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Behavioral Economist Examines Interplay of Money, Morality and Rationality

May 20, 2009 at 6:45 PM EDT
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In the latest in economics correspondent Paul Solman's Making Sense series, behavioral economist Dan Ariely mulls decision-making mechanisms in finance and they ways in which many people rationalize their unethical actions.

JIM LEHRER: Next tonight, a chat about money and morality. It’s part of economics correspondent Paul Solman’s ongoing NewsHour series on “Making Sense” of financial news.

DAN ARIELY, behavioral economist: So here’s how this experiment worked…

PAUL SOLMAN, economics correspondent: One of the more memorable moments from the stories we’ve done about the great recession, economist Dan Ariely, likening the behavior of consumers to that of dogs subjected to random electric shocks in psychological experiments.

DAN ARIELY: The bell comes. And instead of jumping, the dog lays down on the ground whimpering. And I think we’re all kind of like this dog right now.

PAUL SOLMAN: Ariely is a behavioral economist, a field he came to by accident, tragic accident, as he lay in a hospital bed for nearly three years recovering from severe burns. It was plenty of time to ponder the irrational behavior of nurses who insisted on ripping his bandages off quickly, rather than peeling them off slowly as he requested.

Later, Ariely focused on irrationality in economics, a contradiction in terms since the dismal science is based on the belief that economic behavior is supremely rational.

On his Web site, Ariely takes the role of the Mac in the ubiquitous Apple computer ads.

DAN ARIELY: Hello. I’m behavioral economics.

STANDARD ECONOMIST: And I’m standard economics.

PAUL SOLMAN: The Microsoft stand-in spouts the P.C. argument.

STANDARD ECONOMIST: People are always making rational decisions all the time, not letting their emotions cloud their judgment, and always thinking about the future.

DAN ARIELY: I just don’t see how you can say this. We see stock bubbles. We see people overextending themselves on credit cards. We see people taking mortgages they shouldn’t be taking. I just don’t see where this rationality is coming from.

Experiments on irrationality

PAUL SOLMAN: In addition to developing his Web site, Ariely has revised his international best-seller "Predictably Irrational," with new sections about the financial and economic crises, which prove, he says, just how irrational Homo economicus can be.

DAN ARIELY: We've been doing experiments on irrationality for years trying to show all kinds of different irrationalities. And we would show these results to standard economists. They would say, "It's very nice and very cute, but clearly all of these things will go away when we deal with professional people making repeated decision in the comparative environment of the market."

PAUL SOLMAN: Not only didn't those things go away, says Ariely, they brought the world economy to its knees. To some extent, standard economists and their equations have become the stuff of mockery.

STANDARD ECONOMIST: My motto is so much cleaner. I have formulas and algorithms.

PAUL SOLMAN: Behavioral economists, by contrast, are in the ascendance.

DAN ARIELY: I have experiments.

Restoring trust in banks

PAUL SOLMAN: We sat down with Dan Ariely to discuss his experiments and his conclusions from them regarding the banking crisis and what, beyond the bailout billions, it might take to fix the system.

DAN ARIELY: From my perspective, the real problem here is that we have a crisis of trust. We feel betrayed. We want revenge. There's anger, and there's a deep lack of trust in the banking system. And unless we think about how to fix that trust, nothing is going to actually move forward.

PAUL SOLMAN: So what do we do to restore people's trusts in the banks?

DAN ARIELY: Well, one thing you could do is you could try and take revenge against the bankers and hope that this would fix it.

PAUL SOLMAN: Revenge, like cutting their salaries, putting them in jail?

DAN ARIELY: Limit bonuses, change the tax code. We will exert revenge. We would feel good about it. It will not solve the problem.

The real problem is that the bankers were facing a situation in which they could distance themselves from what they were doing. In fact, in the experiments we do, we show that, the more distance you get from money, the more people can actually become immoral and still feel good about themselves.

Money and morality

PAUL SOLMAN: Ariely has been studying morality and money ever since the Enron scandal made him wonder what made financial felons tick.

DAN ARIELY: I started looking at experiments when we would tempt people to steal, and we would try to understand what rule governs cheating in everyday life.

In one experiment, I walked around dormitory refrigerators one day, and I put in the refrigerator six packs of Coke. And then I would come every few hours and I would measure how many Cokes are left. What's the half-life of Coke? And it turns out that Cokes disappeared very, very fast. People stole the Coke.

When I repeated this experiment, but instead of putting Coke, I put a plate with six dollar bills, nobody took the money.

PAUL SOLMAN: So most consciences said taking a Coke wasn't stealing -- like taking supplies from the office, perhaps -- but taking cash was.

Ariely has since designed and carried out dozens of stealing and cheating experiments, in one of which people are given a reward for how many correct answers they got on a quiz, as reported by them.

DAN ARIELY: We carry these experiments all over the world, and we found that everywhere people cheat just the same way. You go to Washington, D.C., and you measure politicians. They cheat a little bit, but just like the rest of the world.

The one exception is New York. When we go to New York City and we check New York bankers, they are the only group that cheats more, and much more, by about twice as much.

Strong regulations necessary

PAUL SOLMAN: Not that they are necessarily worse people, says Ariely, but because of the nature of their work, which tempts them with things that are easier than cash to rationalize stealing, like extra shares of stock via the backdating of stock options, say.

DAN ARIELY: As we move to a society where we have less and less cash and more and more symbolic transactions, it might actually become easier and easier for people to be dishonest and still think of themselves as being honest.

As a consequence of this, I don't think we can appeal to the moral compass to guide them, and instead what we need to do is to create strong regulations and make sure that we enforce those.

PAUL SOLMAN: But even that, he concedes, may not be enough. Ever the optimistic, though, Ariely has one more notion.

DAN ARIELY: My real hope is that one bank will decide to be the good guy, that will create a system that they will be transparent with no conflict of interest, with no hidden fees, and people will start banking with those, with bank of this type, and more and more banks will have to compete. They will have to adopt the same approach. And if banks will start behaving like this, they will actually deserve our trust and we will have a much better banking system.

PAUL SOLMAN: A race to the top, says Dan Ariely, after so many years of economic behavior in exactly the opposite direction.