AI transcript
0:00:05 Hello, boys and girls, ladies and germs. This is Tim Ferriss coming at you from a beautiful
0:00:10 studio. And I am going to introduce you to an interview, a conversation with three people
0:00:16 in total that I’ve been trying to set up for a year, maybe longer than a year. And it features
0:00:25 both a new guest and a fan favorite. So the new guest is Richard H. Thaler. He is the 2017 recipient
0:00:31 of the Nobel Memorial Prize in Economic Sciences for his contributions to behavioral economics.
0:00:36 There’s a lot more to his bio, which I’ll put in the blog post, but let’s keep it short. He is also
0:00:42 a founding principal at Fuller Thaler Asset Management, which uses behavioral finance to manage
0:00:49 more than $30 billion in small cap U.S. equities. He is the co-author of multiple New York Times
0:00:56 bestselling books, including Nudge and Misbehaving. We’ll have the subtitles in the show notes as well.
0:01:03 His new book, which is actually a revision of a lot of what he has done, and it still holds water,
0:01:11 is The Winner’s Curse Behavioral Economics Anomalies Then and Now, co-authored with economist Alex O.
0:01:18 Emis. My co-host for this conversation with Richard is a friend of his, Nick Kakonis. Nick Kakonis is an
0:01:24 entrepreneur, investor, and author, best known as the co-founder of the Alinea Group, sold in 2024,
0:01:31 and the reservation platform Talk, which is now owned by American Express. He also has some wild stories
0:01:37 from trading derivatives and all sorts of craziness in Chicago. For that, listen to my first conversation
0:01:41 with him on the podcast. After revolutionizing how restaurants and experiences are crafted,
0:01:46 booked, and managed, he is now focused on creative ventures that blend business, technology, and art.
0:01:50 For both of these guys, a lot more I could say, but I’ll put it in the show notes. You can find both of
0:02:00 them on X. You can find Richard at R underscore Thaler, T-H-A-L-E-R. And then Nick is at Nick Kakonis,
0:02:07 K-O-K-O-N-A-S. And without further ado, please enjoy a wide-ranging conversation with Richard and Nick.
0:02:39 Well, I’m excited to dive in. And I thought, Nick, we would let you take the reins because
0:02:44 you had this idea of starting from first principles, or at least fundamentals. And I think that is
0:02:49 a great place to start. Because maybe the things we think we understand, we don’t understand. Or the
0:02:54 things we think we’ve defined for ourselves, we haven’t defined. When I got to college at a liberal
0:03:01 arts college and didn’t know what I was going to study, but I knew I enjoyed business, quote unquote,
0:03:06 or might work in business of some sort, you’re left with the study of economics there. Like,
0:03:13 you’re not getting an undergrad MBA or something. So you get to economics class, and it’s not that at
0:03:17 all. You know, it’s a bunch of models. It’s a bunch of all that. So I thought what we would start,
0:03:24 which is first principles, what is the study of economics? And we’re going to the best source in
0:03:28 the world on that. But it’s really basic, yet I think fundamentally misunderstood.
0:03:35 I think that’s actually a great place to start. And especially, it’s not really possible to talk
0:03:43 about what behavioral economics is without understanding what economics is. And economics is
0:03:51 really two things. It’s people interacting in markets, and then what are those people doing?
0:04:02 And what happened is sometime right after World War II, economists started getting interested in making
0:04:12 their models more rigorous and more mathematical. And the easiest model to write down of what somebody is
0:04:21 doing is to write down a model in which they’re doing it perfect. So if you open up any economics textbook,
0:04:35 you’ll see the three letters MAX. And that’s short for maximize. And all models start with that. So we assume
0:04:43 that when Nick goes to the grocery store, what he chooses is the best things he could choose.
0:04:53 And that’s a simplifying assumption. It’s simplifying for the economist, because that’s the easiest model to write down.
0:04:58 And so what are they modeling, though? Like even more fundamentally?
0:05:07 Well, what they’re modeling is whatever you do. So what route do you take to drive from home to the golf course?
0:05:15 The best route. Which home do you choose to buy? The best one. What mortgage do you choose? The best one.
0:05:23 Look, economists are jealous of physics. And they’re jealous of physicists.
0:05:31 Many economists started out in school as a math major or physics major or engineering major,
0:05:37 and then decided, oh, this is too hard. But they kind of admire that.
0:05:44 So they want a model that’s as accurate as the model you use to send up a rocket.
0:05:54 And the problem is that that problem is solvable. How much stuff do you need to get a rocket to go up
0:06:02 there? That’s a solvable problem. And figuring out what people do, you know, if you open a book,
0:06:10 an economics textbook, you actually don’t see the word people. You see the word agents. Economics starts
0:06:21 with Adam Smith, 1776. And it’s that way about until 1950. So then we start having math. Now we have
0:06:31 an equation that says exactly what a smart person is going to do. And so the agents in these models are
0:06:39 getting smarter and smarter because the norm is my model is better than your model if my agents are
0:06:47 smarter than your agents. And so what does it mean to be rational within those models? Well, it means to
0:06:52 solve the problem the way an economist would. And I don’t mean that economists think that they’re the
0:07:02 smartest, though they may. But if it’s an economic problem, like how to adjust your thermostat so you’re
0:07:11 comfortable and spend the least money, that’s a little practical economic problem. And an economist and an
0:07:19 engineer might solve it. And knowing you, Nick, you could easily get absorbed with figuring out how to really do it.
0:07:27 But most people can’t figure out how to use that easy using thermostat in their house, much less solve it
0:07:38 themselves. So people will take shortcuts. And my joke is, instead of writing down max, suppose we wrote down meh,
0:07:45 because what people are doing isn’t really max, right? It’s, uh, you know, I’ll do something.
0:07:55 So where I come in on that part of the story is, okay, if people are not capable or interested in solving
0:08:05 and they’re doing something else, taking some shortcut, then what? So that’s principle number one.
0:08:12 Principle number two is economists, again, for simplicity, have assumed that people are selfish.
0:08:22 And, you know, most of us care more about ourselves than anybody else, maybe our family, some family
0:08:30 members, you know, but we give money to charity. You know, NPR collects money, right?
0:08:31 We might care about fairness.
0:08:37 We might care about fairness, right? I’m sure we’re going to have a discussion about fairness.
0:08:44 And we might care about being treated fairly. So that was left out of the model. Again,
0:08:50 because it seemed like a simplifying assumption to just start out.
0:08:55 Yeah. You’re making the rocket equation and you don’t really care about the astronauts at this point.
0:08:56 Right.
0:08:58 You just got to get the rocket.
0:09:06 You got to get the rocket up. And then I’ll mention a third thing, which is these agents don’t have any
0:09:14 self-control problems. So they eat just the right amount. They exercise just the right amount.
0:09:21 We wouldn’t need these new fat drugs because people would already be optimizing for the health.
0:09:29 Yeah, it would be perfectly fit. And you wouldn’t have sold half as many books, Tim, if people were
0:09:36 those agents. And, you know, even other kinds of things you’re interested in implicitly in this
0:09:42 idea that the agents are maximizing means they don’t need any advice. They’re doing it right.
0:09:49 You know, they’re getting the labor leisure trade off, right? They don’t need any help in getting
0:09:52 along with their spouse because they’re-
0:09:56 No. I’ve optimized my marriage. It’s perfect.
0:10:00 Right. And in fact, our wives would be happy to testify-
0:10:01 Yes. They’ve done a wonderful job.
0:10:06 We’re both perfect, really. We couldn’t be better husbands.
0:10:15 I’ve been looking forward to this conversation. I’ve always furrowed my brow at the agents all
0:10:20 as rational and selfish because I just don’t see that behavior if you look at your neighbor
0:10:25 or your friend or someone else. So my question though is not so much to dive into that. We could.
0:10:32 And the story of your friend who got hay fever, Richard, when he mowed his lawn is a pretty funny
0:10:37 one from New York Times. Maybe we’ll bring that up. But suffice to say, people self-sabotage. They
0:10:42 care about fairness. There are all these things that seem to invalidate getting the rocket to the moon
0:10:50 or that approach to economics. And I’m wondering, were they just force fitting precision to something
0:10:56 in order to defend it as more rigorous and it was a waste of time? Or was it more like Newtonian physics
0:11:02 versus quantum mechanics where it’s like, well, you can actually use Newtonian physics for a lot of good
0:11:08 things. Is there anything productive that came of these incorrect assumptions about all agents being
0:11:15 rational and selfish as a bedrock assumption? I would say, sure. Supply and demand still works.
0:11:20 All economics starts with supply and demand. If you raise the price, you’re going to sell less,
0:11:28 almost always. And when you write down these more formal models and make more precise predictions,
0:11:40 then the question is, are you adding predictive power through that? And I think what happened is we’re
0:11:50 starting in the 50s and I would say rationality peaked in the 90s, maybe where this norm that a model with
0:11:58 really, really, really smart people is the best possible model. Eventually, people start to realize,
0:12:04 well, maybe there’s some drawbacks to that. But you can argue, and of course, I’ve spent my career
0:12:13 arguing about how wrong this is. The great Chicago economist Milton Friedman had this defense is he
0:12:22 would say, look, I just want a model that people are behaving as if they were maximizing. So he would
0:12:29 say it doesn’t matter if they literally know how to do it if their behavior is close enough. And so the
0:12:35 real debate over my career has been about that question.
0:12:45 Well, let’s go back to the start then, I think, of sort of your origin story and thus the origin story of
0:12:52 behavioral economics itself. Because at some point, psychologists start getting involved and they
0:13:00 start looking at these models and they start saying, yeah, but people don’t really act this way. And so this
0:13:06 could be great in a laboratory or on a piece of paper and a spreadsheet, but it might not work in
0:13:11 the real world. And there’s real consequences to those things. So let’s go back to when you were
0:13:17 a young academic and started coming across those ideas.
0:13:24 Yeah, I guess this is like in grad school. So there’s a story I tell about a dinner party
0:13:31 with some other economics graduate students. And there’s some roast in the oven that smells great.
0:13:40 And there’s some adult beverages. And I bring out a bowl of cashew nuts and people started nibbling as
0:13:48 they do. And at some point I realized that their appetite was in danger. And so I grabbed
0:13:56 the bowl of cashew nuts and went and hid them in the kitchen. And then I came back into the living room
0:14:01 and people thanked me. Oh, thank God you got rid of those nuts. We were going to eat them.
0:14:03 Yeah. So you removed choice.
0:14:09 Yeah, I removed choice. And then because this is a group of economists, they start analyzing it. There’s a
0:14:15 rule of thumb. You don’t want too many economists at any dinner party. And this is a good example of it.
0:14:19 So somebody mentions that, well, we’re actually not allowed to be happy about that because
0:14:26 more options is always better. And we used to have the option to eat nuts and now we don’t. Well,
0:14:31 you can imagine. But the principle, the discussion wasn’t that interesting, but the principle is
0:14:44 interesting. That sometimes we prefer not to have options. And so I started with this list of stuff
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0:17:37 So you want to change the framework of economic theory without throwing out the rigor. But now
0:17:43 you’re introducing something super messy, which is humans and psychology and irrationality and
0:17:46 all of those things. So how do you do that without getting rid of the rigor?
0:17:52 Yeah, just to make sure I’m tracking, it seems like, so you’ve created this list of sacred cows
0:17:56 that you would put on trial, but the question was how to do it quantitatively or in some way,
0:18:00 like Nick said, rigorously without just leaving it as an anecdote?
0:18:07 Well, there are two parts to it. One is, can you show that people are really doing that? And then
0:18:18 second, can you create rigorous models that describe that behavior? And I think we might as well stick to
0:18:26 the demonstration part. So we can go from that, the Cashew story and say, well, what does that have to do
0:18:32 with the real world? And we can talk about retirement saving. As a first principle,
0:18:42 Americans don’t save unless the money is taken from their paycheck and put into a retirement plan. Now,
0:18:49 economic theory would say it doesn’t matter. People are going to save the right amount. There have been
0:18:56 two Nobel prizes for theories that basically say people save the right amount. They take their
0:19:03 income and they decide, okay, I’d like this consumption path over my lifetime. And now how
0:19:09 much do I have to save to get that? And then I keep re-optimizing market goes up. I can save a little
0:19:14 less. I mean, that seems so obviously wrong. So were you frustrated at this point? Like you’d,
0:19:18 I read some of your old papers in preparation for this, and I saw these little backhanded
0:19:25 little mentions that were snide. I mean, it’s funny reading 40 year old academic papers and reading the
0:19:31 snark in them, right? I mean, there’s actual snark in young Thaler for long before any of this.
0:19:36 It never escaped. It never escaped. So, you know, tell me a little bit about that because it seems to
0:19:43 me like in hindsight, you know, the first time we met, we played golf together after like a Twitter
0:19:49 exchange. And I remember thinking to myself, as you were saying this, I would go like, yeah, well,
0:19:54 obviously. And then you’d look at me like, no, no, no, you don’t understand for 150 years. That wasn’t
0:20:01 obvious. And so within the context of this academic world, why was any of applying what seems to be
0:20:08 pretty logical stuff, why was it resisted so much? Why is that system built like that?
0:20:16 You know, I can tell you while I was living through that, the emperor has no clothes was a recurring
0:20:24 thought. Why am I seeing that and no one else does? And the no one else was just economists.
0:20:31 So I remember giving a talk in the psychology department at Cornell, where I was teaching,
0:20:37 and I was talking about this theory of how people save and the audience just starts laughing.
0:20:41 Yeah, that’s what I did. I was like, this is pretty easy stuff.
0:20:48 I was laughing. And one of my economist friends was there and he had to assure them that I wasn’t
0:20:57 making this up and that this wasn’t a caricature of economic theory. No, there are economists one
0:21:02 floor up from here who actually believe this is the way people behave.
0:21:06 But they didn’t even think of it as an abstraction in the model. They actually thought like,
0:21:14 hey, this is how humans go through life or as if remember those magic. Yes, that that was,
0:21:22 you know, they don’t have to know how to do a present value, but they’re acting as if they knew.
0:21:28 That’s right. That has a bit of a like maxing works in mysterious ways type of
0:21:35 to it. Is that defensible as an argument? The as if, or is that just kind of a wiggle?
0:21:45 Well, look, it was the winning argument when I started on this. And in fact, in my first paper,
0:21:53 which was published in 1980, my first behavioral economics paper, it ends with a long response to
0:22:01 Milton Friedman’s as if he talks about a billiards player. It’s an expert billiards player, I should
0:22:09 point out, that he talks about. He says he may not know physics or trigonometry, but he acts as if he
0:22:16 did. Is it really inferring that like the law of large numbers or crowd intelligence or whatever
0:22:20 you want to call it, where you go like, well, it doesn’t matter what the individual does as an
0:22:26 aggregate. When we look at a model, like it will average out that the smart people and the idiots all
0:22:34 get to the midline, which is the model. There are two things here. One is when he talked about this
0:22:41 expert billiards player, I pointed out in this article, you know, we actually study regular people, not
0:22:50 experts. So you’re a pretty good golfer. I’m a mediocre golfer. Neither of us play like Tiger Woods,
0:22:55 right? So even though you’re a pretty good golfer, we wouldn’t want to predict the way you’re going to
0:23:02 hit a shot by saying, what would Tiger do? So that was my first point about the billiards player is let’s
0:23:11 just go to a bar and try to predict what this guy is going to do. Is the model going to be the one that
0:23:19 is optimizing? Or is it the model of the regular guy at a bar? And if we’re studying investors,
0:23:27 they’re not Warren Buffett. You know, they’re pretty far from Warren Buffett. So the second thing is,
0:23:35 and it’s sort of another version of the same thing, which is if we’re trying to describe behavior,
0:23:43 whose behavior is it? So, you know, there’s a lot of discussion in, say, monetary policy
0:23:52 about expectations. The Fed will say, we have to change interest rates because we’re worried that
0:23:59 if prices go up, people will expect them to go up further. I’m always asking my friends who are in that
0:24:06 field, whose expectations are they talking about? If it’s the guy walking down Michigan Avenue,
0:24:14 they have no expectations about inflation. They may have impressions of what’s going on now.
0:24:17 Like, oh, meat’s high now.
0:24:18 Eggs.
0:24:25 Eggs are high, right. Gasoline. You know, I have an electric car. Even I’m aware of the price of gas
0:24:33 because it’s posted in those big signs. So we know kind of the level. Do we have real forecasts
0:24:40 about the future? No. Going back a little bit now, how did you then go about designing
0:24:49 thought experiments, actual lab experiments, experiments out in the public to take these
0:24:59 erratic, if you will, or non-optimal behaviors and go back to the models that you questioned
0:25:05 and improve them, alter them, change them? If you could give a couple examples, because I think
0:25:12 they’re kind of fun too. Let’s talk about loss aversion. Here’s the first survey I ever, my thesis,
0:25:18 which was a very traditional bit of economics, although on a kind of exotic topic. It was on
0:25:26 the value of saving lives. So if we make a highway safer and we save 10 lives a year, how much should
0:25:33 we be willing to pay for that? And I decided it might be interesting to ask people a question.
0:25:42 So I asked people, suppose by attending this lecture today, you’ve been exposed to a one in a thousand
0:25:48 risk of dying. You have this disease and there’s one in a thousand chance you’re going to die a quick
0:25:56 and painless death next week. But I have a cure here that I can sell. How much would you pay for it?
0:26:04 That was one question. Another question was, over at the med school, we’re studying that same disease.
0:26:12 We’d like to know how much you would have to pay you to expose yourself to a one in a thousand chance
0:26:19 of getting that disease. And there’s no cure here. Now, economic theory says the answers to those two
0:26:26 questions have to be the same. So the amount I’m willing to pay to get rid of it or the amount
0:26:35 of have to be paid to do it should be approximately the same. They’re nowhere near the same. So people
0:26:42 would say, oh, I’d pay a thousand dollars to get that cure. I wouldn’t do that experiment for a million
0:26:50 dollars. Now they’re lying because they drive, they do all sorts of things. But they wouldn’t
0:26:58 choose to be in that experiment for a million. So, okay. So that’s buying and selling prices are
0:27:04 wildly different. Now, how do we get that down to something more real? You asked about an experiment.
0:27:11 There’s a famous experiment I did with my friend and mentor, Danny Kahneman, and our friend,
0:27:19 Jack Knetch. And the way it works is very simple. We go into a classroom and we did some of these at
0:27:27 Cornell. We would go and put a Cornell coffee mug of the sort you can get at any campus bookstore.
0:27:36 We put it on every other desk. And then we say, all right, if you have a mug, we ask you of each
0:27:44 of the following prices, are you willing to sell? Start at $10. And if you don’t have a mug, you get
0:27:52 the same form and say that each of the following prices, are you willing to buy? And now the mugs are
0:27:58 signed at random. People have had this mug for 30 seconds. It’s not their grandma’s mug.
0:28:07 It’s been in their possession for 30 seconds. And what do you find? Well, the people who have a mug
0:28:12 demand twice as much to give it up than the ones who don’t have a mug are willing to pay to get it.
0:28:19 Why is that, do you think? Well, if I’ve got it, I don’t want to give it up. But I wouldn’t pay much to
0:28:27 get it. Right. So the variance between retaining something and acquiring it are really wide. What
0:28:34 are the consequences of that? Well, it means there’s much less trading and much less change
0:28:42 than we would expect because we hold on to the stuff that we have because we don’t like giving it up.
0:28:49 But when there’s a big fire, like they had in LA last year, people are going to have to decide,
0:28:54 all right, now they don’t have the option of moving into the old house. What are they going to do?
0:29:02 So there’s a lot of discussion these days about how hard it is to build in the United States.
0:29:13 And we’ve set up rules, well-intentioned rules to make the environment safer and clean air is good. I
0:29:24 think almost everybody thinks clean air is good, but it shouldn’t make it five times as expensive
0:29:31 to build a road as it would otherwise be. So partly because of loss aversion, there’s something
0:29:36 that we call status quo bias. Well, this is the NIMBYs.
0:29:44 Well, the NIMBYs, right. Yeah. Oh yeah. We don’t want to allow you to build that thing.
0:29:51 The interesting thing about these is that the way that we met is that I was running experiments of
0:29:56 loss aversion with a restaurant. So I had these restaurants, I had people making reservations.
0:30:03 If they had absolutely not a single penny in, they didn’t care about anything. But you could take the
0:30:09 richest person in the world and once they had $5 in for their reservation as a deposit, it took the
0:30:15 no-show rate from 14% to under 3%. And I wrote about that and published it. And these economists
0:30:22 from Northwestern published an article saying that I was an idiot and I should just run an auction.
0:30:31 And I replied to them suggesting that maybe there’s a little bit of human behavior and psychology involved
0:30:36 in this. And I think that I’ve got it right. And I have hundreds of thousands of examples as to why
0:30:42 this is working for my business. And Thaler read this and tweeted at me. But at the time,
0:30:48 I didn’t know who he was. And so finally, people said, “Hey, you know, you’ve got one of the best
0:30:53 economics professors in the world who really wants to talk to you about this.” And so I was just doing
0:31:01 it out of intuition and experimentation. But they’re the same sorts of experiments in a practical way that
0:31:04 that you were abstracting into these traditional models.
0:31:10 Kahneman and I wrote another paper where we tried to find out what people think is fair.
0:31:13 Yeah. Fairness is a really interesting concept.
0:31:20 You know, the Northwestern economists that were dumping on Nick thought that what he really should do
0:31:26 is just auction off the tables at 7:30 on Saturday night for whatever price he could get.
0:31:29 Kahneman: Because I’d be maximizing my utility.
0:31:31 Kahneman: Well, no, you’d be maximizing your profits.
0:31:32 Kahneman: Profits, yeah.
0:31:38 Kahneman: Right, right. And there is some rich guy who will pay $2,000.
0:31:39 Kahneman: For sure. Especially then, yeah.
0:31:44 Kahneman: Yeah. So you were back and said, “Yeah, but they might not come back.”
0:31:53 Kahneman: And the questions that we asked in this paper were scenarios like there’s a hardware store
0:32:00 that’s been selling snow shovels for $20 and there’s a blizzard and they raised the price to $30.
0:32:07 Is that fair? And people say, “No.” You know, but there’s one exception. You know,
0:32:13 there’s a group that say absolutely yes. And that’s business school students.
0:32:21 So I teach a class in decision-making and each week I show them, “Look, here’s the data from some
0:32:29 experiment. You think these people are idiots, but look, you do it the same. So they may be idiots,
0:32:34 but so are you.” Kahneman: What’s the example? Kahneman: But any of them, any of these other experiments,
0:32:42 except this one. On fairness, the business school students are different from the idiots because they
0:32:50 think, “Of course you should raise the price of snow shovels after a blizzard.” We learned that in micro.
0:32:53 Kahneman: Yeah. Well, it’s the Uber surge pricing. Tim, you know something about that.
0:33:02 Kahneman: Yeah. So surge pricing, I thought at the time that there’s nothing wrong with surge pricing,
0:33:11 but you have to put a limit on it. And the example I gave, I tried to convince the owner of Uber of this.
0:33:23 I said, “Suppose Uber existed on 9/11 and you had Ubers charge $5,000 to drive people back to Greenwich.”
0:33:31 Kahneman: How many days would Uber still be in business? Minutes. You can’t do that.
0:33:33 Kahneman: You can’t do that. And that’s the fairness principle.
0:33:34 Kahneman: That’s right.
0:33:40 Kahneman: And that proves the rule that we are psychological. Everyone is a psychological creature
0:33:45 when it comes to markets and interaction. Kahneman: Right. It might be the guys that are in that Uber
0:33:52 Kahneman: for $5,000. But even they are going to be a little pissed. But more importantly to Uber,
0:34:02 if they did that, the thing is at the time when they would have these surges like of 10X, they were not
0:34:09 Kahneman: making any money off of that. It would be fleeting. So they’d make a little bit of money,
0:34:17 just like if Nick had sold one dinner reservation for 10 grand. Yeah, he’d make 10 grand. He’d have
0:34:26 thousands of people writing articles. So Uber was making a little bit of money and pissing off millions
0:34:34 Kahneman: of people. And that was dumb in a business where they had to fight city by city to get permission
0:34:45 to take people to the airport. And so the important lesson is that if you’re doing business in the real
0:34:55 world and you have customers and employees that are people, not agents, then you have to do things a bit
0:34:59 Kahneman: differently. That’s like the one sentence summary of behavioral economics.
