Looking back at the carnage created by the bursting of the credit bubble, it’s natural to scratch your head and ask “How did we ever let that happen?” Behavioral economics exists to answer questions like this.
Last week Chris sat down with Dan Ariely, gallivanting behavioral-economics researcher-extraordinaire, who is breathing new life into this previously obscure field of study. The resulting interview is full of fresh, non-intuitive insights and shines light on how the human brain is often hard-wired for irrational action when it comes to money.
Dan has a fresh and pretty non-traditional way of explaining the more intriguing aspects of human behavior, including:
- The overwhelming influence of emotion in driving our decision-making
- Our vulnerability to present temptations & our overestimation of our future virtuousness
- Our amazing capacity to justify irrational circumstances
- Our blindness to conflicts of interest when they work in our favor
- Why we do a poor job of appreciating future risk
Each of these played a role in the excessive behavior responsible for the credit crisis – and continue to hamper our ability to handle its aftermath rationally today.
One of the key takeaways for us was how Dan’s research provides an empirical explanation for why inflation will likely win the day: our mental programming leads us to prefer behavior that favors it.
Dan is the James B. Duke Professor of Psychology & Behavioral Economics at Duke University, where he holds appointments at the Fuqua School of Business, the Center for Cognitive Neuroscience, the School of Medicine, and the Department of Economics. He is also a founding member of the Center for Advanced Hindsight.
Using simple experiments, Dan studies how people actually act in the marketplace, as opposed to how they should or would perform if they were completely rational. His interests span a wide range of daily behaviors and his experiments are consistently interesting, amusing, and informative, demonstrating profound ideas that fly in the face of common wisdom.
He is the author of the New York Times Bestseller Predictably Irrational: The Hidden Forces that Shape Our Decisions and The Upside of Irrationality: The Unexpected Ways We Defy Logic at Work and at Home. His research has been published in leading psychology, economics, and business journals, and is featured occasionally in the popular press.