Here’s a five-minute video by Dan Ariely, a professor of behavioral economics at Duke University and the author of the book Predictably Irrational, explaining why businesses behave less rationally than individuals. The primary reason they do, says Ariely, is that it’s often too costly for large companies to experiment.
For example, if you don’t know if you like brussels sprouts or not, you can spend $1.50 to find out. But a business that wants to find out if one of its processes is running in the most optimal way possible has a much more complex (and hence expensive) problem to solve. That’s why, Airely says, “businesses are mostly stagnant,” and end up doing “the same thing over and over.”
One way that companies can create positive change in a cost-effective way, he says, is by employing behavioral economics principals. He describes a recent experiment that a car insurance company conducted. It sent out forms to its customers asking them to enter the number of miles they had driven during the previous year. Half the forms put the signature line at the bottom, and the other half put the signature line at the top. The forms with the signature line at the top had, on average, 15 percent more mileage reported on them than the forms with the signature line at the bottom. That’s because people behave more honestly if they are asked to be honest before they’re asked for information, rather than asking them if they had been honest after they provided the information. (Airely suggests that income tax forms ought to have the signature line at the beginning instead of the end to encourage honesty.)
Even though the principles Ariely describes in this video pertain to companies, they could also be applied to your personal life. If you want to have a discussion with your teenage child about a problematic issue, for instance, it would probably be better to start out the conversation with “Let’s have an honest discussion, okay?” than to ask your child after the conversation, “Did you tell me the truth?”
Can you think of other instances in which behavioral economics principals could help you in your personal life?
Mark Frauenfelder Credit.com contributor, editor-in-chief of MAKE magazine and the founder of the popular site Boing Boing, Mark was an editor at Wired from 1993-1998 and is the founding editor of Wired Online. He covers creative DIY projects and how-tos that will help you make the most of your money.
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