I want to talk to you today a little bit
about the predictable irrationality and
my interest in irrational behavior is
started many years ago in hospital and I
was burned very badly
and if you spend a lot of time in
hospital you'll see a lot of types of
irrationalities and the one that
particularly bothered me in the burned
apartment was the process by which the
nurses took the bandage of me now you
must have all taken a band-aid off at
some point and you must have wondered
what's the right approach do you rip it
off quickly short duration but high
intensity or do you take your band-aid
off slowly you take a long time but each
second is not as painful which one of
those is the right approach the nurses
in my department thought that the right
approach was the ripping wound so they
would grab hold and they would rip and
they would grab hold then they would rip
because I had 70% of my body burned it
would take about an hour and as you can
imagine I hated that moment of ripping
with incredible intensity and I would
try to reason with them and say why
don't we try something else why don't we
take it a little longer maybe two hours
instead of an hour and have less of this
intensity and the nurse just told me two
things and they told me that they had
the right model of the patient that they
knew what was the right thing to do to
minimize my pain and they also told me
that the word patient doesn't mean to
make suggestions or interfere or this is
not just in Hebrew by the way it's in
every language I've had experience with
so far and you know there's not much
there wasn't much I could do and they
kept on doing what what they were doing
in about three years later when I left
the hospital I started studying at the
University and was the most interesting
lessons I learned lessons it was that
there is an experimental method that if
you have a question you can ask a
creative replica of this question in
some abstract way and you can try to
examine this question maybe learn
something about the world
so that's what I did I was still
interested this question of how do you
take bandages of burned patient so
originally I didn't have much money so I
went to a hardware store and I bought a
carpenter's vise and I would bring
people to the lab and I would put their
finger in it and I would crunch it a
little bit and I would crunch it for
long periods and short periods that
painting went up and when it went down
and with breaks and without breaks all
kinds of versions of pain and when I
finished hurting people a little bit I
would ask them so how painful was this
oh how painful was this so if you had to
choose between the last two which one
would you choose I kept on doing this
for a while and then like all good
academic projects I got more funding I
moved to sounds electrical shocks
I even had a pain suit that I could get
people to feel much more pain but at the
end of this process what I learned was
that the nurses were wrong here were
wonderful people with good intentions
and plenty of experience and
nevertheless they were getting things
wrong predictably all the time it turns
out that because we don't encode
duration in the way that we encode
intensity I would have had less pain if
the duration would have been longer and
the intensity was lower it turns out it
would have been better to start with my
face which was much more painful and
moved toward my legs giving me a trend
of improvement over time that would have
been also less painful it also turns out
who have been good to give me breaks in
the middle to kind of recuperate from
the pain all of these would have been
great things to do and my nurses had no
idea and from that point on I started
thinking are the nurses the only people
in the world who get things wrong in
this particular decision or is it more
general case and it turns out it's a
more general case there's a lot of
mistakes we do and I want to give you
one example of one of these
irrationalities and I want to talk to
you about cheating and the reason I
picked cheating is because it's
interesting but also it tells us
something I think about the stock market
situation we're in
so my interest in cheating started when
Enron came on the scene exploded all of
a sudden
and I started thinking about what is
happening here is it the case that auras
got a few apples who are capable of
doing these things or are we talking
about endemic situation that many people
are actually capable of behaving this
way so like we usually do I decide to do
a simple experiment and here's how it
went if you were in the experiment I
would pass you a sheet of paper with 20
simple math problems that everybody
could solve but I wouldn't give you
enough time when the five minutes were
over I would say pass me the sheets of
paper and I'll pay you $1 per question
people did this I would pay people four
dollars for their tasks on average
people would solve four problems other
people I would tempt to cheat I would
pass the sheet of paper when the five
minutes are over I would say please
shred the piece of paper put the little
pieces in your pocket on your backpack
and tell me how many questions you got
correctly people now solve seven
questions on average now it wasn't as if
there's a few bad apples a few people
who did a lot instead what we saw is a
lot of people who cheat a little bit now
