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research A Conversation with Dan Ariely WHY DO PEOPLE CHOOSE to purchase a 15-cent gourmet chocolate rather than a lesser quality one-cent chocolate, but turn their noses up at a 14-cent gourmet chocolate if its lesser competitor is free? Why does com- pany performance decline as CEO incentives increase? Because the human psyche is governed by irrationality, says researcher Dan Ariely, the James B. Duke Professor of Behavioral Economics at Duke University's Fuqua School of Business in Durham, North Carolina. Ariely addresses such questions in his bestselling books Predictably Irrational and The Upside of Irrationality and on his blog at www.danariely.com. People can make irrationality work for them, Ariely says, if they're more conscious of how it works. He spoke on this topic and others at AACSB International's annual meeting in New York City in April. How has behavioral economics changed since you began your studies? As researchers, we've moved from the lab to the field; it's become more applied and less theoretical. We've learned that rational economics doesn't work in principle, so we want to understand exactly how the same way. Of all the regulation changes made in banking, none have addressed the conflicts of interest. So, the financial crisis was a wasted crisis. You became interested in behavioral economics after you suffered a serious accident and saw how your mind adapted to the difficult circumstances that followed. How has your own view of behav- ioral economics changed since then? When I first started my research, I assumed that indi- viduals might be irrational, but that companies are always rational. But I did not understand that irra- tionality is even more rampant in companies than in individuals. Also, I didn't realize how much we look for ways to It turns out that people can cheat a little bit and feel very good about themselves. As long as we cheat just a little, we can still see ourselves as honest, thanks to our cognitively flexible psychology. it fails, and we're more interested in how to actually change how people behave. The financial crisis really helped us in this regard. It's sad to say, but you probably cannot think of a better example of irrational economics than the finan- cial crisis, which showed us just how big the problem is. I think the financial crisis eliminated the illusion that little people make mistakes from time to time, but professionals and big decision makers don't. In your second book, you talk about the "upside" of irrationality. Was there any upside to the financial crisis? The only possible hope would have been if we had learned from what happened and fixed the problems. But the crisis was caused by conflicts of interest, and we haven't eliminated those conflicts. I don't think bankers are evil—if you or I made $5 million dollars a year to sell mortgage-backed securities, we'd behave 60 May/June 2011 BizEd Dan Ariely of Duke University