Why Consumers Aren't As Crazy As They Seem

A chat with bestselling author Dan Ariely about bad bosses, online dating, revenge, and his new book.

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In his 2008 bestseller Predictably Irrational, Dan Ariely executed some intellectual loop-de-loops that helped explain why we make a lot of decisions that on the surface seem less than logical. The Duke University professor now has a follow-up, The Upside of Irrationality, in which he continues the mental gymnastics and suggests a variety of ways that companies can be more effective and consumers can be happier. I spoke recently with Ariely about workplace habits, coffee, online dating, and revenge. Excerpts:

How is this book different from your first? This book is very different. It's much more personal than my first. Since I wrote Predictably Irrational, I had the opportunity to talk with many of my readers, and as a consequence, I feel that we are having a discussion with an increased level of intimacy. So I talk about my injuries and how they helped me think about life in a different way. A severe injury makes you stop and think a little differently. It took me out of my regular cycle of life, and made me able to contemplate some stuff I wouldn't have thought about otherwise.

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You apply some of that thinking to ordinary things, like how people behave in the workplace. How do we act irrationally at work? We tend to fall in love with the wrong ideas. I show this in many ways. People love ideas that they created. They think their own ideas are more valuable than somebody else's. Now, you could say this is terrible, because it makes you susceptible to lots of mistakes. But it turns out that it's also useful because it gets us to focus and concentrate and put time and money into things. You could say that we should value an idea on the merits, regardless of who came up with it. But we don't do that.

[See 10 Ways to Make Any Job Healthier.]

That's known as the not-invented-here syndrome, right? What's a good example of that? Thomas Edison is a good example. He invented direct current, while at about the same time, Nikolai Tesla, who worked for Edison, invented alternating current. Both argued that their system was the best. The only one that's really scalable is alternating current. To power big cities over great distance, you need AC. It's a very good source when the power source is far away. Edison was wrong about alternating current. But he was so in love with own idea that he didn't want to consider that Tesla might be right. He even went out of his way to sabotage Tesla.

It turns out that when you make something yourself, you love it more. And if the instructions are difficult to follow, your love for it increases even further once you've put it together. So, here are some questions to consider: Would you enjoy dinner more if somebody cooked for you or if you cooked for yourself? Would you rather have someone create an awesome garden for you, or create it yourself? If the goal is just outcome, you'd never want to do anything yourself. But it turns out we're really bad at estimating our enjoyment. We don't invest in lots of things that would make us happier.

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How does this insight affect the way people live and make decisions every day? No. 1, you want to invest more into those things that could actually make you happier. If you spend more time building things that you'll use on a daily basis and creating your own stuff, you might think that it will be a pain, but there's a good chance that in the end you'll enjoy it more. The moment you create something, that thing is more interesting to you, more nuanced, more valuable.

What can companies do with this kind of information? You want to let people create things. If your company builds products, it could be product design. In the workplace it's also about ideas. When people create ideas, they love them more.

What if you don't have the kind of job where you're responsible for creating something? It doesn't have to be something big and important. Imagine something simple—your next assignment. How could your boss present it to you, to make you feel you had a choice in choosing it?

You also write about our digital lives. Talk about that. In one chapter I discuss online dating. What we have now is a really pitiful solution. Online dating is one area of life where we've moved from a centralized market to a decentralized one. Nobody tells us how to date anymore. Yentas are gone and parents don't get as involved in their kids' matches. On top of that, people move across great distances constantly. Social networks are really fragments of conversations, which make it really hard to maintain romantic relationships.

So online dating as a market maker is incredibly important—but sadly, it is badly designed. Imagine if you took 100 people you know, 50 that you like, and 50 that you don't like. Try to describe them using the same dimensions as you would on an online dating site. Their height, weight, income, political affiliation, etc. Now, without knowing their names, tell me how much you like them. Do you think you'd be able to sort that group into those you like and those you don't like? Online dating sites try to describe people in ways that are easy for computers to use the data. As if we can describe people like digital cameras along the lines of pixels and memory size. But people are much more like wine. We are much more complex. You can taste it and tell whether you like it or not, but the attributes don't tell you much. So we end up with a badly designed market.

[See how to Stay Upbeat Amid Financial Ruin.]

I gather you have a better idea. Let's step back and look at real dating. What do people do? Usually they go and experience something together. It's not usually the case that people type on a computer and ask each other questions. Instead, they do something together. So maybe we learn something about each other by experiencing something together. Going to an art gallery or a restaurant. Seeing how each of you reacts to other people. Even if I can't put my finger on it, I get a sense of what you're like.

So we experimented with virtual dating. People went into virtual space, each person was represented by a square or a circle and a particular color. Each virtual space had stuff in it. Like art or a picture, music, movies. You could go next to those things and other people could do the same thing. If you got close, you could start talking. But you'd be talking about something. We found that this method is about twice as good in terms of creating real dates and regular dates than the typical online dating experience. Our approach was not very sophisticated, but even something that simple produces twice the outcome. It turns out [that] it provides a lot of info for people to be able to make better decisions.

