Dan Ariely Decodes Why Humans Are Hard-Wired To Inflate

 I liked the application of  time preference affecting the inflation/deflation tradeoff ...   interesting!

 I can see the "identifiable victim" effect as also biasing in favour of  inflation/bailouts/subsidies at the expense of the anonymous taxpayer...

 I guess it's a variation on the "broken window" fallacy too, wherever benefits are visible, immediate and personal we favour them even if the associated costs are far larger but anonymous, delayed, and dispersed.

 It's easy to see how the same principles apply to pollution (concentrated benefits, widespread costs), tragedy of the commons, resource scarcity..  and a "non-negotiable" lifestyle...

 It's a sort of perverse, myopic utilitarianism... the greatest temporary good, as soon as possible,  for the most visible.

Wow! What a fantastic dose of content, delivered in a most effective manner (for us auditory learners, at least). That podcast was full of a lot of interesting ideas and observations.

I would have to say that the "high price of ownership" concept applies equally well to gold ownership (and its associated blindspots) as it does to the house ownership example discussed. It wasn't until I sold my physical gold that I recognized some of the theoretical and emotional baggage that comes with the "gold identity".

Applying the deferred-pain observation to the inflation/deflation debate was a bit of a stretch in my opinion. Of course people are inclined to defer pain, but they never escape the consequences of that pain by doing so. I deal with people in physical pain everyday in my practice, and I cannot cite one instance where deferring the pain (with painkillers, for instance) allowed anyone to ignore the underlying problem in the long run. Eventually the painkillers no longer work, and the person is left with dealing with a more complicated problem than they originally sought to avoid in the first place.

Inflating the credit supply (QE) is just a painkiller for the excessive debt pathology plaguing our economy. Sooner or later, QE will no longer work to ameliorate the symptoms and underlying pathology will have to be dealt with directly. Debt-deflation is not a choice, but a consequence. 

Thanks again for the interview, I look forward to more.....Jeff

The thought of behavioural economics theory in the hands of government economists is frightening.

I agree with Chris that the moral hazard element was and is an important factor in how banks have behaved. This is supported by comments from bank insiders including Nassim Taleb. That Dan Ariely - an influential economic researcher - doesn't get this and that he doesn't understand the fraudulent nature of a government backed fractional reserve banking system I found disturbing.

Thanks for presenting the podcast.

I thought that the deferred pain insight was the most important of a very revealing set of insights.

Across the centuries and across cultures, living under entirely different sets of circumstances we find people generally behaving the same.  The question as to why that might be is rooted in biology and how we are wired up.  Without imposing our values on whether that's the way we aught to be, or should be, or not, I find the observation that people will strongly favor deferring an immediate and certain pain for a distant and uncertain pain to be highly useful and telling.

Also, the idea that simply putting some complexity between the action and the consequence, as little as a single step,  provides sufficient 'allowance' for individuals to rationalize otherwise unacceptable behavior(s) is powerful.

I feel like three's some sort of basic truths being uncovered by this work; ones that explain much and are like little light bulbs going off in my brain.  

Of course, my main background, once upon a time, is rooted in the biological sciences (Pathology and Cell Biology) and I view humans as organisms wired up and programmed just like any other.  Understanding that base programming is essential to getting a good outcome.  Never expect a basset hound to herd sheep, and never expect a sheep dog to lie quietly in your house all day without destroying it.  That sort of thing.

If deflation represents an immediate pain, and it does, and inflation represents an uncertain future offering the chance that somehow we might dodge the bullet entirely (hey, there's always a chance, right?) then B.E. explains why that path is a slam-dunk choice for policy makers no matter that the risks associated with inflation might be an order of magnitude larger than deflation.

People are rationalizers, not rational.

Chris,

Utterly fascinating man. I'm forever drawn to creative people, especially those who lean toward observational study, who identify deeply with a personal experience, sometimes a devastating one, with the result that they become hard-wired advantageously from the event, turning inward upon themselves and finding a substance that can change others lives about them.