0:35:05 Kahneman: Richard, could you, for people listening and for me, give an example or two of how you take
0:35:15 the research and then apply it in the real world? You mentioned effectively forced savings earlier. Maybe
0:35:17 that’s a domain we could explore.
0:35:28 Kahneman: When my father worked, he was an actuary, worked at a big insurance company. He had the pension
0:35:37 that was prevalent at that time, the fine benefit pension plan, the old fashioned kind, where how much
0:35:42 you got in your pension just depended on how long you worked and what your final salary was.
0:35:50 Kahneman: No decisions. And we gradually started shifting over to the new 401k type that’s called
0:35:58 defined contribution, meaning it, you put money in and invested, and then you get what you have at the
0:36:04 Kahneman: And that’s what you have at the end. Now, when I started working in this area, one problem we
0:36:15 noticed was lots of people weren’t joining this savings plan, even though their employer was matching
0:36:23 contributions dollar for dollar up to, say, 6% of their salary. So that’s like the stupidest thing you
0:36:30 Kahneman: You could ever do. You’re making $100,000. They’ll say, I’m going to give you $6,000 as long
0:36:35 Kahneman: You save 6,000. Kahneman: Yeah. In a tax deferred. Kahneman: Tax deferred. That’s right.
0:36:41 Kahneman: So an economist would say, well, everybody will do it. And what we noticed is
0:36:48 in a lot of companies, only half of new workers would sign up within the first year.
0:36:54 Kahneman: So how can we fix that? Well, remember, we talked about status quo bias.
0:36:59 Kahneman: So here’s a simple way. The way it worked at that time was in order to join,
0:37:05 you have to fill out a form and choose some investments and then sign. And this was a piece
0:37:11 of paper at the time. So how about if we just change the form and say, there’s this plan, we’re going to
0:37:16 Kahneman: We’re going to put you in unless you fill out a form saying you don’t want it. Now,
0:37:22 again, economic theory says that won’t make any difference. Everybody’s going to join. And certainly
0:37:26 Kahneman: just filling out a piece of paper, that’s, you know,
0:37:27 Kahneman: It’s not enough friction to change things.
0:37:33 Kahneman: Yeah. I mean, we’re giving you $6,000. But the first company that did that,
0:37:44 new employees now joined 90% instead of 50%. So I wrote a book called Nudge. And that’s an example of a nudge.
0:37:50 Kahneman: I am fascinated by nudges and tell me if I’m defining this correctly, but some feature
0:37:55 of the environment that improves decisions, but doesn’t force anyone to do anything. Is that a fair?
0:37:55 Kahneman: Yes.
0:37:57 Kahneman: I think I’m trying to quote directly.
0:37:59 Kahneman: I’m pretty sure I wrote those words.
0:38:03 Kahneman: Yeah, I think you did. So one of the examples that I’ve heard you
0:38:09 discuss, I think this started in the Netherlands, but it is the fly
0:38:16 Kahneman: Otherwise put inside of urinals to reduce spillage because a lot of guys are on autopilot.
0:38:18 Kahneman: It turns out they like to aim at things. My question is…
0:38:22 Kahneman: I love that. Of everything that you read, that’s what you chose to pick.
0:38:28 Kahneman: Well, I picked it because at least most guys listening have seen this.
0:38:28 Kahneman: Yes, a thousand percent.
0:38:31 Kahneman: And my question is,
0:38:37 Kahneman: Is there a certain half-life to the effectiveness of nudges? Because I remember
0:38:39 Kahneman: The first time I saw one of these, I was like,
0:38:41 Kahneman: Oh, I’m definitely going to get that fly. I remember it.
0:38:43 Kahneman: And then after a while I was like,
0:38:46 Kahneman: Okay, I realize this is just painted on enamel or etched into the enamel. It’s no
0:38:51 Kahneman: longer that interesting. And not to extrapolate from myself to everyone,
0:38:57 Kahneman: but I’m wondering if you need to refresh nudges as you might refresh
0:39:02 Kahneman: and many other things that maybe Nick has experimented with in the realm of business.
0:39:06 Kahneman: How do you think about the durability of these types of nudges?
0:39:11 Kahneman: You know, there’s a good example of a nudge of that sort here in Chicago.
0:39:18 Kahneman: When Nick and I drive back home, we’re going to go on Lakeshore Drive and there’s a bendy
0:39:23 Kahneman: part. It’s beautiful road. And a lot of people wipe out around these bends.
0:39:29 Kahneman: You really can’t go more than about 30 and it’s a six lane road. So people think they can
0:39:35 Kahneman: go fast. So what somebody did around the time we wrote that book a little before is they
0:39:44 Kahneman: painted lines on the road that get closer and closer together that gives the illusion that
0:39:50 Kahneman: you’re speeding up. Kahneman: That’s clever. Kahneman: And so you’re just instinctively
0:39:58 Kahneman: tap the brake and then don’t wipe out your car. That’s good. Right now, those lines,
0:40:02 Kahneman: they keep repainting them. Kahneman: No one pays attention anymore. Kahneman:
0:40:06 Kahneman: Well, I don’t know. Kahneman: I don’t know either. Kahneman: I don’t know. But I think the fly in the
0:40:15 Kahneman: urinal probably won’t have any effect in the toilet you use at your place of work,
0:40:21 Kahneman: where, you know, you see it several times a day or whatever. But for the pension thing,
0:40:29 Kahneman: if we only have to get you to sign up once, that’s enough. So yes, attention, it may be
0:40:34 Kahneman: that we have to do something different to get your attention this time. But there’s a rule,
0:40:42 Kahneman: which is, if you want people to do something, make it easy. That’s a rule. That’s always true.
0:40:52 Kahneman: And the more complicated you make things, the less people are going to do it. So, you know,
0:40:58 Kahneman: I think that’s pretty much automatic. In terms of capturing attention, you can, you know,
0:41:10 Kahneman: that’s what the business of advertising is constantly trying to do. And click bait on ads,
0:41:14 Kahneman: on social media, they’re all in the business of Trump.
0:41:16 Kahneman: I mean, social media itself is in the business of that.
0:41:25 Kahneman: Right. Keep it simple is a formula that always works. And getting your attention always works. But it
0:41:29 Kahneman: it won’t be the same thing that will keep getting your attention.
0:41:35 Kahneman: So this turned into a whole field from relatively simple concepts like that called choice
0:41:41 Kahneman: architecture. You’ve done consulting with various companies, the NFL, all sorts of
0:41:45 Kahneman: people. I don’t even know which ones I’m allowed to talk about or not, so I have to be careful.
0:41:51 Kahneman: But tell us a little bit about like, when does that become a bad thing?
0:41:58 Kahneman: Can you turn the nudge or can someone that’s malicious turn the nudge into something
0:42:02 Kahneman: that takes advantage of the lack of self-control in these models?
0:42:08 Kahneman: Yeah, sure. We always say we didn’t invent nudging. Adam and Eve, then the serpent,
0:42:14 Kahneman: right? There was the apple. So human nature has been there all along.
0:42:21 Kahneman: Hucksters have existed forever. Charles Ponzi didn’t read our book,
0:42:29 Kahneman: didn’t read any of my papers, neither did Bernie Madoff. So when we wrote nudge,
0:42:37 Kahneman: it was saying, look, here are some basic principles of human behavior. Can we use those
0:42:39 Kahneman: to help people make better decisions?
0:42:45 Kahneman: So practically speaking, how do you then go into one of the businesses that you’ve consulted
0:42:52 Kahneman: for and come up with through your framework, what they have overlooked?
0:42:59 Kahneman: Well, you want to ask, you want people to do more of that. Why are you making it hard for
0:43:04 Kahneman: them to do it? That’s the answer. But where I was going with that was the same principles
0:43:13 Kahneman: can be used to harm people. So if you’re going to a casino, the whole casino has been designed
0:43:23 to get people to bet as much as possible and to bet on things that have the worst possible outcome.
0:43:24 Kahneman: Right.
0:43:24 Kahneman: Yeah.
0:43:32 Kahneman: And now we have online gambling and within game gambling, and we have
0:43:39 Kahneman: places like Robin Hood that are, have made investing feel a lot like
0:43:41 Kahneman: Casino gambling.
0:43:42 Kahneman: Yeah, they gamified it.
0:43:50 Kahneman: Yeah. So they’re making it easy, right? They’ve made it easy to bet. It used to be you had
0:43:58 to go find a bookie. Now you open your phone and you can bet on the game that you’re watching. And that’s
0:44:04 Kahneman: very tempting. So the principles of understanding the customer
0:44:13 Kahneman: and then designing the product can be used for good or evil. And I take no responsibility
0:44:24 Kahneman: for somebody optimizing an online gambling app to make it as attractive as possible for
0:44:31 Kahneman: people to lose all their money. Don’t blame me, but that’s what’s going to happen in a
0:44:34 Kahneman: competitive market with consumers who are humans.
0:44:38 Kahneman:
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0:45:55 Richard, a question for you. How long have you been teaching your, or how long did you teach?
0:45:58 It sounded like it was current day, the decision-making class?
0:46:00 Richard Smith: 40 years.
0:46:03 Richard Smith: Okay. You’ve had time to work on your material.
0:46:05 Richard Smith: Yeah. I should be better at it, right?
0:46:08 Richard Smith: Well, I mean, I wasn’t going to go that far. I was going to ask you
0:46:19 what seems to be the stickiest of what students repeat back to you from that class as concepts,
0:46:24 frameworks, stories, could be anything at all. And I suppose the precursor question is,
0:46:28 what are they hoping to gain from the class in the first place? What’s the promise of the class?
0:46:29 Richard Smith: But I’d be curious to know what sticks.
0:46:35 Richard Smith: So first thing I will say is nobody thinks they need a class in decision-making
0:46:40 because they’re great at decision-making. Why would they need a class in that? Do I need a class
0:46:45 in breathing? Although you’re going to tell me actually, you don’t know how to breathe right.
0:46:50 Richard Smith: I’ve got a frictionless e-course for you with lots of in-app purchases.
0:46:59 Richard Smith: So I do hear from people who took a class from me at Cornell 40 years ago,
0:47:07 which is very gratifying. I’m glad that they even remember that they had such a class. What do they
0:47:16 Richard Smith: They remember? They remember stories. That is the only thing people remember. They do not
0:47:25 remember a formula. They don’t remember some abstract concept. They remember a story or they remember
0:47:34 a demonstration. Take the concept of the winner’s curse. This is an obvious move on my part since I
0:47:39 have a new book that’s called the winner’s curse. But let’s talk about the winner’s curse because it’s
0:47:47 a great example. Winner’s curse, the way you do this in a class is you bring in a jar of coins and you
0:47:52 say, I’m going to auction this off. You get the money in the jar. Richard Smith: You mean like the high
0:47:58 bidder gets the money? Richard Smith: The high bidder gets the money. So there’s $75 worth of coins in
0:48:03 there and the high bidder gets 75 bucks and they pay me something. Richard Smith: That’s what we’re getting
0:48:08 Richard Smith: Right. Richard Smith: Do they know that it contains 75? Richard Smith: No, they just see…
0:48:12 Richard Smith: It’s like a jelly bean estimation or something. Richard Smith: Exactly. In fact,
0:48:21 you can use jelly beans or whatever, paperclips. So what do you find in that? You always make money on
0:48:25 this. Richard Smith: The creator of the jar makes money. Richard Smith: Yeah, the professor always makes money
0:48:33 Richard Smith: Because you have this jar, it’s worth $75. There will be somebody that’ll be at $100 or $150.
0:48:37 Richard Smith: And they win. Richard Smith: And they’re the winner. Richard Smith: They win.
0:48:42 Richard Smith: Yes, they’re the winner. Richard Smith: They win, right? So that experience,
0:48:48 you can tell people this abstract concept of something called the winner’s curse. They won’t even remember
0:48:55 what it means because it’s got a weird name and it doesn’t have anything to do with cursing or witches,
0:49:02 but they remember, oh yeah, that that guy who bid a lot… Richard Smith: Bid too much.
0:49:07 Richard Smith: Bid too much. Richard Smith: Bid too much. Now, this concept was not discovered by psychologists.
0:49:18 Richard Smith: It was discovered by engineers at ARCO, an oil company. There were bidding for leases in what
0:49:28 I’m going to insist on continuing to call the Gulf of Mexico. And what they discovered was the leases that
0:49:41 they won had less oil than the engineers and geologists had told them would be there. And they said,
0:49:49 “Gee, that’s weird because we thought we had great geologists. And what’s the problem?” And the problem they
0:50:00 figured out was very subtle, which is that the auctions you win are not a random sample of the
0:50:05 auctions you bid in. They’re the ones where you’re the highest bidder. And if you’re the highest bidder,
0:50:09 there’s a good chance that… Richard Smith: You bid too much. Richard Smith: You bid too much, right.
0:50:16 Richard Smith: That leads to an interesting conundrum. It’s almost like war games,
0:50:20 where the only way to win the game is not to play if you’re ARCO, which means you should just go out
0:50:24 of business. Richard Smith: Well, so… Richard Smith: You know, so how do you win that if you
0:50:28 are in that market where you have to bid on these things? Richard Smith: Okay, that’s a great question.
0:50:36 So, all right, it’s 1970 or something, whenever they published that paper, they get this finding,
0:50:44 what should they do? One would be not to go into some other line of business. Another would be to bid less,
0:50:51 but then they’re not going to win very many auctions. They came up with a pretty clever
0:50:54 solution. Richard Smith: Was it collusion? Richard Smith: No. Richard Smith: Because that would work.
0:51:00 Richard Smith: I bet it’s something like that. Richard Smith: Major League Baseball. Major League Baseball
0:51:06 does that. Richard Smith: That was their solution. They were outed on that. No, their solution was to write
0:51:14 a paper. Think about it. Richard Smith: So they made everyone aware of it. Richard Smith: Right. So instead of going to all the other
0:51:20 team owners and say, “Hey, guys, when Catfish Hunter becomes a free agent, don’t bid.”
0:51:27 Richard Smith: And, you know, that’s illegal. But publishing a paper saying people are bidding
0:51:34 too much, and the more bidders there are, the less you should bid, that’s perfectly legal and useful.
0:51:43 Richard Smith: Now, it turns out that there’s a funny story about this, which is the version of this
0:51:50 book “The Winner’s Curse” that I published in 1992. The editor who bought that went to Princeton
0:51:57 University Press. And then when Nudge came along, there was an auction for the rights to bid it.
0:52:02 Richard Smith: Did they pay too much? Richard Smith: No, he didn’t bid. And I said, “Peter,
0:52:08 how come you didn’t bid on this book? I think it’s going to sell.” He said, “No, I read The Winner’s Curse.”
0:52:10 Richard Smith: I can’t bid on your book. Richard Smith: Yeah, right.
0:52:15 Richard Smith: And no, don’t bid in auctions. So I said, “Well, you know, maybe this one should have
0:52:22 been an exception.” But that concept, I haven’t forgotten your question. I don’t know whether people
0:52:30 will learn that theoretical lesson, but they’ll remember the jar of coins. And they’ll remember
0:52:39 stories. You know, I had two psychologist mentors, Amos Tversky and Danny Kahneman, now both dead. Amos
0:52:49 sadly died at 59. But at his funeral, his son read a little note that Amos had given him that said
0:52:56 something like, I’m not going to get this exactly right, but he had cancer and had a few months where
0:53:02 he knew he was dying and was spending time talking to his family about it. And he wrote a note saying
0:53:11 that he thinks the time they’ve been spending talking has been useful and that he thinks that people learn
0:53:22 through stories. And I’ve put that little note in my first class ever since then. And I say to people,
0:53:30 look, people will tell you, don’t take this class. All he does is tell stories. And I said, that’s true.
0:53:38 And talk about sports. That’s also true. But here’s this line from Amos, smartest man on earth.
0:53:46 That’s the way you learn. You’re going to learn through the stories. So I think, you know, we show
0:53:54 people that they’re overconfident. And their decision making. Yeah. Or in judgments. I mean,
0:54:03 you ask people, what’s the length of the Amazon River and give 90% confidence limits, meaning give a
0:54:09 high and low estimate so that you’re 90% sure that the correct answer lies somewhere.
0:54:16 And the right answer will be within it, not 90%, but like 60%.
0:54:19 Yeah. I would not wager on that. I have no idea.
0:54:25 Yeah. But so, you know, you have no idea, but still the limits are too narrow.
0:54:35 No. So the same is true for CFOs of Fortune 500. I have two friends at Duke who do a survey twice a
0:54:44 year of CFOs. And they’re asked, what’s going to be the return on the S&P 500 over the next year?
0:54:52 And they are asked for a high and low estimate. And the correct answer comes out between those.
0:54:58 I think they asked for 80% limits. And it’s like a third of the time.
0:55:06 Now, it’s true that that’s an impossible task, meaning nobody can predict the market,
0:55:13 but you should know that you can’t predict the market. So a correct answer for 80% is,
0:55:20 well, it’s going to be somewhere between up 20% and down 10. That’s a reasonable forecast.
0:55:30 But instead they say up 10 minus 2%. There were, there was a whole decade where the average
0:55:33 downside scenario was zero.
0:55:37 Well, it’s a recency bias, right? It’s like whatever happened the last couple of years,
0:55:39 people tend to extrapolate into the future.
0:55:42 They were doing that right up until the financial crisis.
0:55:43 Yes.
0:55:43 Right?
0:55:44 Yeah, yeah, yeah.
0:55:48 So they were most overconfident right before…
0:55:49 Right before the shit hit the fan.
0:55:50 Exactly.
0:55:50 Right, yes.
0:55:53 So that was Kokona saying the shit hit the fan, not that.
0:55:55 I’m allowed to swear on this podcast.
0:55:55 Oh, oh, okay.
0:55:56 Oh yeah, you can swear.
0:55:58 Yeah, you can feel free to fire away.
0:56:05 So, you know, the winner’s curse sounds like an abstract concept, but Nick knows I wrote
0:56:11 a paper about the NFL draft that applies exactly that concept.
0:56:20 Teams really think it’s valuable to have the first pick or one of the top 10 picks.
0:56:25 And then you just cited the Chicago Bears and their quarterback picks, and that’s all you
0:56:26 needed to do.
0:56:26 Yeah.
0:56:34 I mean, and you know, I think the Bears traded up twice to pick quarterbacks.
0:56:37 I mean, this is always, it’s not just the Bears though.
0:56:38 It’s not just the Bears.
0:56:38 Right, right, right.
0:56:41 No, it’s not, this is availability.
0:56:43 We’re just, we live, yeah, we live in Chicago.
0:56:43 We live in Chicago, right.
0:56:43 Yes.
0:56:46 But they’re not the only team that does this.
0:56:58 And my co-author and I, that paper and somebody else have been, again, updating that and nothing’s changed.
0:57:06 But then people actually then hire you to tell them this because for some reason they can’t believe it.
0:57:10 Yeah, but then the problem is that there’s an owner.
0:57:23 Well, let me ask you, Richard, about the hiring just for a second, because the example with Arco involved writing a paper that draws attention to the fact that if you bid the most, you’re likely going to be overpaying, which is a very interesting strategy.
0:57:28 Yeah, Jim, I’m wondering in the case of say an NFL team, what is it that they can do?
0:57:38 How can they change their behavior or bidding behavior based on you describing the winner’s curse and sort of all the connective tissue around it?
0:57:42 If they have the top pick, they can trade down.
0:57:52 So if you have the first pick, you can trade it for the seventh and eighth picks or five, count them, five second round picks.
0:57:58 And those five players will cost you about the same as.
0:57:59 Yeah, in dollars.
0:58:00 In contracts, yeah.
0:58:00 Right.
0:58:16 And if you look, I mean, any sports fan can rattle off the number of very high picks, quarterbacks and others that have been complete busts.
0:58:22 So here’s the one statistic from that paper that I think is most compelling.
0:58:33 Take the players at any one position, let’s say running backs, and rank them in the order in which they were picked.
0:58:37 So we have the first down to whatever.
0:58:43 Now we ask, what’s the chance the higher one picked is better than the next one?
0:58:48 My co-author, Cade, and I used to call it, we called this the better than the next guy.
0:58:48 Yeah, yeah.
0:58:49 So it’s like a tennis ladder.
0:58:50 Right.
0:58:50 Yeah.
0:58:51 Right?
0:58:51 So yeah.
0:58:56 And if teams are perfect at predicting, it’ll be 100%.
0:58:57 Yeah.
0:58:58 Right?
0:59:03 If we rank them tallest to shortest, that’ll be 100%, right?
0:59:08 So if they’re flipping coins, it’s 50%.
0:59:10 It was 53%.
0:59:11 Yeah.
0:59:20 So all that work, all of the prediction, all of the people, all of the scouting, all the combine, and it’s pretty much a coin flip.
0:59:20 Yeah.
0:59:25 So that means more picks are better.
0:59:39 So Tim’s podcast is really about taking, as he always says at the beginning of everyone, the high performers and the people who see things differently and trying to take the nuggets that people can apply to their lives.
0:59:49 And so I know that some of what you’ve studied and done, you’ve looked at people’s habits, like we were saying at the very beginning, where everyone makes perfect.
0:59:52 We live in this wonderful world where people make perfect decisions.
0:59:54 And of course, that’s not the case.
1:00:01 And that’s really what the whole podcast is about, like how to change those bad habits into positive habits.
1:00:19 And so what kind of frictions can we create in our lives where we can improve our decision-making, we can be more like that ideal agent that actually cares about our economic utility without, you know, going nuts and sitting in a room with spreadsheets.
1:00:28 But how do you take these things that you’ve studied in human nature for 40 years and apply them to my life normally?
1:00:31 Well, you know, let’s go back to the cashews.
1:00:33 This is stuff everybody knows.
1:00:38 Your mother told you that if you’re trying to quit smoking, you don’t have cigarettes around.
1:00:41 If you are drinking too much.
1:00:42 Lock the wine cellar.
1:00:44 Yeah, lock the wine cellar.
1:00:51 And so make it harder to do the stuff you want to do less of.
1:00:57 And make it easier to do the stuff you want to do more of.
1:00:57 Yeah.
1:00:58 I mean, that seems obvious.
1:00:59 That, well.
1:01:01 Not so much for economists.
1:01:09 Basic, look, basically everything I’ve done has seemed obvious after the fact.
1:01:23 You know, selling reservations at a restaurant instead of, as you used to say, having five people you pay to say no on the phone, that seems like an obvious thing to do.
1:01:30 It does, but I will say that since I have sold the company, we’ll talk about the law of one price, right?
1:01:34 Like, this penge, if it’s identical, should cost the same kind of all over the place.
1:01:37 And that’s where arbitrage opportunities come from and all of that.
1:01:44 And classical economics would say, well, that those get scrubbed out, like, because of perfect information and all of that.
1:01:52 But as it turns out, you have to then convince business owners that, hey, this is not a controversial idea.
1:01:56 And you can indeed charge a deposit and change the economics of your business.
1:01:59 And I spent over a decade doing that.
1:02:01 And it was very difficult, actually.
1:02:11 And no matter how easy we made that choice architecture for them as business owners, their psychology was that, well, this is a controversial topic.
1:02:20 And then since I’ve left the company, what I’ve watched is that one of the big competitors is now simply going to other restaurants, some of the premier restaurants.
1:02:25 And they’re saying, well, we’ll give you $10,000 to leave, talk, up front, cash.
1:02:29 Now, I would go, why would they want to give me free money?
1:02:31 There is no such thing as a free lunch.
1:02:33 But it works remarkably well.
1:02:38 And that sort of thing is also an interesting psychological problem.
1:02:45 You know this better than anybody, but people are good at something like being a chef.
1:02:51 Many restaurants are run or owned by the chef.
