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  • I want to talk to you today a little bit

  • about predictable irrationality.

  • And my interest in irrational behavior

  • started many years ago in the hospital.

  • 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 burn department

  • was the process by which the nurses took the bandage off 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 one, so they would grab hold and they would rip,

  • and they would grab hold and they would rip.

  • And because I had 70 percent 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 nurses told me two things.

  • 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 to 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 they were doing.

  • And about three years later, when I left the hospital,

  • I started studying at the university.

  • And one of the most interesting lessons I learned

  • was that there is an experimental method

  • that if you have a question you can create a 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

  • in this question of how do you take bandages off burn patients.

  • So originally I didn't have much money,

  • so I went to a hardware store and I bought a carpenter's vice.

  • And I would bring people to the lab and I would put their finger in it,

  • and I would crunch it a little bit.

  • (Laughter)

  • And I would crunch it for long periods and short periods,

  • and pain that went up and pain that 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? Or, how painful was this?

  • Or, if you had to choose between the last two,

  • which one would you choose?

  • (Laughter)

  • I kept on doing this for a while.

  • (Laughter)

  • 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 move toward my legs,

  • giving me a trend of improvement over time --

  • that would have been also less painful.

  • And it also turns out that it would 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 a 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 there was kind of

  • a few apples who are capable of doing these things,

  • or are we talking a more endemic situation,

  • that many people are actually capable of behaving this way?

  • So, like we usually do, I decided 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 a dollar per question."

  • People did this. I would pay people four dollars for their task --

  • on average people would solve four problems.

  • Other people I would tempt to cheat.

  • I would pass their sheet of paper.

  • When the five minutes were over, I would say,

  • "Please shred the piece of paper.

  • Put the little pieces in your pocket or in your backpack,

  • and tell me how many questions you got correctly."

  • People now solved seven questions on average.

  • Now, it wasn't as if there was a few bad apples --

  • a few people cheated a lot.

  • Instead, what we saw is a lot of people who cheat a little bit.

  • Now, in 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 out --

  • you 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 10 cents per correct question, 50 cents,

  • a dollar, five dollars, 10 dollars per correct question.

  • You would expect that as the amount of money on the table increases,

  • people would cheat more, but in fact it wasn't the case.

  • We got a lot of people cheating by stealing 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 from the bowl of money that had over 100 dollars.

  • You would expect that 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 they were insensitive to these economic incentives.

  • So we said, "If people are not sensitive

  • to the economic rational 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 ourselves in the mirror

  • and feel good about ourselves, so we don't want to cheat.

  • On the other hand, we can cheat a little bit,

  • and still feel good about ourselves.

  • So, maybe what is happening is that

  • there's a 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 they read in high school,

  • or to recall The Ten Commandments,

  • and then we tempted them with cheating.

  • Turns out the people who tried to recall The Ten Commandments --

  • and in our sample nobody could recall all of The Ten Commandments --

  • but those people who tried 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 Commandments -- cheated less,

  • and the less religious people --

  • the people who couldn't remember almost any Commandments --

  • cheated more.

  • The moment people thought about trying to recall The Ten Commandments,

  • they stopped cheating.

  • In fact, even when we gave 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 they shredded it. No cheating whatsoever.

  • And this is particularly interesting,

  • because MIT doesn't have an honor code.

  • (Laughter)

  • 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 the refrigerators --

  • these were common refrigerators for the undergrads.

  • And I came back to measure what we technically call

  • the half-lifetime of Coke -- how long does it last in the refrigerators?

  • As you can expect it doesn't last very long; people take it.

  • In contrast, I took a plate with six one-dollar bills,

  • and I left those plates in the same refrigerators.

  • No bill ever disappeared.

  • Now, this is not a good social science experiment,

  • so to do it better I did the same experiment

  • as I described to you before.

  • A third of the people we passed the sheet, they gave it back to us.

  • A third of the people we passed it to, 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 finished shredding 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 paid them with something else.

  • And then they took the 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 10 cents from a petty cash box?

  • These things feel very differently.

  • Would being a step removed from cash for a few seconds

  • by being paid by token make a difference?

  • Our subjects doubled their cheating.

  • I'll tell you what I think

  • about this and the stock market in a minute.

  • But this did not solve the big problem I had with Enron yet,

  • because in Enron, there's 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 cause us?

  • So, we did another experiment.

  • We got a 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 that at the end, we asked them

  • to pay us back the money they didn't make. OK?

  • The same thing happens.

  • When we give people the opportunity to cheat, they cheat.

  • They cheat just by a little bit, all the same.

  • But in this experiment we also hired an acting student.

  • This acting student stood up after 30 seconds, and said,

  • "I solved everything. What do I do now?"

  • And the experimenter said, "If you've 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 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 sweatshirt they're wearing.

  • Here is the thing.

  • We ran this at Carnegie Mellon and Pittsburgh.

  • And at Pittsburgh there are two big universities,

  • Carnegie Mellon and University of Pittsburgh.

  • All of the subjects sitting in the experiment

  • were Carnegie Mellon students.