Common mistakes in daily decisions

The Old Theatre at the LSE was completely packed last evening for an entertaining and riveting lecture from Dan Ariely, the author of “Predictable Irrationality”. Dan Ariely has for many years used experimental methods to discover more about many of the biases apparent in our everyday behaviour. His lecture was rich in examples and encouraged us at all times to think counter-intuitively.

The talk started with some great illusions including this one

He showed how subtle changes in the wording of opt in or opt out clauses on driving licences can have a huge effect on the percentage of drivers who are ready to give up their organs for donation in the case of a fatal accident. We learned about how conflicts in the range and complexity of choices we have arranged in front of us can lead all sorts of people - from the most skilled physicians to people choosing jam to revert back to their default decisions.

Dan Ariely emphasised that “defaults are very powerful, especially when there are many choices or the choices are complex.” And he argued that consumers frequently don’t know their own preferences to the extent that conventional equilibrium economics tends to assume. We often rely heavily on our first decisions, or common standards that have the effect of anchoring our behaviour. Getting people to change our preferences can be difficult and the solution might be to get people to consider more clearly what their preferences are in order to bring about such a change.

I loved the examples of asymmetric dominance used to guide our purchasing decisions in a certain direction (memo - when heading out on the town to meet a future partner, it makes sense to take an accomplice who is slightly inferior to you in terms of favourable attributes!).

The lecture moved on to consider herding behaviour, much of which can flow from information cascade effects. So many of our day-to-day decisions display individual herding behaviour (i.e. choosing the same decision over and over again) and much of this can be due to people remembering their previous actions much more than their preferences.

The final parts of the lecture focused on the incentives we face to cheat or commit minor crimes and the economic costs of major compared to minor crimes. Dan Ariely showed that the final effects of people cheating a small amount is cumulatively greater than the effects of people engaged in planned dishonesty; this is mainly due to the huge numerical advantage that this group holds over the genuinely bad (an unapologetic) apples in the bag. The value of theft and fraud committed within businesses is massive and so too are the ‘minor crimes’ from consumers returning products back to shops which can no longer be sold for full price! His experiments suggest that getting people at least to contemplate their morality can have a prior effect on behaviour. Making cheating feel less comfortable might be a minor change with a major impact?

Dan concluded by saying that the “goal of economics should be to give us important insights into human behaviour” but that policy-makers should spend more time considering experimental research before framing and introducing big policy decisions. There are lots of ways that a government can give away $150 bn in the form of a fiscal stimulus to support an ailing economy - cash, credit notes, and gift certificates for example. But knee-jerk tax rebates introduced with little or no experimental research findings as an underpinning risk fresh examples of government failure.

Rarely have I experienced an hour in a lecture hall that flew past so quickly! We were treated to a feast of visual illusions and a vivid journey through many of the decisions that are part and parcel of our everyday life. Any professor who can explain how the tricks that make online dating more successful might also be the cause of disillusionment with Barack Obama when we finally meet him for a coffee deserves many plaudits. My students enjoyed this lecture hugely and I urge you to watch it online when it is streamed on the LSE web site.

