Dan Ariely, author of Predictably Irrational, discussed challenges and underlying benefits of irrationalities in our day-to-day life in his opening keynote Saturday afternoon. Punctuated with amusing examples and audience participation, Ariely illustrated the danger of myopic thinking influenced by our, often incorrect, biases.

[For Ariely's interview for the April 2010 issue of Investment Advisor's, click here.]

Beginning on a serious note, Ariely revealed that he was burned seriously some time ago and spent nearly three years recovering in the hospital. It was there he began his study of human behavior. Noting his nurses would quickly, but painfully, remove his bandages, he set about researching the question of how to best accentuate the positive and minimizing the negative over time. He concluded that his nurses, while believing to be acting in his best interest, we’re wrong to quickly remove the bandages.

“In the trade-off between displeasure and duration, duration does not matter,” he noted. “A high amount of pain that decreases over time in worse than a low amount of pain that increases over time. Why were the nurses so consistently wrong in their thinking? It doesn’t matter what we know. Outside stimuli will influence us in a way that will cause us to do what is wrong.”

When researching a particular topic, the manner in which the question is asked, the number of choices in the answer and the ease with which someone can engage all affect the outcome. For example, Ariely noted that organ donation varies widely in countries that have common characteristics. Scandinavian countries, in particular, have some population whose organ donation registration is close to 100%, while others barely break 20%. The discrepancy is attributed to something as simple as whether or not citizens can opt-in or opt-out of the program.

His examples, and this portion of his presentation, were meant to illustrate our lack of understanding of our own preferences.

He then applied this discussion to his research on the psychology of money. Specifically, he explained how it relates to choosing among different opportunity costs; how money is relative in terms how much money we spend in given situations, noting the amount is often the same, but the situation will affect how it is allocated; the “pain of paying” and how it differs when using a credit card versus cash; and mental accounting, which infers that money is non-fungible and allocated to different activities, but which Ariely illustrated is not always the case.

“If you went to the theater and realized you lost your $100 dollar ticket, how likely would you be to buy another?” he asked. “If you decided you wanted to buy another, you would naturally infer that performance cost you $200. But what if you lost $100 on the way to the theater? Would you be more or less likely to say the performance cost you $200. More likely, you would only attribute the price of the ticket, $100, to the performance.”

The lessons form this, he concluded, is how to identify irrational biases if you don’t know you have irrational biases?

“Run experiments,” Ariely said. “Take different approaches to the same issue. Ask yourself what conclusions you base on intuition and what you base on research. Then doubt your intuition.”