Money, Morality and How We Make Economic Decisions

PAUL SOLMAN: "While watching my lifetime market investments in stocks and mutuals" -- I guess he means mutual funds - "fade these days," writes Tom from Canton, Ohio, "I'm interested in your view on the media's influence on investors. It seems that news generates either fear or bravery for some, while others are unaffected. As I'm an anthropologist/archaeologist" -- I guess that means Tom - "I'm interested in your opinion here." Maybe he thinks you're an anthropologist/archaeologist.

DAN ARIELY: So there's no question that the media has a lot to do with our perception of reality. First of all, we can't really perceive things directly very well, you know in terms of risks and what's happening. So we consume things through the media, through the media lens, and that's kind of understandable.

I think the regrettable thing is that much of the media is about short sentences that people repeat multiple times throughout the day. And in the media, there's this slogan that says, "If it bleeds, it leads," with the idea that if something is emotionally capturing, then we want to emphasize that. And because of this there's a bias both in the media and in ourselves as human beings to overemphasize things that are emotionally grabbing.

So if you think to yourself: What's more important? To have a report about one unfortunate individual who lost their job and has very difficult life circumstances, or something that helps us understand more generally what is going on in AIG, how is the bailout going, what is the future of this company? There's no question that it's more important for us as a society to understand the details, we also clearly will be less interested in spending 10 minutes trying to achieve this.

So it's the news feeding our psychology of caring more about emotional things, and because of that much of the news is not really that educational and informative in terms of helping us understand what is going on, instead of just kind of tapping our emotion over and over and over. And I think because of that people also get more fearful. If all the news is focusing on these terrible pieces of information about how frightening this is, and this is, and gloom here, and gloom there, we're going to be much more fearful.

So I think it's kind of an interplay between our psychology of overemphasizing emotion and the media's understanding of that, and building on this weakness. As a consequence, we understand very little about what's going on but we feel a lot about it.

PAUL SOLMAN: Of course the NewsHour with Jim Lehrer tries to not to do that, which is why you're here talking to me, right?

DAN ARIELY: Yeah, there's a few exceptions. But if you look at CNN, which I think used to be a serious reporting station, a while ago it turns out to be this 2 minute, 15 second segment that basically just gives you highlights and emotional pointers and I think...

PAUL SOLMAN: You know it's interesting because we struggle with that too. After all we're up against CNN and every other possible station you can click to in a fraction of a second. And so when we try to do the explanations that I do with you for example on the air, we did one this week, it's an attempt on both our parts, right?

DAN ARIELY: Yep.

PAUL SOLMAN: To emotionally connect with the audience, to be funny for example, to be quirky, and yet to be trying to do that in the service of something that's a larger understanding.

DAN ARIELY: That's right and the fact is it's a very difficult trade-off. It's basically impossible to achieve a deep thoughtful piece that tries to explain something in a deep way and make the emotional connection in the same way. You're just not going to do it in the same way if you talk about, you know, a drowning puppy, but it's actually crucially important because while people might not like at the moment to listen to these things and have to think more hard and focus to a larger degree, in the long term it's incredibly important for psychological wellbeing to understand, and financial wellbeing, to actually have a better understanding of how the world around us is working.

PAUL SOLMAN: Tom from Canton though writes, "It seems that news generates either fear or bravery for some, while others are unaffected." So, from your point of view, what's the difference between people who are vulnerable to the quick, the cheap, the emotional -- cheap maybe is an unfair word -- and people who go, "Hey, it's just the news, they're just selling the excitement and I'm unaffected."

DAN ARIELY: So we actually don't have evidence that there are these other types of people that are unaffected. The only way to be unaffected is to just avoid the news, but when you watch it you are just going to be consumed by the emotions.

Emotions are kind of an interesting thing. It starts not within us, it starts from the outside and it almost evokes in us a feeling automatically. There's nothing we can do about it. So even though it might seem that there's some people who are unaffected by it, it's the people who basically avoid being, avoid meeting emotion by just not watching the news, but once you watch it, and it's emotional news, it's going to hit you. You can't do anything about it.