in the economic theory cheating is a
very simple cost-benefit analysis you
say what's the probability of being
caught how much do I stand to gain from
cheating and how much punishment would I
get if I get caught and you weigh these
options are to do the simple
cost-benefit analysis and you decide
whether it's worthwhile to commit the
crime or not so we try to test this for
some people we varied how much money
they could get away with how much money
they could steal we paid them ten cents
per correct question 50 Cent's $1 $5 $10
per correct question you would expect it
as the amount of money on the on the
table increases people would cheat more
but in fact it wasn't the case we got a
lot of people cheating by still by a
little bit what about the probability of
being caught some people shredded half
the sheet of paper so there was some
evidence left some people shredded the
whole sheet of paper
some people shredded everything went out
of the room and paid themselves on the
ball of money that had over a hundred
dollars you would expect it as the
probability of being caught goes down
people would cheat more but again this
was not the case again a lot of people
cheated by just by a little bit and then
unhhhh sensitive to these economic
incentives so we said if people are not
sensitive to the economic rationale
theory explanations to these forces what
could be going on and we thought maybe
what is happening is that there are two
forces at one hand we all want to look
at yourself in the mirror and feel good
about ourselves so we don't want to
cheat and the other hand we can cheat a
little bit and still feel good about
ourselves so maybe what is happening is
that the level of cheating we can't go
over but we can still benefit from
cheating at a low degree as long as it
doesn't change our impressions about
ourselves we call this like a personal
fudge factor now how would you test a
personal fudge factor initially we said
what can we do to shrink the fudge
factor so we got people to the lab and
we said we have two tasks for you today
first we asked half the people to recall
either 10 books to read in high school
or to recall the 10 commandments and
then we tempted them with cheating turns
out the people who tried to record the
Ten Commandments and in our sample
nobody could recall the Ten Commandment
but those people who try to recall the
Ten Commandments given the opportunity
to cheat did not cheat at all it wasn't
that the more religious people the
people who remembered more of the
commandment cheated less and the less
religious people the people who couldn't
remember almost any commandment you did
more the moment people thought about
trying to recall the Ten Commandments
they stopped cheating in fact even when
we give self-declared
atheists the task of swearing on the
Bible and we give them a chance to cheat
they don't cheat at all now Ten
Commandments is something that is hard
to bring into the education system so we
said why don't we get people to sign the
honor code so we got people to sign I
understand that this short survey falls
under the MIT honor code then this
shredded it no cheating whatsoever and
this is particularly interesting because
MIT doesn't have an honor code
so all this was about decreasing the
fudge factor what about increasing the
fudge factor the first experiment I
walked around MIT and I distributed six
packs of cokes in their refrigerators
these were common refrigerators for the
undergrads and I came back to measure
what we technically called the hatch
lifetime of coke how long does it last
in the refrigerators and you can expect
it doesn't last very long people take it
in contrast they took a plate with six
$1 bills and I left those plates in the
same refrigerators no bill was ever
disappeared now this is not a good
social science experiment so to do it
better I did the same experiment as I
described you before a third of the
people we pass the sheet they gave it
back to us a third of the people we
passed it they shredded it they came to
us and said mr. experimenter I solved X
problems give me X dollars a third of
the people when they finish reading the
piece of paper they came to us and said
mr. experimenter I solved X problems
give me X tokens we did not pay them
with dollars we pay them with something
else and then they took this something
else they walked 12 feet to the side and
exchanged it for dollars think about the
following intuition how bad would you
feel about taking a pencil from work
home compared to how bad would you feel
about taking ten cents from a petty cash
box these things feel very differently
with being a step removed from cash for
a few seconds by being paid by token
make a difference our subjects double
their cheating I'll tell you what I
think about this in the stock market in
a minute but this did not solve the big
problem I had with anyone yet because in
n1 is also a social element people see
each other behaving in fact every day
when we open the news we see examples of
people cheating what does this causes us
so we did another experiment we got the
big group of students to be in the
experiment and we prepaid them so
everybody got an envelope with all the
money for the experiment and we told
them at the end we asked them to pay us
back the money they didn't make okay the
