Bullet-Point Briefing: Dan Ariely

In the final end of the final game of the recent men’s world curling championship, Canadian skipper Kevin Martin held the hammer – the last, decisive rock. But before he got to it, he faced a decision. A mess of rocks were within four feet of the button, his Scottish opponents’ in scoring position. After mulling with his team, and two timeouts, it still didn’t compute. He elected to throw away his second-last rock. It lost his team the championship.

Richard Ivey School of Business faculty director Darren Meister described the scene as an introduction to a presentation by behavioural economist Dan Ariely, author of Predictably Irrational: The Hidden Forces That Shape Our Decisions. Ariely was speaking at an event sponsored by analytical software vendor SAS Institute Inc. at The Toronto Board of Trade.

The kind of decision-making paralysis that Martin faced also affect business decision-makers at times, Meister said. Ariely provided some insight as to why – and how better data makes for better decisions.

* “This was a very good year for behavioural economists,” Ariely deadpanned by way of opening. The decisions that contributed to last fall’s financial market flameout and enduring recession have renewed interest in the small irrationalities that affect our decion-making – and aren’t going away, he said.

* When he was young, Ariely said, he was badly burned over about 70 per cent of his body. In the burn ward, his nurses faced the terrible decision: pull the bandages off quickly and painfully, or slowly, hurting less but taking longer. They invariably opted for the former. When he recovered three years later and studied physiology, his experiments confirmed what he’d though all along: People preferred less intense, but more prolonged, pain.

“We pay more attention to intensity than duration,” he said. “How could the nurses get it wrong?” Though experienced, competent and caring, they relied on the wrong intuition – as we all frequently do. That proved to him the value of the experimental method to decision-making.

* Using familiar optical illusions, he demonstrated that although we know, for example, that the oblong on the right is as wide as the oblong on the left is tall, our eyes and brains tell us it isn’t so. “We all make the same mistake and we make it all the time,” he said. “It doesn’t matter that we know it’s an illusion.”

Though a large portion of our brain is dedicated to vision, we process information very superficially. Ariely told the audience to watch a clip of two groups playing basketball and count how many times the team in white passed the ball to each other. Some counted 16, some 17. No one had noticed that someone in a gorilla suit had walked through the middle of the shot. Apparently, we’re capable of ignoring the gorilla in the room – literally.

* Defaults are very powerful. “You actually don’t make so many decisions as you think,” Ariely said. Comparing organ donation card registrations across Europe, about a third of countries have a donation volunteer rate of lower than 25 per cent, while the rest have rates north of 90 per cent. It’s not cultural or religious, he said; the countries with the lower rates had a questionnaire check-box reading that registrants had to check in order to participate in the program, while in the high-rate countries, registrants had to check a box to not participate. “When we don’t know what to do, we take whatever we are given as a default,” he said. Complex alternatives make defaults even more powerful, he said.

* Ariely’s done extensive research into why people cheat. In one experiment, his team discovered that Yale and MIT students cheated less when they were told cheating would be a violation of their schools’ honour code before taking the test. (Neither school has an honour code, according to Ariely.) Ariely tried to apply that knowledge with a major insurance company. Over-claiming by insured customers is rampant; Ariely figured if they were to sign the claim form at the top, before filling in the details, they’d be more honest. The company ran an experiment with an auto insurance form, mailed to customers each year asking how far they’d driven. Those who had to sign at the top of the form claimed, on average, to have driven 2,700 miles, or 15 per cent, farther than those who signed at the bottom.

Yet the insurance company wouldn’t change its forms despite the obvious advantage. Companies must learn to better balance the short-term cost of experimentation against the long-term gain. Experimental data will often contradict the false intuitions we fall prey to.

“If we accept the Homer Simpson in all of us, we can decide how to move forward,” he said.

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