Motley Fool Hidden Gems Investing - Interview with Dan Ariely: Investing in the Irrational

Episode Date: September 14, 2025

Dan Ariely, a Professor of Behavioral Economics at Duke University, is the bestselling author of Misbelief, Dollars and Sense, and Predictably Irrational. Motley Fool contributor Rich Lumelleau talks with Ariely about the rational and irrational: Inspiration for studying human behavior Swiss Army Knife problem Emotions and investing Extrinsic and intrinsic motivation Host: Rich LumulleauProducer: Mac GreerEngineer: Adam LandfairDisclosure: Advertisements are sponsored content and provided for informational purposes only. The Motley Fool and its affiliates (collectively, “TMF”) do not endorse, recommend, or verify the accuracy or completeness of the statements made within advertisements. TMF is not involved in the offer, sale, or solicitation of any securities advertised herein and makes no representations regarding the suitability, or risks associated with any investment opportunity presented. Investors should conduct their own due diligence and consult with legal, tax, and financial advisors before making any investment decisions. TMF assumes no responsibility for any losses or damages arising from this advertisement. Learn more about your ad choices. Visit ⁠megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

So, when we collect data on what it is that companies create in their employees and employees feel about the company that make a dent in alpha in stock market return, it ends up having nothing to do with extrinsic motivation. That was Dan Ariely, Professor of Behavioral Economics at Duke University. I'm Motley Fool producer Matt Greer. Now, we've had the opportunity to interview Dan Ariely a number of times over the years. He's really great at helping us understand our behavior as investors. Motley Fool contributor Rich Lomelo recently talked with Ariely about investing, including the rational and the

irrational. Welcome to Motley Fool Conversations. I'm your host, Motley Fool contributor Rich Lomelo. Today on the show, I'm thrilled to welcome Dan Ariely, a renowned behavioral economist, professor, author, and entrepreneur whose work has reshaped how we think about decision-making, money, motivation, and human nature. Dan's the author of 10 books, including three New York Times bestsellers like Predictably Irrational, The Honest Truth About Dishonesty, and Dollars and Cents. He's delivered some of the most watched TED Talks of all times. He penned a popular Wall Street Journal column for over a decade, and he co-founded multiple companies that apply behavioral science in health and finance and technology. Today, we'll dive into what really

kind of drives our financial behavior, why we often get investing wrong, and how we can make smarter choices in an irrational world. Dan, welcome to the podcast. Lovely to be here. Thanks for the lovely introduction. I've been on podcasts from The Monthly Fool a few times, and every time it was fun. So I'm looking forward to this. Excellent. Well, clearly, as kind of laid out in the, uh, in the introduction, there's a lot of, a lot of ground to cover. And obviously, as you well know, we're, you know, an investing website. Um, so we'll probably, you know, kind of gear things a little bit that way, but I'd love to, I'd love to, I mean, it's fascinating your, your, you know, your studies. I'd love to kind of jump into what originally drew you to

study, you know, kind of human irrationality and, and maybe touch on how some of your personal experiences helped shape that journey. Yeah. So, uh, the people who are watching us, um, It's obvious that I have a very funny-looking face. The people who are listening to us, you can't tell. I have half a beard, and there are multiple reasons for the half a beard, but the simplest one is that I have scars on most of my body, including the right side of my face. So I just don't have hair growing on this side.

Many years ago, I was badly burned, 70% of my body, three years in hospital. And hospital really gave me kind of a magnifying glass on a few topics in society. Pain, control, but also relationships, end of life. And that started my journey into trying to figure out what do we understand and are we really doing our best to provide with the best possible outcomes for our patients or customers, whoever it is. And basically what I learned was that there are lots of people with good intentions but not enough knowledge.

And as a consequence, they think they're doing what's right for their patients or customers, but they're not. In my case, one example for this was the nurses who thought that ripping off bandages quickly was the best thing for their patients, but it wasn't. And there are many other examples like this. So I'm really kind of a social engineer at heart. I look at the world and I say, what are the topics, what are the areas that I don't like human behavior, that I think we could perform much better? And then I say, and do I have the tools as a social scientist to look into this and find out, are we really not performing as much as we could?

And do I have the tools to try and fix it? So take a problem like hate. We certainly have too much hate in the world. I wish we had less. I know it's a big problem. I look at it and I say, but you know what? I don't know what to do. The solutions we have to hate are not relevant.

