Dan Ariely – Modern Behavioural Economics

Behavioural economics has taken the world by storm, aided by catchy and digestible books and superstar researchers. One of the most prominent contemporary figures in the field is Daniel Ariely, the current James B. Duke Professor of psychology and behavioural economics at Duke University. He has authored multiple best-selling books on his research, most famously his ‘irrational trilogy’ of Predictably IrrationalThe Upside of Irrationality, and The Honest Truth About Dishonesty

A life-changing moment came during a high-school graduation ceremony, where a large, military-grade magnesium flare exploded right next to a 17-year-old Ariely, leaving him with third-degree burns on 70% of his body. This accident set off three years of intense treatments and surgeries. For Ariely, this harrowing experience may have set off his professional career. At the hospital, he suffered through the daily removal of his bandages. The nurses would tear the dressings off quickly, causing intense pain, rather than removing them slowly, with less pain.

When he was a psychology student at Tel Aviv University, he took his experience with pain and ran experiments to test his ideas on them. His results indicated that low-intensity pain for longer durations was preferable to high-intensity pain for shorter durations. Having breaks to recuperate from pain also seemed to alleviated suffering. The seeming irrationality of the well-meaning nurses led him to question whether humans made similar mistakes in other areas of life, sparking decades of research. The following three papers are a sample from the over 70 published academic articles that encapsulate the enquiring and novel mind of Daniel Ariely.

The first article details the special nature of zero. The Law of Demand that is widely assumed in microeconomics intuitively leads to the conclusion that free goods are widely popular. When people make any economic choice, they weigh up the benefits and the costs. Since a free product costs nothing, the costs decrease. Ariely proposed that in addition to seeing fewer negatives, consumers view the price of zero as a positive. He set up a series of experiments, using cheap chocolate and expensive chocolate as comparisons. The cheap chocolate was originally priced at 2¢, while the expensive chocolate was priced at 27¢. He offered participants in the experiment the choice to buy one of the two chocolates. A 1¢ markdown in both caused a negligible change in choice, but a 2¢ markdown skewed the choice significantly towards the cheap chocolate.

Ariely conducted two more versions of the chocolate experiment to account for transaction costs, observing similar results. Thus, Ariely concludes that consumers perceive free goods in a qualitatively different way than other prices.

To expand this finding to prove that consumers would take an ‘inferior’ free option, he then used an experiment involving Amazon gift cards. He asked the participants to choose between a $10 gift card and a $20 gift card at differing prices and marked the cards down, offering the cheaper card for $5 and the more expensive one for $12. Most participants chose the more expensive gift card at these values.

Then he offered the $10 card for free, while offering the $20 card for $7. Nobody took the expensive gift card, even though it was marked down by $13. This disparity suggests that people have a positive bias towards zero that is greater than the economic rationale of cost-benefit analysis.

The second article examines the ‘IKEA effect’. From anecdotal evidence, Ariely found that he preferred a piece of IKEA furniture that he struggled to assemble to another item of furniture that he did not devote time and effort to make. Using this as inspiration, he theorised that imbuing a product with one’s labour increases one’s valuation of its worth. He proved that the IKEA effect exists to some degree by asking his participants to create some origami frogs and cranes. After they had finished, Ariely conducted three types of bids: creators for their own work, observers for the participant work, and observers for expert origami work.

The findings showed that creators valued their work almost five times the worth assigned by observers, nearly as much as they valued the expert’s work. This clear difference in the observers’ values for the participant work and the expert work indicates that the observers did care about the quality of the work. As such, the primary conclusion is that one’s own labour adds value to an item. Although this could be explained by a purposeful overbid to avoid losing the work, Ariely asked the participants to estimate what other people would bid for their creations. This estimate ended up being similar to their own bids, suggesting that participants consistently overvalued their work, thanks to the fact that they made it themselves.

The last article assesses humans’ relationship with honesty and cheating. When given the chance to cheat on a simple task, most participants cheated if financially motivated to do so. However, they only cheated by small amounts. Although traditional theory states that cheating is done purely by a cost-benefit analysis, weighing the risks of getting caught against the benefits of cheating, Ariely posited that individuals also have internal self-validation metrics to consider. He called this range of dishonesty the ‘fudge factor’.

The experiment showed that there were ways to reduce the fudge factor. For instance, the experiment included a section in which participants were asked to recall the Ten Commandments before attempting a task in which cheating was possible. In these conditions, cheating was almost eliminated, probably because of the increased awareness about the morality of cheating. A similar trial using commitment reminders and ‘honour codes’ yielded the same result. However, it was also possible to increase the ‘fudge factor’. A version of the experiment which used token rewards instead of monetary ones found that cheating was almost doubled. However, the level of cheating did not vary with different information about the average level of performance of other people in the tasks set. As such, it seems reasonable that there are more levels of cheating and dishonesty than the simplistic rational calculus.

The contributions in Ariely’s work have widely influenced behavioural economics. However, a frequent criticism of the field is that its results are difficult to replicate and easily manipulated. Recently, Ariely has been accused of falsifying data for one of his studies (not covered in this article). While it is too early to tell how much this affects his wider work, it is important to acknowledge these shortcomings. Behavioural economics provides us with a radical new way of analysing decision-making, but sometimes, it may be too good to be true.

Correction: this article was originally written in good faith before the allegations of Ariely using fake data for a study were publicly made. It has been revised to reflect this new development.

One thought on “Dan Ariely – Modern Behavioural Economics

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s