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Dan Ariely: Money and Happiness

Behavioral economist Dan Ariely made a big splash with
his first book,
Predictably Irrational. He's now released a new book called The Upside of Irrationality. Jill Schlesinger talks with the behavioral economist about big Wall Street bonuses, the best ways to buy happiness, and the social value of revenge. What follows is an edited transcript of that conversation.

How is this different from your previous book?


The first book was basically about the psychology of money
and how consumers think about money and decisions about money. This book has
two parts: The first one is mistakes you make in the workplace, and the second
is about mistakes you make in your personal life.


It’s also very different for me because it’s
a very personal book. So the second half, I really kind of draw on my own life,
my accident, how it made
me think differently and I think I got to be a bit more courageous and open. I talk
about my own life. And because of that, I also care much more about how people think
about this book.


Let’s talk about the workplace. You discover that actually,
paying for performance via bonuses doesn’t quite work the way Wall
Street told us it would.


That’s right.


Can you explain that?


It’s actually very simple. People have this very
simple intuition: They say more money would lead to higher motivation, and then
would lead to higher performance. And it turns out, that’s correct,
for very simple tasks.


So if I ask you, for example, to jump. I say, I’ll
pay you $1,000 per jump that you make in the next 24 hours, vs. a dollar —
you would jump much more for $1,000. But if I ask you to think, to be creative,
thoughtful, use your memory, any cognitive capacity — it turns out
the relationship is not like that. And you try more, you succeed more, but
sometimes you try more and you actually succeed less.


The intuitive way to understand this is: Imagine I told
you I’d give you $100,000 to be funny in the next 10 minutes. How
much of your next 10 minutes will you be able to be funny? Or will you basically
panic because you’re not making it?


Wall Street bankers don’t want to believe this data is applicable
to other people in their case.


Would you want to believe it, if you got such a big
bonus?


Wall Street bankers make a ton of money. Would you change the way in which their
compensation is structured?


So, you’re really asking two questions: How much
money should they be given? And how should it be divided? You can still give
someone $100 million, but the question is do you want to give it as a bonus?
Because if it’s a bonus, it creates incredible motivation, but also
incredible stress.

Dan Ariely: What Works Best at the Office

The biggest thing in business that is unknown is
compensation. Every company has a compensation committee — but the
fact is that they know almost nothing. It’s incredible. I’ve
talked to many people in compensation committees and usually they understand
very little about motivation. They know what other companies are paying —
and that they are paying the same as other people — but nobody is
really thinking or experimenting about how to do it.


In these last two years, I went to many companies and said,
“Let’s do study on your bonuses.” And they said, “No.”
I said, “Let’s do surveys on what people feel and think
about it.” And they said, “You know what? People are so
miserable when they get bonuses, now’s not a good time; we don’t
want to add any stress to this.” I said, “If it’s
such a miserable time, don’t you think you should study it, so you
can improve it for next time?” They said, “Maybe next year.”


The mystery to me is how come businesses aren’t
studying the most important part of business — which is how to use
money to motivate people to the highest degree.


In your book, you talk about the idea of how acknowledgement is important
after completing a task. But you say, “Companies, however
unintentionally, choke the motivation out of their employees.” As an
employee, is there anything that I can do to prevent that from happening to me?


So the first thing to understand is that people work for
multiple reasons. Salary is one of them. But pride, a sense of meaning, and
progress are other motivations that sometimes are more important. Money gets
you to go to work. But to care about work and invest in it, think about it: It’s
much more driven by these other factors.


And the question is: How can we find this meaning, when in
many cases the workplace is just not paying attention to those things? There
are lots of little things that you can do — for example, you know,
think about our last interview. Think about how long you worked on it, and what
was the outcome? How little was left once you finished editing?


Now the question is: If you wanted to feel more meaning
after this, what could you do? You could take part of it, you could put it on
your blog, show it to some of your friends, etc. There’s lots of ways
in which you can extract meaning where your workplace has neglected to.


You also say that greater labor leads to greater love. So does that mean
that the harder we work, the happier we are?


When we work on a project, when we invest ourselves into a
project, we value that project more. This goes for everything: You cooked
dinner, you like the food more. You assembled a chair from IKEA, you like that
chair more. You like any idea, if it’s your idea, you’ll
like it more. When we work on a particular project, that project becomes more valuable
to us. Part of ourselves is invested in that process of labor.


