Dan Ariely, behavioral

economist

*ok, so maybe it’s still partly about economics. But a recent talk by Dan Ariely shed some light on the quirky, human aspects of our financial decision-making. 

A few days ago I saw Dan Ariely speak at MIT as part of the Media Lab’s Center for Future Banking.  The Center is sponsored by major banks like Bank of America,  so in that context Ariely spoke about his research and how it relates to the current financial problems we’re facing. 

Ariely is known as a ‘behaviorial economist’, which is to say he studies how people relate to money.  I’ve been following his work for a few years now, but recently he’s been getting a lot more attention for his book Predictably Irrational and regular NPR radio series. 

So Ariely’s big thesis is that we incorrectly assume people behave rationally, always acting in their own self  interest and maximizing their personal gain. As a society we enact policies that assume these economic principles.  For example, we increase penalties as crimes get bigger, because we assume people will weigh the risk vs. reward and decide the increased jail time is not worth the payoff. 

But reality is different. People do not always behave rationally, especially when money is involved.  And here is where we get to the current events surrounding the ongoing financial meltdown.  

Ariely’s experiments show that people will cheat or steal, but how much they steal is not determined by external factors as much as it is upon our own self-image.  We steal as much as we can as long as we can look ourselves in the mirror.  As much as we can rationalize, as much as we can justify stealing that is how much we will.  

One experiment involved having participants complete a quiz, and then self-report the number of completed answers.  The participant was then paid $1 for each answer.  It was obvious one could cheat; the question was, would they and how much? 

The control group averaged 4 completed questions, worth $4.  The test group averaged $7, implying that they self-reported 3 more questions than they actually deserved.  Test subjects were also more likely to cheat if someone (an actor) obviously cheated from the start — they would just follow his lead and cheat in the same fashion, as if the actor was validating their actions.  

Another test tried substituting tokens instead of cash.  The idea was to see if people are more likely to steal if they are stealing things that do not remind them directly of the monetary value of what they are stealing. Tokens, credit card numbers, etc. As it turns out, Ariely’s experiment shows that people are more likely to steal the tokens — which they can exchange for cash just a few feet away — than they are to steal the cash directly.  It is more abstract, we can rationalize it to ourselves easier, and we can deny that it is really stealing anything of value.  

How this applies to Wall Street is pretty obvious. Take executive compensation, and the back-dating of stock options.  Stock isn’t real money (although it can be sold immediately and electronically for cash in your bank account), so that becomes easy to rationalize.  Stock options aren’t even stock, they are a ‘right’ to purchase, so that is even easier to rationalize as a non-valuable good.  And in the case of back-dating options, we’re not even talking about executives stealing or giving themselves more of those — just changing the dates around a little.  In this light, we can see how executives who engage in this illegal practice can justify and defend these actions as “not really stealing”.

Other psychological links to the financial world: 

• People want to see the banks that made poor lending decisions suffer — even if it means they have to hurt themselves (by paying) in the process. 
• Business students are taught how important diversification is, and yet still concentrate a lot of their own worth into their own company’s stock — like Bear Sterns, which later collapsed.

I haven’t yet installed the SDK, but it looks promising.  Google also announced a $10M prize purse for developers building Android apps, although I’m not sure the fires really need all that stoking — the media buzz around this platform has captured enough interest that I’m sure we’d see some amazing handset apps even without the prizes.

If you haven’t read my previous post, be sure to check out the Android demo at the upcoming MoMo Boston event.

The event is being held in conjunction with the Mobile Internet World conference in Boston — free passes are available, details on the MoMoBoston site. This may very well be the first time the public gets a glimpse at the Android platform, so it should be a fun evening.

This weekend was Harvard Business School Cyberposium 13, a conference of technology and business leaders. It’s interesting in that the entire conference is organized by students, and draws a pretty diverse crowd of MBA-types, tech-types, and startup entrepreneurs.

The Philip Rosedale (founder of Linden Labs, makers of Second Life) talk was more interesting than I expected. His talk walked us through the virtual world of Second Life, as he described how the simple rules of the world led to some very interesting emergent behavior when the user population began to grow. For example, SL users can earn real money by creating and selling virtual goods within the SL world, to a truly global marketplace of buyers. Unlike the web there are no currency or language barriers, since SL has its own currency and a visual mode of interaction.
I didn’t stay for the whole conference, instead I wanted to see John Palfrey speak at the Leadership Institute on the other side of campus. Palfrey heads the Berkman Center for Internet and Society at Harvard Law school. He’s been involved with internet and intellectual property law, which is how I met him during the S-DMCA hearings on Beacon Hill. But he also does some interesting research with his group at the Berkman, which I would call “social media” — how the internet and related technologies are changing the way people communicate and interact. Blogs, social networks, podcasting, RSS — the Berkman examines how all of this is affecting and changing our culture.

So Palfrey gave a talk to the Harvard Leadership Institute, about some of his own personal leadership stories. One such story was about how he was elected co-captain of his squash team, even though he was the worst player, and how he had to lead by example (playing well). Another was the idea of “managing up” when he worked as a political campaign manager, and how to push back instead of trying too hard to please. These are very familiar concepts to me, as I’ve hit my head against them numerous times. He also mentioned the importance of selling, as that is often what a job entails (even when you think it doesn’t). I’ve been thinking a lot about that lately, and how beneficial those skills would be in many careers.
He segued from that into a discussion about his new book Born Digital , about the generational differences in how we relate to technology. It was a very interactive session, which I always prefer with such an engaging speaker. He was teaching Internet and Society: Technologies and Politics of Control” at harvard extension, but it looks like someone else is teaching that course this spring.