Boosting a best-seller: Ariely at Manhattan's flagship Barnes & Noble store. Yunghi Kim
Boosting a best-seller: Ariely at Manhattan's flagship Barnes & Noble store. Yunghi Kim

Why We Do the Things We Do

According to behavioral economist Dan Ariely, our lives are a series of ill-considered choices. His quest is to figure out the forces that make us, time after time, irrational decision-makers.
June 1, 2008
 

Dan Ariely is interested in your Social Security number. Purely for research purposes.

Imagine yourself in a class of students. There's Ariely in front of the class with an array of enticements-some bottles of wine, a computer mouse, Belgian chocolates. Ponder those products, he tells you, and write down the last two digits of your Social Security number; that would be 79 for Ariely. Then note, product by product, whether you would be willing to pay $79. Are you craving those chocolates or moved by that mouse? Well, they're all going to be dispersed in an auction. What are they worth to you?

Your ending digits, it turns out, correlate with the size of your bid: If your digits are low, your bid will be low; if your digits are high, your bid will be high. That doesn't mean that as you go through life as a Social Security 79er, you'll always pay more for everything than a 29er. But once $79 becomes a figure of consequence, it becomes the departure point for deciding what you'd be willing to pay. The first decision, then, influences your later decisions. "It turns out that we can push people's willingness to pay up and down quite dramatically," Ariely says, "just by getting them to think about something from a different starting point."

The starting point for understanding Ariely Ph.D. '98 is to know something about the field called behavioral economics-the field in which, at age forty-one, he's already an established star. Ariely returned to Duke last fall from MIT, where he had joint appointments in the program in Media Arts and Sciences, the Sloan School of Management, and the Media Lab (for which he was principal investigator for the "eRationality" group). Beginning this fall, he gives up his "visiting" professorship and becomes James B. Duke Professor of business administration, along with a secondary appointment in economics and an affiliation with the Center for Cognitive Neuroscience.

Ariely defines behavioral economics as driven by "looking at the same questions that standard economics is looking at, but without assuming people are rational." Standard economics is "basically a beautiful, elegant theory that tries to describe everything according to a set of very simple constructs," he says. Behavioral economics is messier. Ariely finds explanatory parallels in the visual illusions that he enjoys sharing with visitors: The individual sees, for example, an upside-down "T" in which the two lines appear to be drawn to different lengths but are measurably identical. The brain, in essence, fills in a pattern that isn't really there.

"It turns out that more of our brain is dedicated to vision than to anything else," Ariely says. "And we practice more vision than we practice anything else. So if we make mistakes in vision, what's the chance that we will not make mistakes in other things that we're not as practiced [in] or designed to do, like financial decision-making and decision-making about our health? The research we've done shows it's very, very low. In fact, we're likely to make repeatable, predictable mistakes in those domains as well."

Some of those domains are familiar-like shopping at Starbucks. As the standard economics model would have it, the coffee-seeking consumer should be asking himself, "Is this the best way to spend $3.50?" But, in Ariely's view, here's the more likely scenario: You have been a Dunkin' Donuts coffee consumer, but you dare to be different, just this once, when you happen to spot a Starbucks. The prices are much higher than what you're used to, but, with all the fancy-sounding brews and the soothing soundtrack, it's obviously not a Dunkin' Donuts environment. So your mind drifts from price comparisons. The next week, you pass by Starbucks again.

"Now, what do you remember from last week? Do you remember how thirsty you were, or how tired you were, or how coffee-deprived you were? Probably not. You take your past decision, you assume it was sensible, and you extrapolate from that your next decision. And the weeks go by, and every time you walk into Starbucks. Over time you stop thinking about whether the price is high or low."

In February, HarperCollins published Ariely's provocatively (and counterintuitively) titled book, Predictably Irrational: The Hidden Forces That Shape Our Decisions. As an engaging account of economics applied to everyday life, it has drawn comparisons, inevitably, to Freakonomics, Stephen Levitt's 2005 publishing sensation. Ariely's website is packed with testimonials from Nobel laureates, corporate leaders, and even celebrity chef Michael Ruhlman '85. Within days of its publication, Predictably Irrational was receiving pleasing attention from some of the key cultural tastemakers: National Public Radio, The New Yorker, and The New York Times. After just a few weeks, it ranked fifth on The New York Times best-seller list.

