Dan Ariely: Why Humans Are Hard-Wired To Create Asset Bubbles

Tyler Durden's picture

Submitted by Adam Taggart via Peak Prosperity,

Renowned behavioral economist Dan Ariely explains why humans are biologically wired to make irrational decisions when money is involved. It's a case of our evolutionary wiring interfering with the decisions we face in a modern world very different from the one our ancestors adapted to.

For instance, he explains how one of the easiest phenomena to create in a lab are valuation "bubbles". Our vestigial herding instinct encourages us to imitate the actions of those around us (e.g. bidding for a particular asset), which then strengthens that signal for others (leading to even higher bidding), resulting in behavior not justified by the underlying fundamentals of reality (asset prices destined to crash).

In this podcast, Chris and Dan explore the human cognitive triggers that have led us to our third major bubble in 15 years (tech stocks, housing, credit) and why our natural programming often works against our best interests. In certain cases, like the banking sector, bad decision-making has become so ingrained in our institutions that Ariely thinks the "clean slate" approach is our best option should we have the courage to deploy it:

In very general brushstrokes I think that most bankers are in fact inherently decent people. We just put them in situation in which their conflict of interest is tremendously high and their social norms are incredibly dysfunctional.


When you hear bankers talking about their customers as Muppets, for example, they are forgetting who they are serving. They are hired by the rest of us to do a particular job; and they forget this. And then they have terrible conflicts of interest.


Imagine that I give you a world in which, if you can adopt a particular perspective on life, you could get $5 Million as a bonus. Wouldn’t you start believing that world? And then everybody around you is doing the same thing, and you have some justification for it by talking about financial market theory and so on. All of a sudden you could see how you could take good people and you could put them in this distorted way -- in the same way that we talked about how global warming is probably the perfect storm for inaction -- I think Wall Street is the perfect storm for allowing people to rationalize their own selfish motivations as if they are serving other people.


It is really, really terrible because we have not done anything to change the way we pay bankers. And we have not changed anything in terms of the code of ethics and morality.


On the consumer side, there is a tremendous loss of faith. We have been screwed and we know that we have been screwed. And we know that we are not trusting other people. And I think loss of trust is a central issue for this financial crisis and sadly nobody is trying to do anything about that. Human beings are incredibly forgiving, but nobody has really stood up and said, "I am really sorry. I made all of these terrible mistakes. I want this particular bank to start fresh and caring about people," right? Nobody has admitted anything. So we as consumers feel that there are these other people on the other side who have behaved terribly, which is true, and that are smug about it, and that nothing is different. And why should we trust them? And we do not.


I don't think it is a generational thing. I think there is a tremendous feeling of lack of control, agency, and helplessness. And the sad realization -- this is one of the things that came out of financial crisis -- is that it is much harder to start a new bank now. So young people are actually quite idealistic and I think people would have started new banks where they behaved very, very differently. But what happened is that it is really, really tough to open a new bank now. But I am still hopeful: I think that this anger and frustration just needs to be channeled in a better way.


I am not a religious person but the story from the Bible is that God made the people of Israel walk around the desert for 40 years until the old generation that worshipped the golden calf passed away. I do think that we need a new generation of bankers. I think you cannot take the old generation of bankers and rehabilitate them.


Recent history is not showing us that this is something we should hope for. But there is a real question of, How do we create a new generation of bankers that are going to think of themselves as the caretakers of society, rather than the rapists?

Click the play button below to listen to Chris' interview with Dan Ariely (42m:54s):



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Seize Mars's picture

Look, I understand that there is a desire to seek "mystery" answers to the big, social, seemingly baffling things like economic cycles and bubbles. But the smoke has cleared. Von Mises has put it in back and white. It isn't "behavioral," it's financial.

This is being done to us, it's not something we are falling into.

Wake up, read Rothbard, Von Mises.

It. Doesn't. Have. To. Be. Like. This.

Deathrips's picture

Humans are hard wired to shoot heroin, says the addict.


Look at this needle I evolved with.





Anusocracy's picture

I have to disagree with Dan Ariely.

