Seeking Solutions through Behavioral Economics: Dan Ariely

—By Diego de Soto—

With Peru experiencing what is arguably the biggest economic boom in its history, the business community here is confident and in many cases exuberant. However, because of the economic storms in Europe and the U.S., Peru’s interdependence with these economies, and the social conflicts within the country, the degree of this enthusiasm has been called into question by some analysts.

So just how honest are we Peruvians being with ourselves and others about Peru’s economic prospects?

Being honest with ourselves and others, and what happens when this ability breaks down, is one of Duke University Professor Dan Ariely’s research interests, which he describes in his latest book, “The Honest Truth About Dishonesty: How We Lie to Everyone—Especially Ourselves”.

Ariely, a New York Times best-selling author and one of a new breed of academic rock stars, is a behavioral economist by training. He was in Lima last Wednesday night for a presentation of his new book at an event hosted by Duke University’s Fuqua School of Business. The event was set up for prospective MBA students, and Ariely’s presentation of his new book provided participants with a taste of what they could expect from Duke professors.

Duke University’s MBA program is consistently ranked among the top programs in the U.S., and Allison Jamison, an Associate Director of Admissions at Fuqua, explained how Peruvian students have fared at Duke, and how the recent trend shows these students returning to Peru after completing their studies:

“We’ve always had good representation from Peruvian students in our program, and we’re now seeing tremendous interest in coming back to Peru after the MBA, which maybe is different from years past, I think because of the strength of the economy and the opportunities. In their application essays, students really see themselves as having an opportunity to be a leader, to really effect change post-MBA, so it’s really exciting to feel that energy.”

Ariely currently teaches at Fuqua, in Durham, North Carolina, and his insights surely add value to the program. But how do they do this? What is behavioral economics? In an interview after the event, Ariely gave me the following definition of the field:

“I think the easiest way to think about [behavioral economics] is in contrast to standard economics. In standard economics we make very strong assumptions about human behavior, that people have no constraint in thinking and in reasoning, and no problems with self-control, and people always, always, always make the right decisions. And from that starting point as an assumption, economists make conclusions about how to design the world. Behavioral economics is an empirical study; there are no assumptions. It’s basically saying, let’s put people in a situation and see how they behave. And if they behave rationally, great, if they behave irrationally, let’s think differently about what institution we should build. And when we put people in different situations, they very frequently don’t behave rationally, and the implications are that we should think about institutions very differently.”

Why did he settle on this particular field?

“I started being interested in irrational behavior in the hospital. I was badly burned many years ago and I used to have arguments with the nurses about how to take bandages off. The question was, should we remove them quickly by ripping them off or should we take them off slowly and take more time? They liked the ripping fast approach and I liked the ripping slowly approach. And when I started studying at university I started doing experiments on pain, and what’s the best way to deliver pain over time, and I found that the nurses were wrong, that the fast ripping approach is the worst approach. And what struck me about that was that here were good people with good intentions who were nevertheless doing bad things to their patients all the time. And I think that my motivation is basically to identify where people misbehave and think about how to fix it – like what kind of tools and instruments we can use – but first it’s about understanding their behavior, and then trying to fix it, and that’s basically what’s been driving me.”

In his presentation, Ariely gave a wide array of examples on the way he and his researchers put human behavior under a microscope, using experiments as tools to draw conclusions about human behavior on a wider scale. These experiments often offer insights on how to correct this behavior.

For example, he spoke about an experiment that examined people who had trouble taking important medication at specified times. After examining their motivations for this behavior, Ariely and his researchers then tested a new device with these people, an Internet-connected pillbox which would send a timely message as well as opening the relevant compartment in the box. This significantly increased people’s chances of taking their medication. These sorts of “tricks”, as Ariely called them, are often essential in changing destructive patterns of behavior.

Another major insight which has emerged from his research is that the majority of people cheat a little, whether on their taxes or on a college exam, instead of the conventional wisdom that the majority of cheating is done by a few individuals who cheat a lot. This clearly opens the way for different types of interventions to encourage more ethical behavior.

So according to Ariely, the results of this type of research can give us tools to make better decisions in our personal and professional lives. I asked Ariely about applications of this type of research to countries such as Peru, where a substantial percentage of the population is still poor.

“One example was in Kenya. It turns out that for farmers to buy manure for fertilizing is a really good investment, because it increases production dramatically. But what happens is that they think about buying manure at the wrong time, when they plant the plants, which is when they have no money.

“So they basically did an experiment in which they tried to sell farmers the manure during the harvest season, when they actually have money. And it turns out that it works much better. The farmers could have thought about it, they could have said, I have money now, let me buy it. But they don’t go and do it. But if somebody comes to their house, all of a sudden they think about it and they buy manure, and everybody’s better off.”

And finally, what advice did Ariely have for Peru on a policy level, so that as it grows, it doesn’t repeat the mistakes of high-income countries, which led them to the financial crisis in the first place?

“I think there is a question of banking, and how much of the growth is banking versus real growth. I think there is a temptation for the banking system to get over-inflated and start moving money around with all kinds of hidden fees and these types of things.

“I think that’s one big danger, and the other thing is to think about what rate of growth would give people happiness. If you think about rapid growth versus slow growth over time, which one of those is the most happiness-inducing? There is a temptation, when there’s money and there are tax revenues, lots of benefits, to spend things quickly versus creating a slow change.

“And then I would say that investment in education is incredibly important. Peru has a relatively high Gini coefficient [an economic measure of inequality], and there are basically two ways to fight inequality. One is taxation, to shift money from the rich to the poor, and that’s a short-term solution. The other is education, which basically holds that over time you try to create a better workforce across the country. I think that an economic boom is a good opportunity to think about the real solution to inequality, which is education.”

(Prof. Dan Airely writes a blog, and is also a frequent speaker at TED talks and conferences).

2 Comments

  1. really!.. is this about the Peruvian economy boom being stifled by global atrophy….OR – IS THIS AN ADVERTISEMENT FOR DUKE’S MBA PROGRAM……!

    • To me, from the article, the lesson I derive is does Peru take it’s economic successes and use the rewards for short term gains; or does Peru take the gains and invest for the future by growing the education system.

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