Speaker 1: This week on the podcast, I have Professor Robert Frank.
Speaker 1: He teaches economics and management at the Graduate School up
Speaker 1: in Cornell and is the author of a number of books. UH.
Speaker 1: He's probably best known for The Winner Take All Society,
Speaker 1: a very prescient book published in way ahead of a
Speaker 1: lot of the more recent commentary on changes in society.
Speaker 1: Most recently he's published success in Luck, Good Fortune, in
Speaker 1: the Myth of Meritocracy. It's a fascinating conversation about how
Speaker 1: we all tend to under emphasize and and just not
Speaker 1: realize the impact that random fortune has in our life,
Speaker 1: for both better and worse. He he also wrote a
Speaker 1: textbook with some guy named bed Bernanke on economics. UH. Really,
Speaker 1: I think you'll find this to be a fascinating conversation
Speaker 1: if you're at all interested in how not the politics
Speaker 1: but the economics of of income inequality and how these
Speaker 1: things have developed and what they're subsequent impact is on
Speaker 1: both uh, efficiency and productivity of of the economy and
Speaker 1: what it means for society from the middle class for
Speaker 1: changes in in corporate structures. I think you'll find this
Speaker 1: to be an absolutely fascinating conversation. So with no further
Speaker 1: ado my conversation with Robert Frank. This is Master's in
Speaker 1: Business with Barry Ridholts on Bloomberg Radio. My special guest
Speaker 1: this week is Professor Robert H. Frank. He is a
Speaker 1: professor of management and economics at Cornell's Johnson School of Management.
Speaker 1: That's the graduate school up at Cornell. He has won
Speaker 1: numerous teaching awards and all sorts of other accolades. Comes
Speaker 1: to us with a b. S. And mathematics from Georgia Tech,
Speaker 1: has a master's in statistic and a PhD in economics
Speaker 1: for Berkeley, and is the author of a number of books,
Speaker 1: several of which we'll talk about later today, most recently
Speaker 1: Success in Luck, Good Fortune, and The Myth of Meritocracy.
Speaker 1: I would be remiss if I didn't mention the textbook
Speaker 1: he co wrote with some gentleman named Ben Bernanke, Principles
Speaker 1: of Economics and he He probably is best known for
Speaker 1: a book published in The Winner Take All Society that
Speaker 1: won all sorts of critics Choice Award Notable Book of
Speaker 1: the Year by the New York Times Business Week's Top
Speaker 1: ten list for Robert Frank. Welcome to Bloomberg. What a
Speaker 1: pleasure so that that was the short version of your CV.
Speaker 1: I could have gone on if I if I started
Speaker 1: discussing the published papers, we would be here until next Tuesday.
Speaker 1: But one of the things that really struck me about
Speaker 1: your background is how long you've been studying income inequality?
Speaker 1: How did how did you first get interested in that subject? Uh,
Speaker 1: it's it's become quite fashionable now. I first started writing
Speaker 1: about it, it it was very difficult to find anybody who cared.
Speaker 1: I think my own interest in it was kindled by
Speaker 1: my interest in biology, where where if you know an
Speaker 1: animal's rank in whatever group, it's alpha beta, what happened, right,
Speaker 1: that's the that's the most powerful predictor of that animal's
Speaker 1: ability to project its stuff into the next round. So
Speaker 1: so if if there's a famine, it's not the high
Speaker 1: ranking animals that starve. The high rank animals typically have
Speaker 1: much better mating opportunities. There's a whole variety of reasons
Speaker 1: for that. But if if you don't care about where
Speaker 1: you rank, you're probably not coming into the world very
Speaker 1: well equipped to deal with the competitive fray that we're in.
Speaker 1: And it is quite a competitive world, especially when it
Speaker 1: comes to economics. On the other hand, Uh, to really
Speaker 1: succeed in today world, it's essential to be a trusted
Speaker 1: member of an effective team. You have to be able
Speaker 1: to be seen by others as trustworthy and cooperative. Really
Speaker 1: effective teams, teams with talented people have their pick. They
Speaker 1: don't need to hire any jerks for their team if
Speaker 1: you're If you're not a person they feel they can
Speaker 1: rely on. When you're out of you and you have
Speaker 1: a chance to serve your own interests at the expense
Speaker 1: of the teams, then why should they have you on
Speaker 1: on their team. They've got better choices. So it's a
Speaker 1: kind of a complex balancing act. You have to be
Speaker 1: somebody who's who's attractive to others and trustworthy in situations
Speaker 1: where you could cheat them, but they have to feel
Speaker 1: confident you won't. But you have to also care about
Speaker 1: getting ahead. So it's a little bit of a balance
Speaker 1: in society versus what we see out in the wild exactly.
Speaker 1: Society has done an enormous amount to try to tame
Speaker 1: the competition. We have all sorts of regulations that prevent arms,
Speaker 1: races that get out of control and nature. But I
Speaker 1: think you know, the income inequality problem is is maybe
Speaker 1: one of the early signs that our attempts to keep
Speaker 1: things in balance have been falling short. So let's talk
Speaker 1: about income inequality a little bit. I want to mention
Speaker 1: it's funny that you said how fashionable it is today.
Speaker 1: I'm gonna pull a quote from either your book it was,
Speaker 1: or it was a paper that you had written around
Speaker 1: the same time the book had come out that I
Speaker 1: thought was fascinating, And this is from quote. The incomes
Speaker 1: of the top one percent have more than doubled in
Speaker 1: real after inflation terms between nineteen seventy nine and nine
Speaker 1: eighty nine, a period during which the meeting income was
Speaker 1: roughly flat and which the bottom quintile the bottom twenty
Speaker 1: of earners, so their incomes actually fall by ten percent.
Speaker 1: Now that sounds like something that could have come out
Speaker 1: a year or two ago, about the prior decade, and
Speaker 1: yet this was not a big issue back I think
Speaker 1: we were just starting to see clear evidence of those
Speaker 1: trends that were beginning. They they began sometime in the
Speaker 1: late sixties or early seventies. There's still some quarreling about
Speaker 1: when the exact moment was. There probably wasn't an exact moment,
Speaker 1: but but as it's gone on, longer, and as the
Speaker 1: multiples have gotten bigger, more and more people have taken interest.
Speaker 1: And you know, there's been a lot of very serious
Speaker 1: work in recent decades on it. Well you you were
Speaker 1: writing Picketty type stuff twenty years before Pickety was writing them. Yeah.
