Ask The Experts: Dan Ariely ANSWERS - Part 1 (10)
A couple of months ago, we asked you what questions you'd ask world expert in irrationality Dan Ariely. Dan Ariely is the New York Times best-selling author of "Predictably Irrational", professor of behavioural economics at Duke University, and a repeat speaker at TED where his talks have been watched more than 7.8 million times.
We collected your questions for Dan, and we sent our crack interviewer Alex Tsatkin, aka the Angry Russian, to ask those questions of Dan in person in San Francisco.
And now... you have your answers!
The interview was absolutely massive, so we're going to split it up into parts and release them over the next couple of weeks.
In Part 1, we learn about Dan's recommendations for entrepreneurs, social norms vs marketing norms, what mistakes most businesspeople make, and what makes you love a product...
Let's go!
Alex: I think I mentioned we're going to talk about different subjects. First I really want to talk about the social implications of your research and what they mean specifically for entrepreneurs, online marketers, and people who are moving away from more traditional corporate-type structures. The first question would be, why do you think that is happening? Why do you think that there is a generation of people that choose entrepreneurship over going into finance or law or more steady careers? Do you feel like it's that they have to or is it just a situational kind of event?
Dan: The general question of why more people are going into entrepreneurship, I think it is because of a bigger sense of connection to what you're doing. Of course there are people who cure diseases and build bridges and do all kinds of things but in many jobs we really don't feel that connected to the final outcome of what we're doing. There's lots of ways to get connected.
You can care about the final outcome. You can care about the team, but the more entrepreneurial you are and the more you work with a team of people you really care about, the more aspects of meaning you get. You develop a business. You're contributing to its growth. You decide who to hire. You figure out how to work together. All of those things are really about autonomy and feeling of connection. They give people tremendous sense of satisfaction.
Alex: With that being said, we know that there's irrational behaviors that people exhibit while becoming an entrepreneur. What kind of advice or what pitfalls would you warn against, or ways that you could create success for, not just yourself, but maybe your employees as well?
Dan: There are lots of them. I think the first one is probably overconfidence. Maybe the best example is to think about restaurants. What's the percentage of restaurants that actually open and succeed? It's incredibly, incredibly low. What happens is when people think about opening the restaurant they don't really evaluate the chance of success properly. It's actually an interesting question because individuals who go into opening a restaurant and are likely to fail are probably behaving irrationally from their perspective, but think about society as a whole.
How much would you want to live in a society where nobody takes a risk and nobody opens a new restaurant? Not so much, so sometimes the individual irrationality is actually good for society. You want to live in a society where lots of people take risks, try new things. Sometimes they succeed and everybody benefits from them. I think overconfidence is one of them. Now, do we want to cure overconfidence? Of course not. We want to have some overconfidence but we want to get people to keep it in check to some degree.
I can't tell you how many entrepreneurs I meet, they basically just seek no data. They have an idea of where they want to go. They're going full force and you say, "Have you read anything? Have you checked anything? Have you looked at anything?" They said, "No. I realize I probably should but I really believe in that." In some sense it's a wonderful thing to have a deep belief in something and follow it. On the other hand it is a danger.
I think an important approach is to think about what am I assuming? What do I really know? If I don't really know something what kind of data should I get? One of the things we propose in science is to always have a second hypothesis. We say, "This is plan one. What is plan two?" so to keep on thinking about plan two all the time so that if it's actually better at some point you can switch to something else. I usually don't quote mediocre movies but there was this movie World War Z. Do you remember that movie?
Alex: You watched that?
Dan: I watched it, yeah. I watched it for a particular reason. There was a episode there where they said the whole world was being taken by zombies and Israel was doing well. They asked the question of, how come? The thought was that every time that all the people get together and they agree on something, they assign somebody to work on the opposite hypothesis. Assume that everything we're saying here is wrong. Please come up with a scenario that would be the opposite of that. It's a good way to think about it because it's time consuming. If you have 12 people in the room and everybody agrees you say, "Why would we take one person and get them to work on the opposite hypothesis?"
