Dan Ariely 3 of 3: Trust and Healthcare Reform

In the first of this three-post series I offered a sound file of Dan talking about the limits of rationality when devising and regulating public services.

In the second, we explored how  Treasury’s un-trustworthiness dealing with TARP and the financial meltdown has led to social anxiety and depression.

While writing that second post it occurred to me if our elected and appointed officials been truthful and upfront in their dealings with $700b bailout, we’d already have a healthcare reform bill.

It also occurred to me that we hold public servants to a higher standard than CEOs of healthcare. When healthcare execs earn blood money by standing between us and our doctors, we shrug it off by saying “Hey, that’s just capitalism,” or “Oh well, cost of doing business,” but when our elected officials stand between us and our doctors we get nuts because that’s rationing.

What Ariely has to say about our beloved invisible hand of the market

In the updated version of Predictably Irrational, Ariely observes about his own profession:

Rational economics has always been the basis for setting up policies and designing our institutions. What’s wrong with that? Neoclassical economics is built on very strong assumptions that, over time, have become ‘established facts.’   Most famous among these are that all economic agents (consumers, companies, etc., are fully rational, and that the so-called invisible hand works to create market efficiency). To rational economists, these assumptions seem so basic, logical, and self-evident that they do not need any empirical scrutiny.

Building on these basic assumptions, rational economists make recommendations regarding the ideal way to design health insurance, retirement funds, and operating principles for financial institutions. This is, of course, the source of the basic belief in the wisdom of deregulation: if people always make the right decisions, and if the “invisible hand” and market forces always lead to efficiency, shouldn’t we just let go of any regulations and allow the financial markets to operate at their full potential?

On the other hand, scientists in fields ranging from chemistry to physics to psychology are trained to be suspicious of ‘established facts.’ In these fields, assumptions and theories are tested empirically and repeatedly. In testing them, scientists have learned over and over that many ideas accepted as true can end up being wrong; this is the natural progression of science. Accordingly, nearly all scientists have a stronger belief in data than in their own theories. If empirical observation is incompatible with a model, the model must be trashed or amended, even if it is conceptually beautiful, logically appealing, or mathematically convenient.

Unfortunately, such healthy scientific skepticism and empiricism have not yet taken hold in rational economics, where initial assumptions about human nature have solidified into dogma. Blind faith in human rationality and the forces of the market would not be so bad if they were limited to a few university professors and the students taking their classes. The real problem, however, is that economists have been very successful in convincing the world, including politicians, business people, and everyday Joes not only that economics has something important to say about how the world around us functions (which it does), but that economics is a sufficient explanation of everything around us (which it is not). In essence, the economic dogma is that once we take rational economics into account, nothing else is needed (emphasis added).

In sum, we trust theories more than facts.  No wonder we’re in such a quandry.

Dan Ariely 2of 3: Trust and the Meltdown

Last week I set the foundation for today’s installment, complete with a sound file of bestselling author Dan Ariely’s talk to our Business School Alliance in Charlotte. This post will make the most sense to those who read that first.

New insights on the meltdown

The 2nd edition of Ariely’s book,  Predictably Irrational, includes a full chapter on the 2008 meltdown.  In it, he emphasized trust (and the breach thereof), saying that no matter the long list of expensive “heroic measures” the central banks take, they’re unlikely to achieve the desired effect without taking measures to restore trust.” After all, trust is the foundation of paper money to start with.

“Imagine how different things would have looked if the banks and the government had understood the importance of trust from the get-go. Had that been the case, they would have worked harder to explain more clearly what went wrong and how the bailout would be used to clean up the mess. They would not have ignored the public’s sentiment; they would have used it for guidance. They would have included some trust-building elements in the bailout legislation itself thoughts about the subprime mortgage crisis for example, they could have guaranteed that every bank bailed out with taxpayers’ money would have to commit to transparency, limit top managers’ salaries, and eliminate conflicts of interest.”

Trust and “learned helplessness”

Ariely says outright that Paulson’s behavior told us clearly that no one really understood what was going on. “One question we might ask is whether the general (psychological) depression that followed might have been mitigated if Paulson had been able to explain what went wrong in the first place, what his proposed measures were going to achieve, why he changed his decision to buy toxic securities, and what his plan was for the rest of the bailout money.

