Dan Ariely || Spending Smarter

glad to have Dan Ariellie on the show today. Dan is the James B. Duke Professor of Psychology and Behavioral Economics at Duke University, where he studies how we repeatedly and predictably make the wrong decisions in many aspects of our lives. Dan publishes widely in the leading scholarly journals and economics, psychology, and business. His work has been featured in a variety of media, including The New York Times and Wall Street Journal. His books include Predictably Irrational, The

Upside of Irrationality, and The Honest Truth About Dishonesty. His latest book is Dollars and Cents, How We Misthink Money and How to spend Smarter. In his free time. Dan is working on a guide to the kitchen and life, which it calls Dining Without Crumbs, The Art of Eating over the kitchen sink. Thanks for chatting with me today, Dan, Oh my pleasure. Oh I'm curious about the project you're working on with the kitchen. Have you been a long

time chef. No, I've been a long time observer of the kitchen and trying to think about the kitchen as a metaphor for life. So if you think about it, the kitchen is a place where we create, we destroy, we procrastinate, we think about other people, We overinvest, we try too hard, we had too many ingredients. I mean, we do lots of things. So it's a really interesting place to examine from a social science perspective. Makes a

lot of sense. I can't wait to read it. Well, let's talk about this current that you've written, and it's a fascinating read and has a lot of obviously practical implications. I've never seen a book dedicated to money before. I have to say, you say, too, money for the wonderful things you do for us, the terrible things you do to us in all the gray area in between. To me, it sounds kind of like an abusive relationship. Well it's

a great and abusive relationship at the same time. Right, So think about life without money, right, maybe you would grow chicken and I would get apples, and then we will have to meet at some point and figure out what the trade off of chicken to apples is. And none of us will be able to save because neither chickens nor apples store very well. We would not be able to specialize. Right. If you think about myself as a university professor, right, you could never you can have

a job, a job like that. So money is incredible in many ways. At the same time, some of the same things that make it incredible also make it very difficult to use. Is definitely duality. So you know, if we lived in an economy in which we had, you know, apples and chickens, it would be kind of easy. How many apples, how many chickens? What works for you? And salt? In the world in which we have money, everything is

now about opportunity costs. Right, So every time you spend something, you should be thinking what am I giving up now and in the future for the privilege of having this thing. So every time you go to buy a cup of coffee. You should be thinking to yourself, is this the best possible way to spend four five cents or is there a better way to spend it? But that's very hard to do, and it's how to do with small things, it's how to do with large things. So we end

up not doing it, and we end up making mistakes. Sure, this is just a natural extension of your whole body of life's work, I mean, on the irrational decisions that people make and able to predict when we are irrational. And I've really enjoyed reading your prior books, so this seems like it's you know, it fits within a very similar framework. It is in a very similar framework. And

there's a couple of reasons why. You know, I wrote some other books about general the irrational ways in which we behave and you could say why money and why now? And one thing is that since the financial crisis of you know, ten years ago, I became more interested in how we save and particularly how we spend. And then on top of that, we're moving now to a new era of digital money. And as we move to digital money,

we have kind of a choice. Do we make better decisions or do we make worse decisions and how exactly do we want money to look like in this digital age. So think about the following thing. First of all, let's think about spending. When we moved to cash to credit cards, what happened. What happened was that we had less of what we call the pain of pain. Imagine that tonight you go to dinner and you're going to pay with credit card or with cash. The credit card would not

feel as bad, so we'll end up spending more. With cash, you see the money leaving and it makes you feel bad about it. When it's a credit card, you don't feel the payment, so you don't feel as better about it. You're more likely to spend more. And then technology came and we have things like Apple Pay and Android paid, which have even less pain of pain a very different direction.

So that's about spending. Think about saving. So a thousand years ago, how did people save basically in goats or livestock, right, And the last thing about saving in goats is that you can find out how much your neighbor is saving. So you could come back from the office and you know, you look at how many goats your neighbor has. You can see how many goats you have, and we could compete on who has more goats. Now, then we invented

money and digital money. And what we did was to take an activity as important in saving and make it invisible. Think yourself, what do you know about the saving rates of your neighbors? Very little, right, probably nothing. On the other hand, you know very well how much they spend. You see their cars and so on. So if you think about this too, activities spending and saving, we've taken one of them and made it very salient, spending one, and we took one and we made it incredibly hidden.

So now imagine that you and I are designing money. We're designing how to think about money, how electronic quality would look like, all kinds of things like that. I don't think we would want to design this feature into it, right, We would want to design something we will get people to think about the pain of paying, get people to focus more on those things, and get people to spend less, save more, and think more about the future. That's so key,

isn't it. The temporal discounting aspect of it. Yeah, and the temple discounting is hugely We're not good in anything that has to do with we don't take care of our health. We don't exercise, we overeat, we don't wash our hands, We text and drive, and there are many, many, many examples that we don't do. We do the things that are fun for now, not the things that are good for the future. But with money, it's extra hard because the future is really really long away from us.