Speaker 1: Well it's not always who gets there first, who wins
Speaker 1: the prize. Yeah, Picketty has gotten a lot of very
Speaker 1: well justified attention on these issues, and he's done the
Speaker 1: rest of us who are in the trenches writing about
Speaker 1: this subject and enormous service. You know, we can we
Speaker 1: can now write a piece on on the issue and
Speaker 1: people will pay attention to it, whereas it would have
Speaker 1: gone lost in the shuffles. So that's that's a really
Speaker 1: interesting point I find. First, it's amazing how similar the
Speaker 1: data sounds twenty years ago to today. That's astonishing. But
Speaker 1: was income inequality all that obvious back then to people
Speaker 1: who were looking at it? Was the boom in technot
Speaker 1: remember nineties, a huge boom in technology. The stock market
Speaker 1: was on fire. Well, we just otherwise occupied and not
Speaker 1: paying attention. How did this slip by relatively unnoticed right
Speaker 1: in the middle of the nineties. Yeah, I think that's
Speaker 1: a great question, and I don't have a compelling answer
Speaker 1: for it. Uh. It if you take the early onset
Speaker 1: of the date range the late sixties as the the
Speaker 1: time when income inequality started growing rapidly, then uh, plenty
Speaker 1: of time for a lot of people to have noticed it.
Speaker 1: And many people did notice it. It's just that the
Speaker 1: the subject hadn't really caught on as a as one
Speaker 1: of general interest. I'm Barry Ridhults. You're listening to Masters
Speaker 1: in Business on Bloomberg Radio. My special guest today is
Speaker 1: Professor Robert Frank. He teaches up at Cornell both economics
Speaker 1: and management. Let's talk a little bit about the winner
Speaker 1: take all society. The book you co authored in that
Speaker 1: seems to be quite prescient about a variety of changes
Speaker 1: that have taken place in uh in our economy. Let
Speaker 1: me let me start out with a quote. What do
Speaker 1: Boris Becker, Alan Dershowitz, Diane Sawyer, Michael Jordan's, L McPherson,
Speaker 1: and John Griffin all have in common? They are beneficiaries
Speaker 1: of the winner take all markets. Now, what's interesting is
Speaker 1: how memorable all those names are. And still, unless you're
Speaker 1: a millennial, you probably know who all those names are.
Speaker 1: Kas there was a lot of longevity to it. Explain
Speaker 1: to us what the winner take all society is there.
Speaker 1: There's a kind of market we've seen, uh, this market
Speaker 1: structure going back a long long time. Actually, Uh, it
Speaker 1: was written about in the nineteenth century in similar terms
Speaker 1: to the ones we use to describe it. It's a
Speaker 1: market where if you have a task that can be
Speaker 1: done market wide by a single person, then essentially you've
Speaker 1: got the conditions for a big tournament. Uh. It's it's
Speaker 1: a valuable task. Typically if somebody can serve the whole market,
Speaker 1: and if there are thousands of houses of people trying
Speaker 1: to be anointed the person who gets to do that,
Speaker 1: then the competition is pretty bitter and there's a lot
Speaker 1: of bunching of talent and effort. All the people who
Speaker 1: are finalists in that contest are going to be really,
Speaker 1: really good, but typically one will emerge, and it will
Speaker 1: be some one who's uh maybe a little bit better
Speaker 1: than most of the others, but rarely the best contestant.
Speaker 1: He's also had a lucky break or two along the way.
Speaker 1: But when the winner emerges, there's a huge difference between
Speaker 1: the reward that person gets and the rewards received by
Speaker 1: others who were really so close to being as good
Speaker 1: that no one could really tell. It was almost an
Speaker 1: arbitrary choice to anoint the winner. And and so you
Speaker 1: get a situation where you know, most people feel comfortable
Speaker 1: if somebody works one percent harder than others, there is
Speaker 1: one percent more talented, I'll fine, let and be paid
Speaker 1: one percent more. But here, here you have some but
Speaker 1: he emerge who's one percent more talented, And and uh,
Speaker 1: that person might earn ten thousand times as much as
Speaker 1: as the others who are almost as equal. So let's
Speaker 1: let's use Michael Jordan as an example. Wins six NBA finals,
Speaker 1: which was a huge run, but at the same time
Speaker 1: has this amazing set of endorsement deals. He makes hundreds
Speaker 1: of millions, literally hundreds of millions more then he's paid
Speaker 1: as an athlete to do all his endorsements and other
Speaker 1: business ventures. And at the time, nobody else is even
Speaker 1: close to him. Yeah, there there would be plenty of
Speaker 1: people who would do his job for a tiny fraction
Speaker 1: of what he gets. You would, I'm guessing I would
Speaker 1: have been willing. But you have more hit than me,
Speaker 1: so you can you can do that? Well, it's not
Speaker 1: all you need you watch you watch the highlight reel
Speaker 1: of Michael Jordan's and you think you're seeing something in
Speaker 1: slow motion, because it really does seem that he's hanging
Speaker 1: in mid air for thirty five seconds, making decisions on
Speaker 1: the fly that are not only instantaneous, but three steps
Speaker 1: ahead of everybody else, and then executing on those decisions
Speaker 1: while hanging in midair. So so maybe he's not the
Speaker 1: best example of a winner who's only a little bit
Speaker 1: better than the others. Maybe maybe give us another example
Speaker 1: like Secretariat, he won thirty lengths. But but typically it's
Speaker 1: not it's not that far ahead of the field. When
Speaker 1: we see a winner emerged, you know, it could have
Speaker 1: been any one of a number of people who emerged
Speaker 1: that way. And and well, you mentioned Alan Dershowitz or
Speaker 1: Al McPherson or John Grisham. There are a lot of
Speaker 1: fantastic novelists who sell millions of books. Is that and
Speaker 1: their books become movies? Is John Grisham a winner take all?
Speaker 1: He's definitely an example of someone who's been a really
Speaker 1: big winner in a winner take all market. So not
Speaker 1: only have the books done well, but you know, a
Speaker 1: dozen of his books have become really big movies. And
Speaker 1: and the surest way to publish a best seller is
Speaker 1: to have already published one. Uh, if you've published two,
Speaker 1: then you're even more likely to have a best seller.
Speaker 1: And and then once you've got a string of them,
Speaker 1: the movie people start bidding against one other for the rights. Yeah,
Speaker 1: the the rewards really do explode once you're on a
Speaker 1: successful track. But but if you would go back early
Speaker 1: in a person's career, it wouldn't be so clear that
Speaker 1: that would be the person who would emerge and become
Speaker 1: the big winner. Even in Michael Jordan's case, he was
Speaker 1: cut from the basketball team at a couple of stages
Speaker 1: school right, didn't do well. What about j K Rowland?
Speaker 1: I think her book was turned down a dozen different
Speaker 1: publishing shops and and she just on a lark published
Speaker 1: a detective novel or who Done It under a pseudonym
Speaker 1: after she quit the Harry Potter series, And the book
Speaker 1: got good reviews but sold tepidly. Vantil was revealed, it
Speaker 1: was leaked that the author really was j K. It's
Speaker 1: shot to the top of the best seller lists. So yeah,
Speaker 1: having been successful is the is the biggest thing that
Speaker 1: that can assure your success in the next round. So,
Speaker 1: so what impact does this star system have on society
Speaker 1: and what does it mean for the long term economic
Speaker 1: efficiency of of how things run well, It's got good
Speaker 1: aspects to it. And also someone's that ought to concern us.
