Aftermath

by James Rickards

  Ariely is an American by birth, who moved with his family to Israel when he was three years old. He lived in Ramat Hasharon on Israel’s central coast just north of Tel Aviv. Ariely attended Tel Aviv University and received his B.A. in psychology, with a concentration in physics and mathematics. He later gained a Ph.D. in cognitive psychology from Duke University, and another doctorate in business administration from Duke. The second Ph.D. was pursued at the urging of Ariely’s mentor, Daniel Kahneman, because it would facilitate the application of Ariely’s behavioral insights in the realms of economics and business.

  As a high school student, Ariely was preparing canisters for an illumination ritual conducted by his youth group, Hanoar Haoved, when a mix of gunpowder and other chemicals exploded in his hands. He suffered third-degree burns over 70 percent of his body. Ariely spent three years in and out of Israeli hospitals, undergoing treatments to prevent infections, skin grafts, and rehabilitation. He was left partly disfigured and disabled. The accident was thirty-six years ago, yet Ariely lives in pain to this day.

  His horrific burns and subsequent treatment were the inspiration for some of the most insightful experiments in behavioral psychology ever conducted. Ariely was intrigued by the method used by hospital nurses to remove the bandages of burn victims. Most people who have removed Band-Aids from minor cuts or burns are familiar with the dilemma even in far less painful circumstances than those confronting Ariely. If a bandage is removed quickly, the pain is intense, yet over quickly. If a bandage is removed slowly, the pain is reduced but lasts longer because removal takes longer. Removing a bandage involves a trade-off between the intensity and duration of the pain involved for the patient.

  Ariely noticed that standard practice for bandage removal was to proceed quickly, increasing the intensity of pain, but getting it over quickly. Ariely understood the nurses’ dilemma; as a burn victim he lived with it for years. Yet he wondered if nurses were making a rational choice or were succumbing to a bias. In a series of studies in the late 1990s and early 2000s, Ariely and his collaborators, including Kahneman, demonstrated that the slower, less painful approach is usually better for the patient. The matter is complicated by numerous factors, including repetition, sequencing with other procedures, and the patient’s control or lack of control of his circumstances. Still, on balance, the slower, less painful approach is better despite the fact that the pain is prolonged. It turns out that the quick, intense approach was practiced by nurses because it reduced their discomfiture with the bandage removal. It was the nurses who wanted to “get it over with,” not the patients. Ariely’s insights have led to changed medical procedures for burn victims around the world.

  Ariely’s ethical approach to behavioral psychology differs from the Thaler-Sunstein method. He is more interested in pure discovery; he’s simply inquisitive about how humans make decisions. Thaler and Sunstein are more driven by the need to manipulate human behavior in pursuit of what they define as enlightened ends. That said, Ariely does do extensive work in the field of choice architecture as a hired gun for corporations and political parties, as do many of his peers. It was the political work I wanted to discuss with Ariely.

  Given the power of choice architecture to affect outcomes, there’s obvious scope for politicians to use the techniques of behavioral psychology to sway voters to support their program or reject that of a rival. Instead of tricking new employees into signing up for a 401(k), the choice architects can trick voters into voting one way, not another, or staying home on Election Day, which can mean lost votes for an opposition candidate and victory for the candidate using behavioral tricks.

  The choice architects were not initially troubled by this because the early adopters of behavioral manipulation were campaigns such as the 2012 Obama reelection effort. Since academics, including Ariely, Thaler, and Sunstein, generally favor liberal causes, they were cheered to see Obama adviser David Plouffe leapfrog old-school Republican door-to-door methods. Plouffe managed Obama’s 2008 campaign and oversaw his 2012 reelection from the White House as a senior adviser. Plouffe’s savvy use of social media, text messaging, data mining, and choice architecture left Republican adviser Karl Rove’s canvassing techniques in the dust. In 2017, Plouffe joined Facebook founder Mark Zuckerberg’s social advocacy organization to facilitate a wide range of typically liberal initiatives.