PAUL SOLMAN: Didn't you tell me once that you yourself foreswore, you swore off CNN because of the effect it was having on you?

DAN ARIELY: Yep. Well, in a few ways. First of all I think these one sentences were so annoying to me I just didn't want to experience this anymore, and I saw how it changed my own behavior and...

PAUL SOLMAN: Sentences meaning things, too short a precis of what's going on?

DAN ARIELY: Well yeah, not even recapping, not even trying to explain. It was just sort of giving us these very short, very sad stories. The other thing is you know, there's this culture of basically Larry King Live is interviewing celebrities, which I just don't understand. You know, these are people who can play other people in the movies very well, and they have fantastic skills, but why do I really want to hear their opinions on anything is something I don't understand.

PAUL SOLMAN: It's because we think we have an emotional connection to them. We think they are people we actually know and therefore we're interested, right? And they're glamorous, they're famous, so that somehow gives them an aura. Isn't that what's going on?

DAN ARIELY: Yeah, yeah. No, that's exactly what's going on. I just don't want to be a part of it.

PAUL SOLMAN: OK. Benjamin Nelson of, or maybe Nelson Benjamin (I'm not sure) from British Columbia, Canada, writes, "A little paradox came up in conversation, and since it's a fun theoretical problem in economics," he figured he'd ask you.

"Banker A goes to Banker B and says: 'Hey, want to buy some mortgage debt? I'll sell you mortgage contracts I repackaged for $4 million.' Should Banker B take this deal? I argue, he says no. Why not? Because clearly Banker A doesn't think that the debt is worth $4 million. Why should Banker B think it is worth more? Paradox is why two bankers ever traded debt," or he goes on to say, "Why anybody ever trades anything if the other party to the transaction knows more than you do? Is it because they're irrational? What do people say in resolving the -- what he calls -- the no-trade paradox?" I have an answer to this, but why don't you go first?

DAN ARIELY: Yeah. So, Ariel Rubenstein, who is a very smart economist [and] game theorist, basically has a model of negotiation. And his rational model of negotiation is that one person offers a price and another person accepts it. Because he says, "why would you ever offer a price that the second person is not accepting it?"

So, in your mind, you play the game theory solution and you say, "I will offer this," he will say this, I will say this. Eventually we will end up at this price. "Let me just offer this price initially and just settle on this." And it's a nice model, and it's very cute, and it's actually a very nice illustration of how rationality is far away from where we actually are. So, why do people negotiate, and why are people taking deals from other people? This by the way also reflects the problem of what's called the "lemon problem."

PAUL SOLMAN: Right.

DAN ARIELY: That [George] Akerlof got the Nobel Prize for writing about, which is the problem of symmetry of information. And Akerlof basically said: This is why cars that are used, even used very slightly, are so cheap relative in terms of a new one, because the seller might know something that you as the buyer don't know, and for that, to compensate you for that risk, you need to get something that is highly discounted.

PAUL SOLMAN: The point there is you, the buyer, suspects that the seller knows something you don't, therefore you're suspicious, therefore you won't pay the price, therefore it's not a viable market.

DAN ARIELY: That's right. And not just suspicious, there's a good chance that there's reason behind it. So...

PAUL SOLMAN: There's a chance, but it's often not the case, you just don't know when it isn't the case.

DAN ARIELY: That's right. That's right. So. But reality of course is more complex than these two specific models. One is that people have heterogeneous needs. So, for example, with things like mortgage-backed securities, you might have too much mortgage-backed security in your portfolio, and I might not have enough. I mean, it's very funny these days to say "not have enough!" But let's say you wanted to have 10 percent in these assets and you don't have enough. So, the reality is that not every asset is worth the same thing to everybody. You know I already have a car; I don't really need another one. You might not have one; it's really good for you.

PAUL SOLMAN: Or I have a house and my kids have left the house, so I'm an empty-nester. I'm looking, as are many people my age, to have a smaller house, while other people are having kids and want a larger house. Clearly those two houses are worth different things to different families.

DAN ARIELY: That's right. So that's one thing which is important for trade and is part of the rational theory, right? And not everybody has the same value for everything. The second thing which I think is an irrational tendency is that we think we're just smarter than other people. So, you know, we call this the "above-average effect" or Garrison Keillor called it the "Lake Wobegon effect," where all the women are beautiful, all the men are tall (sic) and all the kids are above average.