Speaker 1: So if you think of piano manufacture in the last century,
Speaker 1: it was a local industry. Why because it costs so
Speaker 1: much to ship pianos that if if if you try
Speaker 1: to sell one too far from the factory, the shipping
Speaker 1: costs would eat you alive. And and then canals opened
Speaker 1: up railroads, the market expanded enormously that could be served
Speaker 1: by a single producer. So the good thing for consumers
Speaker 1: if there really were some producers who are better than others,
Speaker 1: now they could extend their reach, so you'd you'd be
Speaker 1: buying a better piano than you would have had access
Speaker 1: to before. The downside of that is that it tends
Speaker 1: to lead to an enormous increase in the concentration of income.
Speaker 1: The people who were thriving in local markets before now
Speaker 1: they compete to see who's going to be the one
Speaker 1: who dominates the broader market that's now serviceable by these firms.
Speaker 1: Since transportation costs are low, and and the losers in
Speaker 1: that contest, they've got to go find something else to do. Basically,
Speaker 1: I'm Barry Ridholts. You're listening to Masters in Business on
Speaker 1: Bloomberg Radio. My special guest today is Professor Robert Frank
Speaker 1: of Cornell, and we were discussing earlier how the middle
Speaker 1: class has begun to fall behind, going back as far
Speaker 1: as the nineteen sixties or seventies, you put out a
Speaker 1: book called falling Behind, How rising inequality harms the middle class.
Speaker 1: And again, some of the data points in this are
Speaker 1: just astonishing. I want to reference the toil index, uh
Speaker 1: from a paper you put out in two thousand eleven.
Speaker 1: Listen to this data. This is astonishing. Between nine seventy
Speaker 1: and two thousand, the median earner would have gone from
Speaker 1: working a little more than forty hours a week in
Speaker 1: order to be able to afford the median priced home
Speaker 1: to working close to seventy hours a week, almost double.
Speaker 1: How did that happen? Yeah, it was the monthly number
Speaker 1: of hours you had to work in order to earn
Speaker 1: enough money to gain access to the median price house.
Speaker 1: And and that's an interesting number because if you're in
Speaker 1: the middle you would earn in the middle. You would
Speaker 1: want to send your kids to a school of at
Speaker 1: least average quality, and to do that you have to
Speaker 1: buy the median price house because, as is true in
Speaker 1: every country, school quality tracks house prices in the neighborhoods
Speaker 1: very closely. So so every parent wants to do that.
Speaker 1: Houses have gotten bigger during that time. That's partly why
Speaker 1: families have to work more hours to be able to
Speaker 1: afford access to the median house. And it's just that
Speaker 1: others like them are spending a higher percentage of their
Speaker 1: income too, so you've got to match what they do
Speaker 1: or else you fall behind. And it's your kids who
Speaker 1: go to schools with the metal detectors out front. What
Speaker 1: what has the addition of a second bread winner in
Speaker 1: a household done to this this data? Uh so, that's
Speaker 1: a really interesting question. In the fifties we had one
Speaker 1: earner families. Now it's much more common to have two earners.
Speaker 1: So families should be doing much better. Well, they don't
Speaker 1: seem to be doing much better. And and one reason
Speaker 1: is that a lot of the extra money has gone
Speaker 1: into a bidding war four houses in the better school districts,
Speaker 1: so we've got more money. Now, what's what's the first
Speaker 1: thing we want to do? Send our kids to better schools. Well,
Speaker 1: other families want to do that too, And it's as
Speaker 1: if everybody stands up to see better. Nobody sees any
Speaker 1: better than before. We just bid up the prices of
Speaker 1: the houses in the better school districts. Half of all
Speaker 1: kids go to bottom half schools, the same as before.
Speaker 1: There's no way around that. That math is there. That's
Speaker 1: that's the cruel dilemma that inequality confronts people with. That
Speaker 1: lake will be gone exists just in fiction, and all
Speaker 1: of the children are not above average. It can't be,
Speaker 1: cannot be. Let me let me throw another data point
Speaker 1: out that I thought was fascinating. From UH falling behind,
Speaker 1: the share of total income going to the top one
Speaker 1: percent of earners was eight point nine percent in By
Speaker 1: two thousand and seven, it had risen to twenty three
Speaker 1: and a half percent, just about tripling. During the same period,
Speaker 1: the average inflation adjusted hourly wage declined by more than
Speaker 1: seven percent. So the meeting, So last time we looked
Speaker 1: at this date, in the top one percent we're growing,
Speaker 1: the bottom we're falling, and the median was flat. Here
Speaker 1: we see the top one percent growing much more in
Speaker 1: this time period, and and the average is actually falling.
Speaker 1: So what's the drivers of this? You know, I think
Speaker 1: it's the same technological changes that Phil Cook and I
Speaker 1: talked about, and that indeed Alfred Marshall had talked about
Speaker 1: in the eighteen nineties. As technology, let's the most able
Speaker 1: performers in each domain extend their reach. Uh, there's just
Speaker 1: gonna be a bigger slice of the market that they
Speaker 1: can effectively serve, and then the bidding for their services
Speaker 1: heats up. We don't need more than two or three
Speaker 1: sopranos at this point. Uh. A hundred years ago, the
Speaker 1: only way to listen to music was but now we
Speaker 1: listen to music mostly in recorded form. Once the master
Speaker 1: discs have been stamped out, they can make copies MP
Speaker 1: three's other media or essentially zero cost to copy. And
Speaker 1: so the real trick is to find the performer who's
Speaker 1: better and at least in the public's eye by a
Speaker 1: small margin, people want that performer and no other. So
Speaker 1: this this leads to a really interesting question. You have
Speaker 1: the current impact of technology and globalization and automation and
Speaker 1: more and more of the winner take all society pre
Speaker 1: nineteenth century, it was almost a feudal system where you
Speaker 1: had the one local monarch and everybody worked for them.
Speaker 1: That almost leads me to think that the post World
Speaker 1: War two middle class was an aberration. That's a theme
Speaker 1: in Thomas Picketty's book, that the period of post war
Speaker 1: relative equality was the aberration, not the I think the
Speaker 1: assumption along had been well, that's normal, and we're moving
Speaker 1: away from it. I don't think, uh, that issue is
Speaker 1: completely settled. But the technological forces that are causing incomes
Speaker 1: to concentrate at the top, those haven't even a gun
Speaker 1: to finish playing out. You know, Amazon is going to
Speaker 1: continue displacing retailers until they're almost aren't any more retailers,
Speaker 1: and we're a long way from that happening. I'm Barry
Speaker 1: Ridhalt's you're listening to Masters in Business on Bloomberg Radio.