  By 2016, Republicans not only caught up to Democrats but leapfrogged them, as Plouffe had earlier done to Rove. This was due to advanced data mining and social media technology offered to the Trump campaign by Robert Mercer, Cambridge Analytica, and Brad Parscale, who was tapped to lead Trump’s 2020 reelection bid. Trump’s own media savvy on Twitter and TV was an enormous asset to a team focused on a digital campaign. In a reversal of the 2012 election, it was the Democrat, Hillary Clinton, who stuck to old-school television appearances and wonky policy papers, while Trump ran under the mainstream-media radar screen and effectively campaigned at low cost on Facebook and Twitter.

  This new alignment of political forces was amplified by highly sophisticated digital Russian intervention in the 2016 campaign. Whether Russian intervention was explicitly to help Trump or designed to sow chaos and dissension in American political discourse is unclear. What is clear is that the Russian effort was pervasive and effective. This should come as no surprise, since Russians have been master propagandists for over a century, first under Communist direction (1917–91), then more recently under the direction of former KGB spy, now president, Vladimir Putin. Behavioral psychology and digital media were mere force multipliers for Russia’s well-practiced arts of deception.

  By 2018, the use of choice architecture on digital platforms by neofascists was widespread. China implemented a “social credit score” program applicable to its 1.4 billion citizens, backed up by a planned 600 million surveillance cameras, digital facial and gait recognition software, and near complete control of internet message traffic. Chinese citizens are assigned a social credit score based on good or bad behavior in a myriad of categories, including smoking in public, tweets, cheating on taxes, community service, or buying locally made goods instead of imports. Citizens with low social credit scores are denied access to government services such as transportation, school admissions, and government jobs. A typical case was that of Chinese citizen Liu Hu, as reported by CBS News:

  When Liu Hu recently tried to book a flight, he was told he was banned from flying because he was on the list of untrustworthy people.16 Liu is a journalist who was ordered by a court to apologize for a series of tweets he wrote and was then told his apology was insincere. “I can’t buy property, my child can’t go to a private school,” he said. “You feel you’re being controlled by the list all the time.”

  China has rolled out the ultimate Thaler-Sunstein voluntary nudge. You’re still free to smoke in China; just don’t expect to fly anywhere or see your kids go to school.

  This was my question to Ariely when we met. I asked, “Your techniques are powerful. You’re bombarded with requests from clients to apply your techniques all the time. How do you decide who the good guys and bad guys are? What’s to stop you from applying behavioral modification techniques for the next Hitler?”

  Ariely paused and said, “That’s a question I ask myself all the time. My students and associates ask me that also. Here’s the answer. When I’m offered a fee to work for a client I ask myself if I would do this work for free. If you remove money from the equation, would I work for this client based on his values being in sync with my own? Only if the answer is yes will I take the assignment.”

  Ariely deserves credit for at least trying to devise a filter for the use of the powerful tools of choice architecture. Yet as with the Thaler-Sunstein assumption of superior judgment, there are many flaws in Ariely’s values-based filtering method. The first flaw is his assumption that his “values” are universal and invariably correct. That’s extremely unlikely. What is more likely in today’s political environment is that half the people agree w
ith him and half disagree on important public-policy issues. This means whenever Ariely takes up a project he’s “screwing” half the population, in his phrase. Democracy is an imperfect mechanism for achieving consensus among divergent views. Choice architecture based on the proclivities of academics doesn’t come close.

  The larger problem is that whatever Ariely’s leanings, not all experts in behavioral psychology are as scrupulous as he. Some choice architects are mercenaries—guns for hire—who work for Big Tobacco or big banks in ways detrimental to the physical or financial health of everyday citizens. Other experts are pure ideologues, out to prevail for a particular cause without regard to money, ethics, or other constraints. There’s nothing new in this. Joseph Goebbels and Leni Riefenstahl used radio and film to make Hitler appear charismatic on the one hand, and a warm friend to children and pets on the other. What is new is the project’s global reach and the relatively low distribution costs compared with traditional media. When manipulative content is combined with data mining, microtargeting, and digital platform distribution, the effect on behavior is forceful and pervasive.