Alpha males and their 'lieutenants' are hard wired to treat lower individuals as objects. The modern alphas' code of ethics and morality are hardly any different than the behavior of animals.

The politicians, banksters, and other elites are basically high-function monkey elites:

"Rhesus macaques live in complex societies with strong dominance hierarchies and long-lasting social bonds between female relatives. Individuals constantly compete for high social status and the power that comes with it using ruthless aggression, nepotism, and complex political alliances. Sex, too, can be used for political purposes. The tactics used by monkeys to increase or maintain their power are not much different from those Machiavelli suggested political leaders use during the Renaissance.

Alpha males, who rule the 50 or so macaques in the troop, use threats and violence to hold on to the safest sleeping places, the best food, and access to the females in the group with whom they want to have sex. Like human dictators intent on holding power, dominant monkeys use frequent and unpredictable aggression as an effective form of intimidation. Less powerful members of the rhesus macaque group are marginalized and forced to live on the edges of the group’s area, where they are vulnerable to predator attacks. They must wait for the others to eat first and then have the leftovers; they have sex only when the dominant monkeys are not looking.

“In rhesus society, dominants always travel in business class and subordinates in economy, and if the flight is overbooked, it’s the subordinates who get bumped off the plane,” Maestripieri said. “Social status can make the difference between life and death in human societies too,” he pointed out. In the wake of Hurricane Katrina, for instance, the poorer members of the community accounted for most of the hurricane’s death toll."

"Male macaques form alliances with more powerful individuals, and take part in scapegoating on the lower end of the hierarchy, a Machiavellian strategy that a mid-ranking monkey can use when under attack from a higher-ranking one. Altruism is rare and, in most cases, only a form of nepotistic behavior."

"Struggles for power within a group sometimes culminate in a revolution, in which all members of the most dominant family are suddenly attacked by entire families of subordinates. These revolutions result in drastic changes in the structure of power within rhesus societies, not unlike those occurring following human revolutions. There is one situation, however, in which all of the well-established social structure evaporates: when a group of rhesus macaques confronts another one and monkey warfare begins. Rhesus macaques dislike strangers and will viciously attack their own image in a mirror, thinking it’s a stranger threatening them. When warfare begins, “Even a low-ranking rhesus loner becomes an instant patriot. Every drop of xenophobia in rhesus blood is transformed into fuel for battle,” Maestripieri wrote.

“What rhesus macaques and humans may have in common is that many of their psychological and behavioral dispositions have been shaped by intense competition between individuals and groups during the evolutionary history of these species” Maestripieri said. Rhesus groups can function like armies, and this may explain why these monkeys have been so successful in the competition with other primates."


The Vineyard's picture

I need to be on drugs.  My demons have demons.  Bitches.

Dick Buttkiss's picture

If the system is inherently immoral, as our money and banking system is, then those in contol of it cannot but act immorally.  That they naturally defend their immorality is perfectly understandable, never mind that it only makes the system that much worse, especially when the system of which it is a subset — i.e., the state — is inherently immoral as well.

The state is based, after all, on the coercion embodied in the confiscation of property — i.e., the theft of taxation — which is no less moral because the people acquiesce in it. On the contrary, it is for this very reason that the immorality worsens, and society, which is inherently cooperative, ultimately breaks down.

This is the situation we are in today, of course, where banks are "too big to fail," and thus bankers to "too big to jail," the system itself becoming one big prison operating under the psychic trauma of the Stockholm Syndrome.

Collapse, then, is inevitable and will only be worse the longer the prison guards are able to perpetuate it.

KickIce's picture

Fair laws that apply to all helps keep immorality in check while risk helps to keep greed in check and the banks have obviously circumvented both of these checks.  In short, our politicians represent the United States as a corporation and not the people.


–John Adams in a letter written to Abigail on the day the Declaration was approved by Congress

"We have no government armed with power capable of contending with human passions unbridled by morality and religion. Avarice, ambition, revenge, or gallantry, would break the strongest cords of our Constitution as a whale goes through a net. Our Constitution was made only for a moral and religious people. It is wholly inadequate to the government of any other." --October 11, 1798

bonin006's picture

It looks like someone (the down voter) is uncomfortable with the truth.

dark pools of soros's picture

anyone that crys about a punch should get 50 more!

