Dan Ariely on Behavioral Economics and Avoiding Krispy Kreme

By Jeff Calareso

Dan Ariely has a Ph.D. in Cognitive Psychology from the University of North Carolina and a Ph.D. in Business Administration from Duke University. He currently serves as the James B. Duke Professor of Behavioral Economics at Duke University and is a founding member of the Center for Advanced Hindsight.'s Education Insider recently spoke with Dr. Ariely about his work in behavioral economics, including how his research can help all of us make better decisions.

Donut Your title is 'behavioral economist.' Can you describe what that means?

Dan Ariely: Let me describe what behavioral economics is from my point of view. I think of it as basically applied social science. It contrasts against economics in two important ways. First of all, economics starts with making some very, very strong assumptions about how people behave: that people are perfectly rational, that they always know what they want to do, that they make the right decisions, that they can compute everything and so on. Behavioral economics, in contrast, doesn't start with any assumptions. You're just saying, 'Let's look empirically at how people behave.'

Now, the difference comes from the fact that the observation of how people actually behave often doesn't fit this idea that people are perfectly rational. So, the starting points are very different. And now, because the starting points are very different, the implications are very different. Both standard economics and behavioral economics are not just descriptive disciplines; they attempt to be proscriptive disciplines. It means that we're not just saying how people behave, we're trying to say how people should behave or how institutions should be made and so on.

I don't care if good ideas come from sociology or anthropology or literature or philosophy. I want them to be good ideas that get some good experimental and empirical validation, and then I'm happy to adopt them. This is quite important because economics has some predictive value. It's not as if because you understand economics you've learned nothing about predicting human behavior. You just haven't learned as much as economists think you've learned. Other disciplines have things to say about human nature as well. How did you end up working in this field?

DA: My original involvement came from being in hospitals, specifically a burn unit, for a long time. And, as you can imagine, being in a burn department led me to experience lots of what I perceived as bad behaviors. My desire was to try and figure out, 'Am I right? Am I wrong? Are the nurses doing things correctly?'

When I started figuring out the experimental method, I realized that they were wrong in some important ways. And from that point on I started trying to fix things. I've always been a very practical guy and I think my interest in behavioral economics is very practical. I think about things that I think people are just not doing well and I have a chance to help. I don't think people are not doing it in most cases because they're bad, I think in many cases they're doing it because they're just not thinking very carefully, and I can help fix that. With regards to making decisions, how do people treat big decisions, like going to a particular college or going to graduate school, differently from a small decision, like deciding what to have for breakfast?

DA: That's a very good question, and one we don't know much about, so take everything I'm going to say with a grain of salt. The first thing is that it's about repeated decisions versus non-repeated decisions. What we know that happens in repeated decisions is that we just settle in to a habit. The habit could be good or bad, but the habit is basically the idea that you're not really thinking about the decision. You're just assuming that what you've done before is a good decision and you keep doing the same thing.

This is not good, big or small, per se. The big decisions are ones with which we have a very hard time. I know that big decisions are overwhelming to an extent that small decisions are not. And I expect that to happen because people don't spend enough time on them, relatively speaking.

Think about big decisions. For example, who is going to be your financial advisor? How many people actually interview many financial advisors? Not that many people. And you can look at the question of deciding on a mortgage. How many mortgage brokers do they go to? That one we know: the answer is one, sometimes two, and rarely more.

The same is true with other very important decisions: when we get married, how many people do we sample before we decide to do it? Compare that to a decision about a stereo or a digital camera. It's not that people spend less time deciding who to get married to than what digital camera to buy, but I think it's not proportionately connected to the importance. If you think a decision about being married is 1,000 times more important, I don't think that people spend that proportion of time. Why do you think that is?

DA: Two reasons. First, I think it's because it's overwhelming. And because it's overwhelming, the state of uncertainty is really unpleasant. I haven't gotten official statistics on it, but somebody told me that when men are being told that they have prostate cancer, the majority of them make a decision during that meeting with the physician about what treatment they're going to have. Very few go home, do research, start talking to all kinds of experts and then make up their minds. And I think you could try to intuit why this is happening - it's because it's so unpleasant. Do you think age plays any role? For example, would a 16 year-old behave differently from a 30 year-old?