If you think that you might be wrong then it's a good idea to take somebody to put an alternative hypothesis. You develop now a new business and you have a business model and so on. What if you also dedicate some of your thoughts to say, "What if some of the assumptions are wrong? What would be an alternative business model under those other assumptions?" and not put 100% of your effort here because also then you'll be blinded. It's not just about lack of commitment. It's that you'll be blinded to information, but if you have an alternative hypothesis at some point you might be able to say, "This is actually a better way to go."
Alex: That's actually really good advice. You touched on one other issue that I think is important. How do you know what data to look at and how to validate your assumptions? This is definitely a difficult thing for most people.
Dan: It's very difficult. I don't think there's a good answer. When you look at art, art is always an abstract representation of reality. What's so interesting, you and I, we look at a good piece of art and we would say, "We understand what aspects of reality this represents." There's lots of things that are being left out but somehow the process of art is to keep the essential in and eliminate all the other things. Data is kind of the same way where you can't represent everything exactly. If you finish developing something and you have this exact thing you can measure it exactly.
Let's say we came up with a new version of Facebook and we got some people to use the new version and some people to use the old version and we saw how it worked. We would have the real data, but if we're not there yet, if we're developing something, the question is what is essential to the representation and what is just secondary? There's no good, systematic way to do it because it is based on your assumption. Once you have your assumption this is the way to go.
Alex: What I'm seeing with things like Airbnb and Uber, is they're creating market norms out of things that used to be social norms, like, "Hey, can you pick me up from the airport?" I have friends in the city but I don't even think about doing that anymore. Same with Airbnb. I have friends in the city but it's almost easier to do Airbnb than ask for something that I always used to ask five, 10 years ago. I want you to talk a little bit more about this trend of taking social norms and turning them into market norms, and how you feel it's going to play out in humanity and the effects it's having. Talk about that a little bit.
Dan: Let's think about social norm and marketing norms in two ways. First of all, let me tell you about the new experiment we just carried out. This was an experiment we did with Intel, the chip manufacturer. This was in one of their factories. In that factory people come for four days, 12-hour shifts a day, and then they have four days off. Then they come back and they have four days on, four days off, and so on. That's their work cycle.
What Intel has been doing for a long time is that when you come for the first day of the shift they give you a threshold. They said, "If you produce 1,300 chips we will give you a $25 bonus. If you produce below that, zero." It's a threshold bonus. Then the second day there is no bonus. No bonus on the third day. No bonus on the fourth day. Four days off, back to the bonus. We tried to get them to do some experiments with us. The first thing we said was, "What about the control condition?" What's a control condition? A condition in which you don't give any reward. They agreed.
We had one condition, no reward; one condition $25. Then we set another condition. "What if we told some people that if you perform at that level we'll send them pizza at home." We thought, "We'll make them heroes in the eyes of their families." It turns out it was too difficult for the HR department of Intel to send people pizza at home but they agreed to give people a voucher for pizza. Then we had a fourth condition in which we gave people a compliment, a next text message from the boss, if they reach that level. People came on that day, a quarter of the people were told nothing, a quarter of the people we said, "If you reach this level you'll get $25," a quarter of the people, "If you reach this level you'll get a voucher for pizza," a quarter of the people, "If you get this you'll get a nice text message from the boss."
Then we measured what happened on that day and everybody, all the three conditions, performed better than the control condition and they were all the same: money, pizza, text, all the same.
Alex: Really? Okay.
