Google is a traditional multinational company on steroids. Andrew Keen

We Need to Understand Our Limitations

We are irrational creatures, argues the behavioral economist Dan Ariely. And if we want to create accurate models for economic analysis and personal behavior, it’s time to embrace that side of our personality. Martin Eiermann talked to Dan Ariely about Amazon, petty theft and the future of the cost/benefit analysis.

The European: Let’s start with a little anecdote: Amazon keeps sending me emails with personalized shopping recommendations. Many of the books on that list would never have caught my attention otherwise. Yet I still click on them rather dutifully and spend my money. That’s irrational, right?
Ariely: We don’t exactly know what we like and what we don’t like. So we often look to other people for hints about what we should get. We used to get those pointers from authority figures. But more and more, we are looking at people who have similar preferences to ourselves for information.

The European: That sounds beneficial to all parties involved: I discover new books, and Amazon gets my money.
Ariely: There is no simple way to answer this question. Because someone else makes decisions for us, it is hard to say when something beneficial turns into a nuisance. That has always been a challenge for advertising, to distinguish between informative and distracting information. If we know exactly what we want, advertising is good. We can get more information about a particular phone or computer and decide which model we want. But if we are not sure what we are looking for, that’s a different case.

The European: So technology is making us more irrational?
Ariely: Yes. The reason for that is that we are creating technology that is not always taking into account the subtle difficulties. Think about cell phones: it is a wonderful technology. But when you combine cell phone use with driving, it can be very dangerous. What happens is that we do not understand all these implications and combine technologies in ways that are potentially harmful. In earlier times, it was not as important that we could shift our attention quickly from one thing to another. Now we don’t have that skill at the same time that technological advance is requiring us to have it. So we are acting irrationally.

The European: But should we question technology itself because of that?
Ariely: There is a flipside to the story as well. Irrationality can be a very positive thing. If you lost your phone in a restaurant, what are the odds that someone would steal it from you or return it to you?

The European: I’d give it fifty percent.
Ariely: I agree that there is a good chance that your phone might be returned to you. But what that means is that someone on the other side is behaving too nicely. In general, we are more trusting than economic models of rational behavior would suggest. So irrationality is not necessarily bad, but it is fundamentally different from what economic theory predicts.

The European: Is it time to abandon the rationality of the cost/benefit model?
Ariely: The model is not especially accurate, but there is something to it: we certainly think about positives and negatives, so the predictions are not always wrong. But the model is never perfectly right.

The European: The classical economic model is providing us with an incomplete picture?
Ariely: If you understand that people are irrational, you want to make sure to build markets in such a way that they protect people from their own failures. The same would hold true in other areas as such, such as the field of public health. An understanding of our own limitations would lead us to create very different institutions that can remedy irrational behavior by rewards and punishments. That role can be filled by the state, or it can be filled by technology. What people want to do is not necessarily the same as what they actually do. If we want to build a better world, we will have to realize that.


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