Dan Ariely, the James B. Duke Professor of Psychology and Behavioral Economics, currently teaches at Duke University and is the author of the bestsellers Predictably Irrational and The Upside of  Irrationality. His  TEDx lectures have over 12 million views and counting. Prof Ariely is the founder of The Centre for Advanced  Hindsight.  His work has been featured in a variety of media including The New York Times,  Wall Street Journal, Washington Post, Boston Globe, Business 2.0, Scientific American,  Science and CNN.  I can say much more, but I am sure if interested, you would follow the links and educate your self-serves, as prof Ariely is truely impressive. Enjoy the interview.

Let’s start with the basics. What is behavioural economics and how does it differ from the classical economics?

In classical economics we assume that people are always rational – we make the right decisions, we consider everything, we don’t have emotions, we look into the future. In behavioural economics, we don’t assume much. Instead, we put people in different situations and we see how they behave. And it turns out that when you put people in different situations and see how they behave, they often don’t behave rationally – people are emotional, don’t look into the future, we don’t consider all the options, we are looking for a shortcut – we do all kinds of things that are far from being rational. And this is the key and the reason it’s so important is if you want to get the world to be a better world, if you want to design the world in a way that is compatible with how people function, whether you offer health insurance or education, or whatever you design, if you take into account the human nature, you are likely to design something that is going to fit with peoples trueability. But if you assume that people are perfectly rational, you are going to design things that are not in line with how people function and people are going to make mistakes.

This year the Nobel prize went to the field of behavioural economics for the second time, 15 years ago the award went to Daniel Kahneman “for having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty”. What has changed over these 15 years in the field of behavioural economics?

I think the biggest changes in behavioural economics have occurred because of technology. So, we always did lab experiments and we could do things in the lab, but measuring how people behave in the real world has been difficult. Think about something like dating. We could do some experiments in how people form attraction in the lab, but measuring lot of people on how they date and form attraction was difficult. Or think about shopping. We could get people to do some shopping things in small environment but we couldn’t really track how people do that. Now we have Amazon. So what happened over this time is that we got much more and better data and with better data, the field between the lab and the field has changed. And the field became more interesting because now we can study more things that are about real life but also the evidence has become much stronger. So it’s becoming an area of research that has moved from the lab into the field – it became more interesting, more exciting, dealing more and more with things that people deal with on a daily basis and also the evidence and data become more interesting.

Has the discipline reached a point where it can be used for making tools for setting public policy?

First of all, I think, the answer is – obviously yes. Public policy is basically an attempt of the regulator to change human behaviour. It has always been like this. If the case was that people were behaving perfectly, nobody would have started policy. We only set policies when we think people are not behaving well. Now, the question is what kind of insights about human behaviours are we incorporating – if we are incorporating naïve notions of people being perfectly rational then it’s not going to work. But if we take the new answers of how people actually behave, then policies are going to work out. So think about something like the death penalty. In the US some states have a death penalty and some state don’t and the logic of the death penalty is that people would worry about the death penalty, they will fear it and they will not behave badly, they will not murder for example. The results show that this is not the case. That the death penalty doesn’t change the propensity of people to commit a crime. So here is a policy that we have, that is based on the idea that people will do the cost-benefit analysis but people don’t do the cost-benefit analysis and therefore it‘s an ineffective policy. And, of course, this is an extreme example, but there are many-many example like this.

Isn’t behavioural economics limiting in terms of unifying the lack of rational motivation behind the decision-making process just as the standard economy unifying theory?

Standard economics has a unifying theory, basically saying that all people are motivated by money and they don’t take anything else into consideration. Behavioral economics says that people are motivated by money, and by pride, and by competition and there are lots of different things and it’s slightly uncomfortable to realize how complex life is, and the economic theory is much simpler in many ways the behavioural economy is more complex. And there is something uneasy about the complexity of behavioural economics. The standard economy might say – I have a theory I have a solution, I will tell you exactly what to do. Whereas behavioural economist will say – I have a few theories, and I can propose an experiment to see which one works in your situation, but they don’t have this conviction that they have the right answer for everything.  It’s an uncomfortable position not to know exactly what’s the right thing to do, but I think it’s also truer. In the same way, when an engineer builds a bridge, you want him to take into account the specifics of every particular environment, I think in the same way when we come into implementing something into social science we need to understand the particulars in each environment, and not just assume that we could just abstract everything is the same.

Could you please give us a couple of practical examples when behavioural psychology has been successfully implemented?

There are lots of examples. Think about automatic deductions from checking accounts into long-term savings. It is certainly not an optimal approach but it gets people to save. Rules against texting and driving – why would you need such rules, if people were rational nobody would text and drive.

We recently did a scale with no display. We find that when people stay on their bathroom scale the fluctuation of the bathroom scale creates confusion and demotivation so instead of showing people their weight in pounds, we

What is your prediction on the development and implementation of behavioural economics in the future years?

I think that there is going to be a big field of applied social science and this field of applied social science is going to do a lot of good for the world. In the same way that we design anything physical, we think about how it fits with the human abilities. I think it the same thing would work for behavioural economics to apply social science.

The earlier economic models don’t consider the human factor as significant and present it as a random deviation. Behavioral economics, however, claims that these are systematic deviations in human behaviour that go against the theory that irrationality will throw you out of the market. Can you please give an example of these systematic deviations?

I will give you one example that is very telling. People value effort. Here is a little story. Imagine you come to visit me in Durham, North Carolina, you are parking by the parking meter, you need a quarter, you check in your pockets, you don’t have one, I happen to pass by and you say – excuse me, do you have a quarter and I say – yes, I have a quarter, I will sell it to you for a dollar. Most people say – no, thank you, I am not going to buy your quarter for a dollar, I will take my risk. Situation number two – you are trying to find a parking, the parking needs your quarter, you don’t have a quarter, I pass buy, you ask me – do you have a quarter and I say – look, I don’t have a quarter, but I will tell you what – there is bank for blocks down the street, if you want I will run as fast as I can down there, I will change a dollar for quarters and run as fast as I can that, but if I do that will you give me a dollar? Now, not only you would feel happy to give me a dollar, you would feel like you are getting a good deal. What happens here is that we derive value from the amount of effort when we do something, even though at the end of the day you are getting the same quarter for the same price. So here is a bias – we evaluate effort and because of that we pay more for things where the effort is clear and pay less when the effort is not clear. And it is not throwing us out of the market. Of course, it does create some inefficiencies and is also a very systematic deviation from a perfect rationality.