Chrystia Freeland

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.

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:

‘We can’t inflate our way to prosperity’

Chrystia Freeland
Oct 12, 2010 18:43 UTC

“There is no other policy tool available [besides quantitative easing],”‘ Laura Tyson, a former chairwoman of the Council of Economic Advisors, said at this morning’s Reuters/YouTube live debate on how to fix the economy. Tyson argues that additional Fed purchases of long-term bonds is the most viable way to energize the U.S. economy since a new fiscal stimulus bill is unlikely to pass Congress:

She appears alongside Glenn Hubbard, another former CEA chairman, who maintains the Fed will spend another $1 trillion to lower rates by 20 basis points. “We can’t inflate our way to prosperity,” he said.

Tyson disagrees and thinks the risk to inflation is low. She admits we have to convince the rest of the world that the U.S. has no intention to inflate away its debt.

Chrystia Freeland
Jul 16, 2010 15:13 UTC

Chrystia’s take on the financial regulation bill and Goldman Sachs’ settlement with the SEC, on the PBS NewsHour, Thursday, July 15, 2010.