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Author Archive: "Dan Ariely"

The Psychology of Money and Habits

Money is an integral part of modern life. We constantly make decisions about whether we're willing to pay for different products and, if so, how much we are willing to pay. In fact, we make decisions about money so often that we consider money to be a natural part of our environment .

However, money is a relatively recent invention, and despite its incredible economic usefulness it does come with its own set of problems. In particular, it turns out that decisions about money are often non-intuitive and, in fact, quite difficult. Consider the following situation as an example: You are thirsty, tired, and annoyed and just want a cup of coffee. You see two coffee shops across the street from each another. One is a specialty coffee shop that sells handcrafted, designer coffee and the other is Dunkin' Donuts which sells standard, decent coffee. The price difference between the two options is $1.75 for your cup-a-joe. Now, how do you decide if the benefit of the handcrafted coffee drink is worth the additional $1.75?

What you should do (if you wanted to be rational about it) is consider all of the things that you could buy with that $1.75, now as well as in the future, and decide to buy the expensive coffee only if the difference between the two coffees is more valuable than all of those other possibilities. But of course this computation would take hours, it is incredibly complex, and who even knows all the possible options to consider?

A Crisper Solution

I personally find fruit and vegetables to be not only healthy, but also delicious. I enjoy cooking and preparing them, and try to eat them often. Sometimes I wind up spending egregious amounts of money getting the freshest local organic produce. Still, even when I empty my wallet at the farmer's market, some of my fruit and veggies inevitably end up wilting or rotting in the fridge, leaving a fairly unpleasant sludge. A number of things could contribute to this waste — but I'd like to point out a few simple design flaws that I think we can fix.

1) I suspect that one of the main culprits is the produce drawer in the refrigerator. Most refrigerators have a special drawer designed to hold produce, usually located at the bottom of the fridge. The drawer is often just barely opaque and for some reason difficult to open. Because of these "features," when you open the fridge door, you look straight ahead, to the leftover lasagna or apple pie (and their convenient position) come to mind, leaving the carrots and nectarines hidden and forgotten in the vegetable drawer. If the design of the produce drawer is one of the barriers for eating the fruit and vegetables we have already purchased, what can we do about it? For one, instead of using the crisper to store fruit and vegetables, we could put them on a higher shelf so that they are more inviting when that door is opened. We'll smile and say to ourselves: "Oh, right, I now remember I have blueberries and I want to eat some of them."

Some Thoughts about Gifts

From a standard economic perspective, gifts are a waste of money. Imagine that you invite me over for dinner one day and I decide to spend $50 on a bottle of wine. There are a bunch of problems: To start, I am not sure what wine you would like the most. And besides, maybe you'd prefer something else, like a book, a DVD, or a blender. This means that the bottle of wine that cost me 50 dollars might be worth, at most, 25 dollars to you.

If gift-giving were rational I would come to dinner and tell you, "Tom, thanks for inviting me for dinner. I was going to spend $50 on a bottle of wine, but realizing that this might provide you with only $25 of benefits, here is the cash instead and you can decide how best to spend it."

(Or even better, maybe I would split the cost and offer Tom $37.50, making both of us better off.)

Save Your Own Life

What would you think if someone told you: Do the right thing because your life may depend on it? Or more accurately, that you better start making better decisions because it is a matter of life and death. This may sound like something an overprotective parent would tell their child, but in reality it's the way most of us should start to think about our day-to-day decisions and their potential to lead to harmful habits and fatal consequences. It is hard to believe that this is true, but recently, researchers have done some interesting analyses on this topic and the results support the idea that personal decisions, and often fairly mundane ones, are a leading cause of premature death in the United States (and I suspect that similar numbers are also the reality in the rest of the developed world).

One of the most interesting analyses on the ways in which our decisions kill us is one by Ralph Keeney (Operation Research, 2008), where Ralph puts forth the claim that 44.5% of all premature deaths in the US result from personal decisions — decisions involving, among other things, smoking, not exercising, criminality, drug and alcohol use, and unsafe sexual behavior. In his analysis, Ralph carefully defines the nature of both the type of personal decision and what is considered premature death. For instance, dying prematurely in a car accident caused by a drunk driver is not considered premature in this framework because the decision to drive somewhere is not one that can logically be connected to the premature death. Unless, of course, the person who dies is also the drunk driver, in which case this counts as a premature death caused by a bad personal decision. This is because the decision to drive drunk and dying as a result are clearly connected. In this way you can examine a large set of cases where multiple decision paths are available (the drunk driver also has the option to take a cab, ride with a designated driver, or call a friend), and where these other decision paths are not chosen despite the fact that they won't directly result in the same negative outcome (i.e., fatality). As other types of examples, consider the decisions to smoke (when not smoking is an option), to overeat (when watching our weight is an option), or for people with long term medical conditions to skip taking insulin or asthma medication when these are important to their ongoing health.

From Personal Experience to Exploring Irrationalities

My interest in the irrationality of human behavior started many years ago in hospital after I had been badly burned. If you spend three years in a hospital with 70 percent of your body covered in burns, you are bound to notice several irrationalities. The one that bothered me in particular was the way my nurses would remove the bandage that wrapped my body. Now, there are two ways to remove a bandage. You can rip it off quickly, causing intense but short-term pain. Or you can remove it slowly, causing less intense pain but for a longer time.

My nurses believed in the quick method. It was incredibly painful, and I dreaded the moment of ripping with remarkable intensity. I begged them to find a better way to do this, but they told me that this was the best approach and that they knew the best way to remove bandages. It was their intuition against mine, and they chose theirs. Moreover, they thought it unnecessary to test what appeared (to them) to be intuitively right.

After leaving the hospital, I started doing experiments that simulated these two ripping methods. And I found that the nurses were wrong: quick ripping turned out to be more painful than slow ripping. In my experiments, I discovered a collection of approaches that could have been used to lessen the pain or manage it more effectively. For instance, they could have started from the most painful part of the treatment and moved to less painful areas to give me a sense of improvement; they could have given me breaks in between to recover.

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