1:02:56 And being a good chef doesn’t make you a good business person.
1:03:00 The same is true of being a coach.
1:03:06 You don’t get to be the coach of a team just by being smart.
1:03:09 You almost always have to have played that sport.
1:03:14 And that doesn’t make you a good decision maker.
1:03:26 And the field of behavioral economics and the field of sports analytics, think of Michael Lewis’s book, Moneyball, it’s the same field.
1:03:28 So why do I say that?
1:03:31 Well, again, people optimize, right?
1:03:40 So economists would say, well, teams are all going to do the strategy that maximizes their chance of winning.
1:03:42 Well, let’s take basketball.
1:03:47 There was an innovation 40 years ago, the three-point shot.
1:03:51 Before that, all shots are with two points.
1:03:55 Now you have a shot that’s 50% better.
1:04:02 Now, every team had somebody who could make 40% of their three-point shots.
1:04:07 And teams average about half of their two-point shots.
1:04:11 Now, Nick, see if you can keep up with the math here.
1:04:11 Yeah.
1:04:14 40% of three.
1:04:15 Expected value.
1:04:18 Is greater than 50% of two.
1:04:19 Yeah.
1:04:22 How long did it take them to figure that out, though?
1:04:24 Basically 40 years.
1:04:24 That’s right.
1:04:25 Steph Curry.
1:04:26 Steph Curry.
1:04:37 Well, so take just right now I’m going to say the words Michael Jordan and give me an image that comes to mind.
1:04:39 And I can tell you what it is.
1:04:48 It’s Michael taking some last-second shot somewhere mid-range with two guys hanging on him.
1:04:53 Now, that, even if you’re Michael Jordan, that’s a low-percentage shot.
1:04:59 Steve Kerr, who’s now the coach of the Warriors, was on the team with Jordan.
1:05:05 For an entire year, his three-point shooting percentage was 50%.
1:05:06 Was that true?
1:05:07 Really?
1:05:07 Yes.
1:05:08 I had no idea.
1:05:10 And how many shots a game do you think he got?
1:05:12 Like one and a half or something.
1:05:12 Yeah.
1:05:12 Right.
1:05:23 So, if you have a look at a plot of three-point attempts over time, it’s been going up, but very slow.
1:05:30 So, I’m friends with Daryl Morey, who’s the general manager of the 76ers.
1:05:41 I always tease him that he got to be rich and famous because he was the first guy to calculate that 0.4 times 3 was greater than 0.5 times 2.
1:05:46 He’s actually a really smart guy, but that’s kind of true.
1:05:49 And then that happens everywhere around us.
1:05:50 Yes.
1:05:51 Yes.
1:05:53 There are examples of that.
1:06:02 And again, you know, when I came from Cornell to Chicago, I came and gave a job talk.
1:06:03 It’s called an interview.
1:06:04 And you present a paper.
1:06:20 People think I’m making up the story because it’s sort of an apocryphal economic story that economists look at that.
1:06:24 It can’t be real because otherwise somebody would have already picked it up.
1:06:25 I picked it up.
1:06:31 So, economists, economics, really, they think there aren’t these $20 bills on the street.
1:06:34 And there kind of are.
1:06:34 There are.
1:06:37 But then what I was going to say is where do you put that?
1:06:46 So, I want to just touch on a little bit my favorite concept of yours, of all, because it comes up in my household and in my businesses like once a week.
1:06:47 And that is mental accounting.
1:06:48 Oh, yeah.
1:06:56 And if you could just go over, because I think this one might be the most applicable to every single person that I know.
1:06:58 Because people are incredibly irrational about this.
1:07:00 Explain what that is.
1:07:03 In economic theory, there’s money.
1:07:07 And it has no labels.
1:07:19 There’s just, you have wealth, W, and then you figure out, and you just, it doesn’t matter where it is or how you got it or that’s it.
1:07:29 Now, humans think about money as sort of coming in categories.
1:07:42 And where, you know, let’s suppose you take out a pair of jeans you haven’t worn in a long time and you find $300 bills in there.
1:07:45 You don’t know exactly when you left them there.
1:07:47 Oh, that feels like a windfall.
1:07:48 Jackpot.
1:07:48 Right.
1:07:49 I can go have a nice meal.
1:07:55 So, again, the standard theory is money has no labels.
1:07:59 Now, here’s a kind of a policy version of this question.
1:08:09 In the financial crisis, the Obama White House had to, there was going to be some tax refund to stimulate the economy.
1:08:16 And the question was, should we give it in a lump or should we spread it out?
1:08:21 Now, the economists will say, does it matter?
1:08:23 It’s W.
1:08:24 That’s it.
1:08:25 Right?
1:08:28 So, it matters.
1:08:31 I’m not saying I know exactly what the right answer is.
1:08:33 It’s kind of a complicated question.
1:08:42 But the point is, is that people take sort of money and how they acquired it matters to them.
1:08:42 Right.
1:08:48 Like, if I win $100 off you at golf, I might go like, well, I’ll buy a bottle of wine with that.
1:08:50 But really, it’s just part of my cumulative wealth.
1:08:54 And I should have just done that anyway because I had another $100.
1:08:55 Right.
1:08:56 But that comes true.
1:08:58 Like, we’re selling our house right now.
1:08:59 Oh, yeah.
1:09:00 And so…
1:09:02 That money, I’m pretty sure you ought to just give that to me.
1:09:05 And so, my house is going to get sold.
1:09:11 And so, there’s this concept now that, well, that’s the money for the next house.
1:09:12 Right.
1:09:15 Or the condo we’re buying in Chicago as we downsize.
1:09:21 So, somehow, the budget is tied from one house to the other, even though it’s completely irrelevant.
1:09:23 Like, the money is going to come in from the house sale.
1:09:27 And I can use any pool of – it’s just in the big swimming pool.
1:09:29 It doesn’t matter which drop you take, right?
1:09:30 Right.
1:09:33 And in our companies, I think businesses do a terrible job of that.
1:09:35 People get budgets.
1:09:37 And they become – you know, they own that budget.
1:09:44 And they look at tax savings that the company might get as completely different than earnings that they might get.
1:09:46 And they spend it differently.
1:09:47 And they think about it differently.
1:09:50 And boards I’ve been on are, like, are talking about all this.
1:09:53 And what we all said in our businesses, we tried to.
1:09:54 Steve Bernacki, I’ll give you a shout-out.
1:09:56 Every dollar spends the same.
1:09:57 They’re all the same.
1:10:01 So, I got to know the CEO of an airline.
1:10:02 I won’t mention which one.
1:10:11 And I was trying to convince them before COVID that they should get rid of change fees.
1:10:16 And I think I was also lobbying for getting rid of baggage fees.
1:10:24 And he told me, well, you know, there’s a guy – they have a billion dollars a year in baggage fees.
1:10:25 Yeah.
1:10:28 There’s a guy who owns that.
1:10:29 He ain’t going away.
1:10:29 Yes.
1:10:31 Now, of course, owns.
1:10:32 What does that mean?
1:10:35 It’s not that the money goes to him.
1:10:36 No.
1:10:37 He’s the baggage guy.
1:10:38 Yeah, yeah, yeah.
1:10:40 He’s pricing out the baggage.
1:10:49 Well, it would be like if you’re in your restaurant, you have – well, I’m sure there was a beverage manager, and that money is the same as the food.
1:10:50 It’s the same money as all the other stuff.
1:10:50 It’s the same.
1:10:51 Yes.
1:10:52 So –
1:10:58 And so people, the mental accounting concept is don’t do mental accounting basically, right?
1:11:00 I mean, now, it can be helpful.
1:11:10 So putting money into a children’s education account, that can be smart.
1:11:12 And treating that as off-limits.
1:11:17 Some people have trouble spending too much.
1:11:18 Most people have that problem.
1:11:21 Some have the opposite problem.
1:11:30 And so it’s just like we were talking about you want to hide the booze and put the exercise equipment somewhere where it’ll be easy to use.
1:11:32 It’s the same with the money.
1:11:38 So you can have a fiction that that money –
1:11:40 So there can be good fictions and bad fictions.
1:11:40 Yes.
1:11:41 Yes.
1:11:49 And now, you know, part of mental accounting, probably the biggest mental accounting thing, is the so-called sunk cost fallacy.
1:12:05 And the idea is if you paid for something – so we go out to dinner, and we’ve bought some dessert, and we realize, you know, God, we’re really full, and neither of us need to weigh more.
1:12:06 We’ll just say that.
1:12:12 So – but, you know, we paid 30 bucks for that dessert, so we can’t –
1:12:12 You got to eat it.
1:12:14 You got to eat it, right?
1:12:15 That’s dumb.
1:12:20 And, again, every economist teaches that.
1:12:23 And this is the sort of discussion I used to have in the old days.
1:12:31 I said, look, why do you have to teach people the sunk cost fallacy and then assume they already know it?
1:12:36 You know, people would say, what do you mean I can’t waste that?
1:12:38 I mean, I fully admit your wine example.
1:12:38 I do.
1:12:40 I fully admit this.
1:12:47 And I even know – and every time I do it, I think of the sunk cost fallacy because, you know, I’ve got this old bottle of wine.
1:12:48 It’s now worth $500 or $600.
1:12:53 I would not pay $500 or $600 to acquire it, but I will gladly drink it.
1:12:56 But I won’t go buy a $500 bottle of wine.
1:12:56 Right.
1:12:58 And that’s it in a nutshell, right?
1:12:58 That’s it.
1:13:00 And that’s literally – I built the whole company off that.
1:13:01 Yeah.
1:13:04 The entire company of Talk was built off that one concept.
1:13:06 Wait, Nick, could you expand on that?
1:13:08 How is that built off of that?
1:13:10 Well, you know, the big friction in –
1:13:12 And maybe you could explain it.
1:13:16 I would have mentioned it briefly in the intro, but since it’s come up a few times.
1:13:16 Totally.
1:13:17 The reservation platform.
1:13:18 Yeah, yeah.
1:13:19 Maybe you could just give a little bit of background.
1:13:22 Well, he doesn’t own it anymore now, so, you know, he doesn’t need to plug it.
1:13:23 No, no, no.
1:13:24 I’m not trying to plug it.
1:13:31 No, but it was – that’s how we met was because, you know, I got into the restaurant industry by accident in some ways.
1:13:34 And then when I got there, I saw all of these sort of irrational behaviors.
1:13:41 One of them was that people would make reservations for restaurants and then simply not show up.
1:13:42 And it’s a big number.
1:13:44 It’s like 12%, 14% of the people just wouldn’t show up.
1:13:50 And then even at a destination place like Alinea that I used to own, you know, 6%, 7%, 8% of the people wouldn’t show up.
1:13:57 And what I realized very quickly was that if people had paid for it, they would show up.
1:14:00 They would show up at all costs.
1:14:11 Like the dog could have died and, like, you know, the snowstorm is happening, but they’re going to figure out a way to get there because they have paid some amount of money.
1:14:13 Whether it’s the whole or the half, it doesn’t really matter.
1:14:27 And it’s fascinating because if something more important lines up or something has more economic utility to you, you should, in classical theory, just go, well, screw it.
1:14:28 Like, that’s already done.
1:14:30 I’ve already spent that $300 or whatever it is.
1:14:34 And now I have something that’s more important or more valuable.
1:14:40 But people cling to that thing very, very, very, very strongly.
1:14:41 I’ll tell you a funny story.
1:14:44 My daughter lives in Rhode Island.
1:14:49 There was a guy, a kid in the neighborhood grew up to be a pitcher for the Mets.
1:14:53 And he was pitching in some first-round playoff game.
1:15:00 And I noticed that, and I said, I think I can get you tickets to this game.
1:15:01 Why don’t you go?
1:15:02 That’d be fun.
1:15:03 She said, oh, that’s great.
1:15:04 That’s great.
1:15:11 So I’d look online at one of these ticket sites, and tickets are, this was a first-round.
1:15:13 It wasn’t that expensive, so $300 or $400.
1:15:18 But then I wasn’t sure which ones she would want and how to get them to her.
1:15:19 So I say, okay, here’s what.
1:15:27 I’ll send you $1,000, you pick which tickets you want, and take the rest to buy Outdogs.
1:15:30 So she texts me back.
1:15:31 Now she has a choice.
1:15:36 She texts me back and says, LOL, this is just like in your book.
1:15:39 If you send me $1,000, I’m not going to spend it on baseball tickets.
1:15:43 So just last week, I learned my lesson.
1:15:46 We’re David Byrne fans in my family.
1:15:50 And David Byrne had a show in Providence where she was playing.
1:15:52 I sent her the tickets.
1:15:53 Yeah, yeah, yeah.
1:15:55 And she had no choice.
1:15:56 They were free.
1:15:57 Well, they’re free.
1:16:00 Yes, they have no, they’re mentally accounted for as zero.
1:16:01 Yeah, right.
1:16:03 So that was the best gift ever.
1:16:04 Yes.
1:16:05 Let me hop in.
1:16:08 I’d love to talk about cognitive biases for a second.
1:16:10 A few things have come up already.
1:16:11 Sunk cost fallacy.
1:16:16 I think maybe you were referring to something that I might put under the
1:16:20 category of endowment effect with maybe the mugs might be mixing that up.
1:16:24 But my question is, what are good examples?
1:16:29 I can think of a few for myself where actually as a backstory, I bought books on cognitive biases
1:16:34 and the framing around the reading for me was things to avoid, right?
1:16:35 These are things that I want to avoid.
1:16:37 These are yellow flags.
1:16:43 But what I realized, at least for myself, and maybe I’m misapplying the term, but I could
1:16:49 basically do what Nick did to his customers, making reservations to myself.
1:16:56 For instance, I could prepay for personal trainer or something like that.
1:17:02 And it would make me more inclined to do the thing that I say I want to do that’s good for me.
1:17:07 I know of, I actually wrote about the case of two engineers.
1:17:08 They worked at tech companies.
1:17:14 They made perfectly good money, but they bet each other, effectively it was a bet, $1.
1:17:16 So it’s kind of like trading places.
1:17:21 But they would show up at the gym at the same time to do something like 15 minutes of treadmill.
1:17:25 And if somebody didn’t show up, they had to pay the other person a dollar.
1:17:30 And these are two people who had failed at every exercise regimen prior to that.
1:17:35 And they both ended up losing 50 plus pounds, even though they didn’t really know the nuances
1:17:37 of exercise or anything like that.
1:17:43 So I’m curious if any examples come to mind where you can actually use cognitive biases to
1:17:44 your advantage.
1:17:50 I’m a big believer in that, that a good way to get yourself to do something
1:17:53 is have a commitment.
1:17:54 Pay for it.
1:17:55 And pay for it.
1:17:56 It’s a monetary commitment.
1:17:57 It’s pain.
1:17:58 It’s a little bit of pain.
1:18:03 I have some young colleagues who wrote a paper called Paying Not to Go to the Gym.
1:18:07 So yes, I do Pilates.
1:18:12 And if I make an appointment with my trainer, then I go.
1:18:19 So there’s a clever experiment by a young colleague of mine called Katie Milkman,
1:18:22 who’s big in this behavior change space.
1:18:31 And she ran an experiment with getting people to go to the gym, where what she did was she
1:18:35 gave them the Hunger Games audiobook.
1:18:41 And they could only listen to it when they were on the treadmill.
1:18:47 The idea is you pair something good with something that you don’t want to do.
1:18:50 So if you go, then you…
1:18:51 You get to hear the next chapter.
1:18:52 You get to hear the next chapter.
1:19:01 And it’s like if you’re binging, imagine to watch the next episode, first you have to run around the block.
1:19:04 Computation bundling, that’s what you call it.
1:19:04 That’s it, yeah.
1:19:18 I mean, it strikes me that a lot of the experiments you’ve done required finding groups of people and then testing them methodically and then putting rigor to some things that were maybe a little amorphous and whatnot.
1:19:40 And at the end of the day, that seems like those tests and experiments are so much easier now with social media, with the internet, with the ability to engage with huge populations of people.
1:19:41 Is that true?
1:19:45 Has the field, like, sort of utilized that?
1:19:48 I know you’ve cited eBay auctions in some of your papers.
1:20:02 I think the big thing, as you know, I took on a task, kind of a weird task, of taking a book I wrote in 1992 and taking on a young co-author and going back and saying,
1:20:17 did we make all that up or how does it hold up and it holds up and the kind of encouraging thing is that we can go from the lab and now to the field.
1:20:19 So, we were talking about mental accounting.
1:20:21 Here’s a funny mental accounting result.
1:20:30 During the financial crisis, the price of gasoline fell, like, by 50%.
1:20:33 So, what do people do?
1:20:36 Now, remember, it’s a financial crisis, right?
1:20:37 So, people are tight for cash.
1:20:43 But their gasoline budget is overflowing.
1:20:47 They have a little compartment in their head that’s for gas.
1:20:56 So, they go, let’s say they spend $100 a week at the gas tank, and now it’s $50.
1:20:58 So, what do they do?
1:21:04 Well, they start treating their car to occasional tanks of high test.
1:21:06 Now, that’s really stupid.
1:21:11 You know, your Prius, it’s not going to do any better.
1:21:12 Premium gas.
1:21:14 With premium gas.
1:21:16 You know, it’s made to run on regular.
1:21:25 No matter what the gasoline companies are telling you, more expensive gas isn’t better for 90% of cars.
1:21:32 But what they found was when the price went down, they would buy more expensive gas.
1:21:40 Now, you know, you and I would say, if we’re going to do some mental accounting with that, we’d say, all right, we could upgrade the wine.
1:21:41 Yes.
1:21:43 I always say that.
1:21:45 That’s always my mental accounting.
1:21:46 We would always do it anyway.
1:21:48 Or buy better olive oil.
1:21:49 That’s right.
1:21:51 You know, instead of the store brand.
1:22:09 So, the bigger picture is, and that’s kind of one of the lessons in this new book, is all the stuff that we’ve found in thought experiments and laboratories now, because of big data, you can find in the real world.
1:22:18 And, like, this paper, they had data from millions of shoppers at a large box chain store.
1:22:28 And so, they could say, they could show, not only are they upgrading the gas, which is stupid, but they’re not upgrading the orange juice.
1:22:32 Or purchasing in bulk to save money during a crisis.
1:22:32 Right.
1:22:39 So, that, I think, you’re right, that there’s, it’s much easier to run experiments now.
1:22:45 And, of course, companies are running these experiments every minute.
1:22:49 The largest economics department in the world is now at Amazon.
1:22:54 A hundred PhDs in economics working at Amazon.
1:22:56 Which could be good or bad for them.
1:22:59 Well, according to you.
1:23:00 If they’re my company.
1:23:00 Right.
1:23:04 I was going to say, it depends if they’re the right stripe, right?
1:23:04 Yeah.
1:23:07 I think they’re getting pretty good economists.
1:23:28 How many do you think work, and maybe the label of economists is too confining here, but in terms of working with mass data sets in the real world, say a Palantir, I don’t know if those numbers are public, but I would imagine they also have an entire army of people who are working on this stuff.
1:23:47 Yeah, and, you know, the mix of data scientists and some of them got their training in economics department, so exactly what their training is, but there are people with the equivalent of PhDs in economics or computer science working at all these companies.
1:23:54 To rewind the clock quite a ways, you’ve done a lot of amazing things in your career.
1:24:04 I was looking at an interview with you on Nobelprize.org, and there’s a line here I’d love for you to explain.
1:24:11 My thesis advisor famously said when interviewed about me of my time in graduate school that, quote, we did not expect much of him, end quote.
1:24:15 So, why is that the case?
1:24:22 I was not the best grad student in my class, and I wasn’t in the best department.
1:24:33 I mean, actually, I wasn’t a great student in any way, but I certainly knew I was not the best grad student in my class.
1:24:34 Why is that?
1:24:42 You know, I was good in math, but not as good in math as the people who go to get PhDs in economics.
1:25:03 And I was better at noticing the problems with economics than you can think about it as you could be somebody who can draw perfectly.
1:25:09 Or you can be somebody who thinks of a different way of drawing.
1:25:13 And I was more that guy.
1:25:34 So, the only way I managed to succeed, even get a job as an economist and get tenure, much less get a Nobel Prize, which was certainly never on my radar when I was a young person, was to think of a different way of doing economics.
1:25:42 And I more or less had to invent behavioral economics to have a career.
1:25:45 Otherwise, I would have done something else.
1:25:51 I was reading, in preparation for this, a bunch of his old source material papers.
1:25:54 Like, I’ve read Nudge, and I read Misbehaving, and all of these.
1:25:59 And I went back to some of the source papers, and I was literally laughing out loud.
1:26:01 I mean, they were written 30, 40 years ago.
1:26:08 And some of these same problems and the same human nature shows up again and again and again.
1:26:17 It’s just a fascinating thing that within this entire academic discipline for hundreds of years, no one said, well, the emperor doesn’t have the clothes on this.
1:26:21 And I think that’s what you’ve done really, really well time and again.
1:26:25 I always say that I never changed anybody’s mind.
1:26:29 What I was saying was heresy.
1:26:31 It was the emperor has no clothes.
1:26:38 I’m thinking, you know, look, see that mole on his belly?
1:26:40 You know, you can’t see that?
1:26:43 And you’re talking about the three-piece suit?
1:26:47 But sarcasm doesn’t really convince people.
1:27:04 So, the strategy I adopted at some point, I mean, I had to write some papers, but the strategy I adopted to broaden the field, I always say instead of changing people’s minds, I would corrupt the youth.
1:27:18 So, one example of that is there’s a foundation in New York called the Russell Sage Foundation, and they wanted to support behavioral economics when we were just getting started.
1:27:20 And they gave us some money, and they said, you can do whatever you want with it.
1:27:27 And what we decided to do is start a two-week summer camp.
1:27:31 That’s not the official name, but everybody refers to it as the summer camp.
1:27:42 So, it’s two weeks, we got 30 grad students from around the world, best students in the best departments, and we would teach them about behavioral economics.
1:27:47 There are graduates from that, graduates, I mean, attendees.
1:27:48 Alums.
1:27:52 Alums in the best economics departments around the world.
1:27:54 They’re editing journals now.
1:28:00 The new chairman of the Berkeley economics department was at one of those.
1:28:07 And I think it’s still the truth that people my age, they never got convinced.
1:28:11 And it’s the 30 and 40-year-olds.
1:28:20 The other thing I did was, there was a new journal called the Journal of Economic Perspectives.
1:28:25 And it tells you something about economics that this journal had to be created.
1:28:36 Journal articles had gotten so arcane and technical that the papers were not understandable unless you were in the subfield.
1:28:44 So, you know, a macroeconomics paper was not understandable to a labor economist or a finance professor.
1:28:57 So, they started this journal, and the idea was the articles would be written in a way that would be accessible to any economist or a grad student or even advanced undergrad.
1:29:02 My friend, Hal Varian, who was the chief economist at Google, he was an editor at this journal.
1:29:09 And he and I were having lunch one day, and we got the idea they were going to have some regular features.
1:29:15 And the idea was I would write a column in this journal on anomalies.
1:29:18 So, these were pokes.
1:29:25 There was one on the endowment effect that we’ve talked about, that buying and selling prices are different.
1:29:33 There was one about the fact that stocks that have gone down a lot do better than ones that have gone up a lot.
1:29:44 So, I started writing this when I was about 40, and it’s kind of an old man thing to do, to write stuff like that.
1:29:52 And there was a colleague of mine at Cornell who I overheard telling somebody about this journal,
1:29:57 well, I don’t know whether articles in that journal should count.
1:29:59 And I’m thinking, you know.
1:30:00 What are they counting?
1:30:02 Yeah, what are they counting?
1:30:02 Right, right, right.
1:30:04 Imaginary economist points.
1:30:05 Right.
1:30:05 Yes.
1:30:09 You know, now, there is something you can count, which is citations.
1:30:14 Citation is if somebody else writes an article and cites your article.
1:30:15 Those are counted.
1:30:22 And actually, publications in this journal get a lot of citations because people read them.
1:30:24 Because they’re readable.
1:30:25 Yes, they can read them.
1:30:26 Because, right.
