Dan Ariely's Blog, page 53

Help Me Choose a Title

My next book is about dishonesty, the little daily lies we tell but quickly justify. Right now I have a few ideas for what to call it, but I would really like your feedback. What would you find more appealing? Let me know here. Thanks for your feedback.

Upside of Irrationality: Chapter 11

Here I discuss Chapter 11 from Upside of Irrationality, Lessons from Our Irrationalities: Why We Need to Test Everything.

A Dinner with Drug Reps

Janet Schwartz of Tulane University and I recently spent an evening with a few pharmaceutical reps, men who used to be in the business of selling a wide range of drugs to treat all kinds of diseases and conditions, from fibromyalgia to depression to restless leg syndrome. As drug representatives, they would go from doctor to doctor attempting to convince physicians to prescribe their company's drugs. How? They would typically start by passing on informative pamphlets and give out products like pens, clipboards and notepads advertising their drugs.

But we knew that there was more to the story, so we tried the pharmaceutical reps at their own game – we took them to a nice dinner and kept the wine flowing. Once we got them generously lubricated, they were ready to spill. And what we learned was fairly shocking.

Picture these guys: attractive, charming young men. Not the kind of guys who would have trouble finding a date. One of them told us a story about how he was once trying to persuade a reluctant female physician to attend a seminar about a medication he was promoting. After a bit of schmoozing, she finally decided to attend – but only after he agreed to escort her to a ballroom dancing class. This was a typical kind of quid pro quo where the rep does a personal favor for the doctor and the doctor promotes the rep's product in return.

Another common practice was to bring meals to the doctor's office (one of the perks of being a receptionist), and one office even required alternating days of steak or lobster for lunch in exchange for access to the well-fed doctors.

Even more shocking to hear was that when the reps were in the physician's office, they were sometimes called into the examination room (as "experts") to inform the patients about the drug directly. And the device reps experienced a surprisingly intimate level of involvement in patient care, often selling medical devices in the operating room, while the surgery was going on.

Aside from learning about their profession, a very interesting feature of this dinner was realizing how well these pharmaceutical reps understood classic psychological persuasion strategies, and how they employed them in a sophisticated and intuitive manner. One clever tactic that they used was to hire physicians to give a brief lecture to other physicians about a drug. Now, they really didn't care what the audience took from the lecture, but were actually interested in what the act of giving the lecture did to the speaker himself. They found that after giving a short lecture about the benefits of a drug, the speaker would begin to believe his own words and soon prescribe accordingly. Psychological studies show that people quickly start believing what is coming out of their own mouths, even when they are paid to say it. This is a clear case of cognitive dissonance at play; doctors reason that if they are touting this drug, they must believe in it themselves — and so they change their beliefs to match up with their speech.

The reps employed other tricks like switching on and off various accents, personalities, political affiliations, and basically served as persuasion machines (they may have mentioned the word "chameleon"). They were great at putting doctors at ease, relating to them as similar working people who go deep-sea fishing or play baseball together as peers. They used these shared experiences to develop an understanding that the physicians write prescriptions for their "friends."  The physicians, of course, did not think that they were compromising their values when they were out playing with the drug reps.

I was recently at a conference for the American Medical Association, where I gave a lecture about conflicts of interest.  Interestingly, the lecture just before me was by a representative from a device company that created brain implants.  In his lecture he made the case for selling devices in the operating room because the doctors may need help learning how to use the device. And in order to fight conflicts of interest, the company no longer takes physicians to Hawaii for their annual conferences — and instead they have their conference in Wisconsin.

So, what do we do?  First, we must realize that doctors have conflicts of interest.  With this understanding we need to place barriers that will prevent this kind of schmoozing, and to keep reps from accessing doctors or patients. They, of course, have the right to send doctors information, but their interactions should stop there.

I have one more recommendation: What if we only hire people to be drug reps if they are over 75, misanthropic and unattractive? Not only would these individuals have more personal experience with the healthcare system, but it could at the same time reduce conflicts of interest and open up job opportunities to an undervalued population.

Upside of Irrationality: Chapter 10

Here I discuss Chapter 10 from Upside of Irrationality, The Long-Term Effects of Short-Term Emotion: Why We Shouldn't Act on Our Negative Feelings.

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Upside of Irrationality: Chapter 9

Here I discuss Chapter 9 from Upside of Irrationality, On Empathy and Emotion: Why We Respond to One Person Who Needs Help but Not to Many.

http://www.youtube.com/watch?v=DlzHxU...

Calling Artists…

Calling All Artists for "Cheat Codes"

Artists from around the world are invited to attend a discussion about behavioral economics, dishonesty and cheating at the Center for Advanced Hindsight on October 25 at 7:30 PM EST.  (Artists who do not live within driving distance of Durham, NC can watch the forum streaming live online.)

Interested artists should RSVP to Catherine Howard (irrationalcreativity@gmail.com) by October 24 by 9 PM for driving directions and/or the online streaming link.

After the forum, applications will be circulated to artists interested in creating artwork to depict their reflection on cheating and dishonesty.  Applications will include a brief explanation of the artist's creative process and 2-3 digital images of past work.

Please submit applications to Catherine Howard at irrationalcreativity@gmail.com by October 28.

Artists will be notified if they are selected to participate by October 29 and will receive a $100 stipend to complete their piece.  There is no limitation to the style or media of pieces created for "Cheat Codes," but all work must be completed by November 26. 