Speaker 1: My special guest today is Professor Robert Frank. He is
Speaker 1: the author of Success in Luck, good Fortune, and the
Speaker 1: Myth of Meritocracy, as well as the Winner Take All
Speaker 1: Society and Principles of Economics, say textbook co written with
Speaker 1: some guy named Ben bernanke. Uh, let's jump right into
Speaker 1: success in Law because This is a topic that I
Speaker 1: find absolutely fascinating. Part of the reason is in this series,
Speaker 1: in these interviews that I do, you would be amazed
Speaker 1: at how many billionaires say and of course I got
Speaker 1: lucky early in my career, or this happened and it
Speaker 1: was just good fortune. And I know a lot of
Speaker 1: people think that that's just a false humility. But I
Speaker 1: think and have observed that folks really, especially people who
Speaker 1: were wildly success I don't mean hey, good job, good career, whatever,
Speaker 1: I mean wildly successful, winner, take all top of their field. Billionaires,
Speaker 1: Many of them referenced the role of luck in their success.
Speaker 1: Why is that? I think that's a great thing when
Speaker 1: you see it happen, and you do see it happen.
Speaker 1: I have no successful people who are very quick to
Speaker 1: acknowledge that they had breaks and wouldn't be where they
Speaker 1: are now except for them. But still there are many
Speaker 1: who who whose position seems to be I did it
Speaker 1: all on my own. I think think back to two
Speaker 1: thousand and twelve when Elizabeth Warren gave her you didn't
Speaker 1: build that speech. It was a video that went viral
Speaker 1: and had millions of angry comments directed at her. What
Speaker 1: did she say? She said, you built a business, it succeeded.
Speaker 1: That's great, but just remember you shift your goods to
Speaker 1: market on roads. The rest of has helped build you.
Speaker 1: Hired workers the community, pay to educate. Police and firemen
Speaker 1: that we hired helped protect you. Part of the social
Speaker 1: contract is to pay forward, so the next group that
Speaker 1: comes along will enjoy those same opportunities to succeed that
Speaker 1: you did. Uh. I don't hear anything controversial in those remarks,
Speaker 1: but people were very angered by them. And so if
Speaker 1: you if you tell a rich person who's beginning with
Speaker 1: the posture I did it all myself, that hey, you
Speaker 1: were lucky also, which is almost always true. Uh, they
Speaker 1: tend to hear you saying that, oh, you don't belong
Speaker 1: where you were your skillful that's not the message. No,
Speaker 1: the people who win in these markets are almost invariably
Speaker 1: really skillful, and they work really hard. So so it's
Speaker 1: in a way natural that when they try to explain
Speaker 1: to themselves why do they succeed, that they focus on
Speaker 1: their hard work and talent. That's a big pack factor
Speaker 1: and what did bring them to the top. But they
Speaker 1: were also very lucky. So so let's take an example
Speaker 1: from the book that I thought was pretty fascinating. How
Speaker 1: lucky of a guy was Bill Gates. Oh, Bill Gates, Uh,
Speaker 1: to his everlasting credit is really quick to acknowledge how
Speaker 1: lucky he was. He had one of the few schools
Speaker 1: that had a computer lab in it. He was born
Speaker 1: in nine didn't exist where if if he had been
Speaker 1: born ten years earlier, that wouldn't have existed. If he'd
Speaker 1: been ten years later being born, every people would have
Speaker 1: been all over that already. He was there at the
Speaker 1: right time. He got access to the computer labs at
Speaker 1: the University of Washington, like an actual lab with real
Speaker 1: time response, not the punch cards up the hill and
Speaker 1: wait three days to see what happened. He was in
Speaker 1: high school. That's a that's an amazing thing he had.
Speaker 1: And he'll say there's probably probably what wasn't a group
Speaker 1: of a dozen worldwide had opportunities like he had. But then,
Speaker 1: even even so, you would never know who he was.
Speaker 1: Probably belie if IBM hadn't Uh sort of in a
Speaker 1: short sighted move giving him the license to sell the
Speaker 1: operating system to its personal computer that was about to launch.
Speaker 1: They didn't have high hopes for sales of that machine,
Speaker 1: and so he ended up being the richest man on
Speaker 1: the planet. As he's quick to concede because he got
Speaker 1: a few really well time breaks. The technology lare is.
Speaker 1: He goes out and purchases a version of DOS for
Speaker 1: fifty dollars from a company who the urban legend is
Speaker 1: that founder eventually commits suicide. Um years later when he
Speaker 1: figures out what he does, sells this to IBM, and
Speaker 1: IBM never says, yeah, we're gonna buy this from you.
Speaker 1: Instead they'll say, yeah, we'll pay you for each one.
Speaker 1: We'll pay you less, but every time we sell a machine,
Speaker 1: we'll give you a royalty. And and that wasn't amazing.
Speaker 1: But make no mistake, Gates is really smart. He's very talented,
Speaker 1: very hard working. But that combination of things isn't sufficient.
Speaker 1: So the the guys who who come in second, the
Speaker 1: men and women who come in second, they're really smart,
Speaker 1: they're really hard working, they're really creative and skillful and opportunistic.
Speaker 1: But some of them just don't get a lucky break,
Speaker 1: and they don't achieve the sort of success that we
Speaker 1: see from the smart, hardworking, lucky ones. Brian Cranston I
Speaker 1: had never heard of I've watched Breaking Bad. He was
Speaker 1: unbelievably good in it. When Vince Gilligan proposed casting him
Speaker 1: in the Walter White role, which was the heart of
Speaker 1: that series, the studio bosses said, no way. This is
Speaker 1: a guy who's never had a leading dramatic role. He's
Speaker 1: a middle aged sitcom guy. He was the goofy dad
Speaker 1: in the middle, which I had never seen. But people
Speaker 1: who saw it said, well, it was good. If you
Speaker 1: saw it, you would have never in a million years
Speaker 1: imagined him exactly. He was a goofball, funny, but certainly
Speaker 1: not that intense dramatic. So so the studio people, they said, no,
Speaker 1: we're gonna offer the part to John Cusack's totally wrong.
Speaker 1: Cusack turned it down there all right, Matthew Broderick. Matthew
Speaker 1: Broderick turned it down. Even then did they go to Cranston? Now,
Speaker 1: of course Cranston is a superstar. Everybody wants him in
Speaker 1: their picture, and he was in his mid fifties. He
Speaker 1: was not going to become a superstar. If either Cusack
Speaker 1: or Broderick had taken that role, that was gonna be
Speaker 1: a fate for him. Just like thousands of other actors,
Speaker 1: they're good enough to succeed, but they don't get their chance.
Speaker 1: So I've noticed you've written about this, Other people have
Speaker 1: written about this. The issue of luck versus skill seems
Speaker 1: to divide along the political spectrum. Some people on the
Speaker 1: left are are faster. Liberals are more quick to attribute
Speaker 1: luck to people's success. Conservatives have a tendency to attribute
Speaker 1: skill to me. It's luck and success. So so what
Speaker 1: is the basis of this divide? Yeah, it's a very
Speaker 1: interesting question. And John Hight, my friend John Hight, the psychologist,
Speaker 1: has done some interesting work. There are temperamental differences between
Speaker 1: liberals and conservatives. Actually, the the split between the two
Speaker 1: groups on the role of luck is is maybe a
Speaker 1: little more nuanced than our popular impressions make it seem.
