A couple weeks ago, I watched a documentary on Netflix (NFLX, Financial) entitled, “(Dis)Honesty - The Truth About Lies”. The film is about the research of Duke’s Professor of Psychology and Behavioral Economics, Dan Ariely. As the title implies, the film examines how likely everyday people are to cheat and lie under different circumstances. All of us lie, yet we like to think of ourselves as good people. It turns that the most important variable in determining when we lie and cheat is how we rationalize each situation. In the video clip below, Ariely describes this rationalization process as “the fudge factor”, which may include elements like peer pressure, conflicts of interest, social norms, self deception, etc . The film shows Ariely lecturing to an audience as he walks them through the results of his experiments. As he talks about each experiment, the film shares anecdotes from people who were caught cheating, including a trio who committed insider trading over many years, Tim Donaghy, the NBA referee who was caught betting on games and influencing outcomes, a professional cyclist who eventually got caught up using performance enhancing substances, and other examples. At the end of the film, Ariely considers the immense societal cost of lying and cheating.
The film inspired me to read Ariely’s book, “Predictably Irrational: The Hidden Forces That Shape Our Decisions”. The book argues that people are anything but rational. With classic economic theory, economists argue that actors are always rational with rational being defined as profit maximizing. The last several chapters of the book overlap with the film’s topic of cheating and lying but the book also covers the following topics.
- Social and market norms. In an experiment, lawyers were asked to give a big discount when providing help to disadvantaged citizens. Most of the lawyers refused. However, when they were asked to donate free services, many of them agreed. This example demonstrates that people think of situations in social and market norms. When the lawyers agreed to provide free services, they were thinking in social norms. However, as soon as a fee was introduced, the lawyers began valuing their time in market norms. The book points out that comedian, Jerry Seinfeld, made a career out of satirizing the confusion over social and market norms. Think of how it is socially acceptable to give your mother-in-law a bottle of wine for cooking Thanksgiving dinner, but how offended she might be if you slipped her a crisp $100 bill. This was my favorite topic in the book because so many companies try to use social norms for their benefit. Think of how companies market themselves as having family values but then stick customers with hidden fees. Ariely argues that companies with these mixed marketing messages damage themselves financially in the long run.
- Circle of distrust. The book discusses how cynical we have become of truthfulness in advertising. In one experiment, Ariely set up a booth to give away free money in increments of $1 to $50 with no strings attached. His success rate in giving away money was below 30%. This topic interests me because I wonder whether the effectiveness of advertising and branding has changed. When I read business journals, I regularly come across the narrative that millennials do not respond well to advertising. Google the phrase “millennials want authenticity” and you will get articles discussing how to reach millennials. In the book, Ariely has some ideas on how companies can more effectively communicate with its customers.
- The concept of anchoring. In one experiment, test participants were asked to write down the last 2 digits of their social security number and express it as a dollar amount. For example, if someone’s last two digits were 8 and 9 then they were told to write down $89. They were then asked to bid on different items. It turns out that the participants with the higher values for their social security numbers ended bidding higher amounts.
- Emotional decision making. Male college students were asked to make decisions in a control situation without any inducement. They were then asked to make decisions after being sexually aroused. You will be surprised at what they were willing to do.
- Expectations affect outcomes. In one experiment, test subjects were asked to choose which beer they thought tasted better. It turns out that when the participants were told of the ingredients ahead of time, it affected their final choice. In another test, subjects were given identical pills but told the pills had different prices. It turns out that the price of the pill influenced the effectiveness. People expected the more expensive pill to work better.
- Peer influence. Ariely conducted a number of tests showing how peer influence affected the choices people make. Tests also showed that people were much more likely to cheat when their peers cheated too.
- The book covers other subjects like how supply and demand influence one another. In classical economics, they are presented as two independent forces. Topics like how irrational people are when it comes to free stuff, how people overvalue what they own, and how they overvalue keeping options open are also covered.
I highly recommend both the film and the book as they are both entertaining and thought provoking. Investors can consider these topics to spot their own irrational predispositions and formulate better decision making processes. As previously discussed, the book has made me think more about the role of branding and if I need to re-evaluate how much intangible value established brands have. Another topic I have considered is peer influence in investing. Does getting feedback from other people on an investment idea help? For me, getting industry and company information from others is helpful. However, does arguing about a stock with certain people unduly affect my judgement?
Below is another interesting clip of Professor Ariely discussing a study of incentives at Intel (INTC, Financial). It will give you an idea of what to expect out of the film and book.
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