Learning Lessons from: Dan Ariely

On Monday Dan Ariely gave an engaging lecture at the LSE on behavioural decision theory. Here was a branch of economics which borrowed aspects of neural psychology in order to investigate the reasons for human behaviour. Geoff already gave a detailed summary of the event here but I’d like to highlight and discuss some of the most interesting points Dan put forward. This entry might be more of an intermittent running commentary, and it would be extremely helpful if you listen to the podcast first, here.

His little anecdote about nurses peeling off bandages may be easily mistaken for just another icebreaker, but the other 90% of the iceberg is actually very significant. The point he makes does not only apply to behavioural economics, it demonstrates how difficult it is for people shift away from false conventional wisdom, despite good intentions and experience. As he later explains, this could be an example of (self)-herding behaviour. But is it really irrational? Even he admits that perhaps he is underestimating the principle-agent problem present in the nurses’ (selfish, from a sceptic’s point of view) desire to minimise their own suffering rather than the patients’.

His mention of framing with regards to the opt-in/opt-out organ donation system is certainly a very topical issue. His explanation of why the opt-out system gathers much more donors than the opt-in system is because that the life-or-death decision is so hard to make that many people simply cannot process it and therefore resort to the default option and not tick that box. His example about choosing jam shows how decisions can be complicated by both quantity and quality. I actually asked him after the talk whether his research implicated that sometimes, more choice is a bad thing, to which he answered yes. We all know that even choices are subject to the law of diminishing marginal utility but he seems to draw the line where it dips into negative a lot sooner than common perception.

However, another thought occurred to me during the ibuprofen/piroxicam/hip replacement example. The proposition which he put forward was that irrelevant information can influence decisions, which would support the hypothesis that we’re not rationalising them. But what if the information is not irrelevant? Economists mostly concur that rarity has a value, so if by introducing another similar drug, or more jam, you’re giving people the perception that it’s less rare, they might be less likely to choose it. This also applies to when adding a similar yet strictly inferior option (priming – trip to Italy without espresso; The Economist; ugly students). That doesn’t mean that we’re irrational, simply that our short-term memory converges very quickly and the information we have to base our decisions on are those weak perceptions rather than concrete objective facts. Could this be described as a natural or an inherent information failure?

The last thing I want to talk about is perhaps the most important conclusion drawn out of Dan’s talk, and that’s how significant mechanism design is. Not content with winning last year’s Nobel Prize for Economics, it’s now present in psychology and Dan shows us how you can set up certain systems to encourage or discourage cheating, how everyone has a moral threshold and may be willing to “cheat a little”. However, everyone cheating a little leads to big effects, and he suggests that the Enron debacle may have unfolded as it had due to a fundamentally rotten core in its incentive design. People seem to be insensitive to risk detection rates, but sensitive to what form their cheating takes. The Coke-stealing example implies that we are more likely to steal Cokes or tokens than money. This is an interesting paradox worth investigating into – assuming similar monetary values, the only difference is their values of liquidity, and the more liquid an asset is, surely the more attractive it is in terms of utility? So why is it that it’s more morally acceptable to steal Cokes or tokens rather than the more useful money? Is this some twisted form of self-restriction, the moral equivalent of mild masochism?

Perhaps I’m just one of those stubborn LSE rational choice theorists he mentioned at the beginning of the lecture, but he is a fantastic speaker and I did thoroughly enjoy the talk. If you haven’t listened to the podcast yet and have already gotten to the end of this blog entry, you must be confused and intrigued enough to do so, here is the link again.

[Editor’s note: this is the fifth instalment of the Learning Lessons series, detailing the author’s exploits on the London lecture circuit. For further information or to subscribe to the mailing list, contact arthurmauk@gmail.com]