It turns out when you ask people questions about how intelligent you are, how successful, how good a driver you are, people basically think they are above average. When you ask them about bad things, like the chance of getting a heart attack, cancer, being involved in a car accident, people think they are less likely than average to do those things.

So now you have people with over-exaggerated confidence and belief about themselves trying to make decisions, and if they think that they are smarter than other people they are likely to make decisions assuming that their evaluation is better. So you have a certain evaluation of something, I have a certain evaluation of something but because I know how much smarter I am than you are, I trust my evaluation much more than I trust you, and this kind of mitigates some of the effects you talked about. It's an interesting paradox.

PAUL SOLMAN: There's something deeply gratifying isn't there, about thinking that you've gotten a bargain? I mean, I don't know anybody who isn't vulnerable -- if you will -- to the idea that, Hey, I got a bargain on something! Now, according to this paradox, there would be no bargains. So there's something driving us. We're smarter than the other guy, we won in some kind of competition, something emotionally that's driving us to constantly think that we're getting the better side of the deal, no?

DAN ARIELY: And we seek it, right? So people sometimes drive across town to get something at a good deal, wasting a lot on gas and wear and tear on the car. You know when gasoline was $4 a gallon, people in San Diego used to drive to Mexico to get cheap gas, losing much more money and time in the process. There's a huge sense in which we think deals are available out there, we can outsmart the system, and we can do much better for ourselves.

Now if everybody we rational, like Ariel proposed, there would be no such, no such deal. In fact a few years ago, I went to rent a car with an economist friend of mine, and the guy at the car rental said, 'Would you like insurance?' And my economist friend's reaction was, 'If you're offering this insurance to me, it can't possibly be a good deal for me.' So, his perspective was nobody would ever offer me something that is good for me, they will only offer me something that is good for them, but in reality it doesn't have to be this case. It could be...

PAUL SOLMAN: There's a story, you're originally from Israel right?

DAN ARIELY: I was born in New York but grew up in Israel.

PAUL SOLMAN: Grew up in Israel. There's a story about a famous economist, I won't mention his name, but a person who was with him, another economist, told me this story. They were in a car in Israel, it was at night, they took a ride somewhere and the guy said 250 shekels -- let's say -- the cab driver. And this economist said, "No, no, I'll give you 125." And his friend said, "What are you...? How are you...? Why are you trying to negotiate?" Don't worry there are no other cabs, there are no other fares here, the guy has to take the money, so it's just a question of a negotiation, we'll get a bargain here. The guy said, "No, no." "Alright I'll give you 200." The guy said, "No." So, he said, "Well, I'm not going above 200," said the famous economist. And the cab driver said, "Fine." He locked both doors -- he had one of those devices that can lock the doors of the passengers -- and drove them back to the original spot and let them both off.

So, people behave irrationally on both sides of the game, right?

DAN ARIELY: That's right. And if you have a simplified version view of the world and the reality is more complex, then you might make some serious mistakes like this guy.

DAN ARIELY: Phew! What a question!

So, here there is lots of different types of corruption, but let me focus on what I think is the biggest one in the economy and I think it's not so much the person, it's the environment.

So, we've done lots of research on cheating, when we tempt people to cheat money from us. And what we basically find is that when we put people in a situation of conflict of interest where cheating is good for them, and they kind of trade-off honesty versus benefiting illegally and immorally from cheating, lots and lots and lots of people cheat but they cheat just by a little bit.

And it turns out that people don't cheat more when we give them more money for questions they solve correctly, or when we reduce the probability of being caught, but we do change their level of cheating when we get them to contemplate their own morality. So, after they try to recall the Ten Commandments, for example, they cheat less. And interestingly enough we get them to cheat more when they're cheating something that is multiple steps removed from money. And finally we also get, we see that people cheat more when they see other people around them cheat even more.

