Dan Ariely: Hidden Forces that Shape Our Decisions
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By the way, conflict of interest was a major contributor to the financial crisis. Imagine if I paid you ten million dollars a year to believe that mortgage-backed securities are a good thing, and I got everybody around you to behave in the same way. The desire to see the world in a way that is comfortable for us is very powerful, and I don’t think we can escape it. What we can do, is to try to limit the amount of trouble it gets us into by taking steps to eliminate conflict of interest from our financial system, from our healthcare system and from politics. However, the sad truth is that once people are tempted with a conflict of interest, they are likely to fail, and this brings me to another point: many people think Behavioural Economics is just about ‘how stupid we are’, but it’s also about how wonderful we are. If you are a lobbyist for company X, and you come and spend time with me and tell me stories, and I learn about your family and your hobbies and so on, I am predisposed to like you, and I will want to help you. It is this basic human desire to help others that makes me susceptible to you. This is a wonderful capacity -- it’s great that we like other people and are willing to do all sorts of things for them. As we’ve discussed, conflict of interest also has a very dark side, but I would not want to program people so that they aren’t susceptible to it; while it would eliminate many decision errors, it would also mean people wouldn’t care about each other. I think we just need to better understand human nature, figure out its strengths and weaknesses, and find ways to limit the costs of the weaknesses.
When it comes to our finances, you have said that most people suffer from ‘the planning-fallacy syndrome’. What is this, and what can we do to overcome it?
The planning-fallacy syndrome resides in domains where we make ourselves promises to finish something by a certain time, but we rarely do. The reason this happens is that in life, different things tend to go wrong at different times. For example, I am late getting home nearly every day. To an outsider, it might appear as if I never learn from my mistakes, but in my defense, every day something new happens: I might get an unexpected phone call, or the printer gets jammed. If the exact same thing happened every day – say the printer got stuck every day for ten minutes -- I would quickly learn how to work around it, but that isn’t what happens. And like most of my fellow humans, I haven’t taken the time to calculate the range of things that might go wrong, to take an average of the probability of each one happening, and assume that something will go wrong every day, thereby indicating that I should leave 17½ minutes earlier in order to get home on time. This same phenomenon happens with our finances. We all have certain fixed expenses – mortgage, electricity bills and so on, but things also go wrong sometimes and surprise us. The car breaks down or the roof starts leaking, and because different things go wrong at different times, we don’t plan for any of it. It’s not as if we even plan for the average amount of bad things happening: we don’t plan for any bad things at all, so we need some help with that. Imagine if somebody could go over your expenditures and say, ‘Over the last three years you have been spending 20 per cent of your income on unexpected expenses; let’s see if we can better account for that.’ It’s a tall order to say that we can change the way we think all the time. Instead, what we need to do is design and implement something automatic that creates solutions for such problems. Maybe a smarter credit card or budgeting tool.
Who has a better chance of making a good decision, an individual or a group?
If you are asking, ‘In the history of the world, have more groups or more individuals made better decisions?’, I would suspect the answer is individuals, but that is not to say that groups don’t have potential. The problem is, when you get groups of people together, they often make bad decisions for a number of reasons. When President Bush decided to invade Iraq, he got his cabinet together and said, ‘I think we should invade; what do you think?’, and he looked for responses from his cabinet members, one after the other. Imagine being the third person to answer: your boss has just said he thinks it’s a good idea, and two other cabinet members have agreed. Are you going to say, ‘No I don’t think we should’? Not likely. So groups have attributes that actually hinder their ability to make good decisions, and issues around authority and conformity are two of the most common ones. If you get a group of 20 people together to express their opinions, you should not expect to actually get the value of the independent opinions of 20 people. On top of that, there’s also political correctness and lots of other stuff that often eliminates good decisions.
Don’t get me wrong -- a multiplicity of opinions is a great thing, but it doesn’t necessarily materialize just because you get lots of people into a meeting, and we have to create solutions that address this. A few years ago, my colleagues and I created a piece of software called ‘anti-groupware’, where we basically tried to remove most of the negative social consequences of group decisions: people voted anonymously, and nobody else could see their vote; if you didn’t feel like you knew much about the topic, you couldn’t vote; and if you thought somebody else knew it better than you, you could assign your vote to them, but that other person (the one voting for you) would not know about it. Taking such steps can allow a group’s potential to flourish. What we need is broad-based interventions that enable the benefits of diverse groups, without the hidden costs.
Dan Ariely is the author of the New York Times’ best-seller Predictably Irrational: The Hidden Forces That Shape Our Decisions (HarperCollins 2009). He is the James B. Duke Professor of Behavioural Economics at Duke University, with appointments to the Fuqua School of Business, the Center for Cognitive Neuroscience and the Department of Economics.
[This article has been reproduced with permission from Rotman Magazine, published by the University of Toronto's Rotman School of Management.]
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Geetha
