Behavioral Economics

Remarks by Dan Ariely, author of The Upside of Irrationality: The Unexpected Benefits of Defying Logic at Work and at Home, at the SEC Investor Advisory Committee (May 17, 2010, morning session) are well worth watching. Just a few cryptic observations to whet your appetite. Duration doesn’t matter as much as intensity. High pain that goes down is less painful than low pain that increases. Useful to take breaks, if pain is going to last. He provides some great examples of visual blindspots and financial decision illusions. Opt out vs opt in inertia. Default decisions influenced more where the environment is important and complicated. The more options, the more you are likely to procrastinate. Where you are on a scale can dramatically shift your decision. Adding choices, even choices that no one wants, influences choice outcomes.

On cheating: lots of people cheat just a little, regardless of the likelihood of being caught. People who signed first cheated less than those that signed after. Cheating increased dramatically with use of tokens, one step removed from actual money. Disclosure of conflicts of interests leads people to feel free be more biased. Lots of irrational tendencies. We often don’t see them. We keep following our intuition, rather than experimenting to learn. But Ariely believes we are as limited in the cognitive domain as we are in the physical. Input from cognition much different from input from emotion… difficult to imagine what we will feel when the event happens.

It is incredibly easy to create conflicts of interest. People will feel favorable towards someone even if they simply by them a cup of coffee… it doesn’t take thousands of dollars. Higher salaries can backfire if makes you think too much of the money… it may reduce creativity. We don’t make less mistakes in investing than we do in driving but we have many more  rules for driving. He thinks we need to give investors more help… defaults that will help them save more.

See also previous post: Cognitive Bias.

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