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Books

Dan Ariely on Behavioral Economics (in San Francisco)

Overview

“…no one knows his place in society, his class position or social status; nor does he know his fortune in the distribution of natural assets and abilities, his intelligence and strength, and the like” —John Rawls “The Veil Of Ignorance”

What are the nudges or pushes that we can use to steer better behavior from governments and organizations?  How can we modify our personal behavior to mitigate the everyday consequences of our irrational decisions? Consider the kitchen as a microcosm for economic behavior. We see all forms of human behavior in the kitchen, including:

  • Procrastination
  • Experimentation
  • Procedures
  • Negotiation
  • Waste
  • Tool usage
  • Optimization & efficiency

As a consequence, we can make the appropriate nudges to optimize for one or more of these behaviors. (e.g. only picking recipes that take 30 minutes or less, agreeing to work together on cooking, etc.) Another example of an everyday behavior that exhibits these facets includes writing. Writing requires us to make a series of choices, such as:

  • Write over a weekend
  • Write in a new environment
  • Find a voice
  • Get feedback
  • The method as the driving force
  • The identifiable victim

How do we accelerate our ability to make better decisions? One way to determine this is by studying when and why we fail, and how we can get better. We should ask ourselves how we fail, and when we make mistakes, how can we make things better. We should also determine how much cognitive energy should we make on big decisions, and how we inculcate better habits. One way of doing this is to:

  • Be much more deliberate about making big decisions
  • Be aware of how bad habits occur and how to inculcate good ones

    Behavior and Happiness

    We should learn to be aware of the happiness of giving something away. Studies with Starbucks gift-cards show that people are happier when they give them away then if they use them themselves. Similarly, giving Pharma sales reps the ability to spend $15 on their colleagues returned $79 in productivity, while spending it on themselves returned only $10. We are wired to give to increase the social bonds between us. Converseley, psychological research has shown that we perceive people to be “lucky” without analyzing what “luck” is. It turns out, that to be lucky, we should try more often in order to get luckier, eliminate things that don’t work quickly, and then quickly follow the things that do work. We can maximize happiness by considering what we are willing to give up, and to consider the long-term benefit of short-term giving. Employers can optimize happiness for employees by providing a corporate social policy program.

    Behavior and Healthcare

    Decision making in healthcare is gated by a number of extrinsic factors, such as when we get a second opinion. Psychology research has shown that healthcare is optimized when doctors need not like their patients, and patients do not like (but respect) their doctors. We also need to look at the economic motivations for poor health. For example, the housing market in the USA drives behavior at the cost of domestic violence, divorce and fraud, since people want to move to good neighborhoods for better schools. (Frank, R. “Darwin’s Economy.”)

    Behavior and Income Inequality

    What is the right way to reduce income inequality in the USA? It turns out that, while unemployment suppresses wage gains, some very wealthy people serve as a motivation. In the long-run, taxes and education are the only two ways to reduce income inequality. Unfortunately, schools play a very small part of a child’s education (~20%). It turns out that the length of summer break plays a major role in children’s retention of knowledge. It also turns out that, because saving doesn’t have a physical instantiation in our day-to-day physical lives, we do not value it. However spending has many direct and consequent actions. How do we make savings a regular part of everyday life?

    Conclusion

    “You are what you measure” – we can only devote our attention to so many behaviors. In order to change a behavior, you must first measure it.

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