Dan Ariely: How to fix Wall Street

December 1, 2010

Dan Ariely, author of “The Upside of Irrationality,” has some (unsurprisingly) unconventional recommendations for restoring the health of the financial system and fixing Wall Street pay. He told Chrystia that the government’s effort to recapitalize the banks and restore liquidity to the financial system are half-hearted since it has done little to restore trust in the industry:

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I think what is really dangerous is the feeling of mistrust and revenge towards bankers. People at AIG have told me that they’ve been punched — physically, people punched them in restaurants. There’s a deep mistrust. And what’s interesting is that people are inherently trusting creatures, but when our trust is being betrayed we get incredibly upset and willing to take revenge … Now, I think the banking industry in general, and also Washington, don’t understand how deep the trust has been betrayed. And what we need is not just to increase liquidity and not just to create sunshine policy. What we need is to restore the trust in banking, and unless we do that I don’t think things will truly recover.

Ariely mentions an experiment he calls the “trust game” that illustrates how vindictive people become once they feel betrayed. It involves two players: A and B. Player A is given $100 and is told he can either go home with the money or send the money to Player B. If he sends the money to Player B, the $100 will quadruple to $400. If the money gets to Player B, he could either go home with the $400 or split the money 50-50 with Player A.

It turns out that, contrary to economic orthodoxy, Player A often sent the $100 to Player B and Player B often reciprocated and split the $400 with Player A. The interesting insight comes from the cases where Player B opted to keep the $400 and Player A felt so betrayed that he was willing to pay Ariely out of his own pocket to punish Player B when that option was offered.

When it comes to reforming how bankers are paid, Ariely told Chrystia his research indicates that the standard equation of “money=motivation” is too simplistic, even in the uber-capitalist realm of Wall Street. To demonstrate this, Ariely ran an experiment in which people get paid to build Lego robots. In one variation called the “Sisyphean condition,” Ariely disassembled the freshly-built robots and asked the participants to start over. Though they were paid the same amount as other participants whose robots were not destroyed, those in the Sisyphean condition reported that they got much less value than other group. Here’s how Ariely describes his findings and how it applies to Wall Street:

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[S]ure, people work for money. But meaning is another ingredient, and that’s just only one of them. Competition is another. There’s lots of other ones, and if we understand those other components, we could get people to work much more for much less pay. Or, put it differently, the amount of money people get right now on Wall Street, partially it’s for salary but partially it’s doing all those other things that we could get in other, cheaper ways. As a shareholder in many of the banks, I want them to pay people an efficient way that would maximize my value. I don’t think what they’re doing right now is the right approach.

Posted by Peter Rudegeair


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I do not think we need a psychology lesson to understand the hatred towards the banksters.

First, most of us are fired or laid-off when we screw-up or our company does. The banksters really screwed-up and not only suffered no negative consequences, they were given bonuses, bonuses derived from our pockets

Second, it is well understood outside of Wall Street that banksters provide no value to society; they manufacture nothing and create nothing, except profits for themselves. We need the commercial banks, but very few of us would lose a nanosecond of sleep if the NY casinos, aka hedge funds and investment companies, were to disappear tomorrow.

Third, as Reuters’ James Saft wrote in “Pension savers get the boot,” the second act has begun. The banksters’ raping and pillaging of the economy is not finished by a long shot. Now they are raiding pension funds and other assets to satisfy their insatiable urges for our money.


Posted by saucymugwump | Report as abusive

saucymugwump: My my, sir, you really are quite predictable, aren’t you? ‘Banksters’ indeed.

Posted by Gotthardbahn | Report as abusive

Gotthardbahn wrote: “you really are quite predictable”

You have obviously never read my blog.

Posted by saucymugwump | Report as abusive

I understand that we need a banking system that works in order to operate our economy, but I don’t understand why our government is willing to spend trillions of dollars to support our current banking system…

because we need a banking system that works.

Posted by breezinthru | Report as abusive

Keep in mind that the $200 in the trust experiment does not represent an amount of money that could determine whether or not someone is able to continue providing for their family…

and it’s money that originally belonged to a neutral party, not money that was taken out of the participant’s pocket.

Posted by breezinthru | Report as abusive

I think the article emphasis on trust is correct, but the problem is the well crafted erosion of trust in government that has been conducted by right wing for decades.

The power of fairness is apparent when a government “by the people for the people” winds up being hated by the people, the confusion and contradiction in this attitude is clear but the irrational components that were used to make the bankers rich this time around, “house prices will never go down” are being used now to promote the extensions of tax breaks in times of high deficits.

Let the tax breaks expire, have the government shut down as the neo cons want it and we will force the end game of this damaged democracy and move on.

Posted by jstaf | Report as abusive

People mistrust those that have acted, AND CONTINUE TO ACT criminally with impunity at the expense of the American people and the United States of America, and the issue is “trust”? Hooey. The issue is a Wall Street/Washington cultural void of honor, integrity, and most of all, accountability.

Furthermore, “recapitalize the banks and restore liquidity” did nothing more than enable banks to continue engaging in ultimately nonviable business practices delaying the inevitable write down of losses. Although banks have been able to shift great portions of their paper losses to the American people to bear, the fiscal healing cannot occur until those losses are realized. Things will get very interesting when the paper losses must become real losses, at the expense of social safety nets such as the food stamps that are keeping about 43 million Americans from going postal.

Posted by Pumpkin731 | Report as abusive