It's very hard to implement them. So I don't know what to do yet. You look at misinformation and say, okay, topic i also big important and so on i i understand it a little bit better you look at questions about financial decision making easier you look at questions about taking care of our health not as easy as money but but still possible and so on so i basically kind of scout the world for problems that i think are i think are big places where we underperform and places So I think that social science has some lessons of how to do things better.

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Hurry into your local Sleep Number store today, because we have your number. And in your various books and TED Talks and your column in the journal, what do you think is the biggest single misconception that people have about how they make financial decisions or the thinking that goes into financial decisions? So I would say more generally that emotions are a real obstacle for good long-term decisions. Now, emotions have their role. You want to fall in love. You want to enjoy poetry. You want to go to a museum and enjoy a piece of art. So it's not as if I think we should eliminate emotions, but there are topics where emotions don't help us. Emotions are not designed for long-term consequences, right? And if you look at

financial investing that's one of the areas where emotions just derail us every time so that'll be one and then i think the second thing is that we we don't have a real grasp of compound interest and i'll give you kind of a story about this i i think of the human mind as a vintage swiss army knife and let me let me tell you what i mean and there are two parts to this the vintage and the swiss army knife let's start with the swiss army knife the swiss army knife as a metaphor is is not particularly good at anything there's not a single task that comes to your mind oh i want to open a can i want the screwdriver say oh the solution the swiss army knife no no it's not that good at anything its greatness is that it's kind of okay in lots of things and we can easily

carry it with us. And our brain is a decision-making mechanism. It's kind of like that. Not particularly great at anything, quite good in lots of things, and we can carry it with us. That's the benefit. But the metaphor is calling for a vintage Swiss

army knife. And what I mean by that is that our brain as a decision-making mechanism developed a long time ago for a very different environment. So, you know, we have a tool to deal with snakes. And we have a tool to deal with hunger and social pressure and trust and betrayal and all kinds of things like that.

We don't have a tool to deal with compound interest. You know, so here we are with this vintage Swiss army knife in an environment that requires very different tools. We don't have something to deal with credit cards and mortgages and student loans and compound interest and so on. And what it means is that the environment, if the environment wants us to perform better, we need better tools. You know, in the same way that in the physical world, we don't say to people, manage. We say, oh, you're not comfortable standing for a long time? Here's a chair. You can't travel great distances? Here's a bicycle. You know, we build things to take our frail human body and make it work for us.

in the physical world in a mental world it's the same thing say oh you can't um calculate compound interest let's help you let's give you a tool that does this for you instead we we don't do that instead we we don't help people and make make better decision i think that once we understand how likely we are to fail in the mental world as we fail in the physical world that we're frail and you know sensitive and so on then we can start building better tools i think that's kind of the hope the hope is to build better tools for this so emotions derail us things like having to think about compound interest derail us we get very much committed to our past choices you know again it's a it's a good thing you you marry somebody you don't want to wake up every

morning and say did i make the right choice you buy a stock you do want to wake up every morning and ask did i did i buy the the right stock so but we we end up um becoming very committed to past decisions we've made even they're not in our in our interest and we don't understand diversification um by the way the stock market helps us because there are etfs and mutual funds and so on that helps us diversify to some degree. But we don't intuitively understand diversification. One of my colleagues at Duke teaches finance. And after the 2007-2008 crisis, he told me that quite a few of his students went into banking, Lehman Brothers.

And they called him afterward and told him that almost all their stock, all their fortune was in the company's stock. And he said, you know, I taught you for a whole semester. Like the number one topic is diversify. And diversification says don't invest in the companies that your human capital is involved in. That's not the right approach, not to mention not too much of, he said, it's kind of amazing. smart people who went to work in banking fail to understand diversification it's just very much not in in in our tool set you know our tool set is to say i know about this i trust like by the way

if we live in a society what do you want people to trust too much or to trust not enough the answer is you want to trust too much because eventually if people trust too much it helps so so we have all of these tools that we carry with us it says trust the people you're with not necessarily good so i would say if you ask me like what's what are the challenges it's about emotion getting in the way not understanding compound interest and not understanding the role of diversification committing too much to our own choices and staying with them for too long and those will probably be the basic yeah well and and to kind of keep on the theme of looking at some of your writing uh in in the upside of irrationality you show that irrational behaviors

can sometimes benefit us what would you say the positive irrationalities are in long-term investing like you know for the listener who is you know a long-term long-term investor which is what we encourage you know what are the positive irrationalities okay i'm going to tell you something that has been kind of a big focus of interest of mine for the last eight years. Sure. So for the last eight years, I've been looking at data for how companies treat their employees, how the employees feel about the company, and what that means for the performance of the stock of that company. And I have data going back to 2006 until today, and I examine lots of things.