And I think when we think about this financial crisis, we have this notion of looking for villains -- who is to blame? Are people corrupt? But mostly I think that all of us could have behaved in the same way that the bankers have behaved if we had these huge amounts of money -- imagine $10 million you would get if you could view mortgage-backed securities as a good product -- and the fact is that they're so hard to evaluate and everyone around you doing the same thing makes it even harder to become truly honest. So, I think the reality is that we look for traits in the individuals but to a large degree it's about the environment.

The sad news about this is that lots of us are capable of doing it, that's on one side; on the other hand if we don't understand it's about the environment, we're not going to change the environment to eliminate these temptations in the future. So if you ask me what we need to do, we need to basically eliminate conflicts of interest from the market or at least reduce them to a substantial level. And unless we do that we will just get another crisis and another crisis and another crisis like this.

I will tell you one more thing which is interesting, which is: What happens when people cheat over time? What happens to their morality? So, we do another type of test in which we give people a couple of hundred times chances to cheat and to steal money, very small amounts every time. And basically what we find is that people start by being slightly cheating, just cheat a little bit, and after a while they basically move to cheating all the time. And we call this the 'what the hell effect.'

And the idea is that if you start cheating and you start trying to balance both benefiting from cheating, but also thinking about yourself as a good person, but if at some point you lose that, you said, "Well, I'm a cheat! I might as well enjoy it."

And you can think about the analogy for dieting, where you say you're on this very strict diet and you eat a tiny bit of chocolate, and you say, "Oh! I screwed up my diet. I might as well pig out for the rest of the day." And that's what we find with cheating is that as people start cheating more, cheat a little bit, at some point they pass the threshold. They say to themselves, "I'm a cheat! I might as well acknowledge it and enjoy it."

PAUL SOLMAN: There are two things that occur to me about this. One is the famous political philosopher Isaiah Berlin and a wonderful book called "The Crooked Timber of Humanity." It's a line from Immanuel Kant -- "the crooked timber of humanity" -- and in there, it's a series of essays, and when he summarizes, he's thinking about morality over the decades, many decades that he thought about it. His main rule of thumb is "talk about it, think about it." Keep it in your consciousness -- that is, morality -- because that is in a sense your, in a sense your conscience. The consciousness of what you should do, like your little example where you ask somebody to remember the Ten Commandments before taking some kind of, being in some kind of experiment and then they cheat less as a consequence, would be a directly what Isaiah Berlin -- who was certainly not talking about the Ten Commandments -- was talking about with regard to how you, how you reinforce morality in a population.

DAN ARIELY: Yep. That's right. And then I think the question is about: How do you get worse and worse and worse over time? So you start by not thinking about morality and you make a mistake, and then you keep on living in the same way more and more and to a larger degree and to a larger degree, and the big interesting question is: How do we stop the deterioration?

PAUL SOLMAN: But I have another question too, which is: Why are some groups of people more likely to cheat than others? In your research, New York bankers, for example, cheat more than anybody else anywhere in the world, you told me. And I wonder whether or not the concept that comes from sociology, I remember learning many many decades ago was differential recruitment, that is, certain professions recruit certain kinds of people. Is it possible that New York banking or finance in the oughts, in the 21st century, recruits people who are more liable to cheat to begin with?

DAN ARIELY: You know, that's possible, but I have to say that the biggest failing, failure of psychology in the last 50 years has been the inability to use personality to predict really anything about behavior. You know it's not that they can't do anything, but it predicts very very little. So maybe there are people who are corrupt, you know, psychopaths for example, but in a big way I think this will explain a very small part of the variance.

What I think could happen to a large degree is that a randomly selected group of people that become bankers learn over time to become more morally flexible. Right? So it's not so much they were born this way or they were like this when [or] since they were 5 years old, but there's something about the interaction of the environment in which they make decisions and how they're being taught and trained, and how their thinking process kind of changes that is going to have an influence on them even after the hours of work.

PAUL SOLMAN: How do you explain this then, the last part of this question? In 2002, I did a story set partly at Babson College, great entrepreneurial school, school for entrepreneurship outside Boston, where I posed a question about how much would it take for you to cheat. And I posed the question, no hands went up, and then one kid in the class said, 'Wait a second, make it $5 million or $20 million' -- I can't remember the number now although people can just Google my name and Babson, and it's the first thing that comes up I notice here on Dec. 3, 2002, show -- and every hand just about went up, hands went up.