But there’s a flip side to that. Let’s say you work for
a company and have an idea — your brainchild; your baby — in
which you’re overinvested. But everyone around you is scratching
their heads and saying it’s not really working. How you do you get a
boss to pay attention?


It’s very hard because once we fall in love with
our own ideas we just see all the advantage. It’s a little like how
we fall in love with our kids. Not only do you fall in love with your kids, you
think they’re wonderful; you think everybody sees them in the same
way.


The question is: How do you project reality into it? And
that’s actually where data is very useful. You know, by the way, that
was one of the big things that happened to Edison. Edison, who, invented the
direct current, had this guy Tesla who worked for him. Now Tesla invented the
alternating current, which had lots of advantages. Edison, however, couldn’t
see it. He fell in love with the direct current, so much so that he chased Tesla
away. Edison tried to get people not to like the alternating current. [He ended
up] kind of destroying the industry for a while. It was really a shame. He
could have had the patent, since it was developed in his lab.


The problem is we fall in love with something we create.
And it also reflects the upside of irrationality: Falling in love with what you
do is wonderful; it gets us to be motivated and caring, and we spend more time
with it. But,it also makes us partially blind, especially when the idea is not
that good.


Are you stuck, if your boss is particularly blind?


No. I think another tactic is to try to come up with another
idea that you think is your own. If you think about it, it’s very
easy for people to actually feel that they own an idea. In fact, we
shared this with readers of the New York Times. We gave them a sentence that
kind of reflects their idea, and we just jumbled a quarter of the words —
and when they reassemble the words themselves, they think the idea is theirs, and
they value it more. They’re willing to spend more time in it.


So, if your boss overvalues an idea, you can try and fight
that, but you can also try and get him to value another idea that wasn’t
originally [his or her] own, but to get them to participate in that. This is
very general, by the way. It’s not just about the boss — it’s
everybody. How do we get other people to participate in an idea — to
be a part of it, and value it more?


You talk about the “hedonic treadmill”: Sometimes
spending money on things is a trap, but experiences tend to have bigger
payoffs.


So here’s what happens. We anticipate: How much
happier would I be if I got the new car? And you think, “I’ll
be really happy,” and indeed you are very happy ... but for a shorter
time than you think you would be. Over a longer time, your happiness diminishes.


That’s for things that are constant: If you get
them everyday, you adapt, you get used to them.

Buying Happiness: Buy a Car or Take a Trip?

There are other things that are not constant, but are
intermittent — like skiing, doing something that is exceptional or
intermittent. You might think, if I buy sofa or a car, I get to enjoy it every day,
and if I go a skiing vacation, I only get to enjoy it for a week. It’s
true — but what people don’t understand is that the enjoyment
from the sofa will be short-lasting, whereas the vacation would actually stay
in your memory and would get you to think differently about parts of your life.
It will actually change your life in a deeper way.


If you think about your experiences — sofa vs.
vacation — odds are you should go for the vacation. Odds are you you’d
get used to the sofa faster than you think you would, and you would enjoy relishing
and thinking back and reflecting on a vacation more than you would a sofa. If
you think the two experiences are similar, odds are you’re
underestimating your adaptation to a larger degree.


So when having a massage, make it last longer. On the other hand, for the tasks
that you don’t like to do — your portfolio, your quarterly
review, taxes, etc. — you say just plow down and do it.


People have this intuition: If I have something wonderful,
like a hot tub or a massage, I should do it and not stop. And if I have
something awful — quarterly reviews, taxes, etc. — I should
take breaks. It’s true that taking breaks from wonderful things is
unpleasant, and taking breaks from a bad thing is pleasant. But what people don’t
understand is that going back to it, you’ll actually be back in a
different place. So if it’s something good, and you take a break, you
come back to it at the same place. But if it’s something good and you
don’t take a break, it becomes not as good over time. So taking a
break actually relieves you from the adaptation, and you come back to a better
experience than you would have otherwise.


The same thing goes with a bad thing: It would become less
bad over time. So if you take a break, you go back, you don’t get
this advantage of adaptation.


Adaptation is one of those things that is good and bad. So
I talk about money, jewelry and how I got used to living with an injury. That’s
the good thing about adaptation. Something bad happened to you, and you learn
over time how to live with it. The bad thing is that when something good
happens to us, we also adapt to it. And the question is: How do we not let adaptation
for good things happen, and how do we let adaption for bad things happen to us?