And what we find is that some elements of what we call human capital make a big difference. Others don't. So you asked me, you know, how do we think about irrationality in a positive way? Human motivation is amazing. And I'll put you on the spot if it's okay. Sure. Think for a minute about the three things you're proudest in your life. Don't say them out loud.

Think about them. how many of them were accompanied by many moments of joy and how many of them were accompanied by more tears and agony and complexity than joy in general in general when people think about this they say you know most of the things i'm proud of were not just moments of laughter whether it was starting a new company or writing a book or having kids most of these things were difficult and complex and painful. They're more like hiking Everest than sitting on the beach drinking mojitos. And all of this is just to say human motivation is incredibly irrational. We love things that are complex and difficult and challenging. We like running marathons. We like

helping other people. When you really think about human motivation, you realize that it's not a rational thing. So when we collect data on what it is that companies create in their employees and employees feel about the company that make a dent in alpha in stock market return, it ends up having nothing to do with extrinsic motivation. We usually think, oh, let's pay people more. Let's give them more vacation. Let's give them better health benefits, better retirement benefit. We find zero almost not not zero but very very low correlation predictive value between those elements and stock market return on the other hand when you think about intrinsic motivation all the things that are irrational big difference right so for example number one thing that we find

is important is whether you feel appreciated you know from a standard economic class appreciation pay me you know why do i care about appreciation turns out appreciation is unbelievably important turns out i told you that salary doesn't matter fairness in salary matters a lot feeling proud about your workplace means a lot being connected feeling connected to your direct manager matters a lot so so at the end of the day uh what what we find is that when you think about stock market returns um a lot of this market is very functional you know and i and i uh i take this data out and i show it to different investment managers and and and they usually say oh you know i want objective measures and i say no you don't i said let's take two two very important things

let's say i want to ask you how much you love your significant other and let's say i want to ask you in how much pain you are i say there's no good objective measures of those i could wire your brain and measure your senses um eventually the love that you feel for your significant other the best evidence i have is how much love do you feel right now it's not how many emojis you send today and the same thing is true about pain if i want to understand your pain it's about your subjective experience. And I say, look, human motivation is eventually about the subjective experience. If you feel that you're being treated unfairly, I don't care if all the objective measures show that you're being treated fairly. Yes, maybe, you know, it would be good for lawyers

to discuss. But from a human motivation, I care what do you feel. So we started an ETF about three years ago. October, we'll have a three-year anniversary for the ETF. And so far, it looks really good. And I'm very proud of it because, you know, when we started this, I could have written another academic paper. And I could have said, you know, human motivation, here's another paper on human motivation, and here's another thing. But I think this is like, I hope, kind of real good evidence that companies should, first of all, it's a really good evidence. It's a good investment strategy, but it's also a really good point that companies should start looking more internally at human and human capital. And one final thing about this is I think that companies

not treating human capital as an asset is an accounting mistake. And what I mean by that is When a company buys a warehouse, it's an investment. When companies invest in their people, it's a cost. That's just a mistake, right? I would want to see on the asset, on the balance sheet, how much you're investing in human capital. Anyway, and I hope we'll get there. Dan, Aurelie, it's been a pleasure speaking with you. for the listeners. There's a catalog of books out there, including Predictably Irrational and

The Upside of Irrationality and The Honest Truth About Dishonesty and seven or eight more TED Talks everywhere. It's been a real pleasure bringing you on The Motley Fool again. Thank you so much for your time. My pleasure. It was lovely. As always, people on the program may have interest in the talks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stock space solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our

full advertising disclosure, please check out our show notes. For the Motley Fool Money team, I'm Pat Greer. Thanks for listening, and we will see you tomorrow. Thank you.