So, they were being honest. I mean they were on camera so I would have thought, I don't think I would have put my hand up in that situation even if I thought I would have cheated. But they seemed to be acknowledging that the amount of money would have made all the difference.

DAN ARIELY: Yeah, but that's... That's kind of an actually interesting story. There's something called "sacred values" -- things that we don't readily say that we will do for money. For example, we don't think that we would sell our limbs, or our lives, so that we would...

PAUL SOLMAN: Our children.

DAN ARIELY: Have sex, or children, or have sex for money. And there's, I think, there's a joke I think attributed to George Bernard Shaw when he comes to a woman and says, "Would you sleep with me for money?" And the woman says, "Of course not, what do you think I'm a prostitute?" He says, "How about £2 million." She says, "Oh, for £2 million I would sleep with you." So he says, "Now that we've established you're a prostitute, let's negotiate the price."

PAUL SOLMAN: Right. I've... There's actually another... It's either Winston Churchill or George Bernard Shaw; and it may be Winston Churchill with Lady Astor, just to let you know I've looked this up.

DAN ARIELY: OK. So you know, that's kind of an interesting thing where you take a sacred value, when you take something that people say, 'I'm not going to trade this for all the money in the world,' And they say, 'Seriously? How about a real big amount of money?' Then you say, "Oh, you know what, if it's really big, I'll do it." And then it could be that you break people's taboo trade-off, that you say, "If you're willing to do it, let's just negotiate, let's negotiate the price," and there is lots of stuff like this that we don't think we're willing to trade off for any amounts of money, but when you put the high enough amount of money people say, "Oh yes, yes, I can see how it can be traded off."

But we still have this aversion for this trade-off, to selling our kids, to selling ourselves, to selling your kidney. I mean, there's some stuff that we still view as kind of morally wrong.

PAUL SOLMAN: Right. Alan Attlee of Cambridge, Mass., writes, "I'm not an experimentalist, but even to me it was obvious" -- this is negative, Dan - "it was obvious that Ariely's Coke versus dollar bills in the dorm fridge was so badly designed as to be completely useless." He's talking about an experiment which we showed on the NewsHour Wednesday the 20th, 19th, something like that, of May in which you actually were reenacting this experiment putting six Coke bottles in a refrigerator and then putting six dollar bills. People did take the Cokes but didn't take the dollar bills and you were talking about the more distanced you are from money, the easier it is to cheat. Anyway, this guy says, "No student would see the bundle of Coke bottles as unusual in a fridge, but a plate of dollar bills? It would have made more sense to put in a bundle of Cokes, and a single $100 bottle of champagne." Would it have made more sense, Mr. Experimentalist? Would you like to change the terms of your experiment?

DAN ARIELY: So, I'm not sure I would have adapted Alan's experiment, but Alan's point is absolutely right.

This experiment is not the end all of these experiments. In fact, if you would look at the research paper that we've posted on this, or you look in my book, this was just a starting experiment and it has some clear flaws, which we fixed later on in doing many more detailed, more simplistic experiments that are not open for other interpretation, and that's basically has given us a good question generally about how science is being made.

And in social science outside of economics there's almost no perfect experiment. And so what we do is collect lots of experiments that do things in slightly different ways and one of them has this possible confound, or problem, and one has this possible, and we hope that we cross all of the experiments, we take care of all of those. But there's never a perfect experiment. Finally you know, we did this experiment partially because it was easy to make the point. If we would have tried to show one of the more detailed experiments in the 7 or 8 minutes that we had, it wouldn't have been, we wouldn't have been able to do it.

So, I'm delighted that you remember the experiment, I'm delighted that you actually were able to think about what was wrong about it, and I'm only hoping that you would follow up and look at the rest of the experiments that came to prove this point in a deeper, not deeper, but in a more precise way, but slightly less interesting. And I'm quite sure that if you do that you will come to conclusion that this principle, in which as you get further away from money, cheating becomes easier, seems to be a robust and general principle and could play out in many many ways.