February 18 2008


February 18 2008


‘Short-term goals have an emotional component that overtakes us. Nobody says, “Today’s a good day for a colonoscopy!” '


Q What exactly is a behavioural economist?

A: Much of standard economic analysis assumes rationality. If you ask a standard economist why people don’t save enough money, they’d say it’s a meaningless statement; people are reasonable, they know what they’re doing— they might not be saving a lot because maybe they don’t have enough resources right now, maybe they want to check out how it would feel to live with their kids at retirement, maybe they really want to test out the bounds of social security. Behavioural economists, though, believe that people make all kinds of irrational mistakes, and we try to analyze them in order to create opportunities to help people out. For instance, have you ever gone to a restaurant wanting to watch your diet, but when the waiter came with a tray of desserts, you succumbed to temptation?

Q: That’s just because I’m weak.

A: Well, a standard economics perspective would say, “If you eat a cheesecake, at the end of the day, it means you are not really concerned with your weight.” Behavioural economists say, “No, people are really concerned with their weight, they just can’t handle the emotion that comes over them from getting so close to the chocolate soufflé, and as a consequence, they make a mistake and regret it later.” You have a different long-term goal than the short-term goal, and in many cases, short-term goals have an emotional

component that overtakes us and makes us forget our long-term goals. Think about health care. Nobody wakes up and says, “Today’s a good day for a colonoscopy!” Because of the fear and disgust that takes over when we think about it, we procrastinate and eventually don’t end up doing it.

Q: Speaking of irrationality, do you find people have negative expectations of you based on the fact that you have visible scars on your face and hands?

A: Yes, very much. When I meet people, I’m very sensitive to whether they shake my hand or not, and I very much categorize people by the type of handshake they give me. There are these people who kind of hold [my hand] between their thumb and their index finger.

Q: Like it’s a bug or something.

A: Yeah! I can understand that it’s not comfortable and you don’t know exactly what to do, but on my side, it’s difficult.

Q: How were you injured?

A: I was 18, at the beginning of mandatory military training in Israel. I was in a place that had some ammunition, and among the things they had were flares, these bombs that are supposed to light up the whole battlefield. One of them exploded next to me. There’s nothing glorifying about that injury, it was just a stupid accident.

Q: How did you get from lying in a hospital bed with 70 per cent of your body burned to reaching the top of your field and teaching at MIT?

A: The hospital is a completely different universe, and I was there for a long time. For months I couldn’t eat, I was fed through a tube, I couldn’t walk, I couldn’t even move. I started looking at the people around me and feeling more and more like a neutral observer because I wasn’t a part of that life anymore. I really started working on [the idea of] human irrationality through the bath treatment, which is the horror of every burn patient. Every day, sometimes twice a day, burn patients are lowered into a big metal bath filled with water and iodine to soak a little bit, and then the nurses start tearing the bandages off. Everybody’s had a BandAid removed, and it’s always a question of do you do it slowly, or fast? But when it’s 70 per cent of your body, and occurs every day, and takes more than one hour, and there’s absolutely no skin so the bandages have adhered to flesh, it’s really very intense. The nurses in my unit believed the best way to get the bandages off was by tearing them very fast, one after the other, and trying to finish quickly.

Q: To minimize the torture.

A: Right. But I thought it would be better to make it slower and more steady for a longer duration, with less pain every second. When I got out of the hospital, I wanted to test out my theory. So I created experiments [at university] in which I would hurt people in different ways. Sometimes you would get a high intensity pain for a short time, sometimes low intensity but longer duration, sometimes

'People expect some sort of correlation between the way you look and your intelligence'

pain that increased, sometimes pain that decreased—all kinds of versions, and I hurt people in all kinds of ways: with heat, with a carpenter’s vise I would crunch their finger, and so on. It turns out that the nurses were wrong: it’s much better to have a longer duration of pain with lower intensity than a shorter duration with higher intensity. It also turns out that it’s much better to start with the most painful part and end up with the least painful, to create a decreased pattern of pain over the treatment. The nurses didn’t know that. I was bothered by the fact that here were these really good people who had tons of experience—they did many of these baths every day for many years. How could they not know the right approach? And I started wondering: what are other cases in which we have a lot of experience and data but very little real knowledge?

Q: So in a very real sense, your injury shaped your career path.

