'Knowledge is not necessarily always good'

The Israeli American professor talks about why managers need to think differently and be humble enough to doubt their own intuition. Read on...

Prof Dan Ariely is the James B Duke Professor of Behavioral Economics at Fuqua School of Business, Duke University.

He is also a visiting professor in MIT's Program in Media Arts and Sciences.

But what Prof Ariely has really earned eminence for, in recent years, are his books on irrational behaviour. Two of his books, namely Predictably Irrational and the Upside of Irationality were New York Times's best sellers.

The Fuqua faculty member has written a couple of more books, and all, interrogate the bedrock on which human beings take decisions in their lifetime.

Prof Ariely has incessantly pushed readers to check time-honoured myths -- that humans take decisions based on rational thought -- almost a complete lie.

This realisation, ironically, dawned when the author was bound to a bed in the burns ward of hospital for three years.

What triggered it, were the nurses who used to rip-off his bandages in a jiffy, day after day, because they believed that "it pained less when bandages were pulled away in speed.'

Prof Ariely challenged this deliberation. According to him, people make systematic mistakes and eventually believe they are the truth for want of not knowing the other side.

In this interview, Prof Dan Ariely talks about his most famous book Predictably Irrational: The Hidden Forces That Shape Our Decisions and how its principles relate to today's managers and MBA students.

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Why and when did your interest in Behavioural Economics arise?

Years ago, I was injured very badly in an accident and spent three years in a hospital.

Hospitals are places where you can observe lots of irrationalities. The question that troubled me every day was how to remove bandages from burn patients.

Should you remove them quickly, ripping them off one after the other or do it slowly?

The nurses in my department believed in the quick ripping approach and I didn't like it. They kept on doing what they thought was the right thing for quite a long time.

When I got out of hospital, I started doing research on this question. I would bring people to the lab and I would hurt them in different ways and I would examine what actually caused them to have higher and lower version of pain.

And what did you find out?

That the nurses were wrong. Even though they thought that the ripping approach was the right approach, it actually created more pain.

From that point onwards, I kept thinking of cases where people with good intentions think they're doing the best for their clients, but in fact they're doing things that are not correct for them.

I looked at all kinds of cases where we have an intuition that points us in one direction but reality should point us in different direction.

How does this subject fit into the b-school curriculum?

Managers in any capacity have very few opportunities to actually learn from their action. You have to make lots of decisions based on your assumptions about human nature what your clients, employees, shareholders are going to appreciate.

You have to make decisions based on your own assumptions with all kinds of other domains as well. So, understanding the true fundamentals of human nature is important for any manager.

But the second thing is that understanding the humility of doubting your own intuition is also very important. I think that for b-schools, it's important to understand what really drives people and not what we think drives people.

In fact, understanding when we should not trust our intuition and the extent to which we should try and do experiments.

Illustration: Uttam Ghosh

You say a man's craze to derive maximum benefit from his environment leads to unrealistic satisfaction. That's asking too much from a common man who is naturally aspirational?

I think that the decision to behave optimal is way too much for anybody. I understand what optimal behaviour is but we shouldn't really hold anybody accountable to that level. It is too much.

At the same time, I think that we could think about how to get people to improve and that's not too much.

I'm hoping that by showing people some kind of direction of what could be much better they at least can go on that path.

With regards to comparing one's life to others, isn't that what pushes people to do better in life when we see successful people and get closer to their level?

Much like lots of irrationalities, it's a mixture of good and bad. The fact that you're comparing yourself to people who are doing better is probably motivating -- to try and strive for the better. But it's also a cause for stress and unhappiness.

I would not think that everybody should move and be around people who are much worse than them because that would make them always happy.

After all, spending your life in front of the TV watching Seinfeld might be a happy life in the short term but not with a lot of meaning.

There's definitely no accomplishment which is not good for society. I think we need to learn about what's really driving our happiness and try to think about which cases affect us in the positive way and which ones affect us in the negative way.

