Interview with Dan Ariely: Investing in the Irrational

Summary

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

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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.

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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]).

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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

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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.

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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]

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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

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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.

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Recommended Reading from Dan Ariely:

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

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(End of summary)

Transcript

[A]

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.

[B]

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 Lumello recently talked with Harry Ellie about investing, including the rational and the irrational.

[C]

Welcome to Motley Fool Conversations. I'm your host, Motley fool contributor Rich Lamello. 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.

[A]

Lovely to be here. Thanks for the lovely introduction. I've been on podcast from the Motley Fool a few times and every time it was fun. So I'm looking forward to this.

[C]

Excellent. Well, clearly, as kind of laid out in the introduction, there's a lot of ground to cover. And obviously, as you well know, we're an investing website, so we'll probably kind of gear things a little bit that way. But I'd love to, I mean, it's fascinating your studies. I'd love to kind of jump into what originally drew you to study, you know, kind of human irrationality and maybe touch on how some of your personal experiences helped shape that journey.

[A]

Yeah. So the people who are watching us, it's obvious that I have a very funny looking face. The people who are listening to us, it's you don't you can't tell. I have half a beard. And the reason, 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. And 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. 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 are 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. 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? 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? 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. You say, okay, topic. I also big important, and so on. 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 still possible, and so on. So I basically kind of scout the world for problems that I think are big places where we underperform and places where I think that social science has some lessons of how to do things better.

[D]

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[C]

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?

[A]

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 will 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 think of the human mind as a vintage Swiss army knife. And 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 is a metaphor, 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 a screwdriver. The solution? The Swiss army knife. No, 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. Our brain as a decision making mechanism is 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. 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 the mental world, it's the same thing. Oh, you can't calculate compound interest. Let's help you. Let's give you a tool that does this for you instead. We don't do that. Instead, we don't help people 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 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. Emotions derail us. Things like having to think about compound interest derail us. We get very much committed to our past choices. Again, it's a good thing 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, even they're not in our interest. We don't understand diversification. By the way, the stock market helps us because there are ETFs and mutual fund 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. Right. 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 our tool set. Our tool set is to say, I know about this, I trust. 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 we have all of these tools that we carry with us. It says trust the people you're with. Not necessarily good. I would say 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. Those will probably be the basic. Yeah. Race the rudders. Raise the sails. Raise the sails. Captain, an unidentified ship is approaching, over. Roger, wait. Is that an enterprise sales solution? Reach sales professionals, not professional sailors. With LinkedIn ads, you can target the right people by industry, job title and more. Start converting your B2B audience today. Spend $250 on your first campaign and get a free $250 credit for the next one.

[D]

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[C]

Well, and to kind of keep on the theme of looking at some of your writing, 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 for the listener who is a long term investor, which is what we encourage, what are the positive irrationalities?

[A]

Okay, I'm going to tell you something that 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 ask 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 at loud. Think of 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 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 appreciation pay me, 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 at the end of the day, what we find is that when you think about stock market returns, a lot of this market is very functional. And I take this data out and I show it to different investment managers, and they usually say, oh, you know, I want objective measures. And I say, no, you don't. I said, let's take 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. 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 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 will have three year anniversary anniversary for the, for the etf. And so far it looks, it looks really good. And, and I'm very proud of it because, you know, when we, 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, I think this is like, I hope, kind of the 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 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.

[C]

Dan, Ariel, 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.

[A]

My pleasure. It was lovely as always.

[B]

People on the program may have interest in the stocks they talk about, and the Motley fool may have formal recommendations for or against. So don't buy or sell stocks based 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 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.