Speaker 1: But you know, conservatives are less likely to believe in
Speaker 1: the challenges to the concept of free will than than
Speaker 1: than liberals are. And so there there are some similarities
Speaker 1: and belief patterns across the groups. But but I think
Speaker 1: if you, if you probe a little more deeply, uh,
Speaker 1: people from all along the political aisle, if they really
Speaker 1: think about the examples that they know about, are are
Speaker 1: quick to concede that. Yeah, it helps, it helps to
Speaker 1: be lucky, being good and working hard by themselves aren't
Speaker 1: usually enough. So we were speaking earlier about Michael Mobisan,
Speaker 1: who is a credit Swiss and professor at Columbia who
Speaker 1: wrote the success Equation, which looks at skill and lack
Speaker 1: in in business, uh, sports and investing. And I said, hey,
Speaker 1: I'm gonna be speaking to Robert Frank any questions for him?
Speaker 1: And he said yes, absolutely. Uh. He gave me a few,
Speaker 1: But let me give you one or two of my favorites.
Speaker 1: How do we justify CEO pay based on skill or
Speaker 1: are there other processes that better explain the current ratio
Speaker 1: between CEOs and workers. That ratio, as you know, is exploded.
Speaker 1: It used to be something like twenty times as much
Speaker 1: as the average worker pay for the CEO in the
Speaker 1: CEO of ratio that recently twice this week has tracked
Speaker 1: the CEO paid average worker ratio since then, and it's
Speaker 1: it's up depending on how large the corporation, it's up
Speaker 1: around or hundred has has gone higher than that. It's
Speaker 1: a huge increase. It's it's the ratio itself is exploded
Speaker 1: by factor of ten. And there's a lot of argument
Speaker 1: about why people talk about crony boards that are voting
Speaker 1: favors for their pals who have installed them on the board.
Speaker 1: You know that happened when I was a boy. We
Speaker 1: used to hear about interlocking directorate's and but you don't ratios.
Speaker 1: You didn't And I think, uh, there are clear examples
Speaker 1: of waste, fraud and abuse still. But the world really
Speaker 1: is a lot more like the NBA now than it
Speaker 1: was when I was a kid. It's it's all it's
Speaker 1: all competition. What have you done for me lately? If
Speaker 1: you're not if you're not performing up to the highest standard,
Speaker 1: if there's somebody we could replace you with who would
Speaker 1: be even epsilon better, where you're out the door, And
Speaker 1: I think that's you know, you don't know who's going
Speaker 1: to be a good CEO up front. You take your chances.
Speaker 1: But the data are pretty clear. If you hire a
Speaker 1: CEO and the and the performance doesn't follow, then they're
Speaker 1: on a very short leash now compared to the old days.
Speaker 1: So but but they're on a short at least with
Speaker 1: a very nice get a very high salary. Uh. If
Speaker 1: they don't perform, they're out. They land whole because they
Speaker 1: get the nice parachute but think about it, if if
Speaker 1: you're right about the CEO, and the CEO really is
Speaker 1: let's say three percent, five percent, if you're if you're
Speaker 1: a ten billion dollar company annual earnings, you know that's
Speaker 1: three million difference on your bottom line. So so having
Speaker 1: somebody who's just a little bit better in this kind
Speaker 1: of market really does translate into a huge difference in
Speaker 1: the bottom line. If people want to find your work
Speaker 1: other than Amazon, where else can they find your writings.
Speaker 1: I have been for more than a decade a contributor
Speaker 1: to the Economic View column in the New York Times.
Speaker 1: Do it less frequently now, but occasionally I still write one.
Speaker 1: Uh Mainly I'm writing books these days, so so i'd
Speaker 1: go to the Amazon page and search out what's available.
Speaker 1: On Twitter, I'm at econ Naturalist. Easy to find you
Speaker 1: via Google. Be sure and check out my daily column
Speaker 1: on Bloomberg View dot com or follow me on Twitter
Speaker 1: at rit Halts. I'm Barry rit Halts. You're listening to
Speaker 1: Masters in Business on Bloomberg Radio. Welcome back to the podcast.
Speaker 1: I don't know why I do this every week, but
Speaker 1: I do. Bob, thank you so much for doing this.
Speaker 1: I'm I'm was really looking forward to to chatting you,
Speaker 1: and you have not disappointed. It's been great fun to
Speaker 1: get a chance to talk with you. So, so before
Speaker 1: we get to some questions um that I skipped over
Speaker 1: during the broadcast portion before I forget. So, you write
Speaker 1: an economics the Economics View column for The Times. That's
Speaker 1: a a monthly typically in the Sunday Business session. Is
Speaker 1: that right? Yeah, it's It depends on how many people
Speaker 1: are in the rotation, which is varied anywhere from five
Speaker 1: to ten. But it's come out. But at the same time,
Speaker 1: there is a Robert Frank who writes for The Times.
Speaker 1: He's a reporter and he's the author of the book
Speaker 1: Richester and a Journey through the American Wealth Boom. How
Speaker 1: confusing is it to have to Robert Frank's both publishing
Speaker 1: in The Times about wealth and economic inequality. Even before
Speaker 1: he started writing for The Times, we were being confused
Speaker 1: for one another again and again. In fact, The Times
Speaker 1: published an article about how often people mistook one for
Speaker 1: the other back in two thousand seven. I think it
Speaker 1: was and probably the best story, uh, in connection with
Speaker 1: with people mistaking us for each other is an email
Speaker 1: I got from a friend in Houston. He had seen
Speaker 1: an announcement for a conference catering to high net worth individuals,
Speaker 1: and there was in the brochure for the conference a
Speaker 1: picture of me with him, picture just of me. I
Speaker 1: was gonna be talking about high net worth strategies or this,
Speaker 1: this and that. That's not something he thought I would
Speaker 1: be likely to be doing. So he wrote back and
Speaker 1: asked me, and I said, wow, you know, I'm I'm
Speaker 1: if I'm speaking at that conference. This is the first
Speaker 1: I've heard about it. So I made some inquiries and
Speaker 1: it turned out that they had tried to book the
Speaker 1: other Robert Frank. They called the Speaker's Bureau who represents me,
Speaker 1: and booked me instead, by mistake. The Speaker's Bureau requires
Speaker 1: a hefty nonrefundable fee upfront deposit, and the Speaker's Bureau
Speaker 1: refused to refund the fee to the client, even after
Speaker 1: it became clear that they hadn't meant to engage to me.
Speaker 1: And I said, well, he's willing to to talk to you,
Speaker 1: We're prepared to send him. So I got a fat
Speaker 1: check for doing nothing that time. That's great. Well, you
Speaker 1: you did go and speak, right, did not? You did?