  Choice architecture and other behavioral modification techniques will no doubt become subject to self-regulation by academics and social media firms in the near future. That won’t be enough to prevent abuse because of the inherent biases of those purporting to self-regulate. Some voices will be heard, others squashed, on a nondemocratic basis. Government regulation will follow, which is at least partly democratic yet hardly efficient. In the end, users of social media and citizens trying to navigate the maze of beeps, buzzers, and contrived choices will have to rely on their own education and common sense to avoid the not always benign corporate and media puppeteers.

  This brings the debate full circle to the definition of “irrational.” Society can readily agree that behavior that is demonstrably and materially harmful to others, directly or indirectly through environmental channels, or harmful to oneself can be regarded as irrational in some sense. When it comes to choices that are not obviously harmful, but simply suboptimal according to consensus rankings or a programmatic approach, more thought is needed before separating the allegedly rational from the irrational.

  Most of the approximately two hundred biases that behavioral psychologists have identified represent a kind of intuitive or instinctive response to uncertainty. Kahneman and Tversky called these responses heuristics—a shortcut for decision making in the absence of more time or data to make a more reasoned response. Yet these heuristics do not come from the ether. They are the product of millions of years of evolution from hominids to modern humans. Some heuristics may be destructive and fade over time through natural selection. Still, evolutionary science suggests that most of the biases serve some purpose in the cause of human survival. Paleoanthropologists and biologists continually marvel at how humans have survived without claws, fangs, massive bodies, or exceptional speed in a world of predators. The answer, of course, is the human brain. And the brain, as we now know, is a bundle of biases.

  Consider the unexamined assumptions behind the Thaler-Sunstein approach. They assume the future resembles the past. They assume that markets will remain open and liquid. They assume that governments will not resort to confiscatory policies to support state power. They assume tax rules will not retroactively change. They assume the smooth functioning of critical digital and financial infrastructure. They assume continuation of the rule of law.

  Every one of these assumptions is false. History is filled with dislocations and dark ages. The New York Stock Exchange has been closed for months at a time. Market liquidity is deteriorating and has vanished completely during certain flash crash episodes. Governments confiscate wealth all the time; just ask U.S. gold owners in 1933, Chinese in 1949, or Venezuelans today. Tax rates in the United States have been as high as 90 percent on occasion. Wall Street came close to complete collapse in 1998 and 2008. Puerto Rico was without adequate electric power a full year after Hurricane Maria in 2017. The rule of law broke down in the United States during the Civil War, the First World War, and in riots since then. This is a small sample of how Thaler-Sunstein complacency is misplaced. On balance, sustained periods of social stability are the exception, not the rule. Efforts by Thaler and Sunstein to overcome a “bias” against joining 401(k)s enshrines their own bias that a society looks tomorrow as it does today. That’s the most dangerous bias of all.

  The difficulty with behavioral psychology is not the science, it’s the application. The pure science exemplified by Kahneman, Tversky, and Ariely has been misapplied by economists such as Thaler and bureaucrats like Sunstein. The Thaler-Sunstein approach assumes not only that the future resembles the past, but that people frankly are stupid and need their highly educated help, another debatable proposition.

  A better approach to applied behavioral psychology has been offered by Samuel Bowles, director of the Behavioral Sciences Program at the Santa Fe Institute, a leading center of complexity theory. The title of his 2016 book, The Moral Economy: Why Good Incentives Are No Substitute for Good Citizens, candidly displays his own bias in this debate.17 While Bowles is completely familiar with the work of Thaler, Sunstein, and other choice architects and agrees it has its place in social governance, he argues for greater latitude for true choice rather than contrived choice.

