Dan Ariely: Why Humans Are Hard-Wired to Make Irrational Decisions Around Money

[adam-taggart-2 (Adam Taggart)]

This week, we thought we'd resurface one of our first podcast interviews, which explores the human factor behind monetary and fiscal policy. The discussion was recorded back in early 2011, yet correctly anticipated the continued quantitative easing (a.k.a. "money printing") that the world's central banks have engaged in since – because we have a biological bias to "kick the can down the road" when it comes to dealing with debts. The insights within this interview will continue to have relevant predictive power as our leaders increasingly scramble to avoid the repercussions of the endgame to our economic profligacy (for example: Don't bet the farm that a Fed "taper" will actually be implemented). ~ Adam

Looking back at the carnage created by the bursting of the credit bubble, it’s natural to scratch your head and ask How did we ever let that happen? Behavioral economics exists to answer questions like this.

Chris sat down with Dan Ariely, gallivanting behavioral-economics-researcher-extraordinaire, who is breathing new life into this previously obscure field of study. The resulting interview is full of fresh, non-intuitive insights and shines light on how the human brain is often hard-wired for irrational action when it comes to money.

One of the key takeaways for us was how Dan’s research provides an empirical explanation for why inflation will likely win the day: Our mental programming leads us to prefer behavior that favors it.

Dan has a refreshing, non-traditional way of explaining the more intriguing aspects of human behavior, including:

• The overwhelming influence of emotion in driving our decision-making
• Our vulnerability to present temptations & our overestimation of our future virtuousness
• Our amazing capacity to justify irrational circumstances
• Our blindness to conflicts of interest when they work in our favor
• Why we do a poor job of appreciating future risk

Each of these played a role in the excessive behavior responsible for the credit crisis – and continue to hamper our ability to handle its aftermath rationally today.

Our time with Dan was fun and fascinating. If you’re not acquainted with it already, the perspective offered by behavioral economics is a valuable addition to add to your world view. It definitely has been to ours.

Click the play button below to listen to Chris’ interview with Dan Ariely:

This is a companion discussion topic for the original entry at https://peakprosperity.com/dan-ariely-why-humans-are-hard-wired-to-make-irrational-decisions-around-money/

[davefairtex]

At one level its just common sense.  But being reminded of our own tendencies and how they apply to the overall ability to effect change somehow ends up to be really fascinating.  I really enjoyed the part about global climate change.  If there's no face on the problem, only about 2% of the population ends up caring about it.
A possible action item came out of this podcast.  If somehow we come to the conclusion that we want to influence the course of events, perhaps a good way - or maybe even the only way - to do that effectively is to chronicle the impact of whatever-it-is-we-don't-like on a victim.  I'm a big charts-and-statistics guy, and I find myself influenced by the big picture. Now I realize I'm about 2% of the population.  Perhaps even less.  And so things that make me go "hmmm" just don't have the same impact on most other people.

So perhaps we need to write a short story about how Grandma saved money her whole life, and now she's running out of money and starting to eat cat food because of 0.01% treasury bonds.

 

[arthur-robey-2 (Arthur Robey)]

I think that it might be appropriate to start discussing humans in the past tense.
I don't know what will emerge from this confluence of exponential crises but I am certain that we are approaching a punctuated evolution event.

I like to fantasize that whatever emerges will be more worthy of the honourific "Sapiens". But if evolution is a random walk, the inheritor of the mantle might be a very unpleasent character. We must choose our future shape.

This is a role we have traditionally left to our females. They have always chosen whom to breed with. They must teach their daughters well to discriminate between Quality and dross. Us males have to support them in their choice.

Another exponential curve, the Singularity, may give us the power to accelerate and control the process. Would it be Godliness, squeeemishness or outrage from our females that detemining the shape of humanity is no longer their sole responsibility, that prevents us from seizing this tool? I for one would gladly allow them complete control. It has been their forte since before we became human.

Thank you for getting Professor Ariely to talk. I have sat at his feet before.

[rob-p]

That was a really great guest and a great interview.  I knew of his work, but it was a real treat to hear it all. 
One thing that has always struck me is that capitalism (emphasis on forming capital), appears to require forgoing immediate gratification to enhance future outcomes. Apparently we, most Americans, were able to do this, or at least more of this, in the past.  This was in spite of the hardwiring to "get it right now". 

Although this is only loosely tied to the points in the discussion, I think that there used to be much more of a tendency for people to "sacrifice" (key word), for various causes, patriotic and otherwise than is the case today.  For instance, the narrative is that millions of immigrants came to the US and sacrificed to build a better life for their children and so forth.  I that was probably true. But now that sort of thing seems entirely gone from the collecitve psychology.

Another example of forgoing immediate gratification - perhaps the most profound - most surely must have been the transition to agriculture, which must have required that in some years, at least, people held the next season's seed while they watched their children starving.  So, while I do believe that we are "hard wired" for the immediate, there have been cultural factors in which we have gone against the general inertia of the hard-wiring.  Through considerable effort, we can go against that grain. We should a degree of heart in that, I think.

Current consumer culture actually plays on the general tendency to "get it right now" - with contrived needs and "immediate financing" etc. I think this, in all its forms - especially advertising - is both exploitative and works to keep people at what I consider a "childlike" or immature level.  I'm associating transcending the hard-wiring with a kind of critically important maturity within the cultural context.