“As it turns out, even some answers could have made a difference. All creatures (including humans) respond negatively in situations where things don’t seem to make sense. When the world gives us unpredictable punishments without rhyme or reason, and when we don’t have any explanation for what is happening, we become prone to something psychologists call ‘learned helplessness.’” In a nutshell, those who’ve learned helplessness simply stop trying to help themselves because they believe such attempts are futile.

He suggested we help ourselves by changing “the way we consume news, from passive receptivity to actively thinking about the information and trying to make sense out of it.”

Amen to that. My prescription?  More NPR and NewsHour; complete abstinence from Fox(so-called) News.

Coming in part 3 of 3: How lack of trust in financial meltdown affected healthcare reform

Writing prompts for bloggers & newsletter writers

• I wrote a post with writing prompts in May based on The Atlantic’s Article “Why I Fired My Broker.”  I quoted Seth Klarman saying “The average person can’t really trust anybody. They can’t trust a broker, because the broker is interested in churning commissions. They can’t trust a mutual fund, because the mutual fund is interested in gathering a lot of assets and keeping them.  And now it’s even worse because even the most sophisticated people have no idea what’s going on.”  What steps is your firm (or are you) taking to communicate to your clients that you are trustworthy?  That your processes are fail safe (or at least properly audited)?
• Do you think more straight talk with your clients on your compensation will engender trust?  If you work for a broker or agency, why not tell your clients why you believe the comp structure you work under is fair to you and to them?
• In a post on compassion fatigue and shared trauma by financial advisors we discovered how and why advisors avoid client contact.  Ariely points out the need for trustbuilding, which can only happen with increased contact.  What steps have you seen advisors take (or have you taken) to step up client communications? Can you point your clients to more trusted information portals?

Dan Ariely 1 of 3: Trust, Revenge & Financial Reform

Bestselling author Dan Ariely, a professor of behavioral economics at  Duke, made a special appearance in Charlotte for our Business School Alliance last week. Ariely’s book, Predictably Irrational, just went into a second edition and — holy cow– is still in hardcover. I’ll write about his visit in this and two other posts this week. Here’s what’s in the new edition:

1.  A New Intro: Why the recent events in the economy make behavioral economics more important than ever before

2.  Reactions and Anecdotes: Expanding on some of the lessons we learned in the earlier chapters with interesting new stories and some more science

3.  Thoughts about the Subprime Mortgage Crisis and Its Consequences: A more in-depth look at how irrationalities played a role in the recent Subprime Mortgage Crisis, along with some of his thoughts on how we can fix those problems

Part One: we trust and seek revenge irrationally

Cliff’s notes: Ariely demonstrates that people aren’t always “selfish economic maximizers.” We will trust when we are rationally unwise to do so.  He also points out that we are, irrationally, “very happy to spend lots of money to make others suffer,”  joking that if you’ve any experience with divorce you’ll understand what he’s talking about. He explained the social utility of revenge in situations where lawlessness prevails.

Interesting factoid: PET scans of brains plotting revenge are quite similar to those experiencing pleasure.

I particularly like the novel way he approaches financial and healthcare reform.  He reminds us that roads and highways have wider lanes than a vehicle width, they have shoulders where people aren’t supposed to drive, they have protective medians and speed limits — none of which a “rational economist” would allow for.  Conclusion: when we devised our transportation system, we allowed that drivers would need room to make mistakes (or get out of the way of others who do).  We should plan ahead for “mistakes” in financial and healthcare reform efforts as well.

I had the foresight to bring my digital recorder, so enjoy what Dan has to say (click the link to play inside this window or download).

Trust-Revenge-Financial Reform

Writing prompts for bloggers & newsletter writers

• This is a time of great mistrust and financial churn. Perhaps you have either benefited professionally or been mistaken for a miscreant (or both). It’s not all in your control, is it? Do you have any anecdotes on how people irrationally trusted you or another advisor?  What about anecdotes where someone wrongly thought you had treated them badly and sought revenge? Does this make more sense now that you’ve heard Dan’s talk? You might offer some straight talk to your clients and prospects on this topic.
• Dan talked about AIG employees being harassed in public after the bailout. Can you relate any episodes of client anger that you handled particularly well or poorly? What lessons did such an episode teach you about yourself? Your profession? Human nature?
• If you’re an advisor, can you see yourself making use of the mango story when dealing with marriage or business partners who are dissolving their relationship? Or perhaps the Dr. Strangelove metaphor works better?
• What do you make of the parallel between how a “rational economist” would design a highway system and how we should revamp our healthcare system or re-regulate our financial system?