Standard Economics vs. Behavioral Economics
In this "Mac vs. PC"-style commercial, professor Dan Ariely, author of Predictably / Irrational (both the book and the blog), explains the difference between standard economics and behavioral economics.
"Standard Economics" (the John Hodgman "PC" in this routine) opens the dialogue by enthusing how wonderful people are for not allowing their emotions to cloud their rational thinking. "We're like supermen of the mind!," he gushes.
"Behavioral Economics" (Ariely, playing Justin Long's "Mac" part) says "Supermen? I think we're more like Homer Simpsons of the mind. We make mistakes, we're confused, we can't think about the future, we fall in love, we're vindictive." Because we're irrational, he says, we need to recognize when our cognitive blind spots are holding us back.
Behavioral economics (and behavior in general) fascinates me because it reveals our robotic and sometimes counterintuitive reactions to everything from being stuck in traffic to making decisions that affect our personal finances. Ariely, too, is fascinated by human behavior, and he's built a career on it.
Here's a video of a terrific presentation Ariely gave at the TED conference in February about why people think it's okay to cheat a little bit. Ariely started thinking about cheating during the collapse of Enron. He wondered if the cheating at Enron was being perpetrated by a few bad apples at the top, or if the corruption there was endemic.
He decided to conduct a series of experiments to understand cheating. He gave test subjects a math quiz with 20 problems and promised to give a dollar for each correct answer. The problems weren't hard to solve, but Ariely imposed a five-minute time limit, making it impossible for anyone to complete the test. After five minutes, Ariely collected the test from the volunteers, scored them, and paid them for their correct answers. On average, volunters solved four questions correctly.
Next, he tempted people to cheat. He told a new group of test takers to score their own tests and tell Ariely how many questions they got correct. These volunteers reported, on average, that they solved seven questions. The interesting thing about this, says Ariely, was that the higher average wasn't because a few people cheated a lot; rather, it was because a lot of people cheated a little. Equally interesting was the fact that the amount of cheating didn't change when the reward for a correct question increased or decreased; nor did it change when the chances of being caught cheating increased or decreased.
I'm skipping over some of the details here, but what Ariely concluded was that people have a kind of "personal fudge factor" that allows them to gain the benefits of low-level cheating without damaging their self-esteem. "On one hand, we all want to look in the mirror and feel good about ourselves, so we don't want to cheat," he said. "On the other hand, we can still cheat a little bit and feel good about ourselves. So maybe what is happening is that there is a level of cheating that we can't go over, but we can still benefit from cheating at a low degree as long as it doesn't change our impressions about ourselves."
Ariely goes on to describe other revealing experiments. For instance, paying people in tokens that they could exchange for cash doubled the amount of cheating compared to paying people directly in cash. And when people saw an outsider (like a college student wearing a sweatshirt from another university) cheating, cheating among the group went down, but when a colleague cheated, cheating among the group went up.
For more of Ariely's ideas, visit his blog, Predictably / Irrational.
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