As often happens in Ariely's world, the experience of seeing the book published has impressed him with the irrationality of the publishing enterprise. Why should an early commitment-signaled by the publisher's advance payment to the author-dictate the scope of the later marketing campaign, even if the eventual book doesn't merit, or doesn't require, much publicity? Why should all books be priced around the same amount, irrespective of quality? For that matter, why should all books pretty much conform to an accepted shape and size?

Ariely had HarperCollins print thirteen different book covers; among other variations, they had a photo of a strikingly handsome model identified as the author, boldly marked the book as a best-seller, cited Ariely alternatively as a Ph.D. and a school principal, and advertised a 75 percent discount. He wanted HarperCollins to print one cover with the imprint of another publisher, but that idea was resisted. With the mock covers in hand, Ariely's team has been surveying Barnes & Noble customers to try to figure out what might inspire them to choose a book with one cover over another.

Ariely's path to publication began in Israel, where he grew up; his last name is a version of the Hebrew term for "lion of God." All through high school, by his own description, he was an indifferent student, sitting in the last row and constantly making jokes. As an eighteen-year-old fulfilling his requirement for military service, he was caught in a life-changing event, an explosion of a cache of magnesium flares. The explosion left him with third-degree burns over 70 percent of his body and brought surgery over a stretch of years. Because his heart and lungs were weakened, some of the surgery proceeded without anesthesia.

Had he been able to anticipate the suffering ahead, he says, he would have been content to die right there. He still has visible scarring, and he still experiences pain every day. He never found out the cause of the accident. It was just one of those things, irrational, and unpredictable. "Sometimes we don't understand the power we harness," he says.

During his long recovery period, he used the time to reflect on his treatment. As he observes in the book, his nurses had theorized that taking off the bandages with "a vigorous tug" was preferable to a slow, drawn-out pull. Ariely's perspective, as a patient, was different. "Their theories gave no consideration to the amount of fear that the patient felt anticipating the treatment; to the difficulties of dealing with fluctuation of pain over time; to the unpredictability of not knowing when the pain will start and ease off; or to the benefits of being comforted with the possibility that the pain would be reduced over time."

Once released from the hospital, he enrolled at Tel Aviv University. He was still heavily bandaged. As he puts it, "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." One of those classes was in brain physiology-an experience that nurtured his interest in devising theories and figuring out ways to test them.

Explanatory notes: At Barnes & Noble reading, Ariely discusses the finer points of his theory.

Explanatory notes: At Barnes & Noble reading, Ariely discusses the finer points of his theory. Yunghi Kim

Today he can be relatively detached in describing the explosion and its painful aftermath. But in public settings, the memories can be searing. Some years ago, he broke into tears as he talked about the episode at an academic conference. It happened again in New York on his recent book tour, providing, he says, "a very good lesson on the power of emotions and our inability to predict their onset."

One of Ariely's early fascinations was with the power of a sports passion. As a graduate student, he explored the tenting tradition that precedes Duke basketball games. Back then, the tradition hinged on a lottery; now, early camping-out ensures a place in the Cameron crowd. Would the students who had won tickets in the lottery value those tickets more than those who lost? Ariely and a colleague surveyed more than 100 students. In general, the lottery losers were willing to pay around $170 for a ticket. A typical student in that category, "William," declared that $175 is a lot of money, and for that price he could watch the game at a sports bar, spend some money on beer and food, and still have a lot left over for other purchases. On the other hand, the students treated well in the lottery valued the ticket highly; they demanded about $2,400 for it. As "Joseph," a ticket-clutching student, told the researchers, the game would be a defining memory of his time at Duke. How could you put a price on memories?

