Value Investing, Videos

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

Renown behavioral economist Dan Ariely explain 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. Dan Ariely is the author of  three books:  Predictably Irrational: The Hidden Forces That Shape Our Decisions (2008),  The Upside of Irrationality: The Unexpected Benefits of Defying Logic at Work and at Home (2010), and The Honest Truth About Dishonesty: How We Lie to Everyone–Especially Ourselves (2012)

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.

Dan Ariely below

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