It's not always the case that we want to eliminate other successful people from our lives.

Illustration: Uttam Ghosh

Discussing 'free' goods, you say that people do not bother to think about their benefits?

I think what you're asking here is that 'free' is a hot button. It gets people to think about purchases in a very different way.

The moment something becomes free, we think about the benefits and not the costs and because of that, we are directed to it.

Fighting this tendency for free requires a lot of understanding of human nature.

As consumers, people should figure out what are our hot buttons, what gets us to misbehave and make the wrong decisions and how do we fight them. Then there's the question of how will marketing work.

Marketing is a profession that is supposed to think about consumers and what they want and try to convince companies to create things that are actually good for consumers. It is also about pricing, tricks, advertising and so on.

I think that the world would be better if people in the marketing profession actually focused on how to get the product to be better rather than tricking people into buying them.

So I don't think it means that marketing will not work. I think that it will have a different path that might actually have more benefits.

Can you provide some more cases of social norms entering market norms?

The simplest examples are our personal lives at home. If you're married to someone, you don't really ask them to do things for money. But we all understand that if you go on a date and you tell the person how much you spent on the date, it's not going to work out very well.

For companies, I think it's somewhere between giving people salaries and asking them to do something for social benefits.

As a company, if you provide your employee with lunch, you're doing something in the social norms. Providing medical and retirement benefits are all social norms but if you tell them how much it cost you, everything can backfire.

Illustration: Uttam Ghosh

Don't people at higher positions in life tackle arousing situations much more professionally?

If you think about people who are higher in life, you can think about Bill Clinton and all kinds of politicians. I think there's plenty of evidence that those people do not tackle things with less emotion and more professionalism.

If self-control is on the decline in the world, shouldn't motivators be in the person rather than external sources?

I think the answer is yes. People should figure out self control. I think we should think about how we can do it ourselves and how we can get better at it.

At the same time, I don't think it's enough. I think we need to think about how to improve it. I don't think it's enough to just do that. I think we need to learn to control both ourselves and the external environment.

Does not 'overvaluing' one possessions actually work well for self-esteem?

I think overvaluing what we own and create is incredibly important. It's one of those irrationalities that have both benefits and disadvantages.

It's beneficial because we start valuing it to a higher degree and we care more about it. It's negative because there are cases where we are not giving it up when we should be giving it up. So I think it's one of those irrationalities and many of them are like that, which have both benefits and costs. We need to figure out when it is beneficial and when it's negative.

In terms of business, I think the place that is most clearly seen in business is the idea of not invented here. Once businesses fall in love with their own ideas, it's all of a sudden difficult for them to not see things that way.

Previous knowledge affecting our decisions is natural. You don't think so?

If you know a lot about the world, it's a shortcut. It's heuristic to say: Hey, I believe that this is just the same decision as the one before. If this is the case, it's a good thing to do.

But it's not necessarily always good. What we show in experiments is that sometimes people use even irrelevant decisions because those decisions give them indications from the past. Even though they are irrelevant, people keep on using them. The question here is how do we make sure we use only relevant knowledge?

The placebo effect helps generally in life. Corporate life, too?

The placebo effect is a wonderful thing because it's about the power of expectation and reality. What the placebo effect shows in pain is that when you expect a medication to relieve you of pain, your body secretes an opiate, a substance that's pain reducing and because of that, the pain reduces.

Expectation changes your physiology in making it into a self-confirming prophecy. If you think about it, a lot of the world is like that.

We have an expectation of how something would work. Our physiology changes, our expectation changes.

You think a vacation will be wonderful, your expectation changes and you interpret more things as being wonderful. You think a particular meeting will be terrible, you interpret everything in terms of terrible and in the end, it'll be more terrible than it had to be.

All of those things happen and because of that, there is a question of how you create expectation and how it becomes reality later.

The application for this is everywhere. It's in pain but it's every experience that people have. The moment you understand that the expectation drives the experience, you understand how you should think about planning expectations and setting them.

Illustration: Dominic Xavier