From a rational perspective, both the ticket holders and the non-ticket holders should have thought of the game in exactly the same way. But a student's treatment in the lottery turned out to powerfully affect his or her sense of the value of the ticket. Not a single ticket holder in the survey group would sell for a price that a non-ticket holder would pay.

An event that produced a large community of losers, the Enron financial scandal, prompted Ariely to explore the value placed on honesty. He asked himself why presumably "good and charitable individuals" would steal millions of dollars from people, even as they wouldn't conceive of breaking into a private home. And what would prompt generally "honest" individuals to "borrow" a pen from an office, exaggerate the cost of a theft in a report to an insurer, or falsely report a meal with an old friend as a business expense?

So he and his colleagues devised studies that would tempt people to cheat. Student subjects, for example, would be paid for each correct answer on a multiple-choice test. In some cases, they transferred their answers to a sheet that had the correct answers pre-marked-meaning they could, if provoked into dishonesty, readily cover up their mistakes. In different versions of the experiment, the test-taking students were asked to sign a statement, just at the moment of temptation, testifying that the exercise fell under an honor system. Alternatively, they were asked first to write down the Ten Commandments.

Those gestures had a significant impact on his subjects' behavior. Once they began thinking about honesty through firm reminders, they stopped cheating completely. "In other words, when we are removed from any benchmarks of ethical thought, we tend to stray into dishonesty," Ariely observes in the book. "But if we are reminded of morality at the moment we are tempted, then we are much more likely to be honest."

It turns out, too, that people draw a sharp boundary, irrationally enough, between stealing dollars and "token" stealing. They'll shy away from walking off with $1 from the petty-cash box. And, as Ariely's experiments showed, they'll resist "fixing" their answer sheets when they're rewarded for correct answers with hard cash; they'll cheat avidly when the cash transaction is indirect-that is, when they're rewarded for correct answers with non-monetary tokens that have to be redeemed for dollars. They'll help themselves to those office pens, seeing in the act no meaning for the business' bottom line, or for their self-image of honesty. And if they're the executives of high-flying, energy-trading Enron, they'll build a house of cards on imaginative balance sheets and deprive employees and investors of their life earnings

At last count-which is certain to be out of date-Ariely is an author of more than fifty published papers. According to John Lynch, the Roy J. Bostock Professor of marketing at the Fuqua School of Business, one professional society instituted what is known informally as the Dan Ariely Rule. The rule restricts presenters to no more than three papers on a conference program. "Usually people have only one paper, maybe two, but there was a year when Dan had eight papers on the program," Lynch says. "What does he do? He's got all these projects and all these students and colleagues, and why should they not get on the program? So he just submits the papers without his name on them."

Shortly after arriving at Fuqua in 1996, Lynch started advising Ariely, whose dissertation would earn him an award from the American Marketing Association. Ariely simultaneously was pursuing a Ph.D. in cognitive psychology at the University of North Carolina at Chapel Hill.

"As his adviser, I was always trying to tell him what I thought he should do," Lynch says. "Fortunately, he didn't listen to me very often. In my experience in academia, if you write papers just for yourself, there's a danger that no one else is going to read them. I tried to tell him to think about his audience. But I think for him that sounded too calculating. It would take the fun out of it. A lot of what motivates him is that the research is so much fun for him."

Ariely and Lynch worked together on a marketing experiment in online shopping. With the cooperation of one of the Triangle area's best-known wine experts, they created two dummy online wine stores and sent Fuqua students on shopping expeditions, to observe their buying decisions. For the student shoppers, feeling well-informed was more of an imperative than bargain-basement (or bargain wine-cellar) prices. Lynch told The Wall Street Journal, which wrote about the study in 1998, "When people have more than price to go on, they become much less price-sensitive." The two researchers found that the students were more satisfied with their purchases when they were told, for example, that a wine was "soft and juicy" or "down-to-earth and fun." They were less satisfied when they received less information about wine varieties, offered on the rival site, even though that other site offered a similar product for a couple of dollars less.