And not only that, we have to give up very concrete things for very abstract things. So it's not just that I say, would you like a car now or a car in the future, it's do you want a car now, a new car now, or fifty thousand dollars in twenty years and you said yourself, what exactly am I getting for these fifty thousand dollars? Completely unclear? So it's now versus later. But it's also concrete versus abstract,

and we fail in those decisions very very frequently. It sounds like, in addition to sex AD, we should also have a course on money management or a course on you spending money to what you're teaching. As early as possible, we should have such a course. So you know, I don't know how effective sex D. And the thing about money is that it has some really nice features that

make it easy in principle to make good decisions. So think about the decision like eating you have to make a decision every day, right every day, or if you go shopping, you have to make it once a week. With money there sometimes we can make a decision about adopting a system and then that system stays with us for a very long time. So, you know, maximizing our for one key, you have to do it once, and

once you've done it once, this is it. You're set a decision to transfer money automatically to savings account, or moving from credit cards to debit cards, or moving from a monthly budget to weekly budget. All of those things are things that you could do one time and then their benefit stays with you for a very long time. And money is kind of unique in that right, It's not you can't do the same thing for you know,

eating or exercising and so on. So we have this fact that we can move money effortlessly after we've made some decision, and that's an incredibly important and useful thing and we should take advantage of it. Do you talk about all the ways that our perceptions are values play a role in our assess You know, in way to really have actually nothing to do with the actual value that we respond to our relevant cues is what I get from your book, and I would like to talk

about some of them. One that I thought was really interesting, which I've not really seen discussed that much, was the impact of fairness on our perception of value. Could you talk a little bit about that? Yeah, So, first of all, I'll mentioned one that I didn't mention in the book. But there's a very nice paper that people are asked

to evaluate art. And they have this big painting and they asked to pick it up and change around and show it in the light and move it around, and then they ask how much would you pay for this art piece? And some people pick up the art piece and for some people you give them the same art piece with the same frame, but you put lead in the frame so the picture feels heavier, and those people feel that the art is worth more. Really right, and

they don't get the frame right. But what happened is the heftiness of the frame kind of penetrates the quality of the picture completely irrelevant, But nevertheless that's how people evaluate why though, what is the psychological mechanism? Well, the point is that we have a really hard time evaluating the thing for itself. Right, if you think about art, like what is it worth? Yeah? Actually, with art, it's completely funny. It's mostly priced per square inch, right, The bigger,

the more expensive. You know, why why can't it be that a bigger picture is somehow more Now if you wanted to do it by the hour of how long it took somebody to draw? Maybe also not clear that's the case. But that goes into fairness you just mentioned. Yes, so let me ask you what industries do you think are good in showing us their effort? You know, basketball, sports, you see it on display. Yeah, sports is not bad.

What else can you think of? Industries that deliberately tell you when you come to buy something from them, look how much I work for you. You know, it's interesting because you see that, you know, sometimes as like a marketing tool at restaurants or things where you know they say, we very much value that. And so though you know they'll come over the table like how are you doing? You know, we work very hard to make sure that

you're happy sort of thing. Right, So restaurants do that when they come to you, but they do it in other way too. Right open kitchens. Yeah, right, when you get to see the efforts or some restaurants they tell you, like, you know, how many hours the fish was marinated or where the tomato came from. Right, So they give you lots of description to say, look, how difficult this is. This is not your regular fish. It came all the way from the other side of something. Right. This is

not the regular marination. It was marinated for seventeen hours in something like this. Good restaurants are good at consultants are good at this. Right. They give you a very long power point presentation that it details all the analysis they did. And you could say, why don't just give me your final recommendation. I don't need to see everything you've done. But no, they have to show with you because otherwise you will not value it sufficiently. Right. And

then there are things that don't show us effort. And almost everything on the Internet doesn't show you any effort. Right, if you think about Google or if you think about Microsoft, like, the amount of work invested in any of those products is incredible, but we don't see it. They don't communicate it, we don't see it, and therefore we take it for Brandon. Yeah, I want to say something that a research area that's

related to this. Similarly, when we look at like a very graceful performance or something that seems to connote talent, we actually have a bias in valuing talent over effort when it comes to hiring decisions. And there's some really interesting research on that. Do you think that relates it all of what you're saying. I think that's another nuance on top of that. Right, So the thing with the elegance or raw talent is that you have to at

least appreciate that there is talent in there. Right, Whereas when you think about Google Search, you don't even know how many people work at Google and how many people are trying to make that process work. So if you think about Apple, for example, they show up and they tell you all kinds of things, all these hinges of the laptop and how it moves, just so you know

it's made of antanium alloy. Now you can say, why don't just give me the laptop and don't tell me all these things, but no, it changes how you view it. So that's the first issue is do you tell people that what you do and not? And then the second question would be is it hard to work and somebody had to really work hard, did it? Or is it just a unique talent? Those are some and let's talk out some others. So when you say that we trust ourselves too much, yes, actually I can see that. How

that's related to what you're even talking about. Yeah, So trusting ourselves too much basically means that we look back at our historical decisions and we somehow assume that our past decisions were good ones. And you said you, oh, I bought you know whatever an audi before that must have been a great decision. I always make good decisions. Let me do this again. Or you say to yourself, I signed up for this cable package for seventeen thousand

different channels. Now you might not remember that at the time it was you did it for a particular deal and all kinds of things. Just remember that you signed it to it, and then you say, oh, I must be the kind of person who does this. So we get to make lots of decisions in life that are not exactly reasoned and not necessarily good. But then we forget that at the time of the decision it was not a particularly good decision, and then we just are likely to follow it up again. Yeah, So why do

we love control so much? Well, why do we like control? So first of all, the thing we control maybe is the first thing that we hate is we hate lack of control. Do you remember the research on helplessness? Of course? Yes, Okay, so you know this was a long time ago. But what they did was they took two dogs, right, and they put one dog in a room, and that dog gets a bell and then shock, a bell and then shock. It's not Pavlo, it's a different it's a different story.

And then there's another dog that gets the exact same shocks as the first dog, but it doesn't get the bell. So the second dog doesn't know what's coming, but it gets the same exact shot. And then you take both dogs into a different room, and that second room has a little separation and there's a light, and if the dog stays on their side of the room, they get an electrical shock, and if they jump over the little partition to the second half of the room the shock,

they don't get the shot. And what happened is that the first dog, the one who had the prediction, and the dog that knew when the shock was coming, basically get some shocks, try things figure out. If they jump over the little petition, everything is good, and they start jumping every time the light comes up. The second dog doesn't even try. The second dog basically lost faith that the world could be a good world. They just expect

things to hit them all the time. And the second dog basically lays there whimpering, not even trying to figure out what's going on. And that's the role of control, right. Control is the fact that we have agency, that we know that there are some things that we can do that we can push. Have agency, and we can push things to be better off. And if you give up this feeling of control, things are just happening to you. The feeling is very much a feeling of devastation. It

also changes the immune system. People get loose some of their natural killer cells and are less likely to be able to fight depression and diseases. And just to tie this to the economy, being fired, there are different types of being fired. Right, If you've done something bad, then it's obvious and you have control. But if nothing that you didn't do anything, and somebody else did something and

you don't understand where this is coming from. People basically don't recover from those things, and we don't recover because we don't understand where this is coming from and we don't think. It kind of tells us how little power we have in the world. Being a victim of a violent crime or crime in general is like that as well, right, because all of a sudden, you say, like, what power do I have in the world that somebody can come and all of a sudden be violent to me? So

how does that relate to spending money unwisely? Okay, so there's lots of ways to spend money, lots of ways to spend money unwisely. So we talked a little bit about value cues, right, So you said there is fairnace, there's weight. We have expectations. Sometimes the price give us a value. For example, if something used to cost two hundred dollars and now it's fifty, we say, oh, my goodness,

that's a great deal, even though it doesn't have to be. Now, when you think about about spending and saving, there's a real question about how do we get to think more about saving and how do we get it to be not something that is just happens if we don't happen to spend enough, Right, it's not just the money that is left over after we finish spending. So you remember in the book the study on Kenya that we did, Yeah,

can you talk a lot about that. Yeah. So for me that was a really interesting study because the study was interesting. But then I started thinking about the rumification and they're very broad in my mind. So here's the study. It's a study in Quibera, very very poor people live on about ten dollars a week, and we created a system for them that it was very easy to put

money into savings and hard to get money out. So they could text money into their empess cant this is the Kenyan payment system, but to get the money out they had to go to the bank and get the money physically right, so easy in hard out. That's kind of basic behavior economic stuff where you basically want to say, let's get the desirable behavior to be easy if we want people to act on it, and difficulty if it's not.

And then we added all kinds of conditions. So some people just got the system, some people got the weekly reminders, some people got the reminder from their kids. Some people got a ten percent match, some people got a twenty percent match. We had all kinds of versions. But one version was we gave people a coin. The coin had twenty four numbers etched on it, and we said, please put the coin somewhere visible in your hut, and every week take a knife and scratch the number for that coin.