Sir Ken Robinson suffered from polio in his childhood, and his inner strength from his life changing experience gained him an ability of empathy that far surpasses ordinary routine observation : -

Dan Ariely suffered seventy percent burns due to an accident with a magnesium flair explosion when only eighteen. He far surpasses many of the observational skills, well beyond most I feel, because of this experience. Both gained standing ovation, and deservedly so, at recent Ted Talks conferences : -

There is such a genuine embrace to understand and to make this world a better place to live, and his energy and dynamism is fully infectious and engaging. So much so that I've surfed all over the net to find him today. An interview that expands further with your discussion left me with the conclusion that I wanted to know much much more about his work : -

I've read the opening previews of his books at Amazon.com that you linked above, leading me to buy: -

Predictably Irrational: The Hidden Forces That Shape Our Decisions

Thank you sincerely for sharing the pleasure he gave you with this interview.

~ VF ~

All,

Are you tired of being a sheeple?  Have a look below and you'll see what I mean.

An item of signficant value to me was Dan's comment (paraphrasing):

"You can motivate people through negative emotions but then you must tell them what to do."

Look carefully at the sentence and you'll see how easy it is for all of us to be controlled through negative emotions (mainstream media, advertising, entertainment of all sorts, etc.) where a logical conclusion (or hidden message) is drawn to pull the strings of our actions. 

What's more Dan voiced concern about how easily sensitized our emotions can be to particular events (the example of the dog on the sinking ship or the slaughtering of a calf) - I believe his inference was that this can be used to misdirect us from other issues (keep us off the ball).

There is only one person who has control over you in this world - and that is yourself - IF you want to take back that control.  So if you don't want to be a sheeple anymore the way to do this is to get control over your emotions.

Impossible you say?  So would I have thought until I took a course a couple months ago called ZPoint.  You can find more out about it at www.zpointforpeace.com   I now use the Bedtime Therapy on a daily basis to clear my negative emotions from the day and get a better sleep. 

Anyways, 2011 is going to get a lot more crazy and I think we will only have a short time until the next big financial crisis in April.  When you are ready to give up the half box of chocolates and do the work necessary to get the full box of chocolates then keep this website I recommended in mind.  After all, Dan mentions that pain is the other motivator - how much pain are you willing to keep taking?

All the best,

James

P.S.  As a friendly challenge...if anyone doesn't like my idea I hope they can respond without negative emotion...although I guess later they can enjoy the irony...

The way I understand it, he's talking in generalities and about herd behavior... The majority of humanity is not evil. There are sociopaths out there, but they need to figure out how to manipulate the "sheeples", otherwise nothing happens. They would get killed, and game over.

Samuel

Great and instinctively sound insights.  This article in the NY Times jives with it all.  Someone from MIT has actually proposed a wallet linked by Bluetooth to your bank account that is more difficult to open (uses a computer controlled hinge designed into the it) depending on the amount of your account balance - i.e., a technology means of interrupting the human tendency for immediate gratification.  Fascinating stuff.

http://www.nytimes.com/2011/01/02/weekinreview/02siegelbernard.html?src=un&feedurl=http%3A%2F%2Fjson8.nytimes.com%2Fpages%2Fweekinreview%2Findex.jsonp

VF,

I share your expressed sentiments and I very much enjoyed the additional material that you provided. 

Thank You,

Jeff

Nice interview.  Indeed we seem to be wired to discount the future.  In fact, I would argue that this fact is behind the reason that the Fed picks a non-zero inflation target for their monetary policy.  Their job is to find that "sweet spot" where the pain of inflation's effect on fixed assets (like pension funds and 401k money sitting around) is  about the same as our "discount rate" for the future - and hence is a spur to investment.  

Hyperinflation,however, is a different beast.  It has its own immediate pain.  Hence, the Fed and the federal government has very reason to avoid this path, even though it may cure "deficit" problems.  Mild inflation, on the other hand, is both stimulative and provides a nice tax that I'm sure Dan Ariely would agree is easier for us to tolerate than actually having to pay money today in real taxes.  Similarly, wages never go down in a slump because there is a great deal of emotional investment in that meter of our worth that we are unwilling to give up.  So there is much-much to keep inflation rolling along.  I would disagree that there is any reason to expect Hyperinflation, however.  The FED can always create a slump by raising interest rates high enough to shut off the investment machine.  It's hard to see how inflation can maintain traction under those conditions.