1:30:27 First idea.
1:30:30 Write an article somebody can understand.
1:30:37 Now, it is the case that if the article is too easy.
1:30:45 We’ve mentioned my friends, Kahneman and Tversky, were writing the psychology articles that inspired me a lot.
1:30:49 A lot of people would look at those articles and say, you know, what’s the big deal?
1:30:52 There just wasn’t enough rigor to them within the economics.
1:30:54 And it seems like so obvious.
1:31:02 So, they have this idea, availability, that you’re going to think something is more likely if examples of it come to mind.
1:31:07 So, ask people, what’s the ratio of homicides to suicides?
1:31:28 And they think, you know, more than one person, either directly or in your community, who is a suicide victim.
1:31:32 And chances are, you don’t know any homicide victims.
1:31:35 But nevertheless, you might give that same answer.
1:31:40 And the obvious reason is that we read about homicides all the time.
1:31:42 And suicides are kind of quiet.
1:31:46 So, the thing is, their papers look too easy.
1:31:48 I don’t even know if you know this, Nick.
1:32:02 But when I was at Princeton undergrad, one of the many ways that I got together little bits of money here and there was by volunteering at mostly Green Hall in the psychology department.
1:32:06 And I was a subject for some of Danny Kahneman’s studies.
1:32:11 So, you were there when Danny was teaching there?
1:32:11 I was.
1:32:13 Did you take a class?
1:32:16 I did not take a class with him, which is one of my great regrets.
1:32:17 That was a bad move, Tim.
1:32:18 I know.
1:32:18 It was a bad move.
1:32:20 Next time, get that right.
1:32:21 Exactly.
1:32:32 And people may recognize the name popularly from Thinking Fast and Slow, which has been recommended by presidents and so on.
1:32:34 But why is he so notable?
1:32:42 What did he do or show or explain that made him so noteworthy?
1:32:45 So, the early work was done jointly with Amos Tversky.
1:32:51 And, I mean, they are the reason why you’re talking to me.
1:32:59 Because I had that list of weird behavior, but I didn’t know what to do with it.
1:33:09 And then I went to a conference and one of their students, this is back in the 70s, one of their students was telling me about the work they were doing.
1:33:23 And I went back home and read a bunch of their papers, which you had to do by going to the library and finding the psychology section in the library, which I had never been to.
1:33:26 And a big light bulb went on.
1:33:34 And the light bulb was that it’s the phrase systematic bias.
1:33:36 So, let me explain.
1:33:41 To an economist, if people make a mistake, that’s no big deal.
1:33:43 Because, fine, they’ll admit.
1:33:54 And, in fact, if you give economists like a half a glass of wine, they’ll admit, even traditional economists, that most of the people they know are idiots.
1:34:07 And certainly their students and their spouse and their dean and the president of the university.
1:34:10 And, actually, there’s a funny story about Amos.
1:34:13 Amos and I are at this conference.
1:34:19 And there’s an economist at dinner.
1:34:27 And he starts going into this rant about, Amos had set him off and said, how’s your wife’s decision made?
1:34:30 And the guy starts telling stories.
1:34:36 And then Amos asks him about the president of the university and the president at the time.
1:34:37 I don’t remember who it was.
1:34:44 And we’re getting, like, this half-hour-long rant about…
1:34:46 The irrationality of all these people.
1:34:47 Right.
1:34:52 And then, it’s like Amos is having him walk the ledge.
1:34:55 And then pulls it out.
1:35:00 And says, so, let me see if I can understand this.
1:35:04 So, basically, everybody you know you think is dumb.
1:35:08 But the people in your models are all brilliant.
1:35:15 So, that’s the systematic bias.
1:35:16 That, yeah.
1:35:21 And the systematic bias is, like, back to the availability we were talking about.
1:35:21 Right?
1:35:29 So, the fact that I can ask you a question, are homicides or suicides, which is more common, I can predict that.
1:35:31 And that’s a mistake.
1:35:33 And it’s not a random error.
1:35:36 So, it’s not that people are dumb.
1:35:38 You know, I don’t really think people are dumb.
1:35:40 I think the world is hard.
1:35:48 But people deal with this hard world using shortcuts and so forth.
1:35:52 And the shortcuts are useful, but not perfect.
1:35:57 And they lead to predictable mistakes, like the sunk cost fallacy.
1:36:10 The more you paid for the play you were going to go to, the less willing you are to skip it, no matter how good the alternative is.
1:36:16 A friend you haven’t seen for 20 years calls and says, my flight got canceled.
1:36:18 I’m in Chicago tonight for dinner.
1:36:19 We bought tickets.
1:36:21 The day I started to talk, this is really true.
1:36:26 We bought tickets to a movie with the kids that they wanted to go to.
1:36:29 And I went on Fandango, bought the tickets.
1:36:31 I don’t like superhero movies.
1:36:32 It was some superhero movie.
1:36:33 And I did not want to go.
1:36:39 I would have easily paid $150 to not go at 9 in the morning.
1:36:40 Then I bought the tickets.
1:36:45 And it was pouring rain outside at like 6 o’clock.
1:36:48 And everyone’s looking at each other and they’re comfortable on the couch.
1:36:50 And everyone’s like, do you really want to go out in this?
1:36:53 I was like, we are going to that damn movie.
1:36:55 Like, how can you not?
1:37:02 Like, and I literally that moment I went, we are putting deposits down on every damn person that goes to the aviary.
1:37:06 I literally, and I walked in and like my CFO was like, this is what I was talking about.
1:37:08 Hope you didn’t go to the movie.
1:37:08 We did go.
1:37:10 And I hated it.
1:37:10 It was terrible.
1:37:12 But that’s because you didn’t know me then.
1:37:13 You know, now.
1:37:15 But it is absolutely true.
1:37:15 Right.
1:37:18 That is a real thing that we all succumb to.
1:37:23 So that was the big idea from Kahneman and Tversky.
1:37:33 And by the way, everybody knows Michael Lewis and Moneyball and many of his other books, like The Big Short, my favorite movie.
1:37:35 People don’t realize I have a cameo in that movie.
1:37:40 It’s not the one with Margot Roby.
1:37:47 But an amazing book Michael wrote was about Kahneman and Tversky called The Undoing Project.
1:37:55 And I kept telling him, you can’t write a book about two psychologists talking to each other.
1:37:59 But he’s an amazing writer, and it’s an amazing story.
1:38:09 So if you’re curious about those two people who are two of the greatest 20th century scientists, I recommend that book.
1:38:10 It’s an easy read.
1:38:11 And quite captivating.
1:38:15 Can we bring up a difficult subject as it applies to?
1:38:16 Is there anything I could do to stop you from?
1:38:17 Absolutely.
1:38:18 You can say no.
1:38:19 Oh, okay.
1:38:20 Yeah, sure.
1:38:21 Bring it up.
1:38:23 Yeah, we can always edit it out.
1:38:23 Yeah, no.
1:38:26 I mean, look, I say it with respect.
1:38:30 But, you know, so it became public, I guess, earlier this year.
1:38:35 And I literally just found this out a couple hours ago that Danny chose assisted suicide.
1:38:37 And I’ve known that for a little while.
1:38:48 But as a friend, as a mentor, that had to be incredibly difficult and something to struggle with when he told you that he was going to do this.
1:38:53 Furthermore, he wasn’t actually tremendously ill or anything like that.
1:38:55 Are you comfortable talking about that a little bit?
1:38:58 He had been a friend and mentor.
1:39:01 He was my best friend for 40 years.
1:39:06 Yeah, he calls me one day and says, ah, that’s it.
1:39:10 And he had just turned 90.
1:39:26 And, you know, one of his findings was that our memory of an experience is determined by two factors, the peak and the end.
1:39:34 So, you go to one of those meals at a three-star restaurant, what was the best thing?
1:39:36 That’s the peak.
1:39:39 And how was it at the end?
1:39:43 I think those restaurants don’t get the end part right because they give you too much food.
1:39:47 But anyway, Danny was concerned.
1:39:48 He took this part seriously.
1:39:54 And he was mostly, he didn’t want to lose control.
1:39:58 At 90, I can tell you, he was still the smartest guy I knew.
1:40:00 He had lost nothing.
1:40:04 So, we spent a week or so arguing.
1:40:08 And I thought I was winning.
1:40:12 And he said, okay, you’re getting annoying.
1:40:16 So, I flew to New York.
1:40:17 I was in California.
1:40:29 I flew to New York, took him out for a good dinner, bought him a bottle of wine, 1998 La Moline, that I thought, this is worth living for.
1:40:31 So, that was my attempt.
1:40:34 I wasn’t allowed to try and argue with him anymore.
1:40:36 Yeah, I figured he’d probably put the kibosh on that.
1:40:37 So, no arguing.
1:40:40 But we went out to dinner together.
1:40:45 He did think the wine was good, but wasn’t going to change his mind.
1:40:52 And then the next day, we spent just figuring out how to manage the next month or so.
1:41:00 So, and our goal was that the obits weren’t about the way he died.
1:41:02 And they weren’t.
1:41:03 And they weren’t.
1:41:05 Until that came out.
1:41:06 Yeah.
1:41:09 Then a year later, there was an article in the Wall Street Journal.
1:41:16 I think the writer shouldn’t have included the letter he sent, the email he sent to friends.
1:41:21 But anyway, I mean, Danny had great 90 years, and he was great up until the end.
1:41:32 And I would have liked a few more, but I respected the right to him to end the way.
1:41:37 I kept sending him emails saying, you know, tell me how the chocolates are in Switzerland.
1:41:40 But he didn’t reply.
1:41:45 Richard, what was his argument for doing it?
1:41:47 Did he feel like he was slipping?
1:41:52 Did he want to just head that off at the pass altogether?
1:41:57 He wanted to be able to decide when he was going to do it.
1:42:12 And his argument was, yes, he realizes that it’s premature, but it would be premature whenever he decided to do it.
1:42:15 And so he’s going to do it now.
1:42:21 And I will say, like, the last month of his life might have been his happiest.
1:42:26 So maybe he got it exactly right.
1:42:32 He went to Paris for two weeks with his partner.
1:42:40 And then his Israeli family, his daughter, lives in Tel Aviv.
1:42:47 And she and her family came and spent a week with him in Paris, which is where he grew up as a kid.
1:42:49 Then he went off to Switzerland.
1:42:52 So I’m a greedy man.
1:42:58 I would have liked a few mores, but I had 45 years, so that’s pretty lucky.
1:42:59 Yeah.
1:43:03 And I won’t spend too much more time on this, but I am curious.
1:43:08 What was his belief around death?
1:43:09 Was it lights out?
1:43:09 That’s it?
1:43:11 Just like before you were born?
1:43:12 Was it something else?
1:43:14 Was he afraid of dying, or did he not have a fear of it?
1:43:17 I think he had no fear of it.
1:43:29 He didn’t want to go through a phase where he didn’t have his full faculties.
1:43:49 And you explained to me when you first told me about this, because I think there’s this innately human thing, which Tim is reacting to as well, and I certainly did, which is we are so ingrained to protect life and the life of ourselves and others that we love no matter what.
1:43:54 And he feared the cognitive decline.
1:43:57 The thing he valued the most was wrestling with ideas.
1:44:04 And you told me that he feared that more and the control over how that ended than anything else.
1:44:17 Yeah, I think it’s not like he was worried about no longer being the smartest guy in the room as much as he thought that he might be slipping.
1:44:42 And then who would, I mean, my intervention and my attempted intervention was to create a group of people he loved and trusted to say, all right, when certain steps are there, we buy you the ticket.
1:44:47 But he wanted to be the one who got to decide when that was going to be.
1:44:51 And that was with all his facilities.
1:44:52 And so that was it.
1:44:53 Now, thank you, Richard.
1:44:54 We can shift gears.
1:44:57 But thank you for being willing to share that.
1:45:08 I mean, I was taken aback when I read the piece and have just been very, very curious as someone who is in the same hallways, but never took a class, which is a real shame on my part.
1:45:11 In any case, it’s actually being willing to talk about that.
1:45:13 What keeps you going, Richard?
1:45:15 Like, what gets you excited?
1:45:16 There’s a transition, Tim.
1:45:20 No, I’m not saying you should buy a ticket to Switzerland.
1:45:26 I’m just saying, like, what is it that gives you the feeling of aliveness?
1:45:28 Is it the wrestling with ideas?
1:45:29 Is it something else?
1:45:31 Is it corrupting the youth in productive ways?
1:45:46 Yeah, and, you know, I think I took on this possibly wacky task of rewriting a book I published in 1992 about those anomalies columns.
1:45:58 And part of that was there’s something in psychology called the replication crisis that there are some experiments that just don’t replicate.
1:46:04 And there are some people that have been proven just to have made stuff up.
1:46:14 And I wanted to see whether the stuff we had built everything on could stand scrutiny.
1:46:21 So I corrupted a young colleague of mine, Alex Amos, who just turned 40.
1:46:34 And we took some of those old things, two pieces I wrote with Danny and one with Amos and then some others, and then gave it the hard look.
1:46:35 Does this hold up?
1:46:37 Is it true out of sample?
1:46:39 Is it true in the real world?
1:46:43 And that’s what keeps you thinking.
1:46:53 I also like, I like that in the book, at the end of every one of these chapters where they go through the rigor of updating it and seeing if it holds up, they also say, for the economist.
1:46:55 And it’s like one sentence.
1:46:56 Here’s your takeaway if you’re an economist.
1:47:00 And then it’s like, for everyone else, here’s one sentence that’s a takeaway.
1:47:06 You can read the whole book, but you can also read those and get an awful lot out of it, which is really good.
1:47:11 Because those conclusions are the nuggets that kind of propel the book for it, I think, as well.
1:47:17 The way we wrote it is, yeah, takeaway for humans and for economists.
1:47:22 We don’t say whether we think economists are not humans, but…
1:47:27 Well, that actually preempts, in a way, my question, but I’ll ask it anyway.
1:47:29 Who is this book for?
1:47:30 Who’s the reader?
1:47:37 You know, I think we tried very hard to write it in a way.
1:47:38 It’s not a thriller.
1:47:41 And it’s not a self-help book.
1:47:50 But I don’t think it’s as hard as Thinking Fast and Slow, which was tough.
1:47:54 I mean, it’s a great book, but it’s dense.
1:47:57 And this book is much funnier than that.
1:48:04 But I think corrupting the youth is always on my mind.
1:48:08 So I’m giving a series of talks at universities.
1:48:13 So I have a trip next week, Cornell, Penn, and Princeton.
1:48:17 So your alma mater, I’ll be there in Green Hall.
1:48:21 I like interacting with the young people.
1:48:26 I officially went emeritus July 1, so I’m not teaching.
1:48:30 But I still, you know, I divide my time between Chicago and Berkeley.
1:48:42 I still like going to workshops and interacting with my colleagues and having them sharpen me.
1:48:50 I mentioned this to Thaler when we were on our way here, is that I was struck by the fact
1:48:55 that these anomalies were pointed out 30, 40 years ago, something like that.
1:49:04 And every single one of them, I could think of an example of a person or myself or a business
1:49:09 that fell victim to one of these issues, if you will.
1:49:16 And so it almost like shines a light on our own, as you were saying, cognitive biases in
1:49:21 a way that takes something that’s a little squishy, like, you know, psychology and this
1:49:28 and that, and then just applies it to something that impacts all of our lives, markets, business,
1:49:34 the way we conduct our own households, and does so in a very basic way.
1:49:38 And just for people, I’ll give you the title again, I’ll mention it also towards the end,
1:49:41 but The Winner’s Curse, Behavioral Economics Anomalies Then and Now.
1:49:45 Is this the subject matter, Richard, of the talks that you’re giving at these various schools?
1:49:45 Yeah.
1:49:52 So it’s essentially a little book tour, but no point in going to bookstores.
1:49:57 I’d rather have 300 young students’ minds to corrupt.
1:50:02 Is there anything else, Nick or Richard, well, I’ll kick it to Nick first, that you’d like
1:50:06 to cover with Richard before we wind to a close?
1:50:11 Or, Richard, anything else that you’d like to mention, point people to, requests of my
1:50:13 audience, anything like that that you’d like to mention?
1:50:15 Nick, you want to go first?
1:50:16 Yeah.
1:50:23 I mean, I was going to ask the Tim question, which is, what books, if you’re new to understanding
1:50:28 this topic of behavioral economics, or even just traditional economics, what are your favorite
1:50:31 sources, other than your own, of course?
1:50:38 And you’ve already mentioned Danny’s book, and all that, but there must be some that are
1:50:42 kind of the foundational books that you go to, or you suggest to these young folks that
1:50:43 you’re trying to corrupt.
1:50:51 So, yeah, one thing I mentioned in passing, so for the students, and just the general, I
1:50:56 mentioned this journal, the Journal of Economic Perspectives, most academic journals you can’t
1:51:00 get, that one is posted online.
1:51:01 Anybody can read it.
1:51:08 And if you’re modestly interested in economics, it’s a fantastic journal.
1:51:12 There’s a guy called Timothy Taylor, who they hired brilliantly.
1:51:15 They call him the managing editor.
1:51:22 I call him the writing editor, and he quickly adopted the strategy of taking your article
1:51:24 and then just rewriting it.
1:51:30 And he would say, you know, it’s like in Microsoft Word with track changes, but the version you
1:51:35 would get is the one, his version, and you could restore.
1:51:38 But we know status quo bias works.
1:51:40 And he’s still at it.
1:51:45 And so that’s a fantastic place to learn about economics.
1:51:46 It’s four times a year.
1:51:50 Typically, there’s a symposium on some topic.
1:51:55 And it’s a resource nobody knows about and is fantastic.
1:51:58 Yeah, I mentioned Michael Lewis’s book, The Undoing Project.
1:52:04 And it’s a great insight into Kahneman and Tversky.
1:52:11 And I think I’m not going to mention any other books, because whichever one I mention, I will
1:52:12 piss off 12 other people.
1:52:17 So I’ll keep the friends I have.
1:52:23 Well, Richard and Nick, thanks so much for taking the time today for a very wide range
1:52:23 of conversation.
1:52:26 There’s a lot more that I could ask about.
1:52:31 But since we’re racking up some decent mileage on this conversation, I’ll keep it to this
1:52:32 duration for around one.
1:52:39 And people can find The Winner’s Curse, Behavioral Economics Anomalies, Then and Now, which is
1:52:41 co-authored with Alex, is it Imus?
1:52:42 Am I saying that correct?
1:52:43 Imus.
1:52:44 With Alex Imus.
1:52:49 And we’ll link to that in the show notes, you can find Richard on X, the artist formerly
1:52:55 known as Twitter, at x.com slash R underscore Thaler, T-H-A-L-E-R.
1:53:00 And as usual, everybody, I will link to anything that came up in the conversation in the show
1:53:02 notes at tim.blog slash podcast.
1:53:05 You can just search Thaler, T-H-A-L-E-R.
1:53:10 And Nick has been on the show, I think at least now, this would be the third or fourth time.
1:53:14 So if you want to delve into all the background on Nick, you have ample opportunity.
1:53:17 Hey, Thaler, thanks for doing this.
1:53:18 I really appreciate it.
1:53:20 I always love spending time with you.
1:53:21 Likewise.
1:53:27 And it’s great having Tim here to make me sound better at asking questions.
1:53:31 It is, I will say to the audience, it is much, much harder what Tim does than to be a guest
1:53:32 on the show.
1:53:36 And so great respect to you because week after week, I listen to your podcast and you do a
1:53:37 wonderful job.
1:53:38 Oh, thanks, man.
1:53:39 Thanks, Nick.
1:53:41 And we’re overdue for an in-person catch-up.
1:53:44 So I look forward to making that happen.
1:53:45 Let’s do it.
1:53:47 I look forward to meeting you in person as well.
1:53:48 That would be great.
1:53:50 I do spend some time in Chicago.
1:53:53 I also spend time occasionally in NorCal.
1:53:54 I’ve got a lot of friends at Berkeley.
1:53:57 So I would suspect we’ll cross paths.
1:53:59 Yeah, I think we both know Michael Pollan, right?
1:53:59 Yep.
1:54:00 Yeah, absolutely.
1:54:04 I’m involved with the center there on a couple of levels.
1:54:05 So lots of overlap.
1:54:07 I really appreciate the time, guys.
1:54:07 Thanks.
1:54:09 And enjoy your dinner.
1:54:10 I will talk to you guys soon.
1:54:11 Thanks.
1:54:11 Take care, Tim.
1:54:12 Sounds good.
1:54:12 Take care, everybody.
1:54:12 Bye-bye.
1:54:14 Hey, guys.
1:54:15 This is Tim again.
1:54:17 Just one more thing before you take off.
1:54:20 And that is Five Bullet Friday.
1:54:24 Would you enjoy getting a short email from me every Friday that provides a little fun before
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1:54:30 Between one and a half and two million people subscribe to my free newsletter, my super short
1:54:31 newsletter called Five Bullet Friday.
1:54:33 Easy to sign up.
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1:54:39 It is basically a half page that I send out every Friday to share the coolest things I’ve
1:54:43 found or discovered or have started exploring over that week.
1:54:44 It’s kind of like my diary of cool things.
1:54:50 It often includes articles I’m reading, books I’m reading, albums, perhaps, gadgets, gizmos,
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1:55:03 And these strange, esoteric things end up in my field, and then I test them, and then I share
1:55:04 them with you.
1:55:09 So if that sounds fun, again, it’s very short, a little tiny bite of goodness before
1:55:11 you head off for the weekend, something to think about.
1:55:15 If you’d like to try it out, just go to tim.blog slash Friday.
1:55:18 Type that into your browser, tim.blog slash Friday.
1:55:21 Drop in your email, and you’ll get the very next one.
1:55:22 Thanks for listening.
1:55:27 I don’t know about you guys, but I’ve had the experience of traveling overseas, and I try
1:55:33 to access something, say a show on Amazon or elsewhere, and it says not available in your
1:55:35 current location, something like that.
1:55:40 I don’t love it, and a lot of you know I take privacy and security very seriously.
1:55:46 That is why I’ve been using today’s episode’s sponsor, ExpressVPN, for several years now, and
1:55:47 I recommend you check it out.
1:55:51 Also, with the example that I gave of you can’t access this content or that content, wherever
1:55:55 you happen to be, then you just set your server to a country where you can see it, and all of
1:55:59 a sudden, voila, you can, say, log into your normal Amazon account that’s supposed to be
1:56:03 routed to .uk or whatever, and everything works.
1:56:08 ExpressVPN is so fast, also, it doesn’t bog things down at all, I usually forget that I
1:56:09 even have it on.
1:56:15 I can stream high-quality video, no lag or buffering, even on servers thousands of miles away.
1:56:20 ExpressVPN has really changed the way I use the internet, and I can’t recommend it highly
1:56:20 enough, so check it out.
1:56:25 Right now, you can go to expressvpn.com slash Tim and get four extra months for free when
1:56:26 you sign up.
1:56:33 Just go to expressvpn, E-X-P-R-E-S-S-V-P-N dot com slash Tim for an extra four free months of
1:56:35 expressvpn.
1:56:37 One more time, expressvpn.com slash Tim.
1:56:44 I have been fascinated by the microbiome and probiotics, as well as prebiotics, for decades,
1:56:47 but products never quite live up to the hype.
1:56:54 Now, things are starting to change, and that includes this episode’s sponsor, Seeds DSO-1
1:56:55 Daily Symbiotic.
1:57:00 I’ve always been very skeptical of most probiotics, but after incorporating two capsules of Seeds
1:57:06 DSO-1 into my morning routine, I have noticed improved digestion and improved overall health.
1:57:09 So why is Seeds DSO-1 so effective?
1:57:14 For one, it is a two-in-one probiotic and prebiotic formulated with 24 clinically and scientifically
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0:00:10 studio. And I am going to introduce you to an interview, a conversation with three people
0:00:16 in total that I’ve been trying to set up for a year, maybe longer than a year. And it features
0:00:25 both a new guest and a fan favorite. So the new guest is Richard H. Thaler. He is the 2017 recipient
0:00:31 of the Nobel Memorial Prize in Economic Sciences for his contributions to behavioral economics.