Gal Zauberman Ph.D. '00, a marketing professor at the University of Pennsylvania's Wharton School, was a UNC undergraduate when he volunteered for an Ariely experiment in pain tolerance. He followed Ariely to earn his Ph.D. at Duke; like Ariely, he was attracted to the strong faculty in decision-making and the Ph.D. training that Fuqua offered, he says. The two have continued to collaborate, particularly on trying to figure out the influences that shape, over time, how we interpret an experience. Ariely is "certainly considered one of the most productive and creative people in our field," Zauberman says. "He has a very creative way of setting up experiments that mimic situations in life. It's easy to recognize an experiment by Dan. It always has something unexpected."

One unexpected bonus for Ariely in his Ph.D. work was meeting his future wife, Sumedha (Sumi) Gupta, also a psychology graduate student at UNC. "We mostly argued about the use of statistics and philosophy," she says. "He was quite annoying and assumed he was always correct, even when he wasn't, but was of course charming, funny, deeply caring, and surprisingly good at soccer for someone whose main sport is squash." Sumi Ariely now works for Duke's Global Health Institute, overseeing student research and fieldwork projects.

Ariely joined the MIT faculty in 1998, the same year he completed his Ph.D. at Duke. He earned tenure four years later, reportedly one of the quickest progressions to tenure in MIT history. One of his Ph.D. students was Leonard Lee, now an assistant professor of marketing at the Columbia University Business School. It's not unusual that graduate students will pursue research agendas already set by their professors, he says. But when Lee sought this professor's advice about what to research, Ariely responded with a question that took him aback: "What makes you happy?" Soon, Lee was shifting from his initial focus on e-commerce and looking instead at how consumers make decisions. Thinking about that question "was a turning point in my life," he says. "It made me see things that I could do, that I always wanted to do, but that I never had the courage to attempt because of my quantitative background."

Over years of collaboration, Lee has worked with Ariely on research questions ranging from how consumers are influenced by retail coupons at different stages in their shopping, to how individuals are affected by their own attractiveness when choosing whom to date. Ariely cares about his students, Lee says, not just in terms of the usual measures of academic accomplishment-finishing the dissertation, getting papers published, landing a prestigious position. When he was about to graduate from MIT, Lee was considering several job offers. Again, he turned to Ariely for advice. Ariely posed the familiar question: "What makes you happy?" Think about the life you'll be leading, he urged, not just the superficial benefits of the position.

Boundary-breaking: Ariely draws on disciplines across the intellectual spectrum.

Boundary-breaking: Ariely draws on disciplines across the intellectual spectrum. Michael Zirrkle

Since his student days, Ariely has applied his restless curiosity, and his imaginative powers, to all kinds of research questions. Soon after he started at MIT, he and a colleague mulled over the sort of questons that might be conjured up in a traditional pub—all of which meant that they would be justifying to MIT accountants a $1,400 bill for beer as a research expense.

In the guise of a waiter, Ariely took beer orders at the Carolina Brewery in Chapel Hill. He found that those who made their choices out loud, in the standard way that food is ordered in restaurants, ended up less satisfied than those in a second group, who ordered privately, writing down their choices after being shown a menu rather than taking their lead from others.

There are other avenues to satisfaction, some of which hinge on what the individual is led to believe about a coming attraction (or non-attraction)—the findings of another beer-suffused experiment. Ariely, working with Lee and another colleague, showed that an advance message can shape the eventual experience. A group of students didn't find vinegar-spiked beer all that bad. That indifferent feeling changed, for the worse, when they were told, before gulping it down, that the beer had a nasty taste.

This winter, as the buzz around the book was building, Ariely received widespread media attention for a study showing that a ten-cent pill doesn't kill pain as well as a $2.50 pill. That may not sound surprising, but in fact, the pain-numbing pills were identical placebos. With his collaborators at MIT, Ariely recruited eighty-two volunteers and told them that they would be testing a new pain drug, "Validone." It was actually a placebo. Following a standard protocol, each of the subjects received light electrical shocks on his wrists and was asked to provide a rating, from "no pain at all" to "the worst pain imaginable."