DA: Yes, I think in some cases it can. People of different ages have different interests, different friends and are exposed to different environments. That will lead them to make different decisions. I think the deeper question is, 'Are there different people?' It's not just, 'Do they encounter a different environment?' They're internally different people. One of the big lessons from social sciences over the last 30 years has been that people's decisions are largely driven by their environment.

If you put the same person in different environments, they're likely to make different decisions. If you take people, adults and non-adults, and put them in different situations, you'll find different things. But if the question is, 'Are there basic, fundamental changes that happen as we grow up more than what you would expect to see from just change in hormonal activity?' I think the answer is probably much less than we think. Could you speak about what steps people can take to improve their decision-making?

DA: First, I think it's very important to step back and examine your decision. It's important to separate whether this decision is done because that's how we've always done something or whether this is the right thing to do. That's incredibly important, yet we can't do it all the time.

Second, a big lesson for me would be to test our human intuition. If one of the big lessons is that our intuitions are often not accurate, then it begs the question of how do you test your intuitions? How do you figure out what you might be wrong about and then have a chance to fix it moving forward?

Testing our intuition, by the way, is easier said than done. For example, imagine your intuition is that you would enjoy a vacation in the Caribbean more than you would enjoy hiking to Machu Picchu. Now we're asking you, 'Is this correct?' You're just not sure. Why don't you test it out? Unfortunately, to test it out is quite expensive. So how do you test your intuition?

DA: That's the thing. You have to do things that you don't think would work out. You almost have to go against your intuition and see if you're wrong. You should do this on those things for which you have intuition but no data.

I'll give you one example. Whom should you date? People mostly think they should date people like them. They think we should date people from our own race and background and religious preferences and so on. Is this correct? How would you know?

Without trying it, how would you ever figure this out? And you can see why it's difficult and expensive and complex. All of a sudden, I tell you, 'Hey, take people that you think you should be dating and date other people.' But if you don't do that, how would you ever find out? In addition to decision-making, you've written about the difficulty of waiting and self-control. You've used the example of the hot doughnut sign at Krispy Kreme and how difficult it is to show self-control and avoid stopping for a doughnut. How can we train ourselves to have better self-control? Are there particular tricks to it?

DA: Once you get excited about something, it's very hard to exert self-control. But what you can do is try to prevent yourself from having a self-control problem to start with. Imagine you have two strategies: one is to be able to resist a chocolate soufflé when someone puts it next to you, and the other is to realize that you would fail and ask the waiter not to bring it in the first place. The second one is going to be more successful. So if you think about tricks, the tricks are basically to find out how we fail and try to make sure we don't get to these situations.

I'll give you another example. Think about long-term savings. It turns out automatic deduction is a very good tool. You just don't have the money to spend. If you have any money, I can teach you all the financial logic in the world. It's really hard to control yourself and to do the right thing. But if you understand your problem, you might say, 'Okay. I'm just going to do something that will not allow me fail.' Are there studies that you've done on human behavior where the results were completely unexpected or surprising?

DA: We have quite a few of those. Things don't always turn the way I expect them to happen. For example, we just finished an experiment in which we tried to increase the marginal tax rate. Some people worked for low wages, some people worked for high wages and some people worked for a higher wage but they were taxed at such a high rate that they actually got the low wages.

Imagine that you can either can make $20 per hour, $10 per hour or $20 per hour but taxed at a rate of 50%. And the question is, 'What will the last one be like?' Will it be like the $20 or will it be like the $10? And it was incredibly similar to the $20. Not the same, but it was very similar, which basically suggests that people just have no sensitivity to marginal tax rates. Do you mean that the group earning $20 at a 50% tax rate, so their net was $10, felt like they were earning $20?

DA: The amount of effort they put in was very close to the people who made $20 per hour. Even though they were only getting $10 because their high tax rate took $10 out of every $20?

DA: That's right. It surprised me how similar it was. We basically found, at least in the initial study, that people just don't care about taxes as much as we thought. If you listen to the political debate, you would think that the moment you just mention the word tax, people will stop working. So it surprised me how insensitive people were in that regard.

Here's another example. This was not a study we did but a study that surprised us. It started from this: there was discussion about salmon that have been injected with the DNA of an eel. It turns out that they grow much faster, they can be raised in a much better environment and it makes fish much cheaper. And there was a huge public outcry against this fish and I didn't know if it was just a few individuals here and there or if this was something more general. So we started looking into this and it turns out that people have this incredible aversion to non-natural stuff.

I don't know where this aversion is coming from, but now we're starting to look into it just because it's so interesting. Why are people so averse to our history of genetically-modified things? The tomatoes that we have now are not the tomatoes that were around 50 years ago. But somehow people have this incredible aversion to genetically-modified foods. I'm not just talking about the Whole Foods/Birkenstock-wearing people. It seems like it's more general. So where is this coming from? Where is this aversion? You've been conducting research in behavioral economics for many years. Do you find that your research has impacted your own behavior?

DA: Yes, in many ways. First of all, I think I've learned to identify a few biases and I try not to be susceptible to them. I'll give you an example. We're renovating a little part of our house. Because people think about prices in relative terms, what often happens is that a contractor will say that for only $10,000 more, you can change the windows. Many people will say, 'Oh, it's only $10,000 more. It looks like a great deal!' But it's still $10,000.

That's not how people should think about it; they should think about it in terms relative to other things they could do. So, my wife and I are very actively trying to not be susceptible to this particular bias. It takes effort, but we're working on it. How successful have you been?

DA: I think we've been successful. Basically, we created a mental exercise for ourselves. When we are facing those decisions when the contractor says, 'For only X more you can get Y,' we force ourselves to say, 'What else could we do with this amount of money?' We don't want to look at it relative to fixing the bathroom. We want to get ourselves to think about it in an absolute way and the way to do that is to compare it to something else. For example, you can say, 'Would we rather do this or would we rather go skiing for a week?' What advice would you give to students while they are considering life-altering education and career decisions?

DA: First, let me say something about education. I'm a deep believer in education and I think that it's a time that we have to invest in the rest of our lives. I think that often, when people are in school, they don't appreciate it. But you're building the foundation for the rest of your life. You're going to classes and some things look useful, and some things don't look very useful. The fact is that no student in that time of life is in a position to judge what's useful or not because the question is not 'What's useful now?' The question is 'What will be useful ten, 20 or 30 years from now?'

Education is a tremendous investment in the rest of our lives. I hope people will all become lifelong learners. I'd like that to be the reality. How do you make the most out of those years from that perspective? And, also, how do you suspend your understanding of what's useful and not useful? The amount of uncertainty that you face in the future is just tremendous.

Second, there's a big dilemma in education between learning more about one topic and closing doors on other topics. I have a chapter in one of my books on that. What I show is that people are overly focused on trying to keep doors open. People want to be able to study this and this and this and not give up. They become jacks-of-all-trades and masters-of-none at the end.

That's an incredibly strong temptation to have. As our society develops more and gains more knowledge, it becomes less and less useful. I think that at age 18 you probably don't want to pick a particular career path. At the same time, it's important not to keep all doors open and to try and get deeper into some things. Finally, is there anything else you'd like to share with our readers about your research in behavioral economics?

DA:I'd like people to think about social science. If you look at what people died from 100 years ago, about ten percent of human mortality was caused by bad decision-making. If you look now at how people die, you would conclude that about 45% of mortality is caused by bad decision-making. Why? Because as we develop as a society, we've created many more ways for us to kill ourselves.

Think about things like diabetes. Think about stuff like smoking and texting while driving. What's happening is that as we develop more and more technology, we are creating situations in which our basic human character extends to an ever-increasing stress test.

If we don't understand how human character works, there are great opportunities for us to fail in magnificent ways. My analogy is that if you walk and you make a mistake, you bump into a pole and it's not a big deal. If you drive at 70 miles per hour and you make a mistake, now there's a price to pay for you and other people around you. As we move to become a more technology-focused society, it's as if we're always driving at 70 miles per hour. Under those conditions, it's incredibly important to figure out what we can and can't do in terms of our natural human abilities. That's where social science comes into play and why I think it's becoming even more important.

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