Posted by Yesterday Dan Ariely came to Davidson to give a few lectures and meet with faculty in the Economics, Philosophy, and Psychology departments. Greta attended two of the lectures and had dinner with him (along with the rest of the Davidson Psychology faculty). I went to his public lecture last night.
If you’re not familiar with Ariely’s work, you should consider reading his book Predictably Irrational, or at the minimum check out his blog, which is full of fascinating research and anecdotes about how we make (un)informed decisions.
At his talk last night, Ariely offered a several fascinating examples of the way everyday decisions can be affected by seemingly unrelated phenomena. To start off, he showed a graph of the organ donation rates in several European countries. I didn’t have a notepad to take down the actual data, but it broke down something like this:
Arguably these are quite similar countries, so why was the donation rate so high in some countries and so low in others? All the countries allowed potential organ donors to easily sign up as a part of drivers’ license renewal.
The reason, Ariely said, was that some of the countries had an opt-in system, like this:
Please check this box if you would like to participate in the organ donation program
This resulted in very low rates, as in England, Netherlands, and Austria. The other countries had an opt-out system, like this:
Please check this box if you would not like to participate in the organ donation program
That, and that alone appears to account for the difference. For a decision such as this, the way the question is phrased has an enormous impact on the outcome, even though countries like Germany and Austria, and Netherlands and Belgium, are clearly quite similar.
There’s another way “irrationality” can be demonstrated, and we may be able to duplicate some of Ariely’s results right here. Try answering this simple poll:
Make sure you answer the poll before reading on. I’ll add some extra space so you aren’t tempted.
Did you answer yet?
This is actually the second poll I posted. In the first poll, users were given three choices: Bermuda with no scuba lessons, Bermuda with scuba lessons, and Hawaii with scuba lessons.
If we had successfully replicated Ariely’s work, then more people should have chosen the trip to Bermuda with scuba lessons. Why? Because we don’t really have enough information to decide which trip is better. Bermuda and Hawaii are both appealing places to visit. By offering the no-scuba-lesson option for Bermuda and not for Hawaii, respondents now have an easy comparison to make. Clearly Bermuda with scuba lessons is better than Bermuda without, so that option is picked more often. I’ll offer a more detailed analysis of our results at the end of this post.
This same effect can be manipulated by pollsters and marketers to get people to do things they wouldn’t otherwise attempt. Ariely says the home-mortgage crisis as a case in point. He says he’s asked dozens of economists what portion of a person’s income should be devoted to a home mortgage. No one can come up with a logical way to determine the answer. Yet since government regulations typically say that no more than something like 38 percent should be devoted to a home mortgage, nearly everyone buys the biggest house the regulations allow them to buy. They don’t have enough information to make the decision, so they take the “best” answer among the options provided.
During the mortgage bubble, some banks started approving loans that would meet this 38 percent target for the first two years, then for the remaining term of the loan, rose much higher. Many people still maxed out the loans they took out, despite having no evidence their income would rise to cover the expected higher payments in two years.
Other banks started offering interest-only loans, which traditional economists would say are better than equivalent loans that require borrowers to pay off some of the principal each month. Arguably this is true — if you buy a $400K home with payments of, say $3000 a month, with an interest-only loan you could save $500 per month. You could use this money to pay back the principal if you wanted, or you could use it for other expenses, as you see fit — it’s more flexible, so it’s better, right?
In fact nearly everyone who gets an interest-only loan simply uses the money to buy a bigger house and does not pay down the principal. They’re gaining no benefit from flexiblity, and at the end of the mortgage term, they still owe $400 thousand dollars.
As you might guess, Ariely has a distinct political philosophy based on his research. I’ll leave it to you to discuss whether that’s a reasonable conclusion in the comments.
UPDATE: Our first poll didn’t quite replicate Ariely’s results. Fifteen percent of respondents chose Bermuda without scuba lessons, 20 percent chose Bermuda with scuba lessons, and 65 percent chose Hawaii with scuba lessons. This could be because people prefer Hawaii over Bermuda, or because scuba lessons aren’t seen as a positive thing. In the new poll, you only got two choices — Hawaii with scuba or Bermuda with scuba. If Ariely’s result holds, then we should have even more than 65 percent of respondents opt for Hawaii.
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