Dan Ariely: Designing for trust | Dan Ariely | TEDxPorto

Very happy to be here, also a little sad. I'm very happy to be here because it's a wonderful city and it's a wonderful event. I'm a little sad to be here because Ron, who's sitting in the back there, Moran, and myself a few years ago decided to spend a month travelling together every year, and this is the end of our trip together. So it's a little sad that we have to wait another year to start our next journey. One more comment: you might have noticed that I have half a beard. You might have wondered why. It is not because I did not wake up in time. Many years ago, I was badly burned, most of my body is covered in burns, including the right side of my face. So I just don't have hair on this side of my face. I didn't plan on this. It looks symmetrical, but it's because of how the explosion happened, and if you're wondering, I'm not recommending half beards. Let's talk a little bit about trust. One of the amazing things about trust is how much trust we have and how little attention we pay to it. Think about banks. You put your money in the bank, and generally, you think you'll get it back. You get a babysitter for your kid. Some 15-year-old you've never met before, and you give them your kid, and you expect them to be healthy when you come back. My phone is in the back room back there; my passport and money is in a room in a hotel - I'm not going to tell you which one. We have tremendous trust, and like many other things, when trust works, we take it for granted. We notice only when it goes badly. I'll give you one example of something that went badly for me. I was in a country in South America - I will not tell you which one - and I was going to buy a pen. I went to a store, and there was this glass cage, and there were little pens underneath it. I point to one of the pens that I wanted, and the person behind the counter wrote me a little note and pointed to another corner of the store. I went to that corner of the store with the note, and I gave the note to a person, and he told me how much to pay him. It was about $12. I paid him $12, and he gave me another note and pointed me to another corner of the store. I go to this third place, and I meet another person, I give him the second note, and I get the pen. Now why do you think you need three people to sell a $12 pen in an empty store? I was the only client. Because the owner of the store didn't trust anybody. He didn't want anybody to have the money and the pen at the same time, so he created this incredibly elaborate and expensive system. And if you think about it, every time we have trust, society benefits, and every time trust breaks, we pay a lot for it. And I'll give you my favorite analogy for trust. And this analogy is something called "The Public Goods Game". The Public Goods Game: it's not really a game, it's an experiment that economists play. Here is how it works: Imagine that we play the game in Porto, and we pick ten random people. We wake them up in the morning, and we say, "You are one of the players, you are one of the ten players of this game, and every morning, we are going to wake you up and give you ten euros. You can do one of two things with those ten euros: you can keep the money to yourself, or you can put it in a public pot, in a central pot. All the money in the central pot will grow throughout the day by five times. In the evening, it will be equally divided by everybody. The other players, you don't know who they are, you'll never find out who they are. And we'll play this game day after day after day." So imagine we play this game. We start on day one, we wake up ten people, and we tell them the rules of the game. What happened? Usually, they all decide to put the money in the central pot. Ten people, each person gets ten euros, multiply, it's 100 euros. During the day, it grows five times. In the evening we have 500 euros, equally divided by everybody, everybody gets 50 euros. Life is good! Right, you wake up with ten euros, you go to sleep with 50. This continues and continues and continues until one day, one person decides to betray the public good. One person keeps the money to themselves. What happened on that day? On that day nine people put ten euros, 90 euros. Multiply five times, 450 euros, in the evening, it's equally divided by everybody, including the bastard that didn't put money in. Everybody gets 45 euros, right? But the bastard has 55 euros: they have their 10 euros from the morning, plus they get the money from the public good. That person betrayed the public good for their own selfish benefit. But here's the question: what happens the next day? What do you think? Nobody puts any money in. And this is the situation, this is a game with two equilibria. There's one equilibria that is good: everybody participates, everybody benefits. This is what a good society is: we all put money in, volunteers, people participate, people help, and everybody benefits. But when somebody starts betraying the public good, What happens? More and more people betray the public good. There's no equilibria where five people participate and five people don't. It's either everybody or nobody. And the nobody participating is a terrible equilibria. But there's another point. The good equilibria, the one where everybody participates, is very fragile. It's enough for one person to betray the public good, and everything deteriorates. The bad equilibria is very stable; imagine that nobody puts money, nobody puts money, then one day three people put money in. What happened the next day? Does it go back up? No. Goes back to zero. And that for me is the issue with trust. When we have trust, we can create the good equilibria, but then things can really deteriorate, and we all suffer. So now the question is, How do we increase trust? How do we engineer things in society to increase trust? I'll give you a couple of examples. The first example is an example from an insurance. Now think about insurance. We have an insurance company and we have customers. Customers pay the insurance company, they pay the insurance company. At some point, something bad happens. And the cusomers want what? They want the insurance company to pay them for their damage. And the insurance company wants what? Not to pay, right? It's very simple. There's a pot of money; if they pay more to the customers, they get to keep less. As customers, we know that the insurance company doesn't want to pay us. So what do we do? We exaggerate, we inflate our claim. And the insurance company knows that we inflate our claim. So they make it difficult and complex and so on. Now if you think about that system, it's a system that is based on conflicts of interest - the insurance company prefers not to pay than to pay - and mistrust. Terrible idea. Who would design a system like this? So at Lemonade - Lemonade is a young insurance company - they said, "Let's solve this problem." How can we solve this problem? Let's change it from a two-player game to a three-player game. How does this help? Here's how it works. When you join Lemonade, imagine all of us join Lemonade, you get to pick a charity you really love; let's say the World Wildlife Fund. We all pick a charity we love. We pay, every month we pay Lemonade, we pay for the insurance. Lemonade takes a fixed amount and pays back claims, and if there's money leftover in the pool for all of us, it goes to the charity. So now Lemonade takes itself out of the conflicts of interest. They say, "We don't care if we pay you or not; it's a game between you and the charity. And if you now cheat us, Who are you cheating? Your favorite charity." Lemonade started a few years ago. About two weeks after we'd started, the first interesting email comes in. That email says, "You insured my apartment. I told you somebody stole my laptop. You paid me. It turns out I just misplaced my laptop; nobody stole it. I made a mistake. How do I return the money?" That was the email. On that day, I called all my friends in all the insurance companies, and I asked them, How do you deal with such cases? They never happened. This is, for me, an amazing starting point. It says that if you create a system that creates trust and you trust people, there's a good chance trust will come back. One more trick about increasing trust. Imagine I'm a waiter. I come to four people, and I say to the first person, "What would you like?" And that person says, "I want the fish." And I say, "Ah, the fish is not so good today. Dont take the fish, take the chicken. The chicken is cheaper and better. Cheaper and better." And then we measure how much the second person, the third person, and the fourth person take my advice and how much the whole table takes my advice for what wine to get. That's case number one. Case number two. I come to the first person, "What would you like?" He says, "I want the fish." I say, "The fish is not so good today; take the lobster. It's only three times more expensive, but it's amazing." How likely are the second, third, and fourth person to take my advice now? Not at all. How much are they likely to take my advice for wine? Not at all. What's the difference between the first waiter and the second waiter? The difference is that the first waiter showed us that they prefer our benefit to their benefit. There was opportunity to say, "Take something better and cheaper." The second waiter, we don't know. Maybe that lobster is the most amazing in the world, maybe we'll dream about it until the day we die, maybe it's a wonderful decision, but we will never know. We will never know if they work for themselves or for us. So the second advice about creating trust is think about the cases where you can show somebody that you really care and show that you prefer their benefit to your benefit. There's a not-so-funny joke that says, "Why do women like diamond rings?" Why do women like diamond rings? And the answer is "Because men hate buying them." (Laughter) Now what is the point about this? The point is, imagine you buy your loved one a digital camera. You come home and you say, "Darling, I love you so much: here is a digital camera." Who are you buying it for? Unclear. You are like the waiter with the lobster; it's unclear who you're working for. But if you buy them something that you clearly hate, now it's a good sign of pure love. There's no other explanation for this. (Laughter) So when you get a chance, think about how to show love and caring with something that is not confusing as a signal. So we said that trust is important and we want to create a high level of trust. But from time to time, things are going to [go] wrong. The question is, How do we not get into a deterioration? And I'll tell you a personal story. I deeply trust everybody I worked with. I did a project with somebody, and at some point towards the end, I decided the project was not going in a good direction, and I stopped it. That person told me she already had lots of expenses she had to pay, and she'd spent a lot of time and money on this. She gave me a very expensive bill to pay for this. And I paid, and then I found out she'd spent much less money than she told me, and then I found out that the contract she had was different than she told me; lots of things about that really upset me and offended me. My first instinct was "I don't want to feel like this again." I don't want to feel bad like this again, and then I thought, "Should I start having contracts with everybody?" Because when I started working with her, I didn't do any contract; it was all a handshake agreement. I love working with handshake agreements. I thought, "Should I start having contracts?" Think about what having contracts with everybody means. It would mean that one bad incident would get me to start doubting everybody I work with. But the thing about trust is that when trust really works, we don't notice it as much. And I thought about all the wonderful relationships I have and all the wonderful people I work with and how much trust is allowing us to behave better, how much trust is allowing us to get to a much higher equilibrium. I decided that from time to time, things are going to [go] wrong, and I'll have the instinct to try and protect myself and say that I never want to feel like this again and to surround myself with security and blankets and contracts, but I'm going to try and resist this. Because trust is wonderful. Trust is wonderful: we need to recognise it; we need to work towards it; we need to create mechanisms that [will] allow us to create trust. And from time to time, things are going to [go] wrong. Then we need to fight our own instinct to try and protect ourselves. But the good news is that if we get to have higher trust, it is certainly worth it. Thank you very much. (Applause)