Motley Fool Money

Episode: Interview with Dan Ariely: Investing in the Irrational
Date: September 14, 2025
Host: Rich Lamello (Motley Fool Contributor)
Guest: Dan Ariely, Professor of Behavioral Economics at Duke University

Episode Overview

This episode features author, professor, and behavioral economist Dan Ariely in a wide-ranging conversation on why investors so often get things wrong—and how our “irrationalities” can help or harm long-term investing returns. Dan shares personal insights from his life, key findings from years of research, and explores the importance of understanding emotions, motivation, and human capital in both business and investment contexts.

Key Discussion Points & Insights

1. Origins of Ariely’s Research into Irrationality

[02:18 – 05:07]

• Personal Story: Dan recounts his motivation for studying human behavior, shaped by his own experience of being badly burned and spending three years in hospital.
• The hospital setting offered a "magnifying glass" into how well-meaning professionals can make irrational or suboptimal decisions due to lack of knowledge (e.g., nurses removing his bandages quickly, believing it was best, when it was actually more painful).
• Ariely’s Approach: Sees himself as a “social engineer”—scouting the world for domains where human underperformance matches the potential to be improved by behavioral science.
• Investigates problems where social science can intervene, from pain management to financial behavior and misinformation, contrasting with areas like hate, which he says science cannot yet solve (“The solutions we have to hate are not relevant. It’s very hard to implement them.” – Dan Ariely, [04:17]).

2. Biggest Misconceptions in Financial Decision-Making

[06:09 – 12:57]

Ariely identifies several core blind spots in how we make investment decisions:

• The Role of Emotions:

  • “Emotions are a real obstacle for good long-term decisions. … Emotions are not designed for long-term consequences. And if you look at financial investing, that's one of the areas where emotions just derail us every time.” — Dan Ariely [06:30]
  • Emotions serve important functions in art or romance, but consistently derail us in investing, which requires a longer-term view.

• Compound Interest Illiteracy:

  • Uses the metaphor of the “vintage Swiss army knife” to describe our brains—versatile, but not exactly designed for modern problems like compounding or credit cards.
  • “We don't have a tool to deal with compound interest ... Here we are with this vintage Swiss army knife in an environment that requires very different tools.” — Dan Ariely [07:26]
  • Suggests society ought to build “mental tools” (analogous to physical aids like chairs or bicycles) because humans are naturally ill-equipped for modern financial decisions.

• Commitment to Past Choices:

  • “We get very much committed to our past choices. ... 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 buy the right stock?' But we end up becoming very committed to past decisions we've made.” — Dan Ariely [09:17]

• Lack of Diversification:

  • Even highly educated people (like his Duke students at Lehman Brothers) failed to diversify, putting all their net worth in company stock despite being taught otherwise.
  • Our “toolset” relies too heavily on trust and familiarity, not the rational calculation needed for prudent diversification.

• Summary List (per Ariely):

  • Emotions getting in the way
  • Not understanding compound interest
  • Not grasping diversification
  • Committing too much to past choices

3. Positive “Irrationalities” and Human Motivation in Investing

[12:57 – 18:51]

• Intrinsic Over Extrinsic Motivation:

  • Research Focus: For 8 years, Ariely has studied how human capital—especially how companies treat employees—impacts long-term stock performance.
  • “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.” — Dan Ariely [00:05 & 13:37]
  • Extrinsic motivators (higher pay, bonuses, vacation) have little predictive power for superior stock returns.

• The Need for Appreciation and Fairness:

  • “It turns out appreciation is unbelievably important. ... Fairness in salary matters a lot. Feeling proud about your workplace means a lot. Being connected to your direct manager matters a lot.” — Dan Ariely [15:25]
  • Subjective feelings—how employees perceive their workplace—signal future company performance better than objective metrics.

• Why This Matters to Investors:

  • Companies prioritizing genuine appreciation and connection outperform, as measured by Ariely’s data and the ETF his team launched:
    • “When we started this…I could have written another academic paper...But I think this is kind of, I hope, the real good evidence that companies should…start looking more internally at human capital.” — Dan Ariely [16:52]

• Accounting Mistakes in Valuing Human Capital:

  • “I think that companies not treating human capital as an asset is an accounting mistake. … I would want to see on the asset, on the balance sheet how much you're investing in human capital.” — Dan Ariely [17:43]
  • Predicts a future where investments in people are treated as assets, not just costs.

Notable Quotes & Memorable Moments

• On Motivation:
  “Human motivation is incredibly irrational. We love things that are complex and difficult and challenging.” — Dan Ariely [13:57]

• On Behavioral Finance’s Potential:
  “Once we understand how likely we are to fail in the mental world...then we can start building better tools.” — Dan Ariely [08:16]

• On the Limits of Rational Models:
  “If you ask me, what are the challenges? It’s about emotion getting in the way, not understanding compound interest, not understanding the role of diversification, committing too much to our own choices and staying with them for too long.” — Dan Ariely [11:56]

Important Timestamps

• [02:18] Dan Ariely shares his origin story and behavioral science perspective
• [06:30] Emotions as barriers to long-term investing
• [07:26] “Vintage Swiss army knife” analogy for the human brain’s design
• [09:17] Commitment to past choices; challenges with change
• [13:20] The upside of irrationality—why human motivation helps companies
• [15:25] Importance of appreciation and fairness at work
• [17:43] Rethinking human capital as an asset in accounting

Final Thoughts

This interview compellingly illustrates that most of our investing mistakes stem from ingrained emotional and cognitive patterns not adapted to a modern financial world. Ariely argues that our irrationalities, especially those which drive motivation and create a sense of belonging and fairness at work, can be positive—both for employees and for long-term investors. He urges companies and markets to recognize the intrinsic side of motivation and to account for human capital as a key asset.

For investors, the lesson is clear: Look beyond numbers. Seek out companies where employees feel proud, appreciated, and fairly treated—because that’s where irrational human motivation turns out to be a powerful, market-beating force.

Recommended Reading from Dan Ariely:

• Predictably Irrational
• The Upside of Irrationality
• The Honest Truth About Dishonesty

(End of summary)