Unit 2 Macro: Cyclical and Structural Economic Issues Facing the UK [23 May 2012]
Unit 2 Macro: Evaluation on Supply-Side Policies [21 May 2012]
Unit 3 Micro: Game Theory and Business Economics [21 May 2012]
Revision notes on unemployment [20 May 2012]
Unit 2 Macro: Bank Cuts UK growth Forecast for 2012 [16 May 2012]
Unit 1 Micro: Economics of Cocoa Prices [12 May 2012]
Unit 1 Micro: Economics of a Minimum Wage [12 May 2012]
Unit 1 Micro: Asymmetric Information [12 May 2012]
Unit 1 Micro: De-Merit Goods [12 May 2012]
Unit 2 Macro: Revision Notes on Supply-side Policies [10 May 2012]
Unit 2 Macro: Unemployment Glossary [5 May 2012]
Macro Revision: Putting Things in Context [29 Apr 2012]
Unit 4 Macro: The Euro Zone Crisis (Revision) [22 Apr 2012]
Unit 2 Macro: Revision on Interest Rates and the Exchange Rate [3 Apr 2012]
Unit 1 Micro: The Collapsing Price of Carbon [3 Apr 2012]
Unit 1 Micro: Revision on Producer Subsidies [2 Apr 2012]
Unit 4 Macro: Floating and Managed Floating Exchange Rates [2 Apr 2012]
Unit 1 Micro: Revision on Producer Cartels [31 Mar 2012]
Unit 2 Macro: Revision on Capital Investment [30 Mar 2012]
Unit 1 Micro: Government launches New Buy Loan Guarantee Scheme [12 Mar 2012]
Unit 2 Macro: Policies to Drive Economic Recovery [9 Mar 2012]
Mortgage interest rates, LIBOR and game theory [3 Mar 2012]
The Economics of Climate Change - Stern 5 Years On [21 Feb 2012]
A return to Glass-Steagall to prevent another crash? A lesson from economic history. [17 Feb 2012]
Unit 4 Macro: King on the UK Economy [15 Feb 2012]
Martin Wolf on Global Shocks [10 Feb 2012]
Daniel Kahneman on decision-making [5 Feb 2012]
Unit 1 Micro: Winning the War on Deforestation [5 Feb 2012]
Unit 1 Micro: Can the UK Computer Games Industry Grow [24 Jan 2012]
Unit1 Micro: Processed Meat and Cancer Risk - Information Failure? [17 Jan 2012]
Unit 2 Macro: Videos on Productivity [17 Jan 2012]
Unit 2 Macro: Frontier Markets - the New BRICS? [15 Jan 2012]
Unit 4 Macro: UK Bond Yields Reach Record Lows [11 Jan 2012]
Economics at the Movies - Freakonomics [9 Jan 2012]
Unit 4 Macro: Natural Disasters and their Economic Impact [7 Jan 2012]
Unit 1 Micro: Externalities from Metal Theft [2 Jan 2012]
Unit 4 Macro: Exchange Rate Economics - Where next for the US Dollar? [31 Dec 2011]
Unit 1 Micro: Biomass Subsidies and Timber Prices [30 Dec 2011]
Unit 2 Macro: The UK Housing Market in 2011 [26 Dec 2011]
Unit 3 Micro: Sub Normal Profits - BP Leaves the Solar Industry [21 Dec 2011]
Economics of Deforestation [20 Dec 2011]
Prezi on Information Failures [20 Dec 2011]
Unit 2 Macro: Long Term Unemployment - A Human Story [15 Dec 2011]
Unit 2 Macro: Will a Youth Jobs Subsidy Work? [30 Nov 2011]
Behavioural Economics: Herd Behaviour [28 Nov 2011]
Beyond the Bike - What is the value of life in Africa? [19 Nov 2011]
LSE Lecture: Daniel Kahneman - Thinking Fast and Slow [15 Nov 2011]
Unit 2 Macro: Should the EU introduce a Tobin Tax? [14 Nov 2011]
Unit 1 Micro: Asymmetric Information - Buying a Used Car [14 Nov 2011]
LSE lecture: Darwin economy [13 Nov 2011]
AS Macro: The State of British Business [13 Nov 2011]
Behavioural Economics: Bittersweet Symphony - The Psychology of Food [8 Nov 2011]
Unit 2 Macro: Video Clips on Unemployment [6 Nov 2011]
Unit 3 Micro: Impulses to Change Management Models [5 Nov 2011]
Unit 4 Macro: Should TNCs make full disclosure on factory wages? [30 Oct 2011]
Unit 3 Micro: UK Executive Pay - All in it Together? [29 Oct 2011]
Unit 1 Micro: Is the Sun Dipping on Solar Subsidies? [27 Oct 2011]
Can the “invisible hand” solve Africa’s poverty? [13 Oct 2011]
Unit 1 Micro: Copper prices and a copper crime wave [10 Oct 2011]
Unit 3 Micro: Tube Drivers set to earn £50,000 a year [3 Oct 2011]
Unit 1 Micro: The Supply and Demand Rap! [28 Sep 2011]
Unit 1 Micro: Drink Driving and Government Intervention [26 Sep 2011]
Unit 1 Micro: Exercise on Market Supply [26 Sep 2011]
Behavioural Economics - The IKEA effect [25 Sep 2011]
Unit 1 Micro: Sleep, Money, Happiness and Choices! [25 Sep 2011]
Unit 4 Macro: IMF Flags up Risks of Double Dip [20 Sep 2011]
Study Note - The Basic Economic Problem: Scarcity and Choice [13 Sep 2011]
UK Macro: Risks of a Double Dip Recession [12 Sep 2011]
50% tax rates - Chuck it George [7 Sep 2011]
An activity for the first Economics lesson of the year! [31 Aug 2011]
Monetary Policy Roundtable [25 Jul 2011]
Unit 2 Macro: Reducing Unemployment after a Recession [11 Jul 2011]
Where there’s muck there’s brass [6 Jul 2011]
Glastonbury, rain, mud, abandoned tents and negative externalities. [4 Jul 2011]
Global Economy: Increased risk of future shocks [28 Jun 2011]
Unit 1 Micro: Are carbon taxes ineffective? [20 Jun 2011]
Poor Economics - Esther Duflo at the LSE [3 Jun 2011]
AS Macro Key Term: Supply-Side Policies [25 May 2011]
Unit 3 Micro: Monopsony Power in Markets [19 May 2011]
A2 Micro: The Importance of Profit [19 May 2011]
Super-cooperators and Game Theory [19 May 2011]
Unit 3 Micro: Perfect Competition [19 May 2011]
A2 Micro: Business Growth [18 May 2011]
A2 Micro: Innovation Efficiency and Welfare [18 May 2011]
A2 Micro: Ownership and Control in Modern Businesses [18 May 2011]
Unit 3 Micro: Diseconomies of Scale [18 May 2011]
UK Economy Update: What Mervyn Said [11 May 2011]
Electric car charging points ‘shortfall’ [11 May 2011]
Review of “Adapt” by Tim Harford [9 May 2011]
AS Micro: Offering heart drugs by default [5 May 2011]
Dominos Pizza turns to Behavioural Economics [5 May 2011]
A2 Micro: Innovation in Markets [4 May 2011]
AS Micro Revision: Public and Private Goods [21 Apr 2011]
Key AS Micro Terms: Prices [15 Apr 2011]
AS Macro Key Term: Frictional Unemployment [11 Apr 2011]
A2 Macro: Back to Roubini - a Year On! [11 Apr 2011]
RES Essay Competition - Obesity and a Fat Tax [7 Apr 2011]
AS Macro Key Term: Aggregate Supply Shock [6 Apr 2011]
Information Failures: Tesco and Second Hand Cars [3 Apr 2011]
AS Micro Revision: Banana Prices [1 Apr 2011]

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