same thing happens when we give people
the opportunity to cheat they cheat that
you just buy a little bit all the same
but in this experiment we also
higher than acting students this acting
student stood up after 30 seconds and
said I solved everything what do I do
now and the experiment is that if you
finished everything go home that's it
the task is finished so now we had a
student an acting student that was a
part of the group nobody knew there was
though it was an actor and they clearly
cheated in a very very serious way what
would happen to the other people in the
group will they cheat more or will they
cheat less here is what happens it turns
out it depends on what kind of
sweatshirts they are wearing here is the
thing we ran this at a Carnegie Mellon
in Pittsburgh and the Carnegie meets
book that two big universities Carnegie
Mellon University of Pittsburgh all of
the subjects sitting in the experiment
were Carnegie Mellon students when the
actor was getting up was the Carnegie
Mellon student pretty it was actually a
con email student but he was a part of
their group cheating went up but when he
actually had the University of
Pittsburgh sweatshirt cheating went down
now this is important because remember
when the moment the student stood up it
made it clear to everybody that they
could get away with cheating because the
experimenter said you finished
everything go home and they worked with
the money so it wasn't so much about the
probability of being caught again it was
about the norms for cheating somebody
from our in-group cheats and we see them
cheating we feel it's more appropriate
as a group to behave this way but if
it's somebody from another group these
terrible people I mean not terrible in
this but somebody we don't want to
associate ourselves with from another
university another group office and
people awareness of honesty goes up a
little bit like the Ten Commandment
experiment and people cheat even even
less so what what have we learned from
this about cheating we've learned that a
lot of people can cheat they cheat just
by a little bit when we remind people
about their morality they cheat less
when we get bigger distance from
cheating from the object of money for
example people cheat more
and when we see things of cheating
around us particularly it's a part of
our in-group cheating goes up now if we
think about this in terms of the stock
market think about what happens what
happens in a situation when you create
something where you pay people a lot of
money to see reality in a slightly
distorted way would they not be able to
see it this way of course they would
what happens when you do other things
like you remove things for money
you call them stock of stock option
derivatives mortgage-backed securities
could it be that with those more distant
things it's not a token for one second
it's something that these many steps
removed for money for much longer time
could it be but people would cheat even
more and what happened to the social
environment when people see other people
behave around them I think all of those
forces worked in a very bad way in the
stock market
more generally I want to tell you
something about behavior economics we
have many intuitions
in our life and the point is that many
of these intuitions are wrong the
question is are we going to test those
intuitions we can think about how we're
going to test this intuition in our
private life in our business life and
most particularly when it goes to policy
when we think about things like No Child
Left Behind when you create new stock
markets when you create other policies
taxation health care and so on and the
difficulty of testing on intuition was
was the big lesson I learned when I went
back to the nurses to talk to them so I
went back to talk to them and tell them
what I found out about removing bandages
and I learned two interesting things one
was that my favorite nurse Ettie
told me that I did not take her pain
into consideration she said of course
you know it was very painful for you but
think about me as a nurse taking
removing the bandages of somebody I
liked and had to do it repeatedly over a
long period of time creating so much
torture was not something that was good
for me too and she said maybe part of
the reason what it was it was difficult
for her it was actually more interesting
than that because she said I did not
think that your intuition was right I
thought my intuition was correct so if
you think about all of your intuition
think about it's very hard to believe
that your intuition is
wrong and she said given the fact that I
thought my intuition was right she
thought her intuition was right it was
very difficult for her to accept doing a
difficult experiment to try and check
whether she was wrong but the fact this
is the situation we're all brawling all
the time we have very strong intuitions
about all kinds of things our own
ability how the economy work how we
should pay schoolteachers but unless we
start testing those intuitions we're not
going to do better and just think about
how better my life would have been if
these nurses would have been willing to
check their intuition and how everything
would have been better we would just
start doing more systematic
experimentation of our intuitions thank
you very much
you