Oracle 911's picture

The current "elite" is a conglomerate of sociopaths and psychopaths, they don't have conscience, lack empathy and they are net consumers not producers (they produce physical feces, but that doesn't count).

The monkeys lack conscience, lack empathy and  they are consumers and not producers. So the comparison of the human "elites" to the macaques is befitting.


Note: I'm talking about physical feces, the intellectual feces a.k.a. lies counts.

ohBehave's picture

Well, that's all well and good.

In general, we ALL treat "the others" as less important.   For example, we can watch real human being suffer greatly in other cities or nations, but we look at them in much the same we'd watch a movie.

We kinda care, but we do nothing.  We focus on our own lives and those who are closest to us.  

We see a homeless dude, but instead of bailing him out, we buy a nice Audi for ourselves.  Sure, we could have bought a Honda Fit with money left over for that guy sleeping on the sidewalk.  In fact, the Honda would be more reliable and more practical.... but no, we act like those evil elites.... we treat ourselves to the nice latte' as we step over the legs of the homeless.

How are any of us behaving ANY differently than those elites or bankers?

We aren't.   To complain about them is to complain about being human.

The answers are simple:  severely limit government

MeelionDollerBogus's picture

I don't. If I have $20 to spare I'll give it to the homeless guy or buy him a meal.
I usually don't have it to spare but I'm not buying some fucking Audi. Ever.
I understand in another city my maximum spending output will do nothing, given the distance, because I can do math. A person's free, even hitch-hiking, to find another city or another country. It's been done before & I may need to do that myself as well.

I don't act even 0.0000001% like those evil elites. Ever.

They are not human. They are wolves posing as humans. Most of us refuse to ever behave like them.

MeelionDollerBogus's picture

considering all the receptors we have for opiates & how convenient it is these happy plants produce opiates, it does appear to be the case.

Irene's picture

Actually, at this stage of the game, I'd recommend Hayek.  He emphasizes the need for societal, cultural, and educational institutions that lay the foundations for a free people and a free market.  We need to get back to basics.  It ain't just about the money anymore.

NoDebt's picture

I'm about tired of institutions telling me how to be free.  Haven't found the institution yet that doesn't exist to protect it's own as it's primary purpose, no matter how well meaning.

Harbanger's picture

That would be the self created institution of awareness.

Irene's picture

Hayek doesn't tell you how to be free.  He talks about how institutions and law that organically arise out of the growth and experience of a society and continue to improve society are preferable to state/top down imposed ones, among other topics. 

Every society needs good institutions, but good institutions also need good oversight.  Protecting one's own is a natural human reaction.  So, don't expect the impossible. 

NoDebt's picture

And who will provide this benevolant oversight?  Me?  I don't even trust you to do it, and you seem like an OK guy/girl.

The fewest number of institutions possible, commensurate with running the society.  And nobody knows how many that is.  So until further notice, the fewer, the better.  Certainly far fewer than we have today.

Irene's picture

I'm not disagreeing with you but "institutions" do not need to be bricks and mortar types.  Marriage is an institution.  Belief in the rule of law is an institution.  These non-physical institutions are very important.  They were built up over centuries of experience and reflect a lot of collective wisdom.

new game's picture

checks/balance????? another human with an agenda. or is that hidden agenda? groups to provide the check/balance????

ultimately it works for a while and get hyjacked by viloence... these are self evident facts.  the cycle of human life.

so you live in a time period within the cycle. ie peace/war. do you feel lucky? tic- toc...

MeelionDollerBogus's picture

marriage is a cultural meme, it isn't an institution. That's simply mis-use of the word.

Canoe Driver's picture

Marriage is an institution of the state, extant for the support of the state, and the state has always used the church to bolster state power. The church itself, in general, is merely another, larger institution of state power. That most of the people understand marriage as a cultural phenom is one of the most significant political manipulations of history. Further, at least since the industrial revolution, child-rearing is essentially reduced to a service provided by individuals, at their own expense, for the support of the state. The fact that we love our children and find them adorable, loving and innocent human beings is irrelevant to the political utility of child-rearing. Society is awash in such poltical manipulations which have been made to pass for the will of the people.