Speaker 1: Now that sounds like an economic inefficiency to say the least. Um,
Speaker 1: I want to get to a couple more questions that
Speaker 1: we skipped earlier, some of which I find really really
Speaker 1: intriguing on success in luck. So again another Michael Mobison question.
Speaker 1: We tend to attribute our success to skill and our
Speaker 1: failures to bad luck. How do we get people to
Speaker 1: be more aware of the true role of serendipity in
Speaker 1: their lives as opposed to merely thinking when it goes
Speaker 1: my way, it was all me. But if something goes
Speaker 1: along just well, you could steer people to the studies
Speaker 1: that show that that there's that asymmetry. I suspect few
Speaker 1: people would want to read them. Uh, And there's actually
Speaker 1: kind of a perverse adaptive quality to the asymmetry. So,
Speaker 1: for example, if you believe that when you succeed it's
Speaker 1: because of your skill, not your luck, then the next
Speaker 1: opportunity that comes along, you'll say to yourself, well, skills
Speaker 1: a persistent trait I had skilled before I succeeded. There's
Speaker 1: no reason not to explore this opportunity. So that's good.
Speaker 1: You're you're you're more likely to take the action that
Speaker 1: would lead to success. But isn't that how he ends
Speaker 1: up with a Michael Jordan playing baseball. Yeah, well, there's
Speaker 1: there's never a strategy that works well all the time,
Speaker 1: you know. But with the bad luck side of that,
Speaker 1: if you attribute your failures to bad luck, then you
Speaker 1: you'll you'll try something you'll fail at. Oh I was unlucky.
Speaker 1: Then another opportunity comes along, and and bad luck is
Speaker 1: not a persistent trait, You'll say, oh, I was just
Speaker 1: unlucky last time. I'm gonna try this time. There's no
Speaker 1: reason to think I'll fail again. So so the person
Speaker 1: who has that asymmetric view about good luck and bad
Speaker 1: luck may actually do better over time than the person
Speaker 1: who's more realistic in his beliefs. It's funny, it's it's
Speaker 1: long been the case on Wall Street trading desks that
Speaker 1: they recruited athletes, and a number of people have have
Speaker 1: pondered this, and and my best explanation for that is
Speaker 1: you can work hard all week, you can run the drills,
Speaker 1: memorize the playbooks, and on a Saturday you get a
Speaker 1: bad bounce or an unlucky call, you have to get
Speaker 1: up on Monday and brush yourself off and start all over,
Speaker 1: which pretty much describes what what happens in the random
Speaker 1: walk on on Wall Street. You have to be able
Speaker 1: to say that just was a bad bounce and start
Speaker 1: all over. It seems it's a little bit of hindsight bias.
Speaker 1: It seems to fit the existing facts and it it
Speaker 1: sort of rationalizes it. But I have yet to find
Speaker 1: a better explanation than that. That a symmetrical, asymmetrical way
Speaker 1: to shake off the bad news and take credit for
Speaker 1: the good news. One of the themes in the book
Speaker 1: is that, uh, false belief sometimes are adaptive for you.
Speaker 1: So when you're thinking about his luck important in your life, UH,
Speaker 1: let me read Duncan Watts's blurb that he's a very
Speaker 1: distinguished sociologist. If you're listeners don't know him, run out
Speaker 1: and by his book, everything is obvious once you know
Speaker 1: the answer. It's a terrific, terrific informative book. Uh. He writes,
Speaker 1: building a successful life requires a deep conviction that you
Speaker 1: are the author of your own destiny. That's absolutely right.
Speaker 1: By the way I think, if you think, oh, I'm
Speaker 1: a cork in the river, what was me? That's you're
Speaker 1: not going to attack your life in a very effective way.
Speaker 1: He continues, building a successful society requires an equally deep
Speaker 1: conviction that no one's destiny is their own. To write
Speaker 1: balancing these seemingly contradictory ideas maybe the most important social
Speaker 1: challenge of our time, And then he goes on to
Speaker 1: say nice things about the book. That's a fascinating um
Speaker 1: way to look at it from bottoms up and top down.
Speaker 1: Exactly what what works for an individual may not work
Speaker 1: for a society. Yeah, what what we what we should
Speaker 1: believe if we want to be effective psychologically confronting the
Speaker 1: world may not be a very accurate description of how
Speaker 1: the world works. So if inequality, as an example, is
Speaker 1: a natural outcome of and again I'm gonna quote mobis
Speaker 1: on a path dependent outcome luck, what if anything, should
Speaker 1: we do about that? One of the points I try
Speaker 1: to make in the book is that we haven't been
Speaker 1: investing for the future. The kids who are growing up
Speaker 1: today without a lot of money in their families are
Speaker 1: having a hard time getting through school, that they're handicap
Speaker 1: from a very early age in terms of training they get.
Speaker 1: It would cost money to do something about that. But
Speaker 1: the point I try to make in the book is
Speaker 1: that those of us who have done well could easily
Speaker 1: supply the resources. We need to do something about that
Speaker 1: without making any sacrifices that would be painful at all.
Speaker 1: And And for instance, I had a conversation with a colleague.
Speaker 1: He was afraid about the new taxes that were coming.
Speaker 1: I said, look, don't worry about them. People like us.
Speaker 1: It doesn't matter. He has a successful textbook. He's not
Speaker 1: going to spend everything. You arned, I don't spend everything.
Speaker 1: Iron We have everything we need, right, what's an issue?
Speaker 1: Will we still be able to get what we want
Speaker 1: if taxes go up to Yeah, that's what he was
Speaker 1: worried about. Well, what do people like us want? We've
Speaker 1: got everything we need. We want something special, And you
Speaker 1: want to be able to have a special celebration when
Speaker 1: your daughter gets married. You want to have a house
Speaker 1: with a sweeping view of the Lake of Choy, Slip
Speaker 1: at the marina, whatever it might be. There aren't enough
Speaker 1: of those things. You have to bid against other people
Speaker 1: like us to get them. What happens if their taxes
Speaker 1: go up and our taxes go up? Who gets those things?
Speaker 1: The same people as before? So and he bought this, Uh,
Speaker 1: you know, I'm not gonna say he bought it but
Speaker 1: he seemed willing to think about it. But if if
Speaker 1: someone were willing to think about it, it's uncontroversial. You know,
Speaker 1: the the things that we care about are defined very
Speaker 1: heavily in relative terms. Everybody wants to have a special
Speaker 1: occasion for his daughter's wedding. What's special? It's a purely
Speaker 1: relative concept. People today are spending thirty dollars on weddings
Speaker 1: on average in New York. It's not not around here
Speaker 1: in Manhattan. Why and it was ten thousand back in
Speaker 1: Why have they gone up so much because other people
Speaker 1: are spending more? And why is that? Because people at
Speaker 1: the time opper spending more. It trickles trickles down. But
Speaker 1: they're not bad people. They just want to have a
Speaker 1: special occasion, and special is relative. If you spend way
Speaker 1: less than everybody else spends, then it seems like a
Speaker 1: kind of a two bit wedding. You use the example
Speaker 1: that people lovers in poor countries the when dating, they
Speaker 1: give a single rose as a gift, and it's it's
Speaker 1: well received. But in wealthy countries, if it's not a
Speaker 1: dozen roses, it's thought of as as you're being cheap,
Speaker 1: and it's not the same sort of resonance. Yeah, it's
Speaker 1: it's a familiar point. No, No one hears about examples
Speaker 1: like that and say, oh, that's not the way the
Speaker 1: world is. Uh, everybody knows that's the way the world works.
Speaker 1: So it's interesting that people resist the notion that framing
Speaker 1: effects and context matters as much as it does. So
Speaker 1: let's let's take another example something I enjoyed from the book,
Speaker 1: where where we were talking about how relative things are
Speaker 1: and how when the the same tide goes up or
Speaker 1: down it affects everybody equally, and use an example of
Speaker 1: we have big tax cuts, which affords somebody to drive
Speaker 1: a Ferrari, but it's over these beat up, pothole cracked roads.
Speaker 1: Had we not had such large tax cuts, if the
Speaker 1: tax cuts were a little smaller, society can afford to
Speaker 1: pave everything and have nice smooth asphalt. And at that point,
Speaker 1: you're driving a Porsche on a smooth, clean road, which
Speaker 1: overall is the better experience for the individual, and what's
Speaker 1: the better experience for society. And the conclusion is the
Speaker 1: Porsche on the smooth, well paved roads is better for
Speaker 1: everybody than a Ferrari on a horrible pothole road where
Speaker 1: you can't get out of second gear, you know. You know, Barry,
Speaker 1: I have yet to meet anyone who who says, oh, no,
Speaker 1: that's not right. I'd rather drive a Ferrari on roads
Speaker 1: riddled with footneep potholes. No, he say, Well, the pushback
Speaker 1: would be, it's not just the Ferrari, but it's all
Speaker 1: this across the whole board, and it's confiscatory, and we
Speaker 1: can have high tax rates and it's a whole philosophical digression,
Speaker 1: but I'm talking at a marginal change sufficient to I
Speaker 1: don't know, pay for the infrastructure we all use. And
Speaker 1: I'm a car fan. I like anything that goes fast. Um,
Speaker 1: and I have been complaining about the roads for a
Speaker 1: long time. We've had a gas tax that's been frozen
Speaker 1: in place since, which leads to a question. Uh, something
Speaker 1: else came up in one of your columns, which had
Speaker 1: to do with the the anti government, Uh, philosophies that
Speaker 1: say we can never raise taxes, We shouldn't be spending money.
Speaker 1: Government should be as small as possible. And that's how
Speaker 1: we end up painted into an a gas tax that's
Speaker 1: unchanged for UM over twenty almost twenty five years. Yeah,
Speaker 1: it's it's just not in the interests of anyone to
Speaker 1: have that rigid anti tax position, and yet that's become
Speaker 1: almost a default for half of the politician. You hear
Speaker 1: people say without any self consciousness that taxation is theft,
Speaker 1: and the presumption there seems to be I earned it,
Speaker 1: it should be mine to keep. Well, every country in
Speaker 1: the world has mandatory taxation. What what's the position here
Speaker 1: that Samalia Smalia is your exception? Taxes should be voluntary
Speaker 1: like there are in Smalia. Do you want to move there?
Speaker 1: Nobody seems to be queueing enough to move there. So
Speaker 1: so if you don't have mandatory taxes, then you don't
Speaker 1: have a government, you don't have an army. You get
Speaker 1: invaded by some other country that has an army, then
Speaker 1: you pay mandatory taxes to them. So so the interesting
Speaker 1: questions are what should we tax, how much should we
Speaker 1: tax it? All those things are ripe for discussion, but
Speaker 1: we don't seem to have any a bill to discuss
Speaker 1: something that has the word tax in it. I have
Speaker 1: a sneaking feeling that this coming election that might be
Speaker 1: a big issue, and and the fallout after this election
Speaker 1: might see some some interesting rethinks of of pre existing
Speaker 1: thought processes. We'll have to see how that that plays out.
Speaker 1: We'll watch that with great interest, won't we. So back
Speaker 1: to um the Ferrari. You had a column in the
Speaker 1: Times that that I when I was researching this, I
Speaker 1: found and thought was pretty interesting, which said, conspicuous consumption
Speaker 1: is not so crazy. You know, we we're we're creatures
Speaker 1: of our inheritance. Uh is it cold out? Well, if
Speaker 1: you ask somebody that in Miami, where I grew up,
Speaker 1: on a sixty degree day in November, they're not happy.
Speaker 1: They know it's cold out. It's a stupid question. But
Speaker 1: if you ask somebody and I don't know Helsinki on
Speaker 1: a sixty degree day in March, they'll think you're stupid,
Speaker 1: would for asking, But the answers the opposite of it
Speaker 1: was not called out. So yeah, context shapes are evaluations.
Speaker 1: You know, I lived in a two room house with
Speaker 1: no plumbing or electricity the two years I was Peace
Speaker 1: Corps volunteer and rural Nepal. Not for one minute did
Speaker 1: that house seem in any way unsatisfactory. But neither you
Speaker 1: nor I could live in that house here in the
Speaker 1: US without feeling ashamed from our circumstances. Your kids wouldn't
Speaker 1: want their friends to know where you lived. So so
Speaker 1: context is clearly important as a as a a frame
Speaker 1: from making evaluations. How am I doing? You can't answer
Speaker 1: the question without a frame of reference. How am I
Speaker 1: doing relative to what? Relative to people like me? Here
Speaker 1: and now? How am I doing? And and what is
Speaker 1: it about some of these um luxury purchases that are
Speaker 1: either signaling events or you know, the difference again, to
Speaker 1: go back to the portion of Ferrari, the difference between
Speaker 1: the portion of the Ferrari e it. At a certain
Speaker 1: point it becomes harder and harder to justify each hundred
Speaker 1: thousand dollar increment for the next mill you know, the
Speaker 1: next tenth of a set. Once you're up to the
Speaker 1: portion of nine eleven, that's a hundred and fifty thousand
Speaker 1: dollar car, you've got virtually every design feature that affects
Speaker 1: performance in any significant way. So if the Ferrari Berlinette
Speaker 1: is a better car, some people will argue that it isn't.
Speaker 1: But if it is, it's at most just a hair's
Speaker 1: breadth better, and so you're not getting much in absolute terms.
Speaker 1: But if you were on a planet where the Porsche
Speaker 1: were the best car and we could hook in the
Speaker 1: driver's brains. How happy are they about their car? They'd
Speaker 1: be just as happy as the as the drivers on
Speaker 1: the other world where the the Ferrari where the best car,
Speaker 1: and and so you know, it's the it's the subjective
Speaker 1: sense that you're driving something special that people are really
Speaker 1: willing to pay for. You know, if you're if your
Speaker 1: car would get to sixty miles money, it would seem
Speaker 1: fast to you. Uh, eventually if it got that that fast,
Speaker 1: Now it's got to get there. Now the Tesla gets
Speaker 1: there in three point two seconds in in a ludicrous mode.
Speaker 1: It's now under In fact, the Tesla is faster than
Speaker 1: the portion of the Ferrari. So tho, just standards are
Speaker 1: are very elastic. That defined special and so this is subjective,
Speaker 1: it's relative, and the context makes a great deal of difference.
Speaker 1: And and collectively we have some say over what the
Speaker 1: context is, you know, meaning it's not in our interests
Speaker 1: to keep throwing tax cuts into pockets that will result
Speaker 1: in spending that just bids up the context. Why would
Speaker 1: an executive be happier in a world where everyone had
Speaker 1: at square foot mansion in that circle than in a
Speaker 1: world where the mansions were only And you use the
Speaker 1: example in in one of the books that if you
Speaker 1: ask people which would they p are if everybody has
Speaker 1: a two thousand square foot house and yours is three thousand,
Speaker 1: or if everybody has a six thousand square foot in
Speaker 1: your house is five thousand, and people take the bigger
Speaker 1: small house rather than the smaller big house. Yeah, if
Speaker 1: the small house gets small enough, they'll flip, right. But yeah,
Speaker 1: within a reasonable range. I think people judge correctly that
Speaker 1: they're probably going to be happier about their house if
Speaker 1: it's not a relatively inferior one in their local context.
Speaker 1: That that's interesting. Um, last of the mobisan questions. So
Speaker 1: most people understand luck at a very high level. How
Speaker 1: we capable of of pinpointing the role of luck um
Speaker 1: in very successful outcomes? Is there a way to identify
Speaker 1: other than Bill Gates saying, Hey, I was really lucky.
Speaker 1: I went to this high school, I got this IBM,
Speaker 1: made this bad deal which we took advantage of. Unless
Speaker 1: someone's in hitting that, how could we really identify luck
Speaker 1: versus skill? You know, it's it's interesting how you get
Speaker 1: people to think about the role of luck in their
Speaker 1: lives and uh, there was a article on Mother Jones
Speaker 1: by Kevin Drum last Uh. He had seen a piece
Speaker 1: that was excerpted from my book on vox vox dot com,
Speaker 1: and he was quick to identify all the lucky things
Speaker 1: that had benefited him in his life. But he was
Speaker 1: skeptical about my claim that telling rich people they'd been
Speaker 1: lucky would make them more willing to pay taxes. Uh.
Speaker 1: The claim in the book is that if you're more
Speaker 1: cognizant of having been lucky, then you are more generous
Speaker 1: to the next generation. And I wrote him back and
Speaker 1: I said, well, I agree. Just telling them that they're
Speaker 1: lucky will elicit a reaction of anger and defensiveness, much
Speaker 1: as that you didn't build that speech to you're telling
Speaker 1: people you don't belong where you are. Uh. But there's
Speaker 1: an interesting twist. If you'll ask a successful person, can
Speaker 1: you think of any examples of breaks eve enjoyed along
Speaker 1: the way that completely disarms the anger and the defensiveness.
Speaker 1: People seem to immediately light up. They think about what
Speaker 1: you know they're they're past. If they think of an
Speaker 1: example of a break they had, they want to tell
Speaker 1: you about it right away. The more examples they can
Speaker 1: think of the happier they seem to get. It's just
Speaker 1: a complete jiu jitsu maneuver. It has a dramatically different
Speaker 1: effect on how they react to the idea that luck
Speaker 1: may have mattered in their their lives. And so I
Speaker 1: wrote that up into a piece uh with the title
Speaker 1: I like best of any piece I ever wrote. The
Speaker 1: title is ask Comma, don't tell ask people about their
Speaker 1: their like. Um, that's a variation on a Ben Franklin issue.
Speaker 1: Instead of debating with people, he would agree with them
Speaker 1: and ask them as to you know, my position is
Speaker 1: wrong and I can't figure out and he would have
Speaker 1: listened their help, and by the time they were done,
Speaker 1: they had convinced him that his position was was right.
Speaker 1: But there's a certain fact to having people volunteered themselves
Speaker 1: rather than you know, the Socratic method has been around
Speaker 1: for a few thousand years, not for no reason. So
Speaker 1: let me jump to some of my favorite questions. UM,
Speaker 1: I was gonna ask you about your background, but pretty
Speaker 1: much out of the PhD talk math. And then you
Speaker 1: ended up at Cornell twenty years ago or so. How
Speaker 1: long have you been there for I've been at Cornell
Speaker 1: since nine, right out of graduate school, UH and started
Speaker 1: my teaching career at Cornell, and I've been there ever
Speaker 1: since except for various sabbatical leaves. Like so, who are
Speaker 1: some of your mentors? There's one I have to ask
Speaker 1: because I'm a fan of his work, But I would
Speaker 1: say that the two economists who have shaped my thinking
Speaker 1: personally the most by a wide margin, even one would
Speaker 1: be Tom Shelling, Nobel laureate, a long time Harvard Public
Speaker 1: Policy School professor. I think he, more than anyone, had
Speaker 1: written clearly about why what it makes sense for us
Speaker 1: individually to do may not make sense for us to
Speaker 1: do when we think about it from the perspective of
Speaker 1: the groups we belong to, so all standing to get
Speaker 1: a better view, no one sees better than if everybody
Speaker 1: remained comfortably seated. That's kind of a trivial example of
Speaker 1: that sort, but that's been a big theme in my
Speaker 1: own thinking about behavior and social organization. The other economists
Speaker 1: who's had the most influence on me is Ronald Co's,
Speaker 1: who U also also no. He was University of Chicago.
Speaker 1: He was also a Nobel laureate. UH and UH wrote
Speaker 1: very little, actually, just a handful of articles, but one
Speaker 1: I think is the most widely quoted and cited article
Speaker 1: of all time and economics, the problem of social cost
Speaker 1: and it's it's it's a way of thinking more clearly
Speaker 1: about what happens when somebody does something that has either
Speaker 1: negative or positive spillover effects on others. You make noise
Speaker 1: that disturbed the neighbors, You drive a heavy car, you
Speaker 1: put others at greater risk of injury and death. Uh.
Speaker 1: It used to be that people thought about those kinds
Speaker 1: of issues in terms of perpetrators and victims. You know,
Speaker 1: there were good guys and bad guys, and and his
Speaker 1: insight was that, no, these are people whose interests, both legitimate,
Speaker 1: are just in conflict with one another. Their shared interest
Speaker 1: is to figure out the most efficient way of resolving
Speaker 1: their conflict, and that sometimes leads to very counterintuitive conclusions
Speaker 1: about what ought to be done. So let me ask
Speaker 1: you about two other people who were at Cornell. One
Speaker 1: as someone you referenced in