0:00:36 There’s a lot more to his bio, which I’ll put in the blog post, but let’s keep it short. He is also
0:00:42 a founding principal at Fuller Thaler Asset Management, which uses behavioral finance to manage
0:00:49 more than $30 billion in small cap U.S. equities. He is the co-author of multiple New York Times
0:00:56 bestselling books, including Nudge and Misbehaving. We’ll have the subtitles in the show notes as well.
0:01:03 His new book, which is actually a revision of a lot of what he has done, and it still holds water,
0:01:11 is The Winner’s Curse Behavioral Economics Anomalies Then and Now, co-authored with economist Alex O.
0:01:18 Emis. My co-host for this conversation with Richard is a friend of his, Nick Kakonis. Nick Kakonis is an
0:01:24 entrepreneur, investor, and author, best known as the co-founder of the Alinea Group, sold in 2024,
0:01:31 and the reservation platform Talk, which is now owned by American Express. He also has some wild stories
0:01:37 from trading derivatives and all sorts of craziness in Chicago. For that, listen to my first conversation
0:01:41 with him on the podcast. After revolutionizing how restaurants and experiences are crafted,
0:01:46 booked, and managed, he is now focused on creative ventures that blend business, technology, and art.
0:01:50 For both of these guys, a lot more I could say, but I’ll put it in the show notes. You can find both of
0:02:00 them on X. You can find Richard at R underscore Thaler, T-H-A-L-E-R. And then Nick is at Nick Kakonis,
0:02:07 K-O-K-O-N-A-S. And without further ado, please enjoy a wide-ranging conversation with Richard and Nick.
0:02:39 Well, I’m excited to dive in. And I thought, Nick, we would let you take the reins because
0:02:44 you had this idea of starting from first principles, or at least fundamentals. And I think that is
0:02:49 a great place to start. Because maybe the things we think we understand, we don’t understand. Or the
0:02:54 things we think we’ve defined for ourselves, we haven’t defined. When I got to college at a liberal
0:03:01 arts college and didn’t know what I was going to study, but I knew I enjoyed business, quote unquote,
0:03:06 or might work in business of some sort, you’re left with the study of economics there. Like,
0:03:13 you’re not getting an undergrad MBA or something. So you get to economics class, and it’s not that at
0:03:17 all. You know, it’s a bunch of models. It’s a bunch of all that. So I thought what we would start,
0:03:24 which is first principles, what is the study of economics? And we’re going to the best source in
0:03:28 the world on that. But it’s really basic, yet I think fundamentally misunderstood.
0:03:35 I think that’s actually a great place to start. And especially, it’s not really possible to talk
0:03:43 about what behavioral economics is without understanding what economics is. And economics is
0:03:51 really two things. It’s people interacting in markets, and then what are those people doing?
0:04:02 And what happened is sometime right after World War II, economists started getting interested in making
0:04:12 their models more rigorous and more mathematical. And the easiest model to write down of what somebody is
0:04:21 doing is to write down a model in which they’re doing it perfect. So if you open up any economics textbook,
0:04:35 you’ll see the three letters MAX. And that’s short for maximize. And all models start with that. So we assume
0:04:43 that when Nick goes to the grocery store, what he chooses is the best things he could choose.
0:04:53 And that’s a simplifying assumption. It’s simplifying for the economist, because that’s the easiest model to write down.
0:04:58 And so what are they modeling, though? Like even more fundamentally?
0:05:07 Well, what they’re modeling is whatever you do. So what route do you take to drive from home to the golf course?
0:05:15 The best route. Which home do you choose to buy? The best one. What mortgage do you choose? The best one.
0:05:23 Look, economists are jealous of physics. And they’re jealous of physicists.
0:05:31 Many economists started out in school as a math major or physics major or engineering major,
0:05:37 and then decided, oh, this is too hard. But they kind of admire that.
0:05:44 So they want a model that’s as accurate as the model you use to send up a rocket.
0:05:54 And the problem is that that problem is solvable. How much stuff do you need to get a rocket to go up
0:06:02 there? That’s a solvable problem. And figuring out what people do, you know, if you open a book,
0:06:10 an economics textbook, you actually don’t see the word people. You see the word agents. Economics starts
0:06:21 with Adam Smith, 1776. And it’s that way about until 1950. So then we start having math. Now we have
0:06:31 an equation that says exactly what a smart person is going to do. And so the agents in these models are
0:06:39 getting smarter and smarter because the norm is my model is better than your model if my agents are
0:06:47 smarter than your agents. And so what does it mean to be rational within those models? Well, it means to
0:06:52 solve the problem the way an economist would. And I don’t mean that economists think that they’re the
0:07:02 smartest, though they may. But if it’s an economic problem, like how to adjust your thermostat so you’re
0:07:11 comfortable and spend the least money, that’s a little practical economic problem. And an economist and an
0:07:19 engineer might solve it. And knowing you, Nick, you could easily get absorbed with figuring out how to really do it.
0:07:27 But most people can’t figure out how to use that easy using thermostat in their house, much less solve it
0:07:38 themselves. So people will take shortcuts. And my joke is, instead of writing down max, suppose we wrote down meh,
0:07:45 because what people are doing isn’t really max, right? It’s, uh, you know, I’ll do something.
0:07:55 So where I come in on that part of the story is, okay, if people are not capable or interested in solving
0:08:05 and they’re doing something else, taking some shortcut, then what? So that’s principle number one.
0:08:12 Principle number two is economists, again, for simplicity, have assumed that people are selfish.
0:08:22 And, you know, most of us care more about ourselves than anybody else, maybe our family, some family
0:08:30 members, you know, but we give money to charity. You know, NPR collects money, right?
0:08:31 We might care about fairness.
0:08:37 We might care about fairness, right? I’m sure we’re going to have a discussion about fairness.
0:08:44 And we might care about being treated fairly. So that was left out of the model. Again,
0:08:50 because it seemed like a simplifying assumption to just start out.
0:08:55 Yeah. You’re making the rocket equation and you don’t really care about the astronauts at this point.
0:08:56 Right.
0:08:58 You just got to get the rocket.
0:09:06 You got to get the rocket up. And then I’ll mention a third thing, which is these agents don’t have any
0:09:14 self-control problems. So they eat just the right amount. They exercise just the right amount.
0:09:21 We wouldn’t need these new fat drugs because people would already be optimizing for the health.
0:09:29 Yeah, it would be perfectly fit. And you wouldn’t have sold half as many books, Tim, if people were
0:09:36 those agents. And, you know, even other kinds of things you’re interested in implicitly in this
0:09:42 idea that the agents are maximizing means they don’t need any advice. They’re doing it right.
0:09:49 You know, they’re getting the labor leisure trade off, right? They don’t need any help in getting
0:09:52 along with their spouse because they’re-
0:09:56 No. I’ve optimized my marriage. It’s perfect.
0:10:00 Right. And in fact, our wives would be happy to testify-
0:10:01 Yes. They’ve done a wonderful job.
0:10:06 We’re both perfect, really. We couldn’t be better husbands.
0:10:15 I’ve been looking forward to this conversation. I’ve always furrowed my brow at the agents all
0:10:20 as rational and selfish because I just don’t see that behavior if you look at your neighbor
0:10:25 or your friend or someone else. So my question though is not so much to dive into that. We could.
0:10:32 And the story of your friend who got hay fever, Richard, when he mowed his lawn is a pretty funny
0:10:37 one from New York Times. Maybe we’ll bring that up. But suffice to say, people self-sabotage. They
0:10:42 care about fairness. There are all these things that seem to invalidate getting the rocket to the moon
0:10:50 or that approach to economics. And I’m wondering, were they just force fitting precision to something
0:10:56 in order to defend it as more rigorous and it was a waste of time? Or was it more like Newtonian physics
0:11:02 versus quantum mechanics where it’s like, well, you can actually use Newtonian physics for a lot of good
0:11:08 things. Is there anything productive that came of these incorrect assumptions about all agents being
0:11:15 rational and selfish as a bedrock assumption? I would say, sure. Supply and demand still works.
0:11:20 All economics starts with supply and demand. If you raise the price, you’re going to sell less,
0:11:28 almost always. And when you write down these more formal models and make more precise predictions,
0:11:40 then the question is, are you adding predictive power through that? And I think what happened is we’re
0:11:50 starting in the 50s and I would say rationality peaked in the 90s, maybe where this norm that a model with
0:11:58 really, really, really smart people is the best possible model. Eventually, people start to realize,
0:12:04 well, maybe there’s some drawbacks to that. But you can argue, and of course, I’ve spent my career
0:12:13 arguing about how wrong this is. The great Chicago economist Milton Friedman had this defense is he
0:12:22 would say, look, I just want a model that people are behaving as if they were maximizing. So he would
0:12:29 say it doesn’t matter if they literally know how to do it if their behavior is close enough. And so the
0:12:35 real debate over my career has been about that question.
0:12:45 Well, let’s go back to the start then, I think, of sort of your origin story and thus the origin story of
0:12:52 behavioral economics itself. Because at some point, psychologists start getting involved and they
0:13:00 start looking at these models and they start saying, yeah, but people don’t really act this way. And so this
0:13:06 could be great in a laboratory or on a piece of paper and a spreadsheet, but it might not work in
0:13:11 the real world. And there’s real consequences to those things. So let’s go back to when you were
0:13:17 a young academic and started coming across those ideas.
0:13:24 Yeah, I guess this is like in grad school. So there’s a story I tell about a dinner party
0:13:31 with some other economics graduate students. And there’s some roast in the oven that smells great.
0:13:40 And there’s some adult beverages. And I bring out a bowl of cashew nuts and people started nibbling as
0:13:48 they do. And at some point I realized that their appetite was in danger. And so I grabbed
0:13:56 the bowl of cashew nuts and went and hid them in the kitchen. And then I came back into the living room
0:14:01 and people thanked me. Oh, thank God you got rid of those nuts. We were going to eat them.
0:14:03 Yeah. So you removed choice.
0:14:09 Yeah, I removed choice. And then because this is a group of economists, they start analyzing it. There’s a
0:14:15 rule of thumb. You don’t want too many economists at any dinner party. And this is a good example of it.
0:14:19 So somebody mentions that, well, we’re actually not allowed to be happy about that because
0:14:26 more options is always better. And we used to have the option to eat nuts and now we don’t. Well,
0:14:31 you can imagine. But the principle, the discussion wasn’t that interesting, but the principle is
0:14:44 interesting. That sometimes we prefer not to have options. And so I started with this list of stuff
0:14:54 like that. And then the work comes into, all right, well, how can you go beyond the story?
0:15:12 I have been fascinated by the microbiome and probiotics as well as prebiotics for decades,
0:15:17 products. But products never quite live up to the hype. Now things are starting to change. And that
0:15:25 includes this episode’s sponsor, Seeds DSO-1 Daily Symbiotic. I’ve always been very skeptical of most
0:15:31 probiotics. But after incorporating two capsules of Seeds DSO-1 into my morning routine, I have noticed
0:15:37 improved digestion and improved overall health. So why is Seeds DSO-1 so effective?
0:15:42 For one, it is a two-in-one probiotic and prebiotic formulated with 24 clinically and
0:15:47 scientifically studied strains. But if the probiotic strains don’t make it to the right place, they are
0:15:52 not as effective. So Seeds developed a proprietary capsule-in-capsule delivery system that survives
0:15:58 digestion and delivers a precision release of the live and viable probiotics to the colon. And now you
0:16:08 can get 25% off your first month with code 25TIM at seed.com/tim using code 25TIM all put together.
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0:16:18 I don’t know about you guys, but I’ve had the experience of traveling overseas and I try to access
0:16:24 something, say a show on Amazon or elsewhere, and it says not available in your current location,
0:16:30 something like that. I don’t love it. And a lot of, you know, I take privacy and security
0:16:35 very seriously. That is why I have been using today’s episode sponsor ExpressVPN for several
0:16:39 years now. And I recommend you check it out. Also with the example that I gave of you can access
0:16:44 this content or that content wherever you happen to be, then you just set your server to a country
0:16:49 where you can see it. And all of a sudden, voila, you can say log into your normal Amazon account
0:16:56 as opposed to being routed to dot UK or whatever. And everything works. ExpressVPN is so fast. Also,
0:17:01 it doesn’t bog things down at all. I usually forget that I even have it on. I can stream high quality
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0:17:37 So you want to change the framework of economic theory without throwing out the rigor. But now
0:17:43 you’re introducing something super messy, which is humans and psychology and irrationality and
0:17:46 all of those things. So how do you do that without getting rid of the rigor?
0:17:52 Yeah, just to make sure I’m tracking, it seems like, so you’ve created this list of sacred cows
0:17:56 that you would put on trial, but the question was how to do it quantitatively or in some way,
0:18:00 like Nick said, rigorously without just leaving it as an anecdote?
0:18:07 Well, there are two parts to it. One is, can you show that people are really doing that? And then
0:18:18 second, can you create rigorous models that describe that behavior? And I think we might as well stick to
0:18:26 the demonstration part. So we can go from that, the Cashew story and say, well, what does that have to do
0:18:32 with the real world? And we can talk about retirement saving. As a first principle,
0:18:42 Americans don’t save unless the money is taken from their paycheck and put into a retirement plan. Now,
0:18:49 economic theory would say it doesn’t matter. People are going to save the right amount. There have been
0:18:56 two Nobel prizes for theories that basically say people save the right amount. They take their
0:19:03 income and they decide, okay, I’d like this consumption path over my lifetime. And now how
0:19:09 much do I have to save to get that? And then I keep re-optimizing market goes up. I can save a little
0:19:14 less. I mean, that seems so obviously wrong. So were you frustrated at this point? Like you’d,
0:19:18 I read some of your old papers in preparation for this, and I saw these little backhanded
0:19:25 little mentions that were snide. I mean, it’s funny reading 40 year old academic papers and reading the
0:19:31 snark in them, right? I mean, there’s actual snark in young Thaler for long before any of this.
0:19:36 It never escaped. It never escaped. So, you know, tell me a little bit about that because it seems to
0:19:43 me like in hindsight, you know, the first time we met, we played golf together after like a Twitter
0:19:49 exchange. And I remember thinking to myself, as you were saying this, I would go like, yeah, well,
0:19:54 obviously. And then you’d look at me like, no, no, no, you don’t understand for 150 years. That wasn’t
0:20:01 obvious. And so within the context of this academic world, why was any of applying what seems to be
0:20:08 pretty logical stuff, why was it resisted so much? Why is that system built like that?
0:20:16 You know, I can tell you while I was living through that, the emperor has no clothes was a recurring
0:20:24 thought. Why am I seeing that and no one else does? And the no one else was just economists.
0:20:31 So I remember giving a talk in the psychology department at Cornell, where I was teaching,
0:20:37 and I was talking about this theory of how people save and the audience just starts laughing.
0:20:41 Yeah, that’s what I did. I was like, this is pretty easy stuff.
0:20:48 I was laughing. And one of my economist friends was there and he had to assure them that I wasn’t
0:20:57 making this up and that this wasn’t a caricature of economic theory. No, there are economists one
0:21:02 floor up from here who actually believe this is the way people behave.
0:21:06 But they didn’t even think of it as an abstraction in the model. They actually thought like,
0:21:14 hey, this is how humans go through life or as if remember those magic. Yes, that that was,
0:21:22 you know, they don’t have to know how to do a present value, but they’re acting as if they knew.
0:21:28 That’s right. That has a bit of a like maxing works in mysterious ways type of
0:21:35 to it. Is that defensible as an argument? The as if, or is that just kind of a wiggle?
0:21:45 Well, look, it was the winning argument when I started on this. And in fact, in my first paper,
0:21:53 which was published in 1980, my first behavioral economics paper, it ends with a long response to
0:22:01 Milton Friedman’s as if he talks about a billiards player. It’s an expert billiards player, I should
0:22:09 point out, that he talks about. He says he may not know physics or trigonometry, but he acts as if he
0:22:16 did. Is it really inferring that like the law of large numbers or crowd intelligence or whatever
0:22:20 you want to call it, where you go like, well, it doesn’t matter what the individual does as an
0:22:26 aggregate. When we look at a model, like it will average out that the smart people and the idiots all
0:22:34 get to the midline, which is the model. There are two things here. One is when he talked about this
0:22:41 expert billiards player, I pointed out in this article, you know, we actually study regular people, not
0:22:50 experts. So you’re a pretty good golfer. I’m a mediocre golfer. Neither of us play like Tiger Woods,
0:22:55 right? So even though you’re a pretty good golfer, we wouldn’t want to predict the way you’re going to
0:23:02 hit a shot by saying, what would Tiger do? So that was my first point about the billiards player is let’s
0:23:11 just go to a bar and try to predict what this guy is going to do. Is the model going to be the one that
0:23:19 is optimizing? Or is it the model of the regular guy at a bar? And if we’re studying investors,
0:23:27 they’re not Warren Buffett. You know, they’re pretty far from Warren Buffett. So the second thing is,
0:23:35 and it’s sort of another version of the same thing, which is if we’re trying to describe behavior,
0:23:43 whose behavior is it? So, you know, there’s a lot of discussion in, say, monetary policy
0:23:52 about expectations. The Fed will say, we have to change interest rates because we’re worried that
0:23:59 if prices go up, people will expect them to go up further. I’m always asking my friends who are in that
0:24:06 field, whose expectations are they talking about? If it’s the guy walking down Michigan Avenue,
0:24:14 they have no expectations about inflation. They may have impressions of what’s going on now.
0:24:17 Like, oh, meat’s high now.
0:24:18 Eggs.
0:24:25 Eggs are high, right. Gasoline. You know, I have an electric car. Even I’m aware of the price of gas
0:24:33 because it’s posted in those big signs. So we know kind of the level. Do we have real forecasts
0:24:40 about the future? No. Going back a little bit now, how did you then go about designing
0:24:49 thought experiments, actual lab experiments, experiments out in the public to take these
0:24:59 erratic, if you will, or non-optimal behaviors and go back to the models that you questioned
0:25:05 and improve them, alter them, change them? If you could give a couple examples, because I think
0:25:12 they’re kind of fun too. Let’s talk about loss aversion. Here’s the first survey I ever, my thesis,
0:25:18 which was a very traditional bit of economics, although on a kind of exotic topic. It was on
0:25:26 the value of saving lives. So if we make a highway safer and we save 10 lives a year, how much should
0:25:33 we be willing to pay for that? And I decided it might be interesting to ask people a question.
0:25:42 So I asked people, suppose by attending this lecture today, you’ve been exposed to a one in a thousand
0:25:48 risk of dying. You have this disease and there’s one in a thousand chance you’re going to die a quick
0:25:56 and painless death next week. But I have a cure here that I can sell. How much would you pay for it?
0:26:04 That was one question. Another question was, over at the med school, we’re studying that same disease.
0:26:12 We’d like to know how much you would have to pay you to expose yourself to a one in a thousand chance
0:26:19 of getting that disease. And there’s no cure here. Now, economic theory says the answers to those two
0:26:26 questions have to be the same. So the amount I’m willing to pay to get rid of it or the amount
0:26:35 of have to be paid to do it should be approximately the same. They’re nowhere near the same. So people
0:26:42 would say, oh, I’d pay a thousand dollars to get that cure. I wouldn’t do that experiment for a million
0:26:50 dollars. Now they’re lying because they drive, they do all sorts of things. But they wouldn’t
0:26:58 choose to be in that experiment for a million. So, okay. So that’s buying and selling prices are
0:27:04 wildly different. Now, how do we get that down to something more real? You asked about an experiment.
0:27:11 There’s a famous experiment I did with my friend and mentor, Danny Kahneman, and our friend,
0:27:19 Jack Knetch. And the way it works is very simple. We go into a classroom and we did some of these at
0:27:27 Cornell. We would go and put a Cornell coffee mug of the sort you can get at any campus bookstore.
0:27:36 We put it on every other desk. And then we say, all right, if you have a mug, we ask you of each
0:27:44 of the following prices, are you willing to sell? Start at $10. And if you don’t have a mug, you get
0:27:52 the same form and say that each of the following prices, are you willing to buy? And now the mugs are
0:27:58 signed at random. People have had this mug for 30 seconds. It’s not their grandma’s mug.
0:28:07 It’s been in their possession for 30 seconds. And what do you find? Well, the people who have a mug
0:28:12 demand twice as much to give it up than the ones who don’t have a mug are willing to pay to get it.
0:28:19 Why is that, do you think? Well, if I’ve got it, I don’t want to give it up. But I wouldn’t pay much to
0:28:27 get it. Right. So the variance between retaining something and acquiring it are really wide. What
0:28:34 are the consequences of that? Well, it means there’s much less trading and much less change
0:28:42 than we would expect because we hold on to the stuff that we have because we don’t like giving it up.
0:28:49 But when there’s a big fire, like they had in LA last year, people are going to have to decide,
0:28:54 all right, now they don’t have the option of moving into the old house. What are they going to do?
0:29:02 So there’s a lot of discussion these days about how hard it is to build in the United States.
0:29:13 And we’ve set up rules, well-intentioned rules to make the environment safer and clean air is good. I
0:29:24 think almost everybody thinks clean air is good, but it shouldn’t make it five times as expensive
0:29:31 to build a road as it would otherwise be. So partly because of loss aversion, there’s something
0:29:36 that we call status quo bias. Well, this is the NIMBYs.
0:29:44 Well, the NIMBYs, right. Yeah. Oh yeah. We don’t want to allow you to build that thing.
0:29:51 The interesting thing about these is that the way that we met is that I was running experiments of
0:29:56 loss aversion with a restaurant. So I had these restaurants, I had people making reservations.
0:30:03 If they had absolutely not a single penny in, they didn’t care about anything. But you could take the
0:30:09 richest person in the world and once they had $5 in for their reservation as a deposit, it took the
0:30:15 no-show rate from 14% to under 3%. And I wrote about that and published it. And these economists
0:30:22 from Northwestern published an article saying that I was an idiot and I should just run an auction.
0:30:31 And I replied to them suggesting that maybe there’s a little bit of human behavior and psychology involved
0:30:36 in this. And I think that I’ve got it right. And I have hundreds of thousands of examples as to why
0:30:42 this is working for my business. And Thaler read this and tweeted at me. But at the time,
0:30:48 I didn’t know who he was. And so finally, people said, “Hey, you know, you’ve got one of the best
0:30:53 economics professors in the world who really wants to talk to you about this.” And so I was just doing
0:31:01 it out of intuition and experimentation. But they’re the same sorts of experiments in a practical way that
0:31:04 that you were abstracting into these traditional models.
0:31:10 Kahneman and I wrote another paper where we tried to find out what people think is fair.
0:31:13 Yeah. Fairness is a really interesting concept.
0:31:20 You know, the Northwestern economists that were dumping on Nick thought that what he really should do
0:31:26 is just auction off the tables at 7:30 on Saturday night for whatever price he could get.
0:31:29 Kahneman: Because I’d be maximizing my utility.
0:31:31 Kahneman: Well, no, you’d be maximizing your profits.
0:31:32 Kahneman: Profits, yeah.
0:31:38 Kahneman: Right, right. And there is some rich guy who will pay $2,000.
0:31:39 Kahneman: For sure. Especially then, yeah.
0:31:44 Kahneman: Yeah. So you were back and said, “Yeah, but they might not come back.”
0:31:53 Kahneman: And the questions that we asked in this paper were scenarios like there’s a hardware store
0:32:00 that’s been selling snow shovels for $20 and there’s a blizzard and they raised the price to $30.
0:32:07 Is that fair? And people say, “No.” You know, but there’s one exception. You know,
0:32:13 there’s a group that say absolutely yes. And that’s business school students.
0:32:21 So I teach a class in decision-making and each week I show them, “Look, here’s the data from some
0:32:29 experiment. You think these people are idiots, but look, you do it the same. So they may be idiots,
0:32:34 but so are you.” Kahneman: What’s the example? Kahneman: But any of them, any of these other experiments,
0:32:42 except this one. On fairness, the business school students are different from the idiots because they
0:32:50 think, “Of course you should raise the price of snow shovels after a blizzard.” We learned that in micro.