One way if you saved, and another way if you didn't save, vertical horizontal, And that coin created almost twice as much saving as twenty percent match. And that's kind of shocking. And the question is why I'll take you to another slum. This is Sueto in South Africa, and I'm walking around in Sueto and I see a father buying funeral insurance for a week. Funerals in South Africa are very expensive. This guy bought funeral insurance for a week, which means it would cover him only if he dies

in the next seven days. Right, And then he takes the little piece of paper their insurance and in a very ceremonious way, it gives it to his son. And when he does this, I think to myself, when a father, a breadwinner, redirects money to savings or insurance, the thing that the family sees is less. Right. If you're very poor, you'll have less tonight, right, it'll be less, fruit less, water, less,

caros in less something. If you're not as poor, it will also be less, maybe not tonight, but will be less. And what his father did with by showing the certificate was to say, it's not less, it's just different. And that's also what I was trying to do with the coin, is to get the family to appreciate that it's not less money, it's just different. Now, this would happened in society right. Imagine that we have two activities. We have saving and we have spending. Spending. We see what people

are spending. Saving is a mystery. What are people saving? We have no idea now. A thousand years ago, when we saved in goats and you know, livestock, we knew what people are saving. Now we don't. So what happened is that we undervalue saving because we don't see it. You can think that we would compete on anything as long as we can see it and measure it and compare ourselves to others. But if we can't, then we're

not going to value it. So what happens is that we have this incredible activity, incredibly important called saving, but we're making it mostly invisible. And because we're making it mostly invisible. It's very hard to care about it, it's very hard to pay attention to it, and so on. And some of the suggestions we have in the book are suggestions about how to make it more visible. Now, I'm not saying, you know, post your saving rates to

your neighbors. But here's a simple example. You go to a new job and you get the form that says how much do you want to put in your for one k? Now, if you put more in your four one k, it means you bring less money home, right, as simple as that. So we had an experiment in which half the people sign up for four one k and the other half were asked to show it to the significant other and decide together with a significant other. What happened The people who decide with a significant other

ended up saving more. Why because if you are just taking the for one k away and you're bringing less money home, you get less pride from it. But if you decide together, that's a different story. Right, So all of a sudden, people think about it in a different way. So the idea is to think about, how do we think more about money, how do we get it to be more people in the family to be more more aware.

It's not just about telling everybody, but it's about some awareness of this or another example, you take kids and on the day that they are born, you open college savings accounts for them. What happens. The kids with college savings accounts perform better cognitively and socially, not because the kids know that they are they have college savings accounts,

right it. These effects shows already by the age of four, But it's because the parents get a statement once a month that said, this little kid has a college savings account, and the parents start thinking about the kids in a different way, right, and that ends up changing. They read to them a bit more, they buy them a few bold books, and over four years it makes a difference. Did say whatever should run the Logitudel study on that? Yeah, yeah,

that's so cool. Yeah, based on this. By the way, we convince the Israel government recently to start a college savings account for each kid since January twenty seventeen. And when we started this, the people from the Ministry of

Finance said, let's just reduce the price of college. But we said, that's not the same thing, right, It's not the same thing for a family or a kid, especially family that doesn't think about sending their kids to college, right, is to say this little kid has this account and we're thinking about that from a young age. Money is not just about money. It's also about mindset. Yeah, that's very clear, and it's also you make clear about you know,

we have these cognitive limitations. If you know, linking all this to just basic human information processing, it's it would go a long way to take some of these recommendations explicitly, so we don't have to, like I mean, it can be very overwhelming and taxing to our working memory, right to have to every time think about this stuff. So you know, the more we can do in advance seems to be better. So you're clearly not saying that we

should question every financial decision always in every way possible. Right, No, that's just just a crazy way to live, exactly. So the thing to do is to question big decisions, and to question decisions that we make multiple times, like habits, because that's the place that we could make a real impact. And you also make clear that we can get pleasure, meaning and fulfillment from our spending. Yeah, life is not about the race to die with the most money. Right.

Life is about maximizing pleasure that we get with our money. But thinking about spending nowvesus spending later. You know, this thing we call saving is not really saving. It's just delayed spending. That's true. Yeah, Well, your findings and the things are talking about it, just stop telling really nicely with the work. We're doing a positive psychology on the relationship between money and well being. And the relationship is

that it's how you spend the money. If you spend it well, it can be correlated, you know, with well being. And you make it very clear that we can find a piece full coexistence with money, and so I really appreciate that and I appreciate your time today, Dan, thank you, Thank you so much, and we'll be in touch. Thanks for listening to the Psychology Podcast. I hope you enjoyed this episode. If you'd like to react in some way to something you heard, I encourage you to join in

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