Behavioral economics is catching on

Dan Ariely, author of "Predictably Irrational"

TEXT OF INTERVIEW

Kai Ryssdal: We sit down to chat with Dan Ariely about once a month or so. He's a behavioral economist at Duke University. And when he's not teaching, he's thinking about how humans, and markets, and entire economies sometimes, do things that don't make much sense. And then he tries to explain why. About a year ago he wrote a book about that, called "Predictably Irrational." And since then we have collectively given him so much more to talk about that there's an expanded version out this week. Dan, it's great to have you back.

DAN ARIELY: Same here, as always.

Ryssdal: So it's been a little bit more than a year since the first version of this book came out. And it's been quite the tumultuous year in the economy, obviously. Do you find that behavioral economics is a little bit more, I don't know, respectable now?

ARIELY: Oh, yeah. Very much so. This has been a great year for me.

Ryssdal: Well, that's good, Dan.

ARIELY: Yeah, if you're looking for a satellite in this whole thing, it's behavioral economists, we're all celebrating. And the real issue is that for a long time we would do these experiments showing all kinds of irrationalities, and people would say, OK, it's very cute, it's very entertaining, it's amusing, but surely when it will come to people making large decisions in a repeated who are experts, all of these irrationalities will go away and people would behave perfectly rational. In 2008, Greenspan's testimony, that basically you can summarize as, oops, I thought the markets were irrational and would take care of themselves but they don't. I think there's a new realization of how important an endemic irrationality is, and that we really need to understand it better if we ever want to get out of not just this crisis, but we want to prevent the next ones who are just waiting around the corner.

Ryssdal: It occurs to me that behavioral economics is pretty easy to figure out in hindsight, right? We can look back over the past year, year and a half, since your original book came out, and say, well, look at the irrationalities. The mortgage market, so many smart people on Wall Street doing so many dumb things. Let me put the test to you then, and ask you what we might see in the next year in terms of irrational economic behavior. Is there a way to figure that out?

ARIELY: So if you think about the problem from a behavioral economists' perspective, then what you would say is the following: we might get over the housing problem, we might help people, we might bail out some of the banks, but the real problem, the thing that was causing this whole issue, is actually the conflict of interest that the bankers had. And unless you solve that deeper problem, you haven't solved anything. So in fact what we're doing is we're looking at the causes for these behaviors. And this actually helps you to think very much about regulation. So we can say what are people naturally good at? And in those cases all we need to do is the government to step out of our business and let us do whatever we can because we would optimize. Versus what kind of things do people fail in and fail in them routinely, in predictable and repeatable ways, and those are the places that we would need to actually step in and regulate, and don't let people create damage for themselves and for the economy.

Ryssdal: When you go to a cocktail party, and somebody says, so Dan, lovely to meet you, what do you to do for a living, what do you say?

ARIELY: I say I examine human irrationality, and then what they say, oh, you must know my wife.

Ryssdal: And then your wife says what?

ARIELY: And then I say, yes, I can see you saying it, but, of course, your wife is not next to you.

Ryssdal: That's right, that's right.

ARIELY: But you know, I think there's actually a recent interest from the public in this irrationality. There's a general mistrust, I think, in economics. I mean, think about what happened to us. We trusted the economics to a very high degree. The metaphor of the market and freedom has permeated every aspect of society and of beliefs. And it's kinda driven us down to a very serous black hole. Even people who were schooled in rational economics, but deal with the real world everyday, all of the sudden are looking at their own behavior and saying, I'm now recognizing all kinds of things I didn't see before. That's kinda the first step for improvement.

Ryssdal: Dan Ariely is a professor of behavioral economics at Duke University. His book, revised and expanded, is called "Predictably Irrational." Dan, thanks a lot.

ARIELY: My pleasure.

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