Chrystia Freeland

Dan Ariely’s new mission: stomping out conflicts of interest

Chrystia Freeland
Dec 1, 2010 20:47 UTC

At the end of Chrystia’s interview with Dan Ariely yesterday, he revealed that his next research priority is to demonstrate how pernicious conflicts of interest really are:

My personal mission is to think about conflicts of interest. So it turns out that if I pay you lots of money to see reality in a certain way, you too will be able to do it … It turns out conflicts of interest paint us. They paint our view of the world in deep ways that we don’t understand. So imagine I pay you $5 million a year to view mortgage-backed securities as a good product. Now, I’m sure you could pretend to like them, but the question is would you really start believing that they are better products than they really are? And that’s the case. We find that people actually can change their deeply held beliefs. They would invest their own money. If something is worthwhile for you to do financially, you would convince yourself that this is also good for you. And if it’s something that is difficult and complex, it turns out it’s even easier for us to do it. And if it’s something that is remote from money — for example, in our experiments when we get people to cheat for something that is not money but a step removed from money — stock, stock options — people find an easier time doing that. So my big issue right now is to try to eliminate conflicts of interests. When you have a situation with conflicts of interest and you put good people in those conditions, you should not expect anything but failure.

As Ariely tells Chrystia, this is a problem not just limited to finance. Doctors and politicians can lose their ability to objectively see reality through their contact with drug reps and lobbyists, he says. And while he’s not wide-eyed enough to believe he could eradicate them completely, Ariely does think conflicts of interest can be dramatically reduced.

You can watch the entire interview here.

Posted by Peter Rudegeair.

Dan Ariely: How to fix Wall Street

Chrystia Freeland
Dec 1, 2010 16:53 UTC

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:

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.

Americans favor more income equality

Chrystia Freeland
Nov 30, 2010 22:52 UTC

Behavioral economist Dan Ariely of Duke University came into Reuters today to talk to Chrystia about his new book and some of his recent research on income inequality.

Ariely, along with Michael Norton of Harvard Business School, conducted a survey to determine what level of inequality Americans tolerate if their incomes were randomly assigned, an equilibrium that philosopher John Rawls called the “just society.” The duo asked nearly 6,000 Americans to guess what percent of wealth they thought was owned by each of the five quintiles of income levels in the United States and what their ideal level of income distribution would be. Then, Ariely and Norton presented the respondents with three unlabeled charts showing–unbeknownst to them–the distribution of income in a perfectly equal society, the United States, and Sweden, respectively, and asked which society they would choose to live in.

The results were quite shocking:

First, respondents vastly underestimated the actual level of wealth inequality in the United States, believing that the wealthiest quintile held about 59% of the wealth when the actual number is closer to 84%. More interesting, respondents constructed ideal wealth distributions that were far more equitable than even their erroneously low estimates of the actual distribution, reporting a desire for the top quintile to own just 32% of the wealth