A The accident was a terrible thing, but it also changed my life in some important ways. All through high school, I was in the last row of the class, making jokes, never really being involved in school. But after my injury, after getting out of the hospital, I started university, and for two years I had these bandages all over my body, to keep pressure on the scars. Everyone around me was young and healthy, and they would look at me and see this limping, brown-bandaged, Spider-Man-type image. People expect some correlation between the way you look and your intelligence—I’m not sure I would go as far as to say they expected retardation, but definitely they expected lower intelligence. I still feel a little bit of the same today. So I started participating in classes and asking questions for the first time, partly because I felt this was all I had. I was sort of invisible, the only thing you could see was my eyes, and the only way I could portray something about myself was through speaking in class.

Q: Now you portray yourself as a contrarian. In your new book, Predictably Irrational: The Hidden Forces That Shape Our Decisions, you state the centrepiece of standard economic theory, that supply and demand determine markets, is a fallacy. How so?

A: It’s not a simple, straightforward answer. Let me describe an experiment first. We went into a classroom and sold different products: keyboards, books, chocolate and so on. We asked people to inspect the products, then write down the last two digits of their social security numbers. Let’s say your last two numbers are 44. We then asked whether you’d buy each product for $44Next, we

said, “Now we’re going to have a [silent] auction, a real one where the highest bidder will pay cash for an item—please submit your bids.” Well, there was a .5 correlation between people’s social security numbers and how much they were bidding. So your first decision [regarding a purchase] can be rather arbitrary, but once you’ve made it, other decisions can be based on it. Here’s the thing: decisions about a product or service should, according to standard economics, involve a cost-benefit analysis. But it turns out, we don’t really know how to evaluate something in terms of its value. Think about something as simple as a piece of chocolate: it’s melting in your mouth, it’s oozing sweetness—how much is this experience worth? How easy is it for you to say, “Exactly 85 cents, but I will not pay 86”? It’s very hard to take an experience and translate it into monetary value. So what people do is to think about their past decisions as a starting point for their next behaviours.

Q :Alot of the experiments in your book are very cleverly designed. Is there one you left out that you really like?

A: A study that I find very interesting, that was very difficult to do but potentially quite important, asked the question, do people always perform better when you offer them more money? This is what’s driving the incredible salaries of CEOs: let’s just offer these people a ton of money based on their performance and stock performance, and they will really be driven to do well. But does being driven to do well actually help you do your best? We came up with a couple of tasks that demanded creativity, thought, concentration and memory and so on, took them to India, and got people to do them and paid them based on their performance. Some people we paid a small amount: if you do this well, you get an hourly wage, if you do it very well, you get two hours’ wages. Some people we paid a month’s wages; some people we paid six months’ wages. What we found was that when more money was at stake, people really tried harder, but actually performed worse.

Q: Was it simply anxiety about not getting the money?

A: Money is a double-edged sword. It motivates you, but beyond a certain level, it actually backfires. Imagine I said, I’ll give you $50,000 if you’re creative in the next five minutes. How much of that five minutes would you spend thinking about the money versus thinking about the task? Or think about the even worse version: in the experiment, we gave some of the people the money upfront, then said, “If you don’t do well, you’ll have to give it back.”

Q: Were they even less creative then?

A: Oh my goodness, they hated it! Two people ran off with the money. We had to stop doing it.

Q: Does recognition work better as a motivator than cash?

A: Sometimes. We live all the time in two markets: one is social, and one monetary. We apply different rules in each, and we decide to work to a different intensity in each, based on rewards. Imagine that I ask you to help change the tire of my car; next, imagine that I ask you do the same thing and tell you I’ll give you $2. Instead of thinking, “Hey, I get to help Dan, plus I get $2,” you’re actually less inclined to do it—the social value of helping is eliminated, so you only think about the money, and it seems insulting. When we move from zero to any amount, we move from a social to a financial norm. We did an experiment where we

didn’t give people money but gifts. We gave people nothing, or a tiny gift of a candy bar, or a box of Godiva chocolates, and we saw that people were not offended by the small gift, they worked hard all the time. So next we created a mixed market, where we gave the same gift but told you how much it cost us. Well, when people learned they were getting a 50-cent candy bar, they were suddenly upset and not willing to work very hard. What this says for society and businesses is, I think, quite important. M