Dan Ariely's Lecture on Behavioral Economics

Introduction

• Dan Ariely: Professor of Behavioral Economics at Duke University's Fuqua School of Business.
• Formerly joint professor at MIT Media Lab and MIT Sloan School of Management.
• Author of “Predictably Irrational,” exploring irrational behaviors in everyday situations.

Concept of Predictable Irrationality

• Traditional economics assumes people’s mistakes cancel out in the market.
• Ariely argues for “predictable” mistakes that accumulate and amplify in the market.
• Example: Subprime mortgage crisis.

Personal Story: Hospital Experience

• Injured in an explosion; spent 3 years in the hospital.
• Pain from bandage removal led to questioning the optimal strategy for minimizing pain.
• Discovered through experiments that slower, lower-intensity removal and breaks in between are less painful.
• Nurses' mistakes attributed to personal discomfort.
• Insighting: Even experienced, well-meaning people can be wrong in high-stakes situations.

Concept of Visual Illusions

• Example: Tables and color squares (brown and yellow-orange) appear different but are identical.
• Visual system makes consistent, repeatable errors.
• Implication: If errors occur in a practiced system like vision, they will be worse in less practiced systems like financial decision-making.

Behavior in Market Choices

• Example: Organ Donation Forms
  • Opt-in vs. opt-out forms drastically change participation rates.
  • Complexity and importance of decision lead to default choices.
• Example: Physician Treatment Options
  • Introducing more choices (ibuprofen + peroxychem vs. only ibuprofen) leads to defaulting to hip replacement.
• Example: Jam Tasting Experiment
  • More choices (24 jams vs. 6) reduce likelihood of purchase.

Implications for Rationality in Decision-Making

• Human nature as flawed; we are not always rational and noble.
• Economic realism vs. optimism: Flaws indicate potential for systematic improvement.

Influence of Context in Preferences

• Preferences are not well-defined; context influences decisions.
• Example: Listing reasons to love one's significant other (3 vs. 10) affects perceived love.
• Context influences perception and valuation (e.g., flossing frequency, clothing returns).

Manipulation through Market Choices

• Introducing dominated options alters preferences towards certain choices.
• Example: Economists' subscription options.
• Example: Photographic attractiveness (ugly version influencing preference).

Cheating and Morality

• Studied under conditions of different cheating incentives.
• People cheat a little, even if the potential gain or the risk of being caught changes dramatically.
• Concept: