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Ariely
What Was
The Question?
I t is nice to believe that the world is
simple and that we can easily get high-
quality answers to our questions. But
in fact our reality is mostly very complex,
and we don’t understand it well. The bot-
tom line is that we need to spend more
time helping people understand and deal
with complexity and less time concocting
dumbing-down mechanisms.
A perfect example of what happens
when you dumb down complexity occurs
in the personal finance industry. When we
face something as complex as money, we
have an urge to simplify the problem. But
we often oversimplify it, by creating add-
water-and-stir solutions.
Typically, a financial adviser takes 1% of
assets under management—annually!—to
balance a portfolio, and makes investment
decisions on the basis of our answers to
36 Harvard Business Review September 2011
1271 Sep11 Ariely.indd 36
Dan Ariely is the James B. Duke Professor of Behavioral Economics at
Duke University and the author of Predictably Irrational (HarperCollins,
2008) and The Upside of Irrationality (HarperCollins, 2010).
two questions: (1) “How much of your cur-
rent salary will you need in retirement?”
(2) “What is your risk tolerance on, say, a
10-point scale?”
Frankly, I think highly trained monkeys
could do the same basic job given answers
to those two questions. Certainly algo-
rithms can do it, probably with many fewer
errors. This is just not something for which
we should pay 1% of assets under manage-
ment. But the real reason we should not
pay for it is that those questions don’t help
optimize our portfolios.
To prove this, I asked many people those
two questions. The most common answer
to the first one was 75%. After some prob-
ing, I learned that most people named that
amount because they’d heard it as a rule of
thumb from financial advisers and from
the media. You can see the inane circular-
HBR.
ity: Financial advisers are asking customers
a question that the customers are answer-
ing with what the advisers have told them
is the right response.
When I changed the question to “How do
you want to live in retirement?” and costed
out where people wanted to live, what they
wanted to do, and so forth, I discovered that
they would actually need almost twice as
much: about 135%. (Think about how much
money you would need if you had nine ex-
tra hours a day in which to spend it.)
I also asked people the risk question,
varying the labels on the ends of the scale.
I told some that the low end was 100% in
cash and the high end was 85% in stocks
When we face something as
complex as money, we often
oversimplify it by creating
add-water-and-stir solutions.
and 15% in bonds. I told others that the low
end was 100% in bonds and the high end
was 100% in derivatives. Regardless of the
labels, people chose somewhere near 5, de-
pending on whether they felt slightly more
or slightly less willing to take risk than what
they thought of as average.
So what do we have? A service that costs
1% a year and is based on two not very use-
ful questions.
Maybe it’s time for less monkeying
around. Financial services—and business
in general—needs to embrace the com-
plexity and difficulty inherent in our lives.
It’s easy to see why this is not very likely to
happen: It’s harder than add-water-and-stir
solutions, which offer instant gratification
and the illusion of progress. But unless we
admit how complex the world is and how
little we really know, we will not search for
better questions, better ways to compre-
hend the world, and better answers. A deep
ILLUSTRATION: DAN PAGE
understanding of what we’re trying to ac-
complish will always yield better answers
than a “red is bad, green is good” approach,
even if it doesn’t feel that way.
HBR Reprint F1109E
7/27/11 6:05:08 PM