What's the broader point? The more important point is that systems should be compatible with the way people look at information and reason about it. That is just crucial. In the financial sector, for example, are products described in ways people can understand? Annuities. Insurance. Mortgages. Take for example, something simple like car insurance. If you have liability of 300,000 what does that mean? For the insurance company, it means something because they have lots of information. But you and I as consumers have no idea. These things are a little bit like online dating.

Think about computers. Do you really care how much RAM and speed your computer has? Do you really want to understand the processor or hard drive or bus? Of course not. We get this description of computers and make all these decisions, but what we want to know is how it will feel to work on this computer. Will it be fast or slow? That's what you want to know.

What I'm trying to say is that we need to take peoples' natural abilities into account. What we're good at and what we're not good at.

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These kinds of tensions must play out in small ways, every day. Take coffee. Coffee is such an ambiguous experience. We're not supposed to like bitter tastes, but we train ourselves to like something we're not supposed to. Given the complexity of something simple like coffee, it's very hard for people to figure out what's the right amount to pay for coffee. Because it's so hard to do, most people get sucked into a habit. Once we pay a certain price a few times, we stop asking questions about whether it's reasonable and we just assume it's the right amount.

We've done some amusing experiments with coffee. In one of them, we gave people coffee, then we gave them an additive that nobody ever uses with coffee. Like cumin or saffron. We wanted to know what would happen if you serve those additives in really fancy metal and glass containers as opposed to hand cups or Styrofoam cups. People drank the coffee and nobody ever put these additives in. But just the existence of the glass and metal containers make people think the coffee is better and pay more for it. Coffee is a good analogy for many things in life. The experience is ambiguous. But it tells us the range of acceptable experience is incredibly wide.

This all suggests that people are extremely manipulable. I was with some friends recently and we were asking, how could we get people to enjoy eating more fruits and vegetables? Can we create a consumption vocabulary around apples, like we have for wine? We could describe the sound they make, the texture, the taste. We know it increases enjoyment of wine drinking. So it might be true to say that people are manipulable, but you can use it to get good things to happen.

[See 9 signs of America in Decline.]

So as your book title says, there are upsides to irrationality. A lot of irrational tendencies have wonderful aspects to them. If you were going to design a person, would you really want a human being to be perfectly rational? If you had the choice, would you choose a spouse or a kid with all these flaws, or somebody who's perfectly rational? When we ask that in surveys, the moment people think about what rational means, they say they don't want it. Because we do lots of wonderful things to each other even if it's irrational. Like trust. What would happen if you left your wallet by your desk and then you stepped away? If somebody passed by and realized they could steal your wallet and get away with it, they'd take it. Rationality has no morality.

People can be strange and myopic and vindictive, but we also have this incredible sense of helping other people. We help older people cross the street, we give directions, we give tips to waitresses even in restaurants in other towns that we have no intention of coming back to. This always puzzles economists. Why would anybody give a tip under these conditions, ever?

People vote. If you're purely rational, you'd never go to vote. So that's the picture I want to portray, we have this complex nature, susceptible to mistakes but also wonderful, and I don't think we want people to be perfectly rational.

It makes me feel better about some of the foolish things I do… As another example, think about revenge. It's actually quite useful. Imagine if you wanted to steal something from me and you believed I was perfectly rational. You might think that you could get away with it, because I would say to myself, "Well, I lost this and it is not worth the time to find you, so I better move on." But if I was irrational and vindictive, I would not care about the time and energy it would take to hunt you down, and I would do it just to punish you. Under those conditions, you probably wouldn't take anything from me to start with. So revenge is really an interesting mechanism that facilitates and creates order in society. Revenge and trust are closely related. They're two sides of the same coin. The reason we can have trust is that we have revenge. Trust is incredibly useful, you want to have trust in society. It's an incredibly human thing, and irrational, because if people just calculated what's in their best interest all the time, they'd lie all the time.

We don't have a great deal of trust these days. The banks, the bailouts, the government… The last two years have been a very low point in trust. It's hard to sink farther below our current level of trust in financial institutions. It's really sad because I don't think any financial institutions understand how important trust is. Banks in general have a well-deserved bad reputation. But none of them are taking steps to increase our trust. If some of them would make a move and give us more reason to trust them, we as consumers would flock to those banks.

[See 6 Strains on your Financial Future.]

Does thinking this way make you cynical or optimistic? It makes me more optimistic. As a social scientist, I think of myself as a social hacker. I want to understand where people fail, where mistakes come from, and then learn how to fix them. I have great optimism that we will discover more of our mistakes and ways to deal with them to create a better world for ourselves.