Looking back at the carnage created by the bursting of the credit bubble, it’s natural to scratch your head and ask “How did we ever let that happen?” Behavioral economics exists to answer questions like this.

Last week Chris sat down with Dan Ariely, gallivanting behavioral-economics-researcher-extraordinaire, who is breathing new life into this previously obscure field of study. The resulting interview is full of fresh, non-intuitive insights and shines light on how the human brain is often hard-wired for irrational action when it comes to money.

One of the key takeaways for us was how Dan’s research provides an empirical explanation for why inflation will likely win the day: our mental programming leads us to prefer behavior that favors it.

Dan has a fresh and pretty non-traditional way of explaining the more intriguing aspects of human behavior, including:

The overwhelming influence of emotion in driving our decision-making

Our vulnerability to present temptations & our overestimation of our future virtuousness

Our amazing capacity to justify irrational circumstances

Our blindness to conflicts of interest when they work in our favor

Why we do a poor job of appreciating future risk

Each of these played a role in the excessive behavior responsible for the credit crisis – and continue to hamper our ability to handle its aftermath rationally today.

Our time with Dan was fun and fascinating. If you’re not acquainted with it already, the perspective offered by behavioral economics is a valuable addition to add to your world view. We’re definitely planning to look through its lens more often going forward.

Click the play button below to listen to Chris’ interview with Dan Ariely: