We Are How We Decide
Think you are a rational decision maker? Behavioral economist Dan Ariely will make you think again.
By Karla Hignite
Why do we get caught up in emotional appeals when making everyday decisions? In part, it’s because we often aren’t aware of our own illogical thought processes, argues Dan Ariely, author of Predictably Irrational: The Hidden Forces That Shape Our Decisions (HarperCollins, 2008) and a scheduled general session speaker at NACUBO’s upcoming annual meeting in Boston, June 27–30.
As the James B. Duke Professor of Behavioral Economics at Duke University, Durham, North Carolina; a founder of the Center for Advanced Hindsight; and visiting professor at the Media Lab at the Massachusetts Institute of Technology, Cambridge, Ariely speaks from experience. The numerous experiments he has conducted on students and other willing, or unknowing, participants through the years have served to test behaviors and rationalizations—from choices we make as consumers about how much we’re willing to spend on a cup of coffee and our ethical perceptions of what constitutes cheating to an array of everyday, big and small business decisions.
The Theory of Relativity
One theory Ariely maintains is the concept of relativity—the idea that most of us don’t know what we want unless we see it in context. Relativity isn’t necessarily a bad thing, but it can cloud our judgment or drain our capacity to make a final decision because we feel we must evaluate everything relative to something else. As a result, we become resistant to closing the door on any option, explains Ariely.
Consider a faculty hiring decision. “People look differently good to us depending on whom else you put in your pool of candidates,” asserts Ariely. Perhaps you include someone who is content where she is and would never consider moving to your institution, but as a courtesy, decides to come for an interview. Everyone is so impressed with this person that the committee can’t consider hiring someone else. In another scenario, you may determine you want to hire a new instructor fresh out of graduate school versus someone with several years of experience. Then, someone on the committee suggests adding an individual who has been teaching for five years. “Of course all the junior candidates will look terrible by comparison,” concludes Ariely.
Both instances show relativity at play: The nonserious candidate and the person with superior experience become decoys, since, by comparison, they detract from the other potential candidates by making them appear less good, argues Ariely. “I have seen cases where, because of those decoy influences, a committee doesn't hire at all.”
This past year, when Ariely was in charge of recruiting, he took a different approach. “We determined that we wanted someone more mature. I started by collecting names from committee members of people that we might be interested in, who met our criteria. Then I shared those names with the group, asking each member to vote—not on whom they wanted but whom they were unwilling to accept.” Ariely eliminated anyone for whom there wasn’t sufficient interest.
As a next step, Ariely called each candidate to determine whether, if offered the job, he or she would seriously consider accepting the position and making the move, eliminating all the “no” responses to remove any irrelevant choices. Next, Ariely compiled the three best papers for each individual and asked committee members to read each candidate’s work. “We then held a meeting to discuss those we considered to be the best candidates based on the quality of writing and articulation of ideas. At this same meeting, we voted on the one person to whom we’d offer the job, assuming the candidate delivered an acceptable interview,” notes Ariely.
“While we couldn’t avoid an interview, what we essentially accomplished by this process was to remove irrationality from the outcome,” says Ariely. “By avoiding interviews with multiple candidates, which could have invited unfair comparisons based on a single conversation, we shifted focus to make the interview the final hurdle to confirm our selection of a single candidate.”
When Social and Market Norms Collide
Some of Ariely’s research, while simple in approach, sheds profound light on the complexity of human response to specific situations and the related implications. In one instance, Ariely visited a series of student dormitory lounges. In each communal refrigerator, he placed a six-pack of Coca-Cola. In some refrigerators, he also put a plate with six $1 bills. Returning occasionally during the next several days, he noted that in all instances, the sodas had vanished within 72 hours; yet all the money remained. This experiment yielded at least one fascinating discovery: Once cash is one step removed, it becomes much easier to rationalize taking what you know doesn’t belong to you, says Ariely.
Could that help explain to some degree the recklessness of recent decision making among some Wall Street firms that invested in subprime mortgages and other risky assets? The more these pieces of paper were bought and sold, the more they lost any connection to the actual money of people who would ultimately lose their homes. “The more a decision is removed from real cash implications, the less we realize the damage we may be doing, and the harder it becomes to implicate the wrongdoers,” affirms Ariely. “I don’t think Wall Street executives were intentionally evil in their actions, but there was real conflict of interest in the flexibility of buying and selling these bad mortgage securities and derivatives. And that has no doubt led to a significant erosion of trust among many Americans.”
Ariely writes: “When a social norm collides with a market norm, the social norm goes away for a long time. In other words, social relationships are not easy to reestablish. Once the bloom is off the rose—once a social norm is trumped by a market norm—it will rarely return.”
At least, it cannot return without concerted effort. Ariely illustrates with a game of trust. “In this game, you get $10 and I get $10. You can decide if you want to give me your $10. If you do, it doubles your $10 and my $10, so that I have $40. Now, I can decide if I want to keep the money or give some back to you. Maybe I give you $25, and it doubles to $50. At any point, you and I have to decide whether we’re going to give up our money,” explains Ariely. “From a larger perspective, if we understand the rules of how to get people to trust and value reciprocation, then we can begin to consider how to build an institution to take advantage of those values.”
In a real-world example, many Americans played the trust game with Wall Street, says Ariely. “We gave our $10 and trusted these companies and lending institutions with our loans and home mortgages and retirement accounts, and they walked away. They violated that social contract and did not seem to care that they revoked our understanding of reciprocation,” says Ariely. “We have to ask why all the measures taken in the months following this crisis have done little to restore confidence and get money flowing again,” asserts Ariely. “It’s because we’re still missing the basic ingredient of trust. Until we understand and try to solve the trust problem, we’re not going to truly fix Wall Street.”
Free Lunches
Ariely’s many observations go beyond dissecting the sources of irrational behaviors and illogical systems toward discovering what he calls free lunches—the tools, methods, or policies that provide opportunities to overcome our predictable irrationality. Whereas standard economics asserts a theory of equilibrium—that you can’t really do better by behaving differently—behavioral economics maintains that many of our mistakes are predictable (and therefore preventable) because they are repeated, argues Ariely. “If we can recognize our mistakes, we can create mechanisms for improvement. In the same way we acknowledge our physical limitations and build chairs a certain height and keyboards a certain size, we can develop processes to counteract shortcomings in our decision making.”
Listeners be alert: Ariely’s anecdotal recounting of his research has the power to place each of us at the center, nodding in agreement, albeit reluctantly, and admitting “I’ve done that,” or “That’s how I think.” As with any recovery program, the first step is admitting you have a problem.
KARLA HIGNITE, Kaiserslautern, Germany, is a contributing editor for Business Officer.
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