Then it was time to pop a "Validone." Half of the subjects were given a brochure telling them that it cost $2.50; the other half a brochure telling them that it cost a dime. They then received a second round of shocks. In the high-price group, 85 percent of the subjects reported feeling less pain from the same voltage after taking the pill. In the low-price group, 61 percent said the pain was less—a significant drop-off. Ariely's experiment was another illustration of the power of expectation: We simply expect better results from more expensive medicines—the placebo effect at work.

Ariely's expectation is that behavioral economics will influence public policy. "From the standard economics perspective, you should just give freedom to people. People are reasonable, sensible. They always make the right decision. Just give them the freedom and flexibility to choose what is best for them." Behavioral economics, though, sees individuals as tempted by emotion, susceptible to mistakes, and not particularly far-thinking. So we need mechanisms and institutions—mandatory health check-ups, for example, or forced retirement savings from 401(k) plans—to promote behavior that's ultimately self-interested. That might be a prescription for a more paternalistic society, Ariely acknowledges.

At MIT, Ariely's first graduate-student advisee was On Amir. Before coming to Cambridge, Amir had reached out to Ariely as a fellow Israeli for advice about M.B.A. programs; Ariely persuaded him that a Ph.D. program would be, of all things, more fun. Because the topics that attract Ariely represent the intersection of economics and psychology, they often have policy implications, notes Amir, now an assistant professor at the Rady School of Management at the University of California at San Diego. Much policymaking hinges on the assumption that potential transgressors will rationally weigh the costs and benefits of their actions. To behavioral economists, of course, that's an incorrect assumption.

Think about the annual burden of filling out tax forms from the IRS. Why not use the forms, Amir suggests, to explicitly remind citizens of the standards of honesty that were long ago impressed on them? That framing language would provide a springboard for decisions. Tax preparation would become a signal of the individual's character. It wouldn't be a mere financial transaction with the government in which the taxpayer gauges what he or she can get away with.

As New York Times columnist David Leonhardt has noted, a decade ago, economics seemed to be "devolving into a technical discipline that was even less comprehensible than it was relevant." There's nothing numbingly technical in Ariely's exploration of why we choose a "free" checking account, with no benefits attached, over one with minimal costs and appreciable benefits. If economics is no longer, in Leonhardt's words, an "old and tired discipline," that's in part owing to the work of the behavioral economists who have come of age with Ariely.

Now Ariely is leaving MIT and circling back to Duke, a decision that, to this decoder of decisions, is sensible. He likes Duke's teaching emphasis; he'll be teaching undergraduates as well as business students. Permeable boundaries between disciplines are another Duke hallmark, he says, and he's already tapped into neuroscience—another field that grapples with inferences, expectations, emotions, and their consequences.

"It is very hard to predict how happy you'll be in a future situation with new circumstances," he says. "But one of the things that make me the happiest is having coffee with interesting people. Most of the time we sit in the office and work. That's okay. The real excitement comes from sharing ideas, learning new things, getting feedback from people."

Among the people in Ariely's feedback loop is Lynch, his former dissertation adviser and current colleague. About a year and a half ago, Lynch and Ariely were in Orlando, Florida, at a professional meeting. As they got up from dinner, Lynch felt faint and collapsed. An ambulance was summoned; Lynch was taken to a hospital emergency room and then to another area for treatment. A concerned Ariely tried to get in to see his mentor, but was told that it was against hospital rules. Frustrated, he began to fake an allergic reaction and insisted on medical care. Sure enough, he was wheeled back to the room where Lynch was being held. A startled Lynch watched as Ariely, now in a hospital gown, bounded over to him and asked him how he was doing (quite well by that point). "Pretty soon," Lynch recalls, "the nurse comes to get him, they give him an epinephrine shot, and he gets stuck with a $400 hospital bill."

Lynch laughs at the memory of a dramatic—and rather outlandish—act of humaneness. It was irrational but, knowing Ariely as he does, predictable.