  Bowles cites the case of a group of child day-care centers that had difficulty with late pickups by parents. To encourage on-time behavior by parents, the centers imposed a fine for late pickups, a classic nudge. The fine failed. Late pickups doubled under the new system of fines. The reason for the failure goes to the dichotomy between altruistic and selfish motives. Without the fine, the parents operated on a kind of honor system when it came to being on time. They did their best out of respect for the day-care center staff and their own sense of duty, despite some lateness. Once the fines were imposed, parental action become purely contractual. The costs of a nudge displaced the sense of duty. Parents coolly calculated the value of their own time and chose to pay the fine in exchange for more flexibility in their schedules. There was no sense of shame at being late; the fine meant being late was all business, just another rational economic choice.

  A better approach by the day-care center would have been to build on the sense of duty with “on-time” reminders in the form of posted signs and brochures. Incentives in the form of “parent of the month” recognition for the most on-time pickups might have created a friendly competition and improved performance without coercion and manipulation. Behavioral applications that involve information are not nudges; they are educational. These nonhidden incentives play to our best instincts, not our worst.

  Behavioral psychology has a broad and beneficial role to play in economic science. Illuminating biases can help individuals make decisions in their best interests. The way to achieve this is education. When education slides into indoctrination through “nudges” contrived by condescending scholars who supposedly know better (but don’t really), we are well down the path to despotism wrapped with a bow.

  Investment Secret #3: Beware the hidden hand of behavioral manipulation. Watch out for nudges.

  Investors need to improve their situational awareness of manipulation by choice architects. Only when you see through the social engineering behind the financial choices presented to you will you be able to counter the engineer’s biases and act in your own best interests.

  Before you can counter the biased manipulation of choice architects, you must understand your own biases. In general, people do not like to fill out forms or check boxes regardless of the content of the form or the question being asked. Choice architects use this bias to create a path of least resistance on applications that leads individuals to a result preferred by the choice architect and her corporate sponsor. Investors must mobilize patience as the antidote to the choice architect’s assumption that you don’t have any. As you read questions on forms, pause, take a minute, and ask yourself if there’s a hidden agenda. Is a financial
choice already made for you (with a separate opt-out box)? Ask yourself if that design is intentional, to get you to go along the plan sponsor’s preferred path. Ask if the more difficult path (checking the opt-out box) is better for you by allowing more choices and degrees of freedom in the construction of a portfolio that preserves wealth. It’s important to understand that the 401(k) and other similar provisions of the U.S. tax law were not benignly bestowed by Congress, but were heavily lobbied for by Wall Street as a way to boost assets under management and inflate stock prices. Before you sign up to Wall Street’s wish list, think of your own.

  Individuals also need to consider the biases of choice architects. These masters of manipulation are either following orders from corporations that hired them or are implementing their own view of how markets and economies function. A long series of market extremes beginning in 1987 (22 percent one-day market crash), including 1994 (Mexico), 1997 (Asia), 1998 (Russia and LTCM), 2000 (dot-coms), 2007 (mortgages), and 2008 (Lehman and AIG), give lie to the notion of rational, efficient markets. Efforts by choice architects to nudge people toward so-called rational choices are a trap for the uninformed. Rational markets don’t exist.

  There’s nothing safe in investing. Stocks, bonds, currencies, and commodities all crash with some frequency. When markets crash, Wall Street still wins with wrap fees, commissions, and spreads. The losers are the clients. You can level the playing field by reducing your allocations to products promoted by the financial industry (and their choice architects) and increasing allocations to less traditional alternatives. Investments in income-producing real estate, natural resources, museum quality collectibles, and other asset classes not usually available in 401(k)s are an excellent way to preserve wealth, diversify risk, and escape the designs of hired-gun social engineers. If you take a buy-and-hold approach, tax deferral happens automatically, even without the much-touted tax shelter of the 401(k).