Our emotions can often lead us to make some bad decisions. Let’s
say you’re in the heat of the day, the market’s down 1,000
points, you feel emotions — what is a natural response that’s
probably going to be in your best interest?


So the way to understand it is that we have these two
systems that help us make this decision. One is cognitive and thoughtful, and
can think about the long term; the other is emotional — and emotion
is about the short term.


Investing should not be done in the short-term system
because investing is not about tomorrow, so investments should not be reactive.
But in fact, here is what happens: Imagine you open your portfolio and you see
you lost 5 percent. What would happen? You would get into a panic that would
change your decision-making perspective, you would not be thoughtful, and you
would make a decision that would probably be negative for you. With
investments, you actually want to turn your emotion off.


There’s two ways to do it. One is to basically
tell yourself never to use emotion when you’re making a decision. And
the other, the way I try to do it, is to never be reactive. I’II
never open my portfolio, see what happened and then make a decision. I try to
make a decision upfront — saying I know what I have, I know basically
what I want, if I read something and I want to change it, I make a decision
about what I want to change and then I go and I change it. But you don’t
want to do it as a reactive way.


The other thing, of course, is to try not to look as much.
The reality is that every time you look, your emotion will get activated.


Emotions are really interesting, right? They don’t
come from within us; they come from the outside world. Something happens and we
become afraid. Something happens, we become aroused. And the question is how
much do you want to get into an emotional state. By not looking so much at your
portfolio, you’re developing a good strategy for feeling less emotion
and therefore acting on it on a lower degree.


So what you’re saying is to make an appointment with yourself —
maybe on the weekend when the market’s not open — to look at
what your positions are and then make your decision from there.


Yes.


What pleasure do we get out of the concept of revenge?


Revenge is really interesting, because again it has both
positive and negative aspects to it.


Imagine a trust game with player A and player B. And we
say to player A, “Hey, player A, you have $20. You can either keep it
and go home, or you can send it to player B. If you send it to player B, the
money would quadruple, so player B would get $80.” Now we tell player
B he can do one of two things: Go home with $80, in which case player A gets $0
— or player B can give player A back half of it.


Now if you’re player A and you think player B is
perfectly rational — you think they’ll go home, you don’t
know them, you’ve never met them — you’ll never
give the money, and player B will never reciprocate.


The first point I’m trying to make is that
people are nicer than economic theory predicts. There is a good chance player A
would give the money and a good chance player B would give the money back.


But imagine you’re player A, you send the money,
and player B decided to go home with the money. Player C comes in and says “Look,
sorry, player B didn’t reciprocate, but I’ll tell you what.
For every dollar you give me, I’ll go, hunt player B down, and I will
take $2 from him . So, if you give me $5, I’ll take $10 from him; you
give me $10, I’ll take $20 from him,” and so on.


The question is: Will you try to get revenge? Would you lose
more money to inflict pain on somebody that you haven’t met and you’ll
never meet, just because they betrayed your trust? As it turns out, people do
it all the time. You might not think that you’ll feel this way,
because you don’t feel angry right now. But if you put yourself into
the situation, and think about places where you’ve been betrayed, you’ll
find people are willing to do it. Part of their brain gets activated when they
do; it’s a part of the brain related to pleasure.


That’s crazy.


It sounds crazy because we trust people too much, but we
also take revenge. Here’s the way to understand revenge: Imagine you
and I lived on an island. And imagine I had a mango, and you really wanted my mango,
and you had a chance to steal it. You might think to yourself: If you steal my mango
and run far enough away, I’ll do the cost/benefit and say, “Should
I chase you or should I get a new mango?” If you run far away enough,
I’ll go and get a new mango. So if I was rational, you might steal my
mango.


But what if I was irrational? What if I had a tendency to get
revenge? Then, if you take my mango and ran away, I would not sleep and I would
not rest; I would hunt you down, I would find you, I would take my mango, I would
take your bananas, I’ll wreak havoc on you. Under those conditions, you probably wouldn’t pick a fight with me.


So two interesting things here: One is that revenge, while
irrational, is sensible — it helps keep order in society. And the
second thing is that revenge and trust are actually two sides of the same coin.
The reason we can have trust is that we have revenge.


And this is one thing I think that the banking industry does
not really understand — how important trust is.


Yeah, well, they’re finding out right now.


They are finding out, but they’re not doing
anything.