Although it is a topic too lengthy for discussion here, one need only look at the full history of modern sport, yes, sport, and its promotion from the days of the British Empire, for yet another eye-opening revelation about the use of purported "cultural memes," to control the population and channel its energies into the support of the state.

In fact, such are of the very essence and nature of government.

MeelionDollerBogus's picture


Marriage pre-dates states and goes back to tribes. Culture. Not states.

Marriage even pre-dates ALL CHURCHES on Earth.

Even marriages in India & all their temples predate every Western Church ever to exist by more than 2 THOUSAND years and marriage easily predates the first building of the first temple in India - ever.

Hail Spode's picture

Good observations NoDebt.  The first goal of any bureacracy is its own well-being, no matter what purpose the institution was originally founded for.   Break government up enough that it is subject to the market and the interests of those running it will co-incide with those living under it because the transaction costs of getting away from bad government would be low.  See http://www.amazon.com/Localism-A-Philosophy-Government-ebook/dp/B00B0GAC...

Seer's picture

"He talks about how institutions and law that organically arise out of the growth"

Perpeptual growth on a finite planet isn't possible.  ANYONE who doesn't get this is an IDIOT.

Anything growing out of cancer is BAD!

RumCurrency's picture

That is nonsense.  As any technology matures it becomes commoditized so that even the poor gain access to it.  While this is happening, wealthier individuals are buying the newest more experimental technologies, and this helps to finance further research and development.  Technology is the never-ending struggle to do more with less.  Eventually (in hundreds or thousands of years) technology will expand human reach far beyond this planet.  The universe may be finite, but I highly doubt all of its resources will ever be fully utilized.

RECISION's picture

If you imagine Homo Sapiens are going to go Star-Treking off into the universe, and raping and pillaging mining planets and asteroids as they go, then you seriously don't understand the factors and issues involved...

MeelionDollerBogus's picture

really? The poor will gain access to HFT trading, to BMW's and to organic GMO-free foods in stores, and to land upon which to grow their own food?

Fuck no. You're dreaming in LSD-technicolour.

Technology isn't cheap enough for the poor to benefit from it. iPhones on contract are but a contract is a debt & the device adds ZERO to survivability. Robotics are too difficult for them to understand & motors far too expensive even to build their own. Computers get discarded now that are too old & can be used by the poor but again, without the tech knowledge (they are poor in knowledge, money & useful experience) this becomes a game-computer or a facebook terminal. Nothing useful.

Very many technologies out now are a way to do less with more, to be stupid & insanely so. Seer is right.

MeelionDollerBogus's picture

indeed, you are right.

That isn't to say we can't do a lot of cost-cutting at the physical level for resource-usage, storage & power transmission but again, this is finite. Either human population x consumption comes to equilibrium the easy way or it doesn't. If it doesn't then there's the hard way, or extinction. That's the entire set of future options.

It's disappointing 3 retards gave you a -1 because they are part of the problem & wilfully blind.

JeffB's picture

Hayek certainly warns of the problems of a socialistic government, &/or a government that wants ever more power to conrol an economy.

The Road To Serfdom, has some timeless insights. No doubt that was why it was such a timeless classic.

Anusocracy's picture

There isn't an example of a government that doesn't want ever more power to control an economy (and everything else).

And there won't be.

JeffB's picture

and that's undoubtedly why our Founding Fathers were so prudently careful in trying to erect a series of checks and balances on that governmental power... and it worked pretty well for quite awhile.

Once the banksters were able to seize control of the money making machine by deceit, among other devious methods, when they were able to spawn the Federal Reserve, aka The Creature from Jekyll Island, putting themselves in the driver's seat, it was just a matter of time before things spun out of control.

Now we're left with the very dangerous task of trying to get the spinning plane back under control again.

Good luck to us.


A Nanny Moose's picture

Meh. We started with the smallest government the world has ever seen, yet still ended up with the largest, most intrusive government ever.

So much for checks and balances. The only government that does not seek to consolidate power, is one that does not exist.

Dr. Acula's picture

>The Road To Serfdom, has some timeless insights.

Yes, here's a choice one from Hayek the socialist planner:

""[T]here can be no doubt that some minimum of food, shelter, and clothing, sufficient to preserve health and the capacity to work, can be assured to everybody. ... Nor is there any reason why the state should not assist the individual in providing for those common hazards of life against which, because of their uncertainty, few individuals can make adequate provision... In any case, the very necessary effort to secure protection against [economic] fluctuations do not lead to the kind of planning which constitutes such a threat to our freedom.”

All Risk No Reward's picture

Which came first - the Money Power or the screwed up societal, cultural and educational institutions?

Because the Money Power has hijacked all of the above and a bag of potato chips.

Debt Money is fraud.

The "business cycle" is a euphamism designed to fool the ignorant.  It really is a debt money Ponzi scheme debt bubble / bust operation.

Offthebeach's picture

The masses have government plantation "education". And TV. The ones troubled with confused imaginations, self medicate.


headhunt's picture

It is simple greed that drives these people to do what they do. The fact is these people are insulated from the majority of ordinary persons daily life. They work long hours and only associate with their breed of aristocracy. They view everyone else as a muppet to justify their greed, if it is not a real person they just stole from it is simple and easy to justify  the greed.

The herd mentality of groups has a tendency to lead groups off the edge of cliffs - look at our last two elections - baaaa...

and they introduce 'common core' to continue the stupification of America

Dr. Acula's picture

>at this stage of the game, I'd recommend Hayek

His teacher, Mises, is clearly a better economist.

Hayek is a socialist who recommends a welfare safety net. For adopting socialism, he even won a central bank's prize.


nmewn's picture

It. Doesn't. Have. To. Be. Like. This.

Unfortunately, yes it does.

There are genuinely stupid people walking the planet and you can't fix stupid. Ignorance, is an entirely different matter.

JeffB's picture

Thanks for that link.

It looks like a great book. I'll have to check it out.


nmewn's picture

Thanks for that.

It looks like what we've always said around here. Rewarding bad behavior (or bad economics) never leads to a change in the bad behavior. There is no clearing mechanism, no floor at which the real, saved capital comes in and establishes one, just more of the artificial and of course, never any punishment for the ones who caused it in the first place.

And the ponzi grows on.

JeffB's picture

You hit the nail on the head, Seize Mars.

For a pretty nice reasonably concise explanation, see Auburn's economic Prof. Roger Garrison's Youtube clip of a PowerPoint presentation he gave to a class on the Austrian Theory of the Business Cycle.


Seize Mars's picture


Good one, bra. I love that video.

OC Sure's picture

Seize Mars is correct.

The symptom is the behavior but the cause is financial [the money printing].

Von Mises analysis and teachings on praxeology certainly prove this and is precisely why Human Action is eschewed in the USA's indoctrination system.

Tu ne cede malis.

dtwn's picture

Yup.  This X100.  Really, economics from the Austrian viewpoint expounded upon by Rothbard and Mises is I believe, the best explanation for how an economic system 'should' be working.


Now, I also do enjoy Ariely's work as well, behavioral economics is quite fascinating as well. However, the Goldman-type bankers with their large bonuses and treating the rest of us peons as muppets would not exist in a free market.  They only exist currently due to teh moral hazard given to them by our corrupt political system. 

I believe that in a truly free market, i.e Austrian economic system, they would not last long.

All Risk No Reward's picture

The Bnaksters aren't going to pay people to teach people anything close to the truth about their Debt Money Tyranny system...

Debt Money Tyranny


pcrs's picture

As long as their is a gun on he head of the tax slave to bbail out the elites, these elites will make seemingly irrational decisions with your money.

A Nanny Moose's picture

Thank You! Bubbles result from currency debasement.

Irene's picture

While you're figuring out how to get "better bankers", try working on "better politicians" too. They go hand and hand.