Behavioural economics for all the family

This evening I went along to a lecture on behavioural economics at the LSE by Dan Ariely. He's a good speaker and peppered his talk with lots of examples from both his research work and real life.

He started by comparing the way that cognitive biases work to the way that we fall for optical illusions. We can properly know that an optical illusion is making us see things wrongly, but we still see it that way. (In fact this comparison is also used in Inevitable Illusions: How Mistakes of Reason Rule Our Mind by Massimo Piattelli-Palmarin, which is worth a read).

He went on to use some examples, including this excellent one. Watch the video very carefully and count the number of times the players in white t-shirts pass the basketball to each other. Just follow passes from white t-shirt to white t-shirt. Then just watch the video back again without trying to count the passes.

He recounted some experiments that demonstrated the impact of framing and anchoring. In the former case it was interesting to hear about the significant impact of an obviously inferior option in a spread of choices. Basically if you are out on the pull it pays to tag along with someone who looks similar to you but is less attractive.

He also did quite a bit on tests about cheating. An interesting insight here was that people were willing to cheat to a greater degree if it was to obtain something without a direct financial value (though it could lead to cash) than for a straightforward cash reward. He made the point that this might help explain how executives could be willing to fiddle options schemes, whereas they wouldn't steal from petty cash. And he said that small amounts of cheating had a much larger economic impact overall than cases of outright fraud, yet society focuses far more on the latter. Interesting point and it sounds like quite fruitful territory for further research.

He made a very good point in closing about how behavioural economics could/should be applied. He said that lots of goods and services were built with the limitations of the human body in mind, yet in lots of areas the limitations of the mind were overlooked and as such expected outcomes were not delivered. He suggested that behavioural economists could therefore be a part of improving policy-making. I agree, and I think that's why we need to bring it further into the mainstream.

Anyway, a good lecture. I think I'll get his book.