 I think that the people on this site, however, are probably way out on the tail of the old curve.  What I mean by that is that there are some people - ONLY A VERY FEW - who can hear an abstract argument, assess it, and act on it through going against the current norms and apparent continuing "normal conditions" of their surroundings.   Whether the abstract argument is economic, environmental (climate change) or about resources, or, as is the case here, a hybrid analysis, there really are a few who can see past the immediate and even act to preserve the planet for "future generations" and other vague conceptualizations.  Now, whether the people here have some special wiring or maybe they have been shaped by some special experiences (or both) is a good question. Certainly given the abstract nature of the arguments, intelligence must also play a role - but I don't think it's the determining factor as I've seen a whole lot of "really smart people" towing the consumer line to the max, replete with massive debt and so forth. Intelligence: maybe it's "necessary but not sufficient"?

It has occurred to me that maybe we are in a process of "natural selection" for individuals with the capacity to act on iformation about an abstract future. Maybe this is a next evolutionarily step.  Just a thought.

Anyway, truly great interview and greatly appreciated.

[oliveoilguy]

Anyone who has the forsight to found the "Center for Advanced Hindsight"  has my undividend attention.
http://advanced-hindsight.com/

[jgritter]

Arthur,
I'm suprised to hear you say that women have much choice in choosing breeding partners.  Traditionally the world has been run by aggressive, cunning and dangerous men, women and lesser men tend to be bought and sold like cattle.  If things get as bad as they might it is likley that the only choice in breeding that a woman might have is the level of violence that accompamies it.  While women might be the traditional transmitters of culture, if women value extremily violent, dangerous men because breeding with those men is likley to give thier children the greatest chance of survival (50-50 perhaps, as opposed to one in four) then that is the culture that they will transmit.

The last evolutionary bottle neck that humans passed through approximatly 70,000 years ago lead to at least 4, and likley more, differant species of the genus Homo as recently as 29,000 years ago, sapiens being the only one left.  The currant confluence of expenential curves is likley to leave hundreds, perhaps thousands of descrete pockets of extraordinary people sprinkled in all over the planet.  The breadth of the biological experiment is over whelming, the cost in humanity is unimaginable, but what ever is looking back at us from 100,000 years in the future is likely to have advanced as far from us as we have from Home erectus.

Enough pontificating for now, thanks for being out there guys, John

 

 

[yogiismyhero]

…and torture myself between what is perceived by all, the proper way to play the game and, by my gut feelings which are to play the game on the edge in order to win. I see and have witnessed for instance that all arrows point to the Fed as having a winning edge with the game today. The appearance is of a game well managed and in control. My gut however, tells me that everything must revert to the mean, and that fundamentals are a certainty. I go with my gut in all such instances using the numbers but until now it has been a failing strategy. However, I am certain that I will win when the game concludes. I am equally certain that all think I am at best eccentric and for that I just have determined it's my decision and thus can live with it. Is this what is meant by trusting your gut? The answer lies in the outcome for which I have placed my bet to preserve capital and not care so much about the adding to my capital.
For the record: I would have jumped in after the little girl. I would have left the dog for dead. I would have waited for the full box of chocolate and given half away. I have no issues wearing a condom if I were sexually active and in the singles game. I don't have a latex fetish, and I have no clue why women should be responsible for our futuristic society by the men they choose today. That, is way above my pay grade. I believe in a future, how that looks is yet determined and, I believe those futurist will deal with their issues and it will be common place and orderly. Of course after our fundamental problems have been resolved. We will go back in time are my thoughts but with better toys and certainly with less people.

I am questioning now if I was even on topic.What was the question again? ( Anyways, nice Podcast.

[myrochat]

wow!

[treebeard]

I would have landed in the 2% as well, full box later etc.  I have heard Dan before a number of times on NPR's market place Freak-a-nomics segment.  This more extended interview was certainly more interesting than the typical sound bites that you catch in the "mass media" and was very enjoyable.  Statistical analysis does have some interesting things to teach us, but I am always a bit wary about the reductionist tendancies such thinking leads to when followed exclusively without other context.
Reacting with "emotions" was contrasted with "rational" thought, as if such such states were singularities when in reality both rational and emotional states are highly complex and greatly variable. We need to be very careful about what we considered to be hard wired into human nature, I think there are better ways of understanding human nature than the statistical analysis of outward actions.

Modern western culture has trotted off in an interesting direction, it has its benefits, but also great distortions.  As Rob P pointed out, modern consumer culture has certainly accentuated certain immature tendancies in human nature.  Certainly the energy bonanza we have all been living through has created its own distortions as well. The results have been, as Rob Hopkins, founder of the transition town movement pointed out, the production of the most useless group of human being to ever inhabit the planet (perhaps specialized in ways that have very limited time horizons is more accurate).

There are periods of time in our own culture, small farming communities at the turn of the century, or further back to the iroquois (their law of seven generations comes to mind) where outcomes today predicted today by analysis would have seemed bizzare or even unbelievable.  When the 2% outcome would have been a majority. I have a feeling that the current collision with reality may start to have the same effect.