Economic Rockstar

Connecting Brilliant Minds in Economics and Finance

050: Dan Ariely on Irrational Behavior and the Importance of Our Environment When Making Decisions

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050: Dan Ariely on Irrational Behavior and the Importance of Our Environment When Making Decisions

Dan Ariely is Professor of Psychology & Behavioral Economics at Duke University in North Carolina. Dan’s interests spanDan Ariely a wide range of behaviors, and his sometimes unusual experiments are consistently interesting, amusing and informative, demonstrating profound ideas that fly in the face of common wisdom.

In addition to appointments at the Fuqua School of Business, the Center for Cognitive Neuroscience, the Department of Economics, and the School of Medicine at Duke University, Dan is also a founding member of the Center for Advanced Hindsight.

Dan is the author of the New York Times bestsellers Predictably Irrational, The Upside of Irrationality, and The Honest Truth About Dishonesty and his latest book Irrationally Yours is now available.

Dan has received numerous honors and awards in medicine, psychology and economics.

Dan received a B.A in Psychology from Tel Aviv University, an M.A and PhD in Cognitive Psychology from University of North Carolina and another PhD in Business Administration from Duke University.

Influencer:

Professor Hanan Frenk, Tel Aviv University

Economists:

In this interview, Dan mentions: Brian Wansink. 

Psychologists:

In this interview, Dan mentions: Mike Norton and Elizabeth Dunn.

Economics:

In this interview, Dan mentions and discusses: Tragedy of the Commons, behavioral economics, public goods, pricing, decision-making, choice architecture, Ulysses Contract, happiness, asymmetric dominance effect and choice.

Takeaway:

“Think about your environment and always experiment” – Dan Ariely

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In this episode, you will learn:

  • about Dan Ariely’s traumatic experience resulting in severe burns.
  • how Dan Ariely found his love for psychology and behavioral economics.
  • why Dan will not be teaching his Irrational Behavior course on Coursera.
  • the problems with MOOCs like Coursera and why it is making the wrong choice regarding its open platform system.
  • why Dan was turned down for his first book – a cookbook and what advice he was given by a publisher.
  • why we as humans make very costly mistakes and what we can do about it.
  • how people eat more than they realise and how experiments in economics have shown this.
  • why we are bad at doing things that makes us happy.
  • the most common mistake companies make when making decisions or processing information.
  • how companies can avoid making mistakes.
  • if anger is a good or bad emotion.
  • the most surprising finding from Dan Ariely’s research.
  • the most surprising question put to Ask Ariely.
  • how to get poor people in Kenya to save.
  • how your environment matters when making decisions.

Quotes by Dan Ariely in Episode 50 of the Economic Rockstar Podcast:

“Choice architecture is this idea that our environment influences how we make decisions” – Dan Ariely

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“In the process of trying to not make any mistakes, companies create environments that punish risk and therefore punish ingenuity and growth” – Dan Ariely

“Tim is a very interesting character and he is experimenting on himself. We have to realize that his experiments have the validity that they work very well for him” – Dan Ariely

On Coursera:

“I think we do need rules for trolls. I think that pricing is a very good mechanism for some things and I’m not sure it’s a mechanism for all for all things like this. The reality is that Coursera probably over samples from the people on the tail of the distribution in terms of mental stability.” – Dan Ariely

Books:

Resources Mentioned by Dan Ariely:

Where to Find Dan Ariely:

Transcript:

The full transcript of this episode with Dan Ariely will be available shortly.

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024: Greg Davies on Behavioral Finance and Controlling Your Emotions When Making Trading Decisions

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024: Greg Davies on Behavioral Finance and Controlling Your Emotions When Making Trading Decisions

Greg Davies is Managing Director and Head of Behavioral Finance at Barclays.  He joined the firm in December 2006 to develop and implement commercial applications drawing on behavioural portfolio theory, the psychology of judgment and decision making, and decision sciences.

