal, but I think the reason I did this is that lots of people had positive reactions to the first book.” says Ariely, who was encouraged in honing his less than orthodox science writing style by the many conversations he’s had with readers.
“A year ago, I sat next to somebody on a flight who had not only read my last book [Predictably Irrational], but who told me that through that I convinced them to install an insulin pump,” Ariely relates. “I was shocked, because I never talked to this person and I didn’t talk about insulin pumps in the book. And they went back and they told me how they thought the discussion between us through the book went, and why they thought they should put an insulin pump in. And I’ve had many discussions like this,” says Ariely. “People come to me and it’s as if we’ve already had a ten-hour discussion. I think it allows me to feel much more personal and open, because now I have faces and pictures, and even people who I think I’m writing to in the next installment… because it’s more personal, I am more invested in this book, I’m much more curious about how people will react to it.”
While Ariely’s work is personally relatable, it’s not just individuals he’s looking to reach. As anyone who has ever attended a music festival, gotten stuck at a family reunion or worked for a large company can attest, human irrationality doesn’t stop when you get enough of us together—more often than we’d like, it instead ramps up. This is as true—and as dangerous—in financial markets as it is anywhere, points out Ariely, who suggests that rather than providing a system of natural checks, markets can also serve to aggravate the consequences of common mistakes. “Imagine that we take lots of people with a biased view of the world, and we put them together in the markets, and they are the only players in the market. What will happen?,” Ariely asks. “There’s a view in which the mistakes people make are random. And if they’re random, the market can fix them, because some people will make one mistake while others will make another mistake. But predictably irrational mistakes are systematic. When we all make the same mistakes all the time and the markets aggregate these mistakes, it’s not going to help. It can actually make things much worse.”
Financial markets are not the only large entities that could benefit from a finer understanding of their own quirks and foibles. “…In the last two and a half years, I’ve gotten a chance to look at many companies…and I have to tell you that I had this view that people may be irrational, but companies would be more rational. And right now, I think this view can only be held by someone who has never worked for a company before in their life. Because the craziness that goes on in companies is just amazing. The mistakes, the lack of knowledge, it’s just crazy,” says Ariely, who is quick to point out that he doesn’t think it’s necessarily a problem of people.
Large organizations trying to make systemic changes run into the same problems as many macro-economists—as good as their ideas may be on paper, it’s very hard to do genuine experimentation on a large scale. When it comes to discovering the best policy and implementing it, Ariely observes, individuals have it pretty easy. “Imagine you don’t know if you like chicken or fish,” Ariely says. “You can try them and figure it out. Imagine if a company, though, doesn’t know whether to choose hiring procedure 1 or hiring procedure 2. It’s really hard to figure out…Companies have a situation where it’s very hard for them to learn. But because of that, I think there are many more irrationalities in companies than in individual’s lives, and it’s much harder to show them to people.”
So when can readers expect Ariely’s next work on confronting irrationality in the business sector? No time soon, says Ariely, who’s not eager to tackle the problems he sees for the same reason that businesses are often unable to. “The reason is that it would be very hard to prove scientifically. I’ve been trying to do experiments with organizations, and it’s very, very hard to get them to test anything.” Which isn’t to say Ariely isn’t looking at the big picture going forward. He very much is—just in places he feels he can make a real impact. “What I’m trying to work on next is to take this into the public policy realm,” Ariely says. “Now that we understand why people behave badly, how do we get them to take their medications on time, and care about global warming, and drive safer, and change their behavior?”