Predictably Irrational Author Dan Ariely Opens the CFA Institute 2010 Annual Conference

May 16, 2010 at 8:40pm by CFA Institute Blog Team

In the opening session of the CFA Institute 2010 Annual Conference, moderated by Wall Street Journal columnist Jason Zweig, keynote speaker Dan Ariely argued that we all make the same mistakes over and over again — and that these mistakes are predictable. Ariely used visual illusions to show the audience that although a very large part of the human brain is dedicated to vision, we still fall for visual illusions in predictable ways, and we do not learn from these mistakes.

Ariely, a professor of behavioral economics at Duke University and author of Predictably Irrational, also showed attendees that the way choices are presented heavily influences decisions. People generally think that they are consciously making choices, he said, but we need to understand and pay attention to the context surrounding the decisions with which we are presented. With regard to financial decision-making, Ariely said, "we have no biological advantages for these choices as we do with vision, for example."

What are the lessons? There are three that can be drawn from behavioral finance. First, human beings exhibit lots of irrational tendencies. Second, we don't see them. And third, we have to become more empirical to overcome these shortcomings. One strategy, Ariely asserted, is to doubt your gut feelings or intuition — and replace that with more empirical data.

Dr. Ariely concluded his discussion by covering conflicts of interest and the need for trust in the aftermath of the financial crisis. He argued that even small improvements in neutralizing conflicts of interest can have substantial benefits for the financial system. As Ariely noted, trust in financial institutions and markets will be difficult to rebuild given the fact that investors feel the system failed them.

By Gregory Seals, CFA