Dan: That surprised us. That surprised us. The next thing was what happened on the next day. Now you remember the next day has no reward. There's no incentive, but is there any residue from the initial reward on the second one? Basically here's what happened, if this is the level of the control everybody performed better on the first day. People who were offered money performed on the second day worse than the control condition. It's as if they said, "Yesterday you paid me. I was interested. Today you're not paying me. Not interested anymore." They went below the control condition and went up and up back to the control condition. By the way, with this insight we went to the Intel management and we said, "Look, you created this bonus condition because you thought it would help but in total, by giving people money you lost about five percent of productivity. Clearly your intuitions about motivation are off. Why don't you let us play with the incentives for upper management," and of course they were not interested.
What happened with the text? The text went up and went down slowly. What happened with the pizza? It went up, went down slightly below. It was kind of in the middle. This is the notion. You see, when we think about the modern workplace a lot of it is about goodwill. The question is, what creates goodwill and what eliminates goodwill? What we find is that sometimes you can pay people and you could incentivize them at the moment but you're hurting the general goodwill. That's actually the very general lesson.
Could I ask you for a favor? Yes. Would you be happy to do it? Most likely, and you would feel good about that. What happens if I paid you? If I paid you I all of a sudden eliminate the goodwill. I tell you, "Hey, this is a job." Now you might have been motivated to help me fix my computer or give me some advice, do something. If I pay you $5 an hour you would say, "I'm not interested." I've taken out the goodwill. I've emptied it and now I'm just paying you. If I pay you $500 an hour you might do it, but for small amounts you might not.
The first thing to realize is that motivations are not additive. People care about lots of things. We care about pride and a sense of meaning and competition and money and all kinds of things. The strange thing about money is sometimes we can add money and take other things away. That's incredibly important to understand and in many ways in society we're eliminating goodwill. Think about the "No Child Left Behind" policy is an example. We took teachers who thought they were working for ideology and the future of the country and so on and all of a sudden we said, "If your kids will perform really well you'll get another $400 a year." Teachers said, "That's all? Really? That's how you value me?" and all of a sudden things went away.
You can think about the gift. What would have happened today if you came to talk to me and you brought me $25 in cash as a thank you versus you bought me a bottle of wine that maybe even cost less than $20? One of them is saying, "Really? That's it?" The other one is a gift exchange. That's one thing to realize, is that we live in this complex world where money can sometimes detract from motivation. Now the other question is about what's so-called, sometimes, the "sharing economy". The question is, how do we think about the world of ... Let's just talk about Airbnb as one example. I think within Airbnb we really have multiple markets. There's the Airbnb of renting an apartment. I don't think that's a social world. I think somebody has an apartment. They're not staying there.
I was recently in Portland. I rented an apartment from somebody. This is a person that owns five apartments. It's their business. They are basically a host and basically doing local renting through Airbnb. There's no social connection. I don't know the name of that person. I don't remember their email. They emailed me the code to the door. Everything was distant, but it was a wonderful place. It was next door to the pot dispensary so I could smell it. It was a wonderful, odd, interesting place but it's not in the social realm. Now, here's the thing. I live in Durham in North Carolina. I signed up for Airbnb. What would convince me to rent a room in my house for somebody? Now that's a very different case. It's not renting an apartment. It's renting a room.
It means that I'm going to get somebody into my family. They will open the fridge. They will have breakfast with us. They might stay for dinner. Who knows what it is? That's a very different world. I think that's where Airbnb is kind of getting it wrong, because yes, if I was very poor and I needed the money I might do it but then it would be much more in a business transaction. I really need the money. Durham is not that expensive. Let's say I could rent a room for $50. Would I really do it for the money? Not so much, but would I do it for something else? Would I be willing to do it for free if somebody was interesting?
Again, imagine that people came to stay with me and instead of giving me money they would give me a gift. The gifts could be much more meaningful, or another thing: what if I said I have a guest room and I'm letting people stay that I just want to help and I want people to contribute money to future guests. All of a sudden it's not a transaction between me and them. For $50 a night I really don't want to be somebody's maid. It's just not where I view my value. If I said, "I have this room and if you want to leave money I'm going to improve the quality of the guests moving forward," all of a sudden the transaction would be different. I think there is a question for these sharing economy kind of services in how they want to think about this question of social and market norms. I think that the way that they're taking now, they're going down the economic efficiency path, but they don't have to.