Today Greg leads a global team of behavioural and quantitative finance specialists, and is responsible for the design and global implementation of Barclays’ Investment Philosophy.

Greg is an Associate Fellow at Oxford University’s Saïd Business School and his first (co-authored) book, ‘Behavioral Investment Management: An Efficient Alternative to Modern Portfolio Theory’, was published in January 2012.

He is co-curator and co-creator of Open Outcry – a reality opera based on the stock market trading floor.

Greg has authored papers in multiple academic disciplines, presents at academic and industry conferences, and is a frequent media commentator on Behavioural Finance.  He is an Editorial Board Member of the Journal of Behavioural and Experimental Finance.

Greg studied at the University of Cape Town and obtained a degree in Economics, Philosophy and Finance. He followed this with an MPhil in Economics and a PhD in Decision Theory and Behavioural Finance from the University of Cambridge.

Economic Themes:

In this interview, Greg mentions and discusses:

Behavioral economics, behavioral finance, rationality, irrational behavior, heuristics, cognitive biases, system 1, system 2, homo economicus, trade-off, home bias, familiarity bias, risk, return, portfolio, efficient frontier, stochastic model, trading floor, noise, herding, bubbles, booms, bust, returns, standard deviation, deterministic model, decision theory, expected utility theory, mean variance and portfolio theory.

Economists:

In this interview, Greg mentions:

Danial Kahneman, Amos Tversky, Terence Odean, Warren Buffet, Charlie Munger and Harry Markowitz.

Influencers:

Jon Elster and Amos Tversky.

Advice:

Be multi-disciplinary. Look for links between fields. Be continuously curious.

Keep learning. Stay curious. Say ‘yes’ to things that are outside your comfort zone.

Find out:

  • what is Behavioral Economics/Finance
  • the disconnection between economics and psychology.
  • how Kahneman and Tversky were ‘swimming up-stream’ to bring common sense to economics.
  • why viewing the world through biases is harmful to behavioral finance.
  • why the ever-increasing list of biases may not be good for the behavioral finance field.
  • about System 1 and System 2 as popularised by Daniel Kahneman.
  • why it’s good to allow emotions to part of the portfolio decision-making process.
  • how to acquire the emotional comfort you need for your long-term financial objectives.
  • how to buy emotional insurance for your long-term investment portfolio.
  • how to avoid costly short-term emotional mistakes.
  • how psychometric tests can extract measures of financial personality.
  • why a set of nudges are designed to help high net-worth individuals to make better decisions.
  • how to build a tailored portfolio to meet your clients needs.
  • why you should consider including expected anxiety into your portfolio building along with risk and return.
  • what an opera experiment has to do with replicating the open outcry system of a trading floor.
  • how music can control your emotions while trading markets.
  • how Barclays Capital are improving the understanding of their clients by turning the lens on themselves.

Behavioral economics is the combination of finance theory and behavioral psychology. It’s about trying to understand how people actually do go about making financial decisions and, as a result, how we might make them better financial decisions.

Problems with Biases in Behavioral Finance:

  • Biases are only often biases if you view them through the lens of what economic theory very narrowly and mathematically deems to be rational.
  • There’s nothing irrational about having the need for a  short-term immediate emotional comfort.
  • A lot of deviations from narrow economic thinking are not irrational at all. They are perfectly reasonable. It is just that other people are bringing other objectives to bear on the decision.
  • The other problem is the tendency to look at the world through a list of biases.

Classical Finance would typically remove irrational behavior from its theories and models. However, the position of Behavioral Finance is much more subtle. As humans, we need emotional comfort. We need to be comfortable with the decisions we make and with the portfolio we hold. There is nothing irrational about that.

You need to find a way of not switching off your emotions but utilising them effectively – Greg Davies

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Emotions are actually a very good source of information for us if we use them in a thoughtful way – Greg Davies

Resources:

Farnam Street by Shane Parish 

Recommended Books:

Where To Find Greg Davies:

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