People's 'predictable irrationality' and how it affects business

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Duke University professor Dan Ariely writes in three voices: his academic voice, which he uses for scholarly publications; his newspaper voice, which he uses for his weekly advice column in the Wall Street Journal; and his third voice, which he used for his five books. Unlike some academics, Ariely’s expertise – behavioural economics – draws plenty of mainstream interest.

Ariely and academics like him challenge widely held assumptions about the human condition, some of which can have implications for many different groups – governments, businesses and even individuals. Ariely acknowledges that, as an added benefit, his writing style is unique and accessible.

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“When writing about the research, the method is the essence of the story. I try to get people to think of the mystery in that method. So I write about myself and how I came up with the idea, and I write about the tension in the research.”

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Ariely often references his own life story in his work. Raised in a suburb of Tel Aviv, Israel, Ariely suffered third-degree burns on the majority of his body due to an incident with flammable materials. His psychological reactions to the treatment he received ultimately spurred an interest in psychology.

Ariely feels that sharing details about one’s personal life can a strength for leaders in any organization.

“If inclined people act in a certain way, we need to understand why. And I think if we don’t understand why, we might make the wrong inferences. So I think being transparent and open is certainly important. It’s authentic, and it also helps motivation.”

Ariely has delved deep into the intersection between psychology and business. In his first book, he asserted that humans often act in a “predictably” irrational way – not just that we make decisions that are not in our best interests, but that we do so in a systematic way.

Ariely says this finding extends to the behaviour of employees in a business, though it differs slightly: decisionmakers know they might need to justify their decisions at a future time, and so they tend to avoid risk.

“The downsides of making bad decisions is potentially much higher in business. Now you might take risks as an individual, but as an employee you don’t want to lose your job. So I think people in organizations are more risk-averse.”

I did 15% better than the S+P. To me, that suggests that the finance world is not looking at human capital

Prof. Dan Ariely

Ariely also believes that business functions vary in their level of irrationality. Accounting, for instance, is certainly the most rational. On the other hand, people in the finance world might overlook important factors that could impact their investment decisions.

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Ariely looked into the hypothesis of this using a small experiment with employee satisfaction and stock market data over a 15-year period.

“I (simulated the 15 years as if) each year I bought the stocks of companies that employees were happy in, and I shorted the ones that they were not happy in,” he explains. “I didn’t look at the performance of the companies, just employee satisfaction, and I did 15 per cent better than the S&P. To me, that suggests that the finance world is not looking at human capital.”

Outside of business, Ariely sees an interesting future for the field of behavioural economics. For instance, artificial intelligence could have a strong impact on human behaviour – both positively and negatively

“I think there are different types of AI. One type can be used to help us with what we’re already doing. And that’s sometimes good, sometimes bad,” he says. “It’s good because it’s faster. But it’s not so good because sometimes, the decisions we make are not ideal for us.”

??This interview has been condensed and edited from The CEO Series on CJAD 800, hosted by McGill University Associate Professor Karl Moore. This article was written with Dan Schechner, BCom student at McGill. The full interview is available onApple Podcasts.