Wednesday, April 28, 2010

The Empirical Economist: Dan Ariely

Robert Langreth writes:

  • His second book, The Upside of Irrationality, comes out in June. In one chapter he describes experiments suggesting that large bonuses won't improve executive performance. He teamed up with Carnegie Mellon economist George Loewenstein and others to test 87 residents of a poor village in India on a variety of tasks involving memory, fine motor skills and creativity. Some were promised a few hours or few weeks of pay if they did the tasks well. Others could get much larger bonuses--the local equivalent of six months of pay. Performance plummeted when people knew they were in the big-bonus pool. "The way to understand it is we are rediscovering choking with money," Ariely says. "For some reason nobody ever thought this applies to bonuses with executives."
  • Ariely says textbook economics is a fine approximation of the world--perhaps half of the time. The problem is that "we take economics too seriously as a society" and assume it works all the time. The world, he says, would be better off if economists spent more time in the field. "In every other field of science data is worth more than theory," he says. Unlike some behavioral economists who focus on high finance, Ariely looks broadly at everyday decision making. He has a knack for taking a complex phenomenon and encapsulating it in a simple experiment. One set of experiments shows that college students are more likely to cheat on a task with financial rewards when they know a confederate from the same university is doing it and getting away with it. If they know someone from a rival school is cheating, they are less likely to cheat.
  • Standard economics, Ariely argues, provides few solutions to the world's problems because it assumes people are making perfect decisions. "People are making mediocre decisions. If you get them to make better decisions, you might have a better world."

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