Irrationality plaguing human decision-making on big issues
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Editor’s note:
Human beings tend to regard themselves as rational. But in fact, we repeatedly take the same wrong decisions and sometimes are not even aware of it. Dan Ariely, MIT professor of economics and bestselling author, recently gave a talk on behavioral tech at Fudan University’s School of Management. He sat down to share with Shanghai Daily reporter Ni Tao his perception of irrationality in workspace, housing and stock markets and even relations between countries.
Q: What are some of the irrationality you spot in workplace?
A: In workplace, I think companies are mistreating their biggest resource, which is human capital. Companies often don’t understand that.
We still have the model of manual labor where you track people for what they do, and pay them by the word or the number of bricks they put down. But the reality is, as we move toward a knowledge economy, good will is more and more important. But companies often do things that are inconsistent with human motivation.
Every company invests in a server or a warehouse or something, it’s an investment in their annual report. In contrast, every time a company invests in human capital, it’s a cost.
But the reality is that human capital is the engine of growth for every organization. We just don’t manage it well enough and don’t get the best outcomes as a result.
Q: What’s irrational about the housing market?
A: First of all, housing is a matter of expectations. People move to cities because of expectations of better quality of life. People buy apartments that are bigger than what they need. The housing market has a lot of irrational behavior when it is caught in a downturn. In Boston, for example, house prices went down dramatically, and lots of people just didn’t sell despite the high taxes they had to pay. It doesn’t obey the logic of supply and demand.
The other irrational thing about housing is that we see people calculating the maximum amount of money they can borrow. That’s not a rational approach. We should start by asking ourselves “what’s my utility for housing?” Sometimes we think that as the decisions get bigger, we get more rational. But that’s not the case. Deciding to get married, having kids, buying a house, how much time do people spend on these decisions? Proportionally, it’s not enough.
Q: Can the same be said of the stock market?
A: I think there are a lot of irrational forces driving the market. The logic is that people and companies are forward-looking, so they would regulate themselves and do the right thing in the long term.
Under those assumptions, the US has reduced regulation, at the cost of very high conflicts of interests. From the social science perspective, conflicts of interests can blind people. What happened to the Wall Street, as we reduced regulation, is that conflicts of interests became more and more powerful. And when you have serious conflicts of interests, you can’t see reality correctly.
Deregulating the market when it has a lot of conflicts of interests is very dangerous. And that’s what we have now. Lots of things are making people uneasy. And one of the most reliable things we can get is bubbles. You get people to trade on anything, and predictably you start a bubble.
Q: Since cooperation is the key to achieving more balanced trade, isn’t it irrational of the Trump administration to wage a trade war?
A: I can’t pretend to understand Trump’s decisions. I don’t follow his Twitter feeds. It’s hard to figure out what his decision-making mechanism is.
I would say in general I worry about people viewing the world as a zero-sum game. I think more often there are situations of negative and positive sum games. Trust is one of the opportunities for positive sum games. I will use the game of public good to explain how that works.
You give 10 people 10 dollars each. They can keep it to themselves or put it in a central pot. In the second situation, all the money will grow five times at the end of the day. In the evening it could be divided equally by everybody. So if everybody puts in 10 dollars, in the evening each has 50 dollars. That goes on for a while. Then one day, one person puts in zero, what happens? In the evening, everybody gets 45 dollars, including the person who puts nothing in. But the person has 55 dollars in all.
That person betrays public good and benefits from it. What happens the next round? Nobody puts anything in. In economics this is considered a game of good/bad equilibrium. The good equilibrium is very fragile. It’s enough for one person to deviate and cause the whole thing to scale down.
A bad equilibrium is one nobody participates in. It is very stable. It just goes back to zero. I think it is a good metaphor for trust in general.
Trade agreement to me is not just about the agreement per se, it is about levels of trust and cooperation. Cooperation has a chance to get a positive sum game where everybody could benefit.
Once we get to a situation with a lack of trust and a competition of minds, everybody can lose. That’s true within a company, across the globe, and certainly for the trade relations between China and the US.
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