Artwork created for "Cheat Codes" will be on display the Center for Advanced Hindsight from December 3, 2011 to January 31, 2012.  An exhibit catalogue / book, including responses and reflections by the artists and the researchers at The Center For Advanced Hindsight, will be published. Each artist will receive a copy.

Artists will retain all rights to their piece. Works will be returned to artists after the exhibit by February 15, 2012.  If the piece is purchased, the $100 stipend will be deducted from the purchase price.

Important Deadlines

Oct 25, 7:30 PM: Dishonesty forum at the Center for Advanced Hindsight

Oct 28, 9 PM: Deadline to apply for participation in "Dishonesty"

Oct 29, 9 PM: Selected artists will be notified

Nov 26, 9 PM: Drop-off deadline

Dec 16, 6 – 10 PM: Opening reception at the Center for Advanced Hindsight

For more information about the Creative Dishonesty project, contact curator Catherine Howard at irrationalcreativity@gmail.com.

Upside of Irrationality: Chapter 8

Here I discuss Chapter 8 from Upside of Irrationality, When a Market Fails: An Example from Online Dating.

Upside of Irrationality: Chapter 7

Here I discuss Chapter 7 from Upside of Irrationality, Hot or Not? Adaptation, Assortative Mating, and the Beauty Market.

Asking the right and wrong questions

From a behavioral economics point of view, the field of financial advice is quite strange and not very useful. For the most part, professional financial services rely on clients' answers to two questions:

How much of your current salary will you need in retirement?
What is your risk attitude on a seven-point scale?

From my perspective, these are remarkably useless questions — but we'll get to that in a minute. First, let's think about the financial advisor's business model. An advisor will optimize your portfolio based on the answers to these two questions. For this service, the advisor typically will take one percent of assets under management – and he will get this every year!

Not to be offensive, but I think that a simple algorithm can do this, and probably with fewer errors. Moving money around from stocks to bonds or vice versa is just not something for which we should pay one percent of assets under management.

Actually, strike that. It's not something we should do anyway, because making any decisions based on answers to those two questions don't yield the right answers in the first place.

To this point, we've run a number of experiments. In one study, we asked people the same question that financial advisors ask: How much of your final salary will you need in retirement? The common answer was 75 percent. But when we asked how they came up with this figure, the most common refrain turned out to be that that's what they thought they should answer. And when we probed further and asked where they got this advice, we found that most people heard this from the financial industry. Sort of like two months salary for an engagement ring and one-third of your income for housing, 75 percent was the rule of thumb that they had heard from financial advisors. You see the circularity and the inanity: Financial advisors are asking a question that their customers rely on them for the answer. So what's the point of the question?!

In our study, we then took a different approach and instead asked people: How do you want to live in retirement? Where do you want to live? What activities you want to engage in? And similar questions geared to assess the quality of life that people expected in retirement. We then took these answers and itemized them, pricing out their retirement based on the things that people said they'd want to do and have in their retirement. Using these calculations, we found that these people (who told us that they will need 75% of their salary) would actually need 135 percent of their final income to live in the way that they want to in retirement. If you think about it, this should not be very surprising: If you add 8 hours (or more) of free time to someone's day, they will probably not want to spend this extra time by going for long walks on the beach and watching TV – instead they may want to engage in activities that cost money.

You can see why I'm confused about the one-percent-of-assets-under-management business model: Why pay someone to create a portfolio that's 60 percent too low in its estimation?

And 60% is if you get the risk calculation right. But it turns out the second question is equally problematic. To show this, we also asked people to tell us how much risk they were willing to take with their money, on a ten-point scale.  For some people we gave a scale that ranges from 100% in cash on the low end of the risk scale and 85% in stocks and 15% in bonds on the high end of the risk scale. For other people we gave a scale that ranges from 100% in bonds on the low end of the risk scale and buying only derivatives on the high end of the risk scale.  And what did we find?  People basically looked at the scale and said to themselves "I am a slightly above the mean risk-taker, so let me mark the scale at 6 or 7." Or they said to themselves "I am a slightly below the mean risk-taker, so let me mark the scale at 4 or 5." In essence, people have no idea what their risk attitude is, and if they are given different types of scales they end up reporting their risk attitude to be very different.

So we have an industry that asks one question it's giving the answer to, and a second question that assumes that people can accurately describe their risk attitude (which they can't). This saddens me because, while I think that financial advisors are overpaid for the service they provide, in principle they could contribute much more, and they could even deserve their salary. But only if they start offering a more useful service, one that they are in the perfect position to provide. Money, it turns out, is incredibly hard to reason about in a systematic and rational way (even for highly educated individuals). Risk is even harder.

Financial advisors should be helping their clients with these tough decisions! Money is about opportunity cost. Every time we think about buying a car or going on vacation we should be asking ourselves what we won't be able to afford in the future if we go ahead and make this purchase. And that's where the financial advisor should come in.

It's possible that the best financial advisors already do help in this way, but the industry as a whole does not. It's still centered on the rather facile service of balancing portfolios, probably because that's a lot easier to do than to help someone understand what's worthwhile and how to use their money to maximize their current and long-term happiness.

The fact is that money is hard to think about and we do need help with making financial decisions. The financial consulting profession has an opportunity to reinvent itself to service this need. And if they do, it will be beneficial for both financial advisors and their clients.

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A shorter version of this appeared at hbr.org

Upside of Irrationality: Chapter 6

Here I discuss Chapter 6 from Upside of Irrationality,  On Adaptation: Why We Get Used to Things (but Not All Things, and Not Always).

If the video is not working — www.youtube.com/watch?v=9pzB3NXr7ys