Common mistakes in daily decisions

The Old Theatre at the LSE was completely packed last evening for an entertaining and riveting lecture from Dan Ariely, the author of “Predictable Irrationality”. Dan Ariely has for many years used experimental methods to discover more about many of the biases apparent in our everyday behaviour. His lecture was rich in examples and encouraged us at all times to think counter-intuitively.

The talk started with some great illusions including this one

He showed how subtle changes in the wording of opt in or opt out clauses on driving licences can have a huge effect on the percentage of drivers who are ready to give up their organs for donation in the case of a fatal accident. We learned about how conflicts in the range and complexity of choices we have arranged in front of us can lead all sorts of people - from the most skilled physicians to people choosing jam to revert back to their default decisions.

Dan Ariely emphasised that “defaults are very powerful, especially when there are many choices or the choices are complex.” And he argued that consumers frequently don’t know their own preferences to the extent that conventional equilibrium economics tends to assume. We often rely heavily on our first decisions, or common standards that have the effect of anchoring our behaviour. Getting people to change our preferences can be difficult and the solution might be to get people to consider more clearly what their preferences are in order to bring about such a change.

I loved the examples of asymmetric dominance used to guide our purchasing decisions in a certain direction (memo - when heading out on the town to meet a future partner, it makes sense to take an accomplice who is slightly inferior to you in terms of favourable attributes!).

The lecture moved on to consider herding behaviour, much of which can flow from information cascade effects. So many of our day-to-day decisions display individual herding behaviour (i.e. choosing the same decision over and over again) and much of this can be due to people remembering their previous actions much more than their preferences.

The final parts of the lecture focused on the incentives we face to cheat or commit minor crimes and the economic costs of major compared to minor crimes. Dan Ariely showed that the final effects of people cheating a small amount is cumulatively greater than the effects of people engaged in planned dishonesty; this is mainly due to the huge numerical advantage that this group holds over the genuinely bad (an unapologetic) apples in the bag. The value of theft and fraud committed within businesses is massive and so too are the ‘minor crimes’ from consumers returning products back to shops which can no longer be sold for full price! His experiments suggest that getting people at least to contemplate their morality can have a prior effect on behaviour. Making cheating feel less comfortable might be a minor change with a major impact?

Dan concluded by saying that the “goal of economics should be to give us important insights into human behaviour” but that policy-makers should spend more time considering experimental research before framing and introducing big policy decisions. There are lots of ways that a government can give away $150 bn in the form of a fiscal stimulus to support an ailing economy - cash, credit notes, and gift certificates for example. But knee-jerk tax rebates introduced with little or no experimental research findings as an underpinning risk fresh examples of government failure.

Rarely have I experienced an hour in a lecture hall that flew past so quickly! We were treated to a feast of visual illusions and a vivid journey through many of the decisions that are part and parcel of our everyday life. Any professor who can explain how the tricks that make online dating more successful might also be the cause of disillusionment with Barack Obama when we finally meet him for a coffee deserves many plaudits. My students enjoyed this lecture hugely and I urge you to watch it online when it is streamed on the LSE web site.