From the April 2010 issue of Investment Advisor • Subscribe!

Professor Ariely's Insights, In Brief:

Sidebar to the cover story "The Upside of Irrationality"

Some of the headline findings of Duke Professor Dan Ariely's research into investor--and just plain human--behavior:

Cheating is a lot more prevalent when it's a step removed from cash. If we're dealing with a string of electrons instead, it's much easier to rationalize actions that aren't totally honest. "When cash is taken away--and that's what's happening to our economic system," Ariely warns, "we will cheat by a factor bigger than we could ever imagine."

"This is a very hard time to have trust in financial advisors," Ariely says. After this financial crisis, he feels that the time-consuming process of regaining it has to begin with a high degree of transparency.

In these turbulent times, investing in the stock market is not for the faint of heart. "The real issue for advisors is to protect people against themselves," Ariely says.

In a purely social environment, people often make generous and altruistic choices. But the moment money is introduced, we lose our altruistic impulses and want to get the best possible deal for ourselves.

"In a market where employees' loyalty to their employers is often wilting, social norms are one of the best ways to make workers loyal, as well as motivated." Treating employees like "family" or members of a team tends to make them more "passionate, hard-working, flexible, and concerned." However, companies that model a social exchange must remember that they can't expect employees to take on more work, put in longer hours, and travel at the drop of a hat without providing loyalty in return.

When people start making tremendously high compensation, they are driven by the amount of the bonus, the stress involved in attaining it, and the fear of not getting it, instead of doing the best job they can.

When we can't determine the right answer to the question facing us, we often figure out the answer to a slightly different question and apply this to the original problem. If a lender says you can afford a mortgage payment of up to 38% of your income, most people accept it as an implicit recommendation that they should spend that much.

If we rely too heavily on the expectation that people will act rationally, we can end up making mistakes when we design policies and institutions.

Finally, we are not helpless. Ariely urges us to "learn to embrace the Homer Simpson within us, with all our flaws and inabilities."

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