What are the chances that you would drive one of your friends to the airport for the same price that Uber takes them? Not that much. What if the money was not going to you, but we were going to define a charity that you and all your friends care about and now your friends will be willing to put even more money into it if you took them. It doesn't have to be this efficiency but we have to design a system to figure out which system do we want? Do we want the system that is all about exchanging money, and then it will be between the rich and the poor and there'll be no friendship in there? Or, do we want to do something that takes the money exchange and makes it about efficiency as well but also provides opportunity for more social exchanges. Now, I'm hoping that they will go in that direction.
Alex: I think what's taxable is usually the direction it goes in because the governments create systems that they can track. I actually heard that bartering for this kind of thing, for Airbnb, is illegal in some places because it's not taxable. You can't report it.
Dan: Bartering, in general, is very complex. I'm hoping that the government will figure out a way to think about it in time. Think about the world in which getting a room somewhere in the city is very cheap and efficient, and because of that you never stay with your friends. Is that a good world? Think about the world in which you can hop up on an Uber and there's just a million of them running everywhere and they're not that expensive. Is this a world in which you don't ask for favors, you don't give favors, you don't spend another hour in the car with a friend as you land from somewhere? Not clear that that's the right approach. Life is not just about maximizing how we spend our money, or at least this exchange.
I think there's more to it and I worry that we're eliminating some of it. When people stay with me ... Sometimes before people show up you say, "Why did I agree to do it? Now I need to make the bed and get new towels and do all this stuff," but when they're there it's often a wonderful, meaningful experience. I think there is a risk of farming too much. Actually the extreme, of course, is parenting. Do you want somebody else to just take care of your kids 24 hours a day? You will be just the delivery ... not you, but somebody ... will be the delivery mechanism and then that's it, because not all moments with kids are great, but still the experience ... I'm not saying you want zero help but you also don't want to eliminate everything.
Just as another example, we had these set of papers in what we called the Ikea Effect. The Ikea Effect is the idea that when you make something yourself you love it to a higher degree. I don't know about you but Ikea furniture always seem to come with crazy instructions. I get things wrong and so on, but after struggling with the furniture for a while I end up that I like the Ikea furniture to higher degree. I'm attached to it. We've been struggling together for a day. We did some experiments and we showed that as people struggle with creating things they end up liking them more: cooking yourself, making art, furniture, assembling. All of those things that might be difficult also create a sense of achievement and completion and satisfaction that you wouldn't get if everything was just about efficiency.
In Part 2: Dan explains the key difference in how we interact with mobiles compared to desktop, and talks about the company he thinks exploits irrationality really effectively...
This is definitely worth reading!
Excellent points. Grab a copy of Predictably Irrational if you can. Well worth the read.
To me, the key point this first part is psychological framing. The ability to present something in a manner that allows participants to draw the utmost value out of the interaction. Another speaker who frequently talks about similar set of problems is Rory Sutherland. Reference talk if you're interested: https://www.youtube.com/watch?v=iueVZJVEmEs
Tremendous and mind-blowing!! I'm a big fan of Dan Ariely. A million thanks go to Alex and Hugh for making this happen and for putting this together!
Amy
man i can't wait for the next installment!
i guess i'll just have to watch world war Z in the mean time.
For me easily one of the best content STM has ever produced! Ariely is simply amazing. Also a big standing ovation for Alex for doing this.
Originally Posted by northernlights
@northernlights - definitely, a big round of applause to Alex. He really knocked the interviewing out of the park.
A very interesting read, thanks for making this happen!
A wonderful take on marketing and it's changing trends.For me the best part was the need to have one person in your team make an alternative hypothesis to prepare for plan B.Also, I appreciate the precise explanation of the link between motivation and money.
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