Chrystia Freeland

Last week at Davos, Chrystia anchored an hour-long daily talk show that featured many of the World Economic Forum’s most exciting participants.  Last Wednesday’s edition featured a segments on frugal innovation in India with two top Indian businessmen; the state of trust in business and government today with a behavioral economist and two CEOs; an appraisal of President Obama’s State of the Union from two pre-eminent economists; and more.  Here’s the video and the guest list:

* T.K. Kurien, CEO, Wipro IT

* Richard Edelman, President and CEO, Edelman

* Dan Ariely, James B. Duke Professor of Behavioral Economics, Duke University Fuqua School of Business

* L. Kevin Kelly, CEO, Heidrick & Struggles

* David Schlesinger, Editor-in-Chief, Reuters

* Raghuram Rajan, Eric J. Gleacher Distinguished Service Professor of Finance, University of Chicago Booth School of Business

* Laura D’Andrea Tyson, S. K. and Angela Chan Chair in Global Management, University of California-Berkeley Haas School of Business

* T.P. Chopra, CEO, Bharat Light and Power

* Dan Gross, Editor, Yahoo! Finance

* Susan Glasser, Editor-in-Chief, Foreign Policy

* Paul Collier, Professor of Economics, Oxford University

Posted by Peter Rudegeair.

At the end of Chrystia’s interview with Dan Ariely yesterday, he revealed that his next research priority is to demonstrate how pernicious conflicts of interest really are:

My personal mission is to think about conflicts of interest. So it turns out that if I pay you lots of money to see reality in a certain way, you too will be able to do it … It turns out conflicts of interest paint us. They paint our view of the world in deep ways that we don’t understand. So imagine I pay you $5 million a year to view mortgage-backed securities as a good product. Now, I’m sure you could pretend to like them, but the question is would you really start believing that they are better products than they really are? And that’s the case. We find that people actually can change their deeply held beliefs. They would invest their own money. If something is worthwhile for you to do financially, you would convince yourself that this is also good for you. And if it’s something that is difficult and complex, it turns out it’s even easier for us to do it. And if it’s something that is remote from money — for example, in our experiments when we get people to cheat for something that is not money but a step removed from money — stock, stock options — people find an easier time doing that. So my big issue right now is to try to eliminate conflicts of interests. When you have a situation with conflicts of interest and you put good people in those conditions, you should not expect anything but failure.

As Ariely tells Chrystia, this is a problem not just limited to finance. Doctors and politicians can lose their ability to objectively see reality through their contact with drug reps and lobbyists, he says. And while he’s not wide-eyed enough to believe he could eradicate them completely, Ariely does think conflicts of interest can be dramatically reduced.

You can watch the entire interview here.

Posted by Peter Rudegeair.

Dan Ariely, author of “The Upside of Irrationality,” has some (unsurprisingly) unconventional recommendations for restoring the health of the financial system and fixing Wall Street pay. He told Chrystia that the government’s effort to recapitalize the banks and restore liquidity to the financial system are half-hearted since it has done little to restore trust in the industry:

I think what is really dangerous is the feeling of mistrust and revenge towards bankers. People at AIG have told me that they’ve been punched — physically, people punched them in restaurants. There’s a deep mistrust. And what’s interesting is that people are inherently trusting creatures, but when our trust is being betrayed we get incredibly upset and willing to take revenge … Now, I think the banking industry in general, and also Washington, don’t understand how deep the trust has been betrayed. And what we need is not just to increase liquidity and not just to create sunshine policy. What we need is to restore the trust in banking, and unless we do that I don’t think things will truly recover.

Ariely mentions an experiment he calls the “trust game” that illustrates how vindictive people become once they feel betrayed. It involves two players: A and B. Player A is given $100 and is told he can either go home with the money or send the money to Player B. If he sends the money to Player B, the $100 will quadruple to $400. If the money gets to Player B, he could either go home with the $400 or split the money 50-50 with Player A.

It turns out that, contrary to economic orthodoxy, Player A often sent the $100 to Player B and Player B often reciprocated and split the $400 with Player A. The interesting insight comes from the cases where Player B opted to keep the $400 and Player A felt so betrayed that he was willing to pay Ariely out of his own pocket to punish Player B when that option was offered.

When it comes to reforming how bankers are paid, Ariely told Chrystia his research indicates that the standard equation of “money=motivation” is too simplistic, even in the uber-capitalist realm of Wall Street. To demonstrate this, Ariely ran an experiment in which people get paid to build Lego robots. In one variation called the “Sisyphean condition,” Ariely disassembled the freshly-built robots and asked the participants to start over. Though they were paid the same amount as other participants whose robots were not destroyed, those in the Sisyphean condition reported that they got much less value than other group. Here’s how Ariely describes his findings and how it applies to Wall Street:

[S]ure, people work for money. But meaning is another ingredient, and that’s just only one of them. Competition is another. There’s lots of other ones, and if we understand those other components, we could get people to work much more for much less pay. Or, put it differently, the amount of money people get right now on Wall Street, partially it’s for salary but partially it’s doing all those other things that we could get in other, cheaper ways. As a shareholder in many of the banks, I want them to pay people an efficient way that would maximize my value. I don’t think what they’re doing right now is the right approach.

Posted by Peter Rudegeair

Behavioral economist Dan Ariely of Duke University came into Reuters today to talk to Chrystia about his new book and some of his recent research on income inequality.

Ariely, along with Michael Norton of Harvard Business School, conducted a survey to determine what level of inequality Americans tolerate if their incomes were randomly assigned, an equilibrium that philosopher John Rawls called the “just society.” The duo asked nearly 6,000 Americans to guess what percent of wealth they thought was owned by each of the five quintiles of income levels in the United States and what their ideal level of income distribution would be. Then, Ariely and Norton presented the respondents with three unlabeled charts showing–unbeknownst to them–the distribution of income in a perfectly equal society, the United States, and Sweden, respectively, and asked which society they would choose to live in.

The results were quite shocking:

First, respondents vastly underestimated the actual level of wealth inequality in the United States, believing that the wealthiest quintile held about 59% of the wealth when the actual number is closer to 84%. More interesting, respondents constructed ideal wealth distributions that were far more equitable than even their erroneously low estimates of the actual distribution, reporting a desire for the top quintile to own just 32% of the wealth

[...]

The (unlabeled) United States distribution was far less desirable than both the (unlabeled) Sweden distribution and the equal distribution, with some 92% of Americans preferring the Sweden distribution to the United States.

He summarized his research findings for Chrystia in the following way:

I think what politicians often do is cover things with layers of words that in many ways obscure the topics. ‘What about taxes?  And what’s your opinion about abortion and social mobility?’ But when you look deep down, it turns out Americans really believe in much more equality than we currently have. And this kind of gives me hope that as long as we can get a discourse to be more about the beliefs, we might get something better.

Posted by Peter Rudegeair.