0:32:53 Kahneman: Yeah. Well, it’s the Uber surge pricing. Tim, you know something about that.
0:33:02 Kahneman: Yeah. So surge pricing, I thought at the time that there’s nothing wrong with surge pricing,
0:33:11 but you have to put a limit on it. And the example I gave, I tried to convince the owner of Uber of this.
0:33:23 I said, “Suppose Uber existed on 9/11 and you had Ubers charge $5,000 to drive people back to Greenwich.”
0:33:31 Kahneman: How many days would Uber still be in business? Minutes. You can’t do that.
0:33:33 Kahneman: You can’t do that. And that’s the fairness principle.
0:33:34 Kahneman: That’s right.
0:33:40 Kahneman: And that proves the rule that we are psychological. Everyone is a psychological creature
0:33:45 when it comes to markets and interaction. Kahneman: Right. It might be the guys that are in that Uber
0:33:52 Kahneman: for $5,000. But even they are going to be a little pissed. But more importantly to Uber,
0:34:02 if they did that, the thing is at the time when they would have these surges like of 10X, they were not
0:34:09 Kahneman: making any money off of that. It would be fleeting. So they’d make a little bit of money,
0:34:17 just like if Nick had sold one dinner reservation for 10 grand. Yeah, he’d make 10 grand. He’d have
0:34:26 thousands of people writing articles. So Uber was making a little bit of money and pissing off millions
0:34:34 Kahneman: of people. And that was dumb in a business where they had to fight city by city to get permission
0:34:45 to take people to the airport. And so the important lesson is that if you’re doing business in the real
0:34:55 world and you have customers and employees that are people, not agents, then you have to do things a bit
0:34:59 Kahneman: differently. That’s like the one sentence summary of behavioral economics.
0:35:05 Kahneman: Richard, could you, for people listening and for me, give an example or two of how you take
0:35:15 the research and then apply it in the real world? You mentioned effectively forced savings earlier. Maybe
0:35:17 that’s a domain we could explore.
0:35:28 Kahneman: When my father worked, he was an actuary, worked at a big insurance company. He had the pension
0:35:37 that was prevalent at that time, the fine benefit pension plan, the old fashioned kind, where how much
0:35:42 you got in your pension just depended on how long you worked and what your final salary was.
0:35:50 Kahneman: No decisions. And we gradually started shifting over to the new 401k type that’s called
0:35:58 defined contribution, meaning it, you put money in and invested, and then you get what you have at the
0:36:04 Kahneman: And that’s what you have at the end. Now, when I started working in this area, one problem we
0:36:15 noticed was lots of people weren’t joining this savings plan, even though their employer was matching
0:36:23 contributions dollar for dollar up to, say, 6% of their salary. So that’s like the stupidest thing you
0:36:30 Kahneman: You could ever do. You’re making $100,000. They’ll say, I’m going to give you $6,000 as long
0:36:35 Kahneman: You save 6,000. Kahneman: Yeah. In a tax deferred. Kahneman: Tax deferred. That’s right.
0:36:41 Kahneman: So an economist would say, well, everybody will do it. And what we noticed is
0:36:48 in a lot of companies, only half of new workers would sign up within the first year.
0:36:54 Kahneman: So how can we fix that? Well, remember, we talked about status quo bias.
0:36:59 Kahneman: So here’s a simple way. The way it worked at that time was in order to join,
0:37:05 you have to fill out a form and choose some investments and then sign. And this was a piece
0:37:11 of paper at the time. So how about if we just change the form and say, there’s this plan, we’re going to
0:37:16 Kahneman: We’re going to put you in unless you fill out a form saying you don’t want it. Now,
0:37:22 again, economic theory says that won’t make any difference. Everybody’s going to join. And certainly
0:37:26 Kahneman: just filling out a piece of paper, that’s, you know,
0:37:27 Kahneman: It’s not enough friction to change things.
0:37:33 Kahneman: Yeah. I mean, we’re giving you $6,000. But the first company that did that,
0:37:44 new employees now joined 90% instead of 50%. So I wrote a book called Nudge. And that’s an example of a nudge.
0:37:50 Kahneman: I am fascinated by nudges and tell me if I’m defining this correctly, but some feature
0:37:55 of the environment that improves decisions, but doesn’t force anyone to do anything. Is that a fair?
0:37:55 Kahneman: Yes.
0:37:57 Kahneman: I think I’m trying to quote directly.
0:37:59 Kahneman: I’m pretty sure I wrote those words.
0:38:03 Kahneman: Yeah, I think you did. So one of the examples that I’ve heard you
0:38:09 discuss, I think this started in the Netherlands, but it is the fly
0:38:16 Kahneman: Otherwise put inside of urinals to reduce spillage because a lot of guys are on autopilot.
0:38:18 Kahneman: It turns out they like to aim at things. My question is…
0:38:22 Kahneman: I love that. Of everything that you read, that’s what you chose to pick.
0:38:28 Kahneman: Well, I picked it because at least most guys listening have seen this.
0:38:28 Kahneman: Yes, a thousand percent.
0:38:31 Kahneman: And my question is,
0:38:37 Kahneman: Is there a certain half-life to the effectiveness of nudges? Because I remember
0:38:39 Kahneman: The first time I saw one of these, I was like,
0:38:41 Kahneman: Oh, I’m definitely going to get that fly. I remember it.
0:38:43 Kahneman: And then after a while I was like,
0:38:46 Kahneman: Okay, I realize this is just painted on enamel or etched into the enamel. It’s no
0:38:51 Kahneman: longer that interesting. And not to extrapolate from myself to everyone,
0:38:57 Kahneman: but I’m wondering if you need to refresh nudges as you might refresh
0:39:02 Kahneman: and many other things that maybe Nick has experimented with in the realm of business.
0:39:06 Kahneman: How do you think about the durability of these types of nudges?
0:39:11 Kahneman: You know, there’s a good example of a nudge of that sort here in Chicago.
0:39:18 Kahneman: When Nick and I drive back home, we’re going to go on Lakeshore Drive and there’s a bendy
0:39:23 Kahneman: part. It’s beautiful road. And a lot of people wipe out around these bends.
0:39:29 Kahneman: You really can’t go more than about 30 and it’s a six lane road. So people think they can
0:39:35 Kahneman: go fast. So what somebody did around the time we wrote that book a little before is they
0:39:44 Kahneman: painted lines on the road that get closer and closer together that gives the illusion that
0:39:50 Kahneman: you’re speeding up. Kahneman: That’s clever. Kahneman: And so you’re just instinctively
0:39:58 Kahneman: tap the brake and then don’t wipe out your car. That’s good. Right now, those lines,
0:40:02 Kahneman: they keep repainting them. Kahneman: No one pays attention anymore. Kahneman:
0:40:06 Kahneman: Well, I don’t know. Kahneman: I don’t know either. Kahneman: I don’t know. But I think the fly in the
0:40:15 Kahneman: urinal probably won’t have any effect in the toilet you use at your place of work,
0:40:21 Kahneman: where, you know, you see it several times a day or whatever. But for the pension thing,
0:40:29 Kahneman: if we only have to get you to sign up once, that’s enough. So yes, attention, it may be
0:40:34 Kahneman: that we have to do something different to get your attention this time. But there’s a rule,
0:40:42 Kahneman: which is, if you want people to do something, make it easy. That’s a rule. That’s always true.
0:40:52 Kahneman: And the more complicated you make things, the less people are going to do it. So, you know,
0:40:58 Kahneman: I think that’s pretty much automatic. In terms of capturing attention, you can, you know,
0:41:10 Kahneman: that’s what the business of advertising is constantly trying to do. And click bait on ads,
0:41:14 Kahneman: on social media, they’re all in the business of Trump.
0:41:16 Kahneman: I mean, social media itself is in the business of that.
0:41:25 Kahneman: Right. Keep it simple is a formula that always works. And getting your attention always works. But it
0:41:29 Kahneman: it won’t be the same thing that will keep getting your attention.
0:41:35 Kahneman: So this turned into a whole field from relatively simple concepts like that called choice
0:41:41 Kahneman: architecture. You’ve done consulting with various companies, the NFL, all sorts of
0:41:45 Kahneman: people. I don’t even know which ones I’m allowed to talk about or not, so I have to be careful.
0:41:51 Kahneman: But tell us a little bit about like, when does that become a bad thing?
0:41:58 Kahneman: Can you turn the nudge or can someone that’s malicious turn the nudge into something
0:42:02 Kahneman: that takes advantage of the lack of self-control in these models?
0:42:08 Kahneman: Yeah, sure. We always say we didn’t invent nudging. Adam and Eve, then the serpent,
0:42:14 Kahneman: right? There was the apple. So human nature has been there all along.
0:42:21 Kahneman: Hucksters have existed forever. Charles Ponzi didn’t read our book,
0:42:29 Kahneman: didn’t read any of my papers, neither did Bernie Madoff. So when we wrote nudge,
0:42:37 Kahneman: it was saying, look, here are some basic principles of human behavior. Can we use those
0:42:39 Kahneman: to help people make better decisions?
0:42:45 Kahneman: So practically speaking, how do you then go into one of the businesses that you’ve consulted
0:42:52 Kahneman: for and come up with through your framework, what they have overlooked?
0:42:59 Kahneman: Well, you want to ask, you want people to do more of that. Why are you making it hard for
0:43:04 Kahneman: them to do it? That’s the answer. But where I was going with that was the same principles
0:43:13 Kahneman: can be used to harm people. So if you’re going to a casino, the whole casino has been designed
0:43:23 to get people to bet as much as possible and to bet on things that have the worst possible outcome.
0:43:24 Kahneman: Right.
0:43:24 Kahneman: Yeah.
0:43:32 Kahneman: And now we have online gambling and within game gambling, and we have
0:43:39 Kahneman: places like Robin Hood that are, have made investing feel a lot like
0:43:41 Kahneman: Casino gambling.
0:43:42 Kahneman: Yeah, they gamified it.
0:43:50 Kahneman: Yeah. So they’re making it easy, right? They’ve made it easy to bet. It used to be you had
0:43:58 to go find a bookie. Now you open your phone and you can bet on the game that you’re watching. And that’s
0:44:04 Kahneman: very tempting. So the principles of understanding the customer
0:44:13 Kahneman: and then designing the product can be used for good or evil. And I take no responsibility
0:44:24 Kahneman: for somebody optimizing an online gambling app to make it as attractive as possible for
0:44:31 Kahneman: people to lose all their money. Don’t blame me, but that’s what’s going to happen in a
0:44:34 Kahneman: competitive market with consumers who are humans.
0:44:38 Kahneman:
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0:45:55 Richard, a question for you. How long have you been teaching your, or how long did you teach?
0:45:58 It sounded like it was current day, the decision-making class?
0:46:00 Richard Smith: 40 years.
0:46:03 Richard Smith: Okay. You’ve had time to work on your material.
0:46:05 Richard Smith: Yeah. I should be better at it, right?
0:46:08 Richard Smith: Well, I mean, I wasn’t going to go that far. I was going to ask you
0:46:19 what seems to be the stickiest of what students repeat back to you from that class as concepts,
0:46:24 frameworks, stories, could be anything at all. And I suppose the precursor question is,
0:46:28 what are they hoping to gain from the class in the first place? What’s the promise of the class?
0:46:29 Richard Smith: But I’d be curious to know what sticks.
0:46:35 Richard Smith: So first thing I will say is nobody thinks they need a class in decision-making
0:46:40 because they’re great at decision-making. Why would they need a class in that? Do I need a class
0:46:45 in breathing? Although you’re going to tell me actually, you don’t know how to breathe right.
0:46:50 Richard Smith: I’ve got a frictionless e-course for you with lots of in-app purchases.
0:46:59 Richard Smith: So I do hear from people who took a class from me at Cornell 40 years ago,
0:47:07 which is very gratifying. I’m glad that they even remember that they had such a class. What do they
0:47:16 Richard Smith: They remember? They remember stories. That is the only thing people remember. They do not
0:47:25 remember a formula. They don’t remember some abstract concept. They remember a story or they remember
0:47:34 a demonstration. Take the concept of the winner’s curse. This is an obvious move on my part since I
0:47:39 have a new book that’s called the winner’s curse. But let’s talk about the winner’s curse because it’s
0:47:47 a great example. Winner’s curse, the way you do this in a class is you bring in a jar of coins and you
0:47:52 say, I’m going to auction this off. You get the money in the jar. Richard Smith: You mean like the high
0:47:58 bidder gets the money? Richard Smith: The high bidder gets the money. So there’s $75 worth of coins in
0:48:03 there and the high bidder gets 75 bucks and they pay me something. Richard Smith: That’s what we’re getting
0:48:08 Richard Smith: Right. Richard Smith: Do they know that it contains 75? Richard Smith: No, they just see…
0:48:12 Richard Smith: It’s like a jelly bean estimation or something. Richard Smith: Exactly. In fact,
0:48:21 you can use jelly beans or whatever, paperclips. So what do you find in that? You always make money on
0:48:25 this. Richard Smith: The creator of the jar makes money. Richard Smith: Yeah, the professor always makes money
0:48:33 Richard Smith: Because you have this jar, it’s worth $75. There will be somebody that’ll be at $100 or $150.
0:48:37 Richard Smith: And they win. Richard Smith: And they’re the winner. Richard Smith: They win.
0:48:42 Richard Smith: Yes, they’re the winner. Richard Smith: They win, right? So that experience,
0:48:48 you can tell people this abstract concept of something called the winner’s curse. They won’t even remember
0:48:55 what it means because it’s got a weird name and it doesn’t have anything to do with cursing or witches,
0:49:02 but they remember, oh yeah, that that guy who bid a lot… Richard Smith: Bid too much.
0:49:07 Richard Smith: Bid too much. Richard Smith: Bid too much. Now, this concept was not discovered by psychologists.
0:49:18 Richard Smith: It was discovered by engineers at ARCO, an oil company. There were bidding for leases in what
0:49:28 I’m going to insist on continuing to call the Gulf of Mexico. And what they discovered was the leases that
0:49:41 they won had less oil than the engineers and geologists had told them would be there. And they said,
0:49:49 “Gee, that’s weird because we thought we had great geologists. And what’s the problem?” And the problem they
0:50:00 figured out was very subtle, which is that the auctions you win are not a random sample of the
0:50:05 auctions you bid in. They’re the ones where you’re the highest bidder. And if you’re the highest bidder,
0:50:09 there’s a good chance that… Richard Smith: You bid too much. Richard Smith: You bid too much, right.
0:50:16 Richard Smith: That leads to an interesting conundrum. It’s almost like war games,
0:50:20 where the only way to win the game is not to play if you’re ARCO, which means you should just go out
0:50:24 of business. Richard Smith: Well, so… Richard Smith: You know, so how do you win that if you
0:50:28 are in that market where you have to bid on these things? Richard Smith: Okay, that’s a great question.
0:50:36 So, all right, it’s 1970 or something, whenever they published that paper, they get this finding,
0:50:44 what should they do? One would be not to go into some other line of business. Another would be to bid less,
0:50:51 but then they’re not going to win very many auctions. They came up with a pretty clever
0:50:54 solution. Richard Smith: Was it collusion? Richard Smith: No. Richard Smith: Because that would work.
0:51:00 Richard Smith: I bet it’s something like that. Richard Smith: Major League Baseball. Major League Baseball
0:51:06 does that. Richard Smith: That was their solution. They were outed on that. No, their solution was to write
0:51:14 a paper. Think about it. Richard Smith: So they made everyone aware of it. Richard Smith: Right. So instead of going to all the other
0:51:20 team owners and say, “Hey, guys, when Catfish Hunter becomes a free agent, don’t bid.”
0:51:27 Richard Smith: And, you know, that’s illegal. But publishing a paper saying people are bidding
0:51:34 too much, and the more bidders there are, the less you should bid, that’s perfectly legal and useful.
0:51:43 Richard Smith: Now, it turns out that there’s a funny story about this, which is the version of this
0:51:50 book “The Winner’s Curse” that I published in 1992. The editor who bought that went to Princeton
0:51:57 University Press. And then when Nudge came along, there was an auction for the rights to bid it.
0:52:02 Richard Smith: Did they pay too much? Richard Smith: No, he didn’t bid. And I said, “Peter,
0:52:08 how come you didn’t bid on this book? I think it’s going to sell.” He said, “No, I read The Winner’s Curse.”
0:52:10 Richard Smith: I can’t bid on your book. Richard Smith: Yeah, right.
0:52:15 Richard Smith: And no, don’t bid in auctions. So I said, “Well, you know, maybe this one should have
0:52:22 been an exception.” But that concept, I haven’t forgotten your question. I don’t know whether people
0:52:30 will learn that theoretical lesson, but they’ll remember the jar of coins. And they’ll remember
0:52:39 stories. You know, I had two psychologist mentors, Amos Tversky and Danny Kahneman, now both dead. Amos
0:52:49 sadly died at 59. But at his funeral, his son read a little note that Amos had given him that said
0:52:56 something like, I’m not going to get this exactly right, but he had cancer and had a few months where
0:53:02 he knew he was dying and was spending time talking to his family about it. And he wrote a note saying
0:53:11 that he thinks the time they’ve been spending talking has been useful and that he thinks that people learn
0:53:22 through stories. And I’ve put that little note in my first class ever since then. And I say to people,
0:53:30 look, people will tell you, don’t take this class. All he does is tell stories. And I said, that’s true.
0:53:38 And talk about sports. That’s also true. But here’s this line from Amos, smartest man on earth.
0:53:46 That’s the way you learn. You’re going to learn through the stories. So I think, you know, we show
0:53:54 people that they’re overconfident. And their decision making. Yeah. Or in judgments. I mean,
0:54:03 you ask people, what’s the length of the Amazon River and give 90% confidence limits, meaning give a
0:54:09 high and low estimate so that you’re 90% sure that the correct answer lies somewhere.
0:54:16 And the right answer will be within it, not 90%, but like 60%.
0:54:19 Yeah. I would not wager on that. I have no idea.
0:54:25 Yeah. But so, you know, you have no idea, but still the limits are too narrow.
0:54:35 No. So the same is true for CFOs of Fortune 500. I have two friends at Duke who do a survey twice a
0:54:44 year of CFOs. And they’re asked, what’s going to be the return on the S&P 500 over the next year?
0:54:52 And they are asked for a high and low estimate. And the correct answer comes out between those.
0:54:58 I think they asked for 80% limits. And it’s like a third of the time.
0:55:06 Now, it’s true that that’s an impossible task, meaning nobody can predict the market,
0:55:13 but you should know that you can’t predict the market. So a correct answer for 80% is,
0:55:20 well, it’s going to be somewhere between up 20% and down 10. That’s a reasonable forecast.
0:55:30 But instead they say up 10 minus 2%. There were, there was a whole decade where the average
0:55:33 downside scenario was zero.
0:55:37 Well, it’s a recency bias, right? It’s like whatever happened the last couple of years,
0:55:39 people tend to extrapolate into the future.
0:55:42 They were doing that right up until the financial crisis.
0:55:43 Yes.
0:55:43 Right?
0:55:44 Yeah, yeah, yeah.
0:55:48 So they were most overconfident right before…
0:55:49 Right before the shit hit the fan.
0:55:50 Exactly.
0:55:50 Right, yes.
0:55:53 So that was Kokona saying the shit hit the fan, not that.
0:55:55 I’m allowed to swear on this podcast.
0:55:55 Oh, oh, okay.
0:55:56 Oh yeah, you can swear.
0:55:58 Yeah, you can feel free to fire away.
0:56:05 So, you know, the winner’s curse sounds like an abstract concept, but Nick knows I wrote
0:56:11 a paper about the NFL draft that applies exactly that concept.
0:56:20 Teams really think it’s valuable to have the first pick or one of the top 10 picks.
0:56:25 And then you just cited the Chicago Bears and their quarterback picks, and that’s all you
0:56:26 needed to do.
0:56:26 Yeah.
0:56:34 I mean, and you know, I think the Bears traded up twice to pick quarterbacks.
0:56:37 I mean, this is always, it’s not just the Bears though.
0:56:38 It’s not just the Bears.
0:56:38 Right, right, right.
0:56:41 No, it’s not, this is availability.
0:56:43 We’re just, we live, yeah, we live in Chicago.
0:56:43 We live in Chicago, right.
0:56:43 Yes.
0:56:46 But they’re not the only team that does this.
0:56:58 And my co-author and I, that paper and somebody else have been, again, updating that and nothing’s changed.
0:57:06 But then people actually then hire you to tell them this because for some reason they can’t believe it.
0:57:10 Yeah, but then the problem is that there’s an owner.
0:57:23 Well, let me ask you, Richard, about the hiring just for a second, because the example with Arco involved writing a paper that draws attention to the fact that if you bid the most, you’re likely going to be overpaying, which is a very interesting strategy.
0:57:28 Yeah, Jim, I’m wondering in the case of say an NFL team, what is it that they can do?
0:57:38 How can they change their behavior or bidding behavior based on you describing the winner’s curse and sort of all the connective tissue around it?
0:57:42 If they have the top pick, they can trade down.
0:57:52 So if you have the first pick, you can trade it for the seventh and eighth picks or five, count them, five second round picks.
0:57:58 And those five players will cost you about the same as.
0:57:59 Yeah, in dollars.
0:58:00 In contracts, yeah.
0:58:00 Right.
0:58:16 And if you look, I mean, any sports fan can rattle off the number of very high picks, quarterbacks and others that have been complete busts.
0:58:22 So here’s the one statistic from that paper that I think is most compelling.
0:58:33 Take the players at any one position, let’s say running backs, and rank them in the order in which they were picked.
0:58:37 So we have the first down to whatever.
0:58:43 Now we ask, what’s the chance the higher one picked is better than the next one?
0:58:48 My co-author, Cade, and I used to call it, we called this the better than the next guy.
0:58:48 Yeah, yeah.
0:58:49 So it’s like a tennis ladder.
0:58:50 Right.
0:58:50 Yeah.
0:58:51 Right?
0:58:51 So yeah.
0:58:56 And if teams are perfect at predicting, it’ll be 100%.
0:58:57 Yeah.
0:58:58 Right?
0:59:03 If we rank them tallest to shortest, that’ll be 100%, right?
0:59:08 So if they’re flipping coins, it’s 50%.
0:59:10 It was 53%.
0:59:11 Yeah.
0:59:20 So all that work, all of the prediction, all of the people, all of the scouting, all the combine, and it’s pretty much a coin flip.
0:59:20 Yeah.
0:59:25 So that means more picks are better.
0:59:39 So Tim’s podcast is really about taking, as he always says at the beginning of everyone, the high performers and the people who see things differently and trying to take the nuggets that people can apply to their lives.
0:59:49 And so I know that some of what you’ve studied and done, you’ve looked at people’s habits, like we were saying at the very beginning, where everyone makes perfect.
0:59:52 We live in this wonderful world where people make perfect decisions.
0:59:54 And of course, that’s not the case.
1:00:01 And that’s really what the whole podcast is about, like how to change those bad habits into positive habits.
1:00:19 And so what kind of frictions can we create in our lives where we can improve our decision-making, we can be more like that ideal agent that actually cares about our economic utility without, you know, going nuts and sitting in a room with spreadsheets.
1:00:28 But how do you take these things that you’ve studied in human nature for 40 years and apply them to my life normally?
1:00:31 Well, you know, let’s go back to the cashews.
1:00:33 This is stuff everybody knows.
1:00:38 Your mother told you that if you’re trying to quit smoking, you don’t have cigarettes around.
1:00:41 If you are drinking too much.
1:00:42 Lock the wine cellar.
1:00:44 Yeah, lock the wine cellar.
1:00:51 And so make it harder to do the stuff you want to do less of.
1:00:57 And make it easier to do the stuff you want to do more of.
1:00:57 Yeah.
1:00:58 I mean, that seems obvious.
1:00:59 That, well.
1:01:01 Not so much for economists.
1:01:09 Basic, look, basically everything I’ve done has seemed obvious after the fact.
1:01:23 You know, selling reservations at a restaurant instead of, as you used to say, having five people you pay to say no on the phone, that seems like an obvious thing to do.
1:01:30 It does, but I will say that since I have sold the company, we’ll talk about the law of one price, right?
1:01:34 Like, this penge, if it’s identical, should cost the same kind of all over the place.
1:01:37 And that’s where arbitrage opportunities come from and all of that.
1:01:44 And classical economics would say, well, that those get scrubbed out, like, because of perfect information and all of that.
1:01:52 But as it turns out, you have to then convince business owners that, hey, this is not a controversial idea.
1:01:56 And you can indeed charge a deposit and change the economics of your business.
1:01:59 And I spent over a decade doing that.
1:02:01 And it was very difficult, actually.
1:02:11 And no matter how easy we made that choice architecture for them as business owners, their psychology was that, well, this is a controversial topic.
1:02:20 And then since I’ve left the company, what I’ve watched is that one of the big competitors is now simply going to other restaurants, some of the premier restaurants.
1:02:25 And they’re saying, well, we’ll give you $10,000 to leave, talk, up front, cash.
1:02:29 Now, I would go, why would they want to give me free money?
1:02:31 There is no such thing as a free lunch.
1:02:33 But it works remarkably well.
1:02:38 And that sort of thing is also an interesting psychological problem.
1:02:45 You know this better than anybody, but people are good at something like being a chef.
1:02:51 Many restaurants are run or owned by the chef.
1:02:56 And being a good chef doesn’t make you a good business person.
1:03:00 The same is true of being a coach.
1:03:06 You don’t get to be the coach of a team just by being smart.
1:03:09 You almost always have to have played that sport.
1:03:14 And that doesn’t make you a good decision maker.
1:03:26 And the field of behavioral economics and the field of sports analytics, think of Michael Lewis’s book, Moneyball, it’s the same field.
1:03:28 So why do I say that?
1:03:31 Well, again, people optimize, right?
1:03:40 So economists would say, well, teams are all going to do the strategy that maximizes their chance of winning.
1:03:42 Well, let’s take basketball.
1:03:47 There was an innovation 40 years ago, the three-point shot.
1:03:51 Before that, all shots are with two points.
1:03:55 Now you have a shot that’s 50% better.
1:04:02 Now, every team had somebody who could make 40% of their three-point shots.
1:04:07 And teams average about half of their two-point shots.
1:04:11 Now, Nick, see if you can keep up with the math here.
1:04:11 Yeah.
1:04:14 40% of three.
1:04:15 Expected value.
1:04:18 Is greater than 50% of two.
1:04:19 Yeah.
1:04:22 How long did it take them to figure that out, though?
1:04:24 Basically 40 years.
1:04:24 That’s right.
1:04:25 Steph Curry.
1:04:26 Steph Curry.
1:04:37 Well, so take just right now I’m going to say the words Michael Jordan and give me an image that comes to mind.
1:04:39 And I can tell you what it is.
1:04:48 It’s Michael taking some last-second shot somewhere mid-range with two guys hanging on him.
1:04:53 Now, that, even if you’re Michael Jordan, that’s a low-percentage shot.
1:04:59 Steve Kerr, who’s now the coach of the Warriors, was on the team with Jordan.
1:05:05 For an entire year, his three-point shooting percentage was 50%.
1:05:06 Was that true?
1:05:07 Really?
1:05:07 Yes.
1:05:08 I had no idea.
1:05:10 And how many shots a game do you think he got?
1:05:12 Like one and a half or something.
1:05:12 Yeah.
1:05:12 Right.
1:05:23 So, if you have a look at a plot of three-point attempts over time, it’s been going up, but very slow.
1:05:30 So, I’m friends with Daryl Morey, who’s the general manager of the 76ers.
1:05:41 I always tease him that he got to be rich and famous because he was the first guy to calculate that 0.4 times 3 was greater than 0.5 times 2.
1:05:46 He’s actually a really smart guy, but that’s kind of true.
1:05:49 And then that happens everywhere around us.
1:05:50 Yes.
1:05:51 Yes.
1:05:53 There are examples of that.
1:06:02 And again, you know, when I came from Cornell to Chicago, I came and gave a job talk.
1:06:03 It’s called an interview.
1:06:04 And you present a paper.
1:06:20 People think I’m making up the story because it’s sort of an apocryphal economic story that economists look at that.
1:06:24 It can’t be real because otherwise somebody would have already picked it up.
1:06:25 I picked it up.
1:06:31 So, economists, economics, really, they think there aren’t these $20 bills on the street.
1:06:34 And there kind of are.
1:06:34 There are.
1:06:37 But then what I was going to say is where do you put that?
1:06:46 So, I want to just touch on a little bit my favorite concept of yours, of all, because it comes up in my household and in my businesses like once a week.
1:06:47 And that is mental accounting.
1:06:48 Oh, yeah.
1:06:56 And if you could just go over, because I think this one might be the most applicable to every single person that I know.
1:06:58 Because people are incredibly irrational about this.
1:07:00 Explain what that is.
1:07:03 In economic theory, there’s money.
1:07:07 And it has no labels.
1:07:19 There’s just, you have wealth, W, and then you figure out, and you just, it doesn’t matter where it is or how you got it or that’s it.
1:07:29 Now, humans think about money as sort of coming in categories.
1:07:42 And where, you know, let’s suppose you take out a pair of jeans you haven’t worn in a long time and you find $300 bills in there.
1:07:45 You don’t know exactly when you left them there.
1:07:47 Oh, that feels like a windfall.
1:07:48 Jackpot.
1:07:48 Right.
1:07:49 I can go have a nice meal.
1:07:55 So, again, the standard theory is money has no labels.
1:07:59 Now, here’s a kind of a policy version of this question.
1:08:09 In the financial crisis, the Obama White House had to, there was going to be some tax refund to stimulate the economy.
1:08:16 And the question was, should we give it in a lump or should we spread it out?
1:08:21 Now, the economists will say, does it matter?
1:08:23 It’s W.
1:08:24 That’s it.
1:08:25 Right?
1:08:28 So, it matters.
1:08:31 I’m not saying I know exactly what the right answer is.
1:08:33 It’s kind of a complicated question.
1:08:42 But the point is, is that people take sort of money and how they acquired it matters to them.
1:08:42 Right.
1:08:48 Like, if I win $100 off you at golf, I might go like, well, I’ll buy a bottle of wine with that.
1:08:50 But really, it’s just part of my cumulative wealth.
1:08:54 And I should have just done that anyway because I had another $100.
1:08:55 Right.
1:08:56 But that comes true.
1:08:58 Like, we’re selling our house right now.
1:08:59 Oh, yeah.
1:09:00 And so…
1:09:02 That money, I’m pretty sure you ought to just give that to me.
1:09:05 And so, my house is going to get sold.
1:09:11 And so, there’s this concept now that, well, that’s the money for the next house.
1:09:12 Right.
1:09:15 Or the condo we’re buying in Chicago as we downsize.
1:09:21 So, somehow, the budget is tied from one house to the other, even though it’s completely irrelevant.
1:09:23 Like, the money is going to come in from the house sale.
1:09:27 And I can use any pool of – it’s just in the big swimming pool.
1:09:29 It doesn’t matter which drop you take, right?
1:09:30 Right.
1:09:33 And in our companies, I think businesses do a terrible job of that.
1:09:35 People get budgets.
1:09:37 And they become – you know, they own that budget.
1:09:44 And they look at tax savings that the company might get as completely different than earnings that they might get.
1:09:46 And they spend it differently.
1:09:47 And they think about it differently.
1:09:50 And boards I’ve been on are, like, are talking about all this.
1:09:53 And what we all said in our businesses, we tried to.
1:09:54 Steve Bernacki, I’ll give you a shout-out.
1:09:56 Every dollar spends the same.
1:09:57 They’re all the same.
1:10:01 So, I got to know the CEO of an airline.
1:10:02 I won’t mention which one.
1:10:11 And I was trying to convince them before COVID that they should get rid of change fees.
1:10:16 And I think I was also lobbying for getting rid of baggage fees.
1:10:24 And he told me, well, you know, there’s a guy – they have a billion dollars a year in baggage fees.
1:10:25 Yeah.
1:10:28 There’s a guy who owns that.
1:10:29 He ain’t going away.
1:10:29 Yes.
1:10:31 Now, of course, owns.
1:10:32 What does that mean?
1:10:35 It’s not that the money goes to him.
1:10:36 No.
1:10:37 He’s the baggage guy.
1:10:38 Yeah, yeah, yeah.
1:10:40 He’s pricing out the baggage.
1:10:49 Well, it would be like if you’re in your restaurant, you have – well, I’m sure there was a beverage manager, and that money is the same as the food.
1:10:50 It’s the same money as all the other stuff.
1:10:50 It’s the same.
1:10:51 Yes.
1:10:52 So –
1:10:58 And so people, the mental accounting concept is don’t do mental accounting basically, right?
1:11:00 I mean, now, it can be helpful.
1:11:10 So putting money into a children’s education account, that can be smart.
1:11:12 And treating that as off-limits.
1:11:17 Some people have trouble spending too much.
1:11:18 Most people have that problem.
1:11:21 Some have the opposite problem.
1:11:30 And so it’s just like we were talking about you want to hide the booze and put the exercise equipment somewhere where it’ll be easy to use.
1:11:32 It’s the same with the money.
1:11:38 So you can have a fiction that that money –
1:11:40 So there can be good fictions and bad fictions.
1:11:40 Yes.
1:11:41 Yes.
1:11:49 And now, you know, part of mental accounting, probably the biggest mental accounting thing, is the so-called sunk cost fallacy.
1:12:05 And the idea is if you paid for something – so we go out to dinner, and we’ve bought some dessert, and we realize, you know, God, we’re really full, and neither of us need to weigh more.
1:12:06 We’ll just say that.
1:12:12 So – but, you know, we paid 30 bucks for that dessert, so we can’t –
1:12:12 You got to eat it.
1:12:14 You got to eat it, right?
1:12:15 That’s dumb.
1:12:20 And, again, every economist teaches that.
1:12:23 And this is the sort of discussion I used to have in the old days.
1:12:31 I said, look, why do you have to teach people the sunk cost fallacy and then assume they already know it?
1:12:36 You know, people would say, what do you mean I can’t waste that?
1:12:38 I mean, I fully admit your wine example.
1:12:38 I do.
1:12:40 I fully admit this.
1:12:47 And I even know – and every time I do it, I think of the sunk cost fallacy because, you know, I’ve got this old bottle of wine.
1:12:48 It’s now worth $500 or $600.
1:12:53 I would not pay $500 or $600 to acquire it, but I will gladly drink it.
1:12:56 But I won’t go buy a $500 bottle of wine.
1:12:56 Right.
1:12:58 And that’s it in a nutshell, right?
1:12:58 That’s it.
1:13:00 And that’s literally – I built the whole company off that.
1:13:01 Yeah.
1:13:04 The entire company of Talk was built off that one concept.
1:13:06 Wait, Nick, could you expand on that?
1:13:08 How is that built off of that?
1:13:10 Well, you know, the big friction in –
1:13:12 And maybe you could explain it.
1:13:16 I would have mentioned it briefly in the intro, but since it’s come up a few times.
1:13:16 Totally.
1:13:17 The reservation platform.
1:13:18 Yeah, yeah.
1:13:19 Maybe you could just give a little bit of background.
1:13:22 Well, he doesn’t own it anymore now, so, you know, he doesn’t need to plug it.
1:13:23 No, no, no.
1:13:24 I’m not trying to plug it.
1:13:31 No, but it was – that’s how we met was because, you know, I got into the restaurant industry by accident in some ways.
1:13:34 And then when I got there, I saw all of these sort of irrational behaviors.
1:13:41 One of them was that people would make reservations for restaurants and then simply not show up.
1:13:42 And it’s a big number.
1:13:44 It’s like 12%, 14% of the people just wouldn’t show up.
1:13:50 And then even at a destination place like Alinea that I used to own, you know, 6%, 7%, 8% of the people wouldn’t show up.
1:13:57 And what I realized very quickly was that if people had paid for it, they would show up.
1:14:00 They would show up at all costs.
1:14:11 Like the dog could have died and, like, you know, the snowstorm is happening, but they’re going to figure out a way to get there because they have paid some amount of money.
1:14:13 Whether it’s the whole or the half, it doesn’t really matter.
1:14:27 And it’s fascinating because if something more important lines up or something has more economic utility to you, you should, in classical theory, just go, well, screw it.
1:14:28 Like, that’s already done.
1:14:30 I’ve already spent that $300 or whatever it is.
1:14:34 And now I have something that’s more important or more valuable.
1:14:40 But people cling to that thing very, very, very, very strongly.
1:14:41 I’ll tell you a funny story.
1:14:44 My daughter lives in Rhode Island.
1:14:49 There was a guy, a kid in the neighborhood grew up to be a pitcher for the Mets.
1:14:53 And he was pitching in some first-round playoff game.
1:15:00 And I noticed that, and I said, I think I can get you tickets to this game.
1:15:01 Why don’t you go?
1:15:02 That’d be fun.
1:15:03 She said, oh, that’s great.
1:15:04 That’s great.
1:15:11 So I’d look online at one of these ticket sites, and tickets are, this was a first-round.
1:15:13 It wasn’t that expensive, so $300 or $400.
1:15:18 But then I wasn’t sure which ones she would want and how to get them to her.
1:15:19 So I say, okay, here’s what.
1:15:27 I’ll send you $1,000, you pick which tickets you want, and take the rest to buy Outdogs.
1:15:30 So she texts me back.
1:15:31 Now she has a choice.
1:15:36 She texts me back and says, LOL, this is just like in your book.
1:15:39 If you send me $1,000, I’m not going to spend it on baseball tickets.
1:15:43 So just last week, I learned my lesson.
1:15:46 We’re David Byrne fans in my family.
1:15:50 And David Byrne had a show in Providence where she was playing.
1:15:52 I sent her the tickets.
1:15:53 Yeah, yeah, yeah.
1:15:55 And she had no choice.
1:15:56 They were free.
1:15:57 Well, they’re free.
1:16:00 Yes, they have no, they’re mentally accounted for as zero.
1:16:01 Yeah, right.
1:16:03 So that was the best gift ever.
1:16:04 Yes.
1:16:05 Let me hop in.
1:16:08 I’d love to talk about cognitive biases for a second.
1:16:10 A few things have come up already.
1:16:11 Sunk cost fallacy.
1:16:16 I think maybe you were referring to something that I might put under the
1:16:20 category of endowment effect with maybe the mugs might be mixing that up.
1:16:24 But my question is, what are good examples?
1:16:29 I can think of a few for myself where actually as a backstory, I bought books on cognitive biases
1:16:34 and the framing around the reading for me was things to avoid, right?
1:16:35 These are things that I want to avoid.
1:16:37 These are yellow flags.
1:16:43 But what I realized, at least for myself, and maybe I’m misapplying the term, but I could
1:16:49 basically do what Nick did to his customers, making reservations to myself.
1:16:56 For instance, I could prepay for personal trainer or something like that.
1:17:02 And it would make me more inclined to do the thing that I say I want to do that’s good for me.
1:17:07 I know of, I actually wrote about the case of two engineers.
1:17:08 They worked at tech companies.
1:17:14 They made perfectly good money, but they bet each other, effectively it was a bet, $1.
1:17:16 So it’s kind of like trading places.
1:17:21 But they would show up at the gym at the same time to do something like 15 minutes of treadmill.
1:17:25 And if somebody didn’t show up, they had to pay the other person a dollar.
1:17:30 And these are two people who had failed at every exercise regimen prior to that.
1:17:35 And they both ended up losing 50 plus pounds, even though they didn’t really know the nuances
1:17:37 of exercise or anything like that.
1:17:43 So I’m curious if any examples come to mind where you can actually use cognitive biases to
1:17:44 your advantage.
1:17:50 I’m a big believer in that, that a good way to get yourself to do something
1:17:53 is have a commitment.
1:17:54 Pay for it.
1:17:55 And pay for it.
1:17:56 It’s a monetary commitment.
1:17:57 It’s pain.
1:17:58 It’s a little bit of pain.
1:18:03 I have some young colleagues who wrote a paper called Paying Not to Go to the Gym.
1:18:07 So yes, I do Pilates.
1:18:12 And if I make an appointment with my trainer, then I go.
1:18:19 So there’s a clever experiment by a young colleague of mine called Katie Milkman,
1:18:22 who’s big in this behavior change space.
1:18:31 And she ran an experiment with getting people to go to the gym, where what she did was she
1:18:35 gave them the Hunger Games audiobook.
1:18:41 And they could only listen to it when they were on the treadmill.
1:18:47 The idea is you pair something good with something that you don’t want to do.
1:18:50 So if you go, then you…
1:18:51 You get to hear the next chapter.
1:18:52 You get to hear the next chapter.
1:19:01 And it’s like if you’re binging, imagine to watch the next episode, first you have to run around the block.
1:19:04 Computation bundling, that’s what you call it.
1:19:04 That’s it, yeah.
1:19:18 I mean, it strikes me that a lot of the experiments you’ve done required finding groups of people and then testing them methodically and then putting rigor to some things that were maybe a little amorphous and whatnot.
1:19:40 And at the end of the day, that seems like those tests and experiments are so much easier now with social media, with the internet, with the ability to engage with huge populations of people.
1:19:41 Is that true?
1:19:45 Has the field, like, sort of utilized that?
1:19:48 I know you’ve cited eBay auctions in some of your papers.
1:20:02 I think the big thing, as you know, I took on a task, kind of a weird task, of taking a book I wrote in 1992 and taking on a young co-author and going back and saying,
1:20:17 did we make all that up or how does it hold up and it holds up and the kind of encouraging thing is that we can go from the lab and now to the field.
1:20:19 So, we were talking about mental accounting.
1:20:21 Here’s a funny mental accounting result.
1:20:30 During the financial crisis, the price of gasoline fell, like, by 50%.
1:20:33 So, what do people do?
1:20:36 Now, remember, it’s a financial crisis, right?
1:20:37 So, people are tight for cash.
1:20:43 But their gasoline budget is overflowing.
1:20:47 They have a little compartment in their head that’s for gas.
1:20:56 So, they go, let’s say they spend $100 a week at the gas tank, and now it’s $50.
1:20:58 So, what do they do?
1:21:04 Well, they start treating their car to occasional tanks of high test.
1:21:06 Now, that’s really stupid.
1:21:11 You know, your Prius, it’s not going to do any better.
1:21:12 Premium gas.
1:21:14 With premium gas.
1:21:16 You know, it’s made to run on regular.
1:21:25 No matter what the gasoline companies are telling you, more expensive gas isn’t better for 90% of cars.
1:21:32 But what they found was when the price went down, they would buy more expensive gas.
1:21:40 Now, you know, you and I would say, if we’re going to do some mental accounting with that, we’d say, all right, we could upgrade the wine.
1:21:41 Yes.
1:21:43 I always say that.
1:21:45 That’s always my mental accounting.
1:21:46 We would always do it anyway.
1:21:48 Or buy better olive oil.
1:21:49 That’s right.
1:21:51 You know, instead of the store brand.
1:22:09 So, the bigger picture is, and that’s kind of one of the lessons in this new book, is all the stuff that we’ve found in thought experiments and laboratories now, because of big data, you can find in the real world.
1:22:18 And, like, this paper, they had data from millions of shoppers at a large box chain store.
1:22:28 And so, they could say, they could show, not only are they upgrading the gas, which is stupid, but they’re not upgrading the orange juice.
1:22:32 Or purchasing in bulk to save money during a crisis.
1:22:32 Right.
1:22:39 So, that, I think, you’re right, that there’s, it’s much easier to run experiments now.
1:22:45 And, of course, companies are running these experiments every minute.
1:22:49 The largest economics department in the world is now at Amazon.
1:22:54 A hundred PhDs in economics working at Amazon.
1:22:56 Which could be good or bad for them.
1:22:59 Well, according to you.
1:23:00 If they’re my company.
1:23:00 Right.
1:23:04 I was going to say, it depends if they’re the right stripe, right?
1:23:04 Yeah.
1:23:07 I think they’re getting pretty good economists.
1:23:28 How many do you think work, and maybe the label of economists is too confining here, but in terms of working with mass data sets in the real world, say a Palantir, I don’t know if those numbers are public, but I would imagine they also have an entire army of people who are working on this stuff.
1:23:47 Yeah, and, you know, the mix of data scientists and some of them got their training in economics department, so exactly what their training is, but there are people with the equivalent of PhDs in economics or computer science working at all these companies.
1:23:54 To rewind the clock quite a ways, you’ve done a lot of amazing things in your career.
1:24:04 I was looking at an interview with you on Nobelprize.org, and there’s a line here I’d love for you to explain.
1:24:11 My thesis advisor famously said when interviewed about me of my time in graduate school that, quote, we did not expect much of him, end quote.
1:24:15 So, why is that the case?
1:24:22 I was not the best grad student in my class, and I wasn’t in the best department.
1:24:33 I mean, actually, I wasn’t a great student in any way, but I certainly knew I was not the best grad student in my class.
1:24:34 Why is that?
1:24:42 You know, I was good in math, but not as good in math as the people who go to get PhDs in economics.
1:25:03 And I was better at noticing the problems with economics than you can think about it as you could be somebody who can draw perfectly.
1:25:09 Or you can be somebody who thinks of a different way of drawing.
1:25:13 And I was more that guy.
1:25:34 So, the only way I managed to succeed, even get a job as an economist and get tenure, much less get a Nobel Prize, which was certainly never on my radar when I was a young person, was to think of a different way of doing economics.
1:25:42 And I more or less had to invent behavioral economics to have a career.
1:25:45 Otherwise, I would have done something else.
1:25:51 I was reading, in preparation for this, a bunch of his old source material papers.
1:25:54 Like, I’ve read Nudge, and I read Misbehaving, and all of these.
1:25:59 And I went back to some of the source papers, and I was literally laughing out loud.
1:26:01 I mean, they were written 30, 40 years ago.
1:26:08 And some of these same problems and the same human nature shows up again and again and again.
1:26:17 It’s just a fascinating thing that within this entire academic discipline for hundreds of years, no one said, well, the emperor doesn’t have the clothes on this.
1:26:21 And I think that’s what you’ve done really, really well time and again.
1:26:25 I always say that I never changed anybody’s mind.
1:26:29 What I was saying was heresy.
1:26:31 It was the emperor has no clothes.
1:26:38 I’m thinking, you know, look, see that mole on his belly?
1:26:40 You know, you can’t see that?
1:26:43 And you’re talking about the three-piece suit?
1:26:47 But sarcasm doesn’t really convince people.
1:27:04 So, the strategy I adopted at some point, I mean, I had to write some papers, but the strategy I adopted to broaden the field, I always say instead of changing people’s minds, I would corrupt the youth.
1:27:18 So, one example of that is there’s a foundation in New York called the Russell Sage Foundation, and they wanted to support behavioral economics when we were just getting started.
1:27:20 And they gave us some money, and they said, you can do whatever you want with it.
1:27:27 And what we decided to do is start a two-week summer camp.
1:27:31 That’s not the official name, but everybody refers to it as the summer camp.
1:27:42 So, it’s two weeks, we got 30 grad students from around the world, best students in the best departments, and we would teach them about behavioral economics.
1:27:47 There are graduates from that, graduates, I mean, attendees.
1:27:48 Alums.
1:27:52 Alums in the best economics departments around the world.
1:27:54 They’re editing journals now.
1:28:00 The new chairman of the Berkeley economics department was at one of those.
1:28:07 And I think it’s still the truth that people my age, they never got convinced.
1:28:11 And it’s the 30 and 40-year-olds.
1:28:20 The other thing I did was, there was a new journal called the Journal of Economic Perspectives.
1:28:25 And it tells you something about economics that this journal had to be created.
1:28:36 Journal articles had gotten so arcane and technical that the papers were not understandable unless you were in the subfield.
1:28:44 So, you know, a macroeconomics paper was not understandable to a labor economist or a finance professor.
1:28:57 So, they started this journal, and the idea was the articles would be written in a way that would be accessible to any economist or a grad student or even advanced undergrad.
1:29:02 My friend, Hal Varian, who was the chief economist at Google, he was an editor at this journal.
1:29:09 And he and I were having lunch one day, and we got the idea they were going to have some regular features.
1:29:15 And the idea was I would write a column in this journal on anomalies.
1:29:18 So, these were pokes.
1:29:25 There was one on the endowment effect that we’ve talked about, that buying and selling prices are different.
1:29:33 There was one about the fact that stocks that have gone down a lot do better than ones that have gone up a lot.
1:29:44 So, I started writing this when I was about 40, and it’s kind of an old man thing to do, to write stuff like that.
1:29:52 And there was a colleague of mine at Cornell who I overheard telling somebody about this journal,
1:29:57 well, I don’t know whether articles in that journal should count.
1:29:59 And I’m thinking, you know.
1:30:00 What are they counting?
1:30:02 Yeah, what are they counting?
1:30:02 Right, right, right.
1:30:04 Imaginary economist points.
1:30:05 Right.
1:30:05 Yes.
1:30:09 You know, now, there is something you can count, which is citations.
1:30:14 Citation is if somebody else writes an article and cites your article.
1:30:15 Those are counted.
1:30:22 And actually, publications in this journal get a lot of citations because people read them.
1:30:24 Because they’re readable.
1:30:25 Yes, they can read them.
1:30:26 Because, right.
1:30:27 First idea.
1:30:30 Write an article somebody can understand.
1:30:37 Now, it is the case that if the article is too easy.
1:30:45 We’ve mentioned my friends, Kahneman and Tversky, were writing the psychology articles that inspired me a lot.
1:30:49 A lot of people would look at those articles and say, you know, what’s the big deal?
1:30:52 There just wasn’t enough rigor to them within the economics.
1:30:54 And it seems like so obvious.
1:31:02 So, they have this idea, availability, that you’re going to think something is more likely if examples of it come to mind.
1:31:07 So, ask people, what’s the ratio of homicides to suicides?
1:31:28 And they think, you know, more than one person, either directly or in your community, who is a suicide victim.
1:31:32 And chances are, you don’t know any homicide victims.
1:31:35 But nevertheless, you might give that same answer.
1:31:40 And the obvious reason is that we read about homicides all the time.
1:31:42 And suicides are kind of quiet.
1:31:46 So, the thing is, their papers look too easy.
1:31:48 I don’t even know if you know this, Nick.
1:32:02 But when I was at Princeton undergrad, one of the many ways that I got together little bits of money here and there was by volunteering at mostly Green Hall in the psychology department.
1:32:06 And I was a subject for some of Danny Kahneman’s studies.
1:32:11 So, you were there when Danny was teaching there?
1:32:11 I was.
1:32:13 Did you take a class?
1:32:16 I did not take a class with him, which is one of my great regrets.
1:32:17 That was a bad move, Tim.
1:32:18 I know.
1:32:18 It was a bad move.
1:32:20 Next time, get that right.
1:32:21 Exactly.
1:32:32 And people may recognize the name popularly from Thinking Fast and Slow, which has been recommended by presidents and so on.
1:32:34 But why is he so notable?
1:32:42 What did he do or show or explain that made him so noteworthy?
1:32:45 So, the early work was done jointly with Amos Tversky.
1:32:51 And, I mean, they are the reason why you’re talking to me.
1:32:59 Because I had that list of weird behavior, but I didn’t know what to do with it.
1:33:09 And then I went to a conference and one of their students, this is back in the 70s, one of their students was telling me about the work they were doing.
1:33:23 And I went back home and read a bunch of their papers, which you had to do by going to the library and finding the psychology section in the library, which I had never been to.
1:33:26 And a big light bulb went on.
1:33:34 And the light bulb was that it’s the phrase systematic bias.
1:33:36 So, let me explain.
1:33:41 To an economist, if people make a mistake, that’s no big deal.
1:33:43 Because, fine, they’ll admit.
1:33:54 And, in fact, if you give economists like a half a glass of wine, they’ll admit, even traditional economists, that most of the people they know are idiots.
1:34:07 And certainly their students and their spouse and their dean and the president of the university.
1:34:10 And, actually, there’s a funny story about Amos.
1:34:13 Amos and I are at this conference.
1:34:19 And there’s an economist at dinner.
1:34:27 And he starts going into this rant about, Amos had set him off and said, how’s your wife’s decision made?
1:34:30 And the guy starts telling stories.
1:34:36 And then Amos asks him about the president of the university and the president at the time.
1:34:37 I don’t remember who it was.
1:34:44 And we’re getting, like, this half-hour-long rant about…
1:34:46 The irrationality of all these people.
1:34:47 Right.
1:34:52 And then, it’s like Amos is having him walk the ledge.
1:34:55 And then pulls it out.
1:35:00 And says, so, let me see if I can understand this.
1:35:04 So, basically, everybody you know you think is dumb.
1:35:08 But the people in your models are all brilliant.
1:35:15 So, that’s the systematic bias.
1:35:16 That, yeah.
1:35:21 And the systematic bias is, like, back to the availability we were talking about.
1:35:21 Right?
1:35:29 So, the fact that I can ask you a question, are homicides or suicides, which is more common, I can predict that.
1:35:31 And that’s a mistake.
1:35:33 And it’s not a random error.
1:35:36 So, it’s not that people are dumb.
1:35:38 You know, I don’t really think people are dumb.
1:35:40 I think the world is hard.
1:35:48 But people deal with this hard world using shortcuts and so forth.
1:35:52 And the shortcuts are useful, but not perfect.
1:35:57 And they lead to predictable mistakes, like the sunk cost fallacy.
1:36:10 The more you paid for the play you were going to go to, the less willing you are to skip it, no matter how good the alternative is.
1:36:16 A friend you haven’t seen for 20 years calls and says, my flight got canceled.
1:36:18 I’m in Chicago tonight for dinner.
1:36:19 We bought tickets.
1:36:21 The day I started to talk, this is really true.
1:36:26 We bought tickets to a movie with the kids that they wanted to go to.
1:36:29 And I went on Fandango, bought the tickets.
1:36:31 I don’t like superhero movies.
1:36:32 It was some superhero movie.
1:36:33 And I did not want to go.
1:36:39 I would have easily paid $150 to not go at 9 in the morning.
1:36:40 Then I bought the tickets.
1:36:45 And it was pouring rain outside at like 6 o’clock.
1:36:48 And everyone’s looking at each other and they’re comfortable on the couch.
1:36:50 And everyone’s like, do you really want to go out in this?
1:36:53 I was like, we are going to that damn movie.
1:36:55 Like, how can you not?
1:37:02 Like, and I literally that moment I went, we are putting deposits down on every damn person that goes to the aviary.
1:37:06 I literally, and I walked in and like my CFO was like, this is what I was talking about.
1:37:08 Hope you didn’t go to the movie.
1:37:08 We did go.
1:37:10 And I hated it.
1:37:10 It was terrible.
1:37:12 But that’s because you didn’t know me then.
1:37:13 You know, now.
1:37:15 But it is absolutely true.
1:37:15 Right.
1:37:18 That is a real thing that we all succumb to.
1:37:23 So that was the big idea from Kahneman and Tversky.
1:37:33 And by the way, everybody knows Michael Lewis and Moneyball and many of his other books, like The Big Short, my favorite movie.
1:37:35 People don’t realize I have a cameo in that movie.
1:37:40 It’s not the one with Margot Roby.
1:37:47 But an amazing book Michael wrote was about Kahneman and Tversky called The Undoing Project.
1:37:55 And I kept telling him, you can’t write a book about two psychologists talking to each other.
1:37:59 But he’s an amazing writer, and it’s an amazing story.
1:38:09 So if you’re curious about those two people who are two of the greatest 20th century scientists, I recommend that book.
1:38:10 It’s an easy read.
1:38:11 And quite captivating.
1:38:15 Can we bring up a difficult subject as it applies to?
1:38:16 Is there anything I could do to stop you from?
1:38:17 Absolutely.
1:38:18 You can say no.
1:38:19 Oh, okay.
1:38:20 Yeah, sure.
1:38:21 Bring it up.
1:38:23 Yeah, we can always edit it out.
1:38:23 Yeah, no.
1:38:26 I mean, look, I say it with respect.
1:38:30 But, you know, so it became public, I guess, earlier this year.
1:38:35 And I literally just found this out a couple hours ago that Danny chose assisted suicide.
1:38:37 And I’ve known that for a little while.
1:38:48 But as a friend, as a mentor, that had to be incredibly difficult and something to struggle with when he told you that he was going to do this.
1:38:53 Furthermore, he wasn’t actually tremendously ill or anything like that.
1:38:55 Are you comfortable talking about that a little bit?
1:38:58 He had been a friend and mentor.
1:39:01 He was my best friend for 40 years.
1:39:06 Yeah, he calls me one day and says, ah, that’s it.
1:39:10 And he had just turned 90.
1:39:26 And, you know, one of his findings was that our memory of an experience is determined by two factors, the peak and the end.
1:39:34 So, you go to one of those meals at a three-star restaurant, what was the best thing?
1:39:36 That’s the peak.
1:39:39 And how was it at the end?
1:39:43 I think those restaurants don’t get the end part right because they give you too much food.
1:39:47 But anyway, Danny was concerned.
1:39:48 He took this part seriously.
1:39:54 And he was mostly, he didn’t want to lose control.
1:39:58 At 90, I can tell you, he was still the smartest guy I knew.
1:40:00 He had lost nothing.
1:40:04 So, we spent a week or so arguing.
1:40:08 And I thought I was winning.
1:40:12 And he said, okay, you’re getting annoying.
1:40:16 So, I flew to New York.
1:40:17 I was in California.
1:40:29 I flew to New York, took him out for a good dinner, bought him a bottle of wine, 1998 La Moline, that I thought, this is worth living for.
1:40:31 So, that was my attempt.
1:40:34 I wasn’t allowed to try and argue with him anymore.
1:40:36 Yeah, I figured he’d probably put the kibosh on that.
1:40:37 So, no arguing.
1:40:40 But we went out to dinner together.
1:40:45 He did think the wine was good, but wasn’t going to change his mind.
1:40:52 And then the next day, we spent just figuring out how to manage the next month or so.
1:41:00 So, and our goal was that the obits weren’t about the way he died.
1:41:02 And they weren’t.
1:41:03 And they weren’t.
1:41:05 Until that came out.
1:41:06 Yeah.
1:41:09 Then a year later, there was an article in the Wall Street Journal.
1:41:16 I think the writer shouldn’t have included the letter he sent, the email he sent to friends.
1:41:21 But anyway, I mean, Danny had great 90 years, and he was great up until the end.
1:41:32 And I would have liked a few more, but I respected the right to him to end the way.
1:41:37 I kept sending him emails saying, you know, tell me how the chocolates are in Switzerland.
1:41:40 But he didn’t reply.
1:41:45 Richard, what was his argument for doing it?
1:41:47 Did he feel like he was slipping?
1:41:52 Did he want to just head that off at the pass altogether?
1:41:57 He wanted to be able to decide when he was going to do it.
1:42:12 And his argument was, yes, he realizes that it’s premature, but it would be premature whenever he decided to do it.
1:42:15 And so he’s going to do it now.
1:42:21 And I will say, like, the last month of his life might have been his happiest.
1:42:26 So maybe he got it exactly right.
1:42:32 He went to Paris for two weeks with his partner.
1:42:40 And then his Israeli family, his daughter, lives in Tel Aviv.
1:42:47 And she and her family came and spent a week with him in Paris, which is where he grew up as a kid.
1:42:49 Then he went off to Switzerland.
1:42:52 So I’m a greedy man.
1:42:58 I would have liked a few mores, but I had 45 years, so that’s pretty lucky.
1:42:59 Yeah.
1:43:03 And I won’t spend too much more time on this, but I am curious.
1:43:08 What was his belief around death?
1:43:09 Was it lights out?
1:43:09 That’s it?
1:43:11 Just like before you were born?
1:43:12 Was it something else?
1:43:14 Was he afraid of dying, or did he not have a fear of it?
1:43:17 I think he had no fear of it.
1:43:29 He didn’t want to go through a phase where he didn’t have his full faculties.
1:43:49 And you explained to me when you first told me about this, because I think there’s this innately human thing, which Tim is reacting to as well, and I certainly did, which is we are so ingrained to protect life and the life of ourselves and others that we love no matter what.
1:43:54 And he feared the cognitive decline.
1:43:57 The thing he valued the most was wrestling with ideas.
1:44:04 And you told me that he feared that more and the control over how that ended than anything else.
1:44:17 Yeah, I think it’s not like he was worried about no longer being the smartest guy in the room as much as he thought that he might be slipping.
1:44:42 And then who would, I mean, my intervention and my attempted intervention was to create a group of people he loved and trusted to say, all right, when certain steps are there, we buy you the ticket.
1:44:47 But he wanted to be the one who got to decide when that was going to be.
1:44:51 And that was with all his facilities.
1:44:52 And so that was it.
1:44:53 Now, thank you, Richard.
1:44:54 We can shift gears.
1:44:57 But thank you for being willing to share that.
1:45:08 I mean, I was taken aback when I read the piece and have just been very, very curious as someone who is in the same hallways, but never took a class, which is a real shame on my part.
1:45:11 In any case, it’s actually being willing to talk about that.
1:45:13 What keeps you going, Richard?
1:45:15 Like, what gets you excited?
1:45:16 There’s a transition, Tim.
1:45:20 No, I’m not saying you should buy a ticket to Switzerland.
1:45:26 I’m just saying, like, what is it that gives you the feeling of aliveness?
1:45:28 Is it the wrestling with ideas?
1:45:29 Is it something else?
1:45:31 Is it corrupting the youth in productive ways?
1:45:46 Yeah, and, you know, I think I took on this possibly wacky task of rewriting a book I published in 1992 about those anomalies columns.
1:45:58 And part of that was there’s something in psychology called the replication crisis that there are some experiments that just don’t replicate.
1:46:04 And there are some people that have been proven just to have made stuff up.
1:46:14 And I wanted to see whether the stuff we had built everything on could stand scrutiny.
1:46:21 So I corrupted a young colleague of mine, Alex Amos, who just turned 40.
1:46:34 And we took some of those old things, two pieces I wrote with Danny and one with Amos and then some others, and then gave it the hard look.
1:46:35 Does this hold up?
1:46:37 Is it true out of sample?
1:46:39 Is it true in the real world?
1:46:43 And that’s what keeps you thinking.
1:46:53 I also like, I like that in the book, at the end of every one of these chapters where they go through the rigor of updating it and seeing if it holds up, they also say, for the economist.
1:46:55 And it’s like one sentence.
1:46:56 Here’s your takeaway if you’re an economist.
1:47:00 And then it’s like, for everyone else, here’s one sentence that’s a takeaway.
1:47:06 You can read the whole book, but you can also read those and get an awful lot out of it, which is really good.
1:47:11 Because those conclusions are the nuggets that kind of propel the book for it, I think, as well.
1:47:17 The way we wrote it is, yeah, takeaway for humans and for economists.
1:47:22 We don’t say whether we think economists are not humans, but…
1:47:27 Well, that actually preempts, in a way, my question, but I’ll ask it anyway.
1:47:29 Who is this book for?
1:47:30 Who’s the reader?
1:47:37 You know, I think we tried very hard to write it in a way.
1:47:38 It’s not a thriller.
1:47:41 And it’s not a self-help book.
1:47:50 But I don’t think it’s as hard as Thinking Fast and Slow, which was tough.
1:47:54 I mean, it’s a great book, but it’s dense.
1:47:57 And this book is much funnier than that.
1:48:04 But I think corrupting the youth is always on my mind.
1:48:08 So I’m giving a series of talks at universities.
1:48:13 So I have a trip next week, Cornell, Penn, and Princeton.
1:48:17 So your alma mater, I’ll be there in Green Hall.
1:48:21 I like interacting with the young people.
1:48:26 I officially went emeritus July 1, so I’m not teaching.
1:48:30 But I still, you know, I divide my time between Chicago and Berkeley.
1:48:42 I still like going to workshops and interacting with my colleagues and having them sharpen me.
1:48:50 I mentioned this to Thaler when we were on our way here, is that I was struck by the fact
1:48:55 that these anomalies were pointed out 30, 40 years ago, something like that.
1:49:04 And every single one of them, I could think of an example of a person or myself or a business
1:49:09 that fell victim to one of these issues, if you will.
1:49:16 And so it almost like shines a light on our own, as you were saying, cognitive biases in
1:49:21 a way that takes something that’s a little squishy, like, you know, psychology and this
1:49:28 and that, and then just applies it to something that impacts all of our lives, markets, business,
1:49:34 the way we conduct our own households, and does so in a very basic way.
1:49:38 And just for people, I’ll give you the title again, I’ll mention it also towards the end,
1:49:41 but The Winner’s Curse, Behavioral Economics Anomalies Then and Now.
1:49:45 Is this the subject matter, Richard, of the talks that you’re giving at these various schools?
1:49:45 Yeah.
1:49:52 So it’s essentially a little book tour, but no point in going to bookstores.
1:49:57 I’d rather have 300 young students’ minds to corrupt.
1:50:02 Is there anything else, Nick or Richard, well, I’ll kick it to Nick first, that you’d like
1:50:06 to cover with Richard before we wind to a close?
1:50:11 Or, Richard, anything else that you’d like to mention, point people to, requests of my
1:50:13 audience, anything like that that you’d like to mention?
1:50:15 Nick, you want to go first?
1:50:16 Yeah.
1:50:23 I mean, I was going to ask the Tim question, which is, what books, if you’re new to understanding
1:50:28 this topic of behavioral economics, or even just traditional economics, what are your favorite
1:50:31 sources, other than your own, of course?
1:50:38 And you’ve already mentioned Danny’s book, and all that, but there must be some that are
1:50:42 kind of the foundational books that you go to, or you suggest to these young folks that
1:50:43 you’re trying to corrupt.
1:50:51 So, yeah, one thing I mentioned in passing, so for the students, and just the general, I
1:50:56 mentioned this journal, the Journal of Economic Perspectives, most academic journals you can’t
1:51:00 get, that one is posted online.
1:51:01 Anybody can read it.
1:51:08 And if you’re modestly interested in economics, it’s a fantastic journal.
1:51:12 There’s a guy called Timothy Taylor, who they hired brilliantly.
1:51:15 They call him the managing editor.
1:51:22 I call him the writing editor, and he quickly adopted the strategy of taking your article
1:51:24 and then just rewriting it.
1:51:30 And he would say, you know, it’s like in Microsoft Word with track changes, but the version you
1:51:35 would get is the one, his version, and you could restore.
1:51:38 But we know status quo bias works.
1:51:40 And he’s still at it.
1:51:45 And so that’s a fantastic place to learn about economics.
1:51:46 It’s four times a year.
1:51:50 Typically, there’s a symposium on some topic.
1:51:55 And it’s a resource nobody knows about and is fantastic.
1:51:58 Yeah, I mentioned Michael Lewis’s book, The Undoing Project.
1:52:04 And it’s a great insight into Kahneman and Tversky.
1:52:11 And I think I’m not going to mention any other books, because whichever one I mention, I will
1:52:12 piss off 12 other people.
1:52:17 So I’ll keep the friends I have.
1:52:23 Well, Richard and Nick, thanks so much for taking the time today for a very wide range
1:52:23 of conversation.
1:52:26 There’s a lot more that I could ask about.
1:52:31 But since we’re racking up some decent mileage on this conversation, I’ll keep it to this
1:52:32 duration for around one.
1:52:39 And people can find The Winner’s Curse, Behavioral Economics Anomalies, Then and Now, which is
1:52:41 co-authored with Alex, is it Imus?
1:52:42 Am I saying that correct?
1:52:43 Imus.
1:52:44 With Alex Imus.
1:52:49 And we’ll link to that in the show notes, you can find Richard on X, the artist formerly
1:52:55 known as Twitter, at x.com slash R underscore Thaler, T-H-A-L-E-R.
1:53:00 And as usual, everybody, I will link to anything that came up in the conversation in the show
1:53:02 notes at tim.blog slash podcast.
1:53:05 You can just search Thaler, T-H-A-L-E-R.
1:53:10 And Nick has been on the show, I think at least now, this would be the third or fourth time.
1:53:14 So if you want to delve into all the background on Nick, you have ample opportunity.
1:53:17 Hey, Thaler, thanks for doing this.
1:53:18 I really appreciate it.
1:53:20 I always love spending time with you.
1:53:21 Likewise.
1:53:27 And it’s great having Tim here to make me sound better at asking questions.
1:53:31 It is, I will say to the audience, it is much, much harder what Tim does than to be a guest
1:53:32 on the show.
1:53:36 And so great respect to you because week after week, I listen to your podcast and you do a
1:53:37 wonderful job.
1:53:38 Oh, thanks, man.
1:53:39 Thanks, Nick.
1:53:41 And we’re overdue for an in-person catch-up.
1:53:44 So I look forward to making that happen.
1:53:45 Let’s do it.
1:53:47 I look forward to meeting you in person as well.
1:53:48 That would be great.
1:53:50 I do spend some time in Chicago.
1:53:53 I also spend time occasionally in NorCal.
1:53:54 I’ve got a lot of friends at Berkeley.
1:53:57 So I would suspect we’ll cross paths.
1:53:59 Yeah, I think we both know Michael Pollan, right?
1:53:59 Yep.
1:54:00 Yeah, absolutely.
1:54:04 I’m involved with the center there on a couple of levels.
1:54:05 So lots of overlap.
1:54:07 I really appreciate the time, guys.
1:54:07 Thanks.
1:54:09 And enjoy your dinner.
1:54:10 I will talk to you guys soon.
1:54:11 Thanks.
1:54:11 Take care, Tim.
1:54:12 Sounds good.
1:54:12 Take care, everybody.
1:54:12 Bye-bye.
1:54:14 Hey, guys.
1:54:15 This is Tim again.
1:54:17 Just one more thing before you take off.
1:54:20 And that is Five Bullet Friday.
1:54:24 Would you enjoy getting a short email from me every Friday that provides a little fun before
1:54:25 the weekend?
1:54:30 Between one and a half and two million people subscribe to my free newsletter, my super short
1:54:31 newsletter called Five Bullet Friday.
1:54:33 Easy to sign up.
1:54:33 Easy to cancel.
1:54:39 It is basically a half page that I send out every Friday to share the coolest things I’ve
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1:54:44 It’s kind of like my diary of cool things.
1:54:50 It often includes articles I’m reading, books I’m reading, albums, perhaps, gadgets, gizmos,
1:54:55 all sorts of tech tricks and so on that get sent to me by my friends, including a lot of
1:54:56 podcast guests.
1:55:03 And these strange, esoteric things end up in my field, and then I test them, and then I share
1:55:04 them with you.
1:55:09 So if that sounds fun, again, it’s very short, a little tiny bite of goodness before
1:55:11 you head off for the weekend, something to think about.
1:55:15 If you’d like to try it out, just go to tim.blog slash Friday.
1:55:18 Type that into your browser, tim.blog slash Friday.
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1:55:22 Thanks for listening.
1:55:27 I don’t know about you guys, but I’ve had the experience of traveling overseas, and I try
1:55:33 to access something, say a show on Amazon or elsewhere, and it says not available in your
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Richard H. Thaler is the 2017 recipient of the Nobel Memorial Prize in Economic Sciences for his contributions to behavioral economics and the Charles R. Walgreen Distinguished Service Professor of Behavioral Science and Economics at the University of Chicago Booth School of Business. He is the New York Times bestselling co-author of Nudge: Improving Decisions About Health, Wealth, and Happiness and the author of Misbehaving: The Making of Behavioral Economics. His new book is The Winner’s Curse: Behavioral Economics Anomalies, Then and Now.
My co-host for this conversation is Nick Kokonas. Nick is an entrepreneur, investor, and author best known as the co-founder of The Alinea Group (sold in 2024) and the reservation platform Tock, which is now owned by American Express.
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