TEXT OF INTERVIEW
KAI RYSSDAL: There's a certainly understandable urge right now to close your eyes and hope this whole recession thing just goes away. Tune out the stock market, Henry Paulson and, well, me, if you like. Though I'd prefer you don't. But Duke University economist Dan Ariely has a theory that the ignorance-is-bliss mentality actually is kind of helpful. For us. And for the economy. Dan, great to have you back.
DAN ARIELY: Same here.
RYSSDAL: All right, I have to ask you something. So I opened my retirement account statement not too long ago . . .
RYSSDAL: Yeah, I know that was a mistake. But when I saw how much I had lost -- and I can't posssibly be alone in this -- my inclination was to cut back on almost all discretionary spending I have.
ARIELY: Yeah, so some people have this desire, this tendency. And it makes a lot of sense for people who have financial constraints, right? If you don't have enough money to live as you are, you should cut. But interestingly enough, I got a lot of e-mail from people who had the opposite sentiment. Think about it. How could somebody have the opposite sentiment? Well, what happened is that -- you probably don't want to share with us how much money you lost recently.
RYSSDAL: It's . . . It's. I'll tell you exactly. It's 40-something percent out of my account. I mean, it's a lot of money.
ARIELY: OK. So now, think about something -- and this is one of my students who wrote me initially. He said, "I just lost $40,000 yesterday." He said, "I deprived myself over the last year. I wanted to buy a new bicycle. I wanted to change my car. I didn't do all of those things and I saved. And now I see that all of the money is gone. How much better would I have been if I had never thought about the sentiment of saving? And I would just spend all the money and increase my spending?"
So, ironically, when you have nothing to use your money for, you can actually think about the fact that it might actually increase spending, rather than decrease it.
RYSSDAL: But what we're seeing now actually is quite the opposite, right? People are losing a lot of money in the stock market and we're seeing consumer spending being cut way back.
ARIELY: There's a question of what's the general tendency and what are the trends within it. And I think we will see both of those things. So, when the Christmas season is coming up, I think a lot of people will just spend less. But there will be people who would actually think about, "What will I do with this bonus I get? I have nothing to do with it. Putting it in the bank is not very helpful. Putting it in the stock market is definitely not something I want to do. So, I'll spend it.
RYSSDAL: Let me ask you what this does to the larger economy, then. If some people might actually spend more but probably the great majority of people won't, what does that do, what does that tell us?
ARIELY: Well, then we get into a self-fulfilling prophecy, an escalation of bad things. You know, the biggest way to get into a recession is for everybody to believe that there is a recession. And by the process of doing it we would all spend 10 percent less, 5 percent less, have less money. People would lose their job and it was completely escalating. In fact, the whole thing about recession is mostly about a social coordination game. If we could all agree that saving now is not the right strategy, and we should trust ourselves and we should all build together and pull together, the outcome would be much better than if we didn't.
RYSSDAL: All right, well let me ask you this then. So I saw my retirement savings account and I decided -- this actually happened -- I decided not to buy a fancy new camera that I've really been wanting to buy for a number of months now. Am I hurting the economy?
ARIELY: First of all, yes. But there's also a chance that you're hurting yourself too much. The question: Are you trading off a couple of years of good, vivid quality, megapixel memory for something that might have an effect for you somewhere in 40 years down the line might not be the right trade-off to do. But, nevertheless, it's hard to do because you just lost money and it's painful.
RYSSDAL: So, clearly, I have to get you on the phone with my wife and tell her it's OK, right?
ARIELY: That's right. I actually am going to create an automated service that gives notes to people.
RYSSDAL: Dan Ariely teaches behavioral economics at Duke University. His book on exactly that topic is called, "Predictably Irrational." Dan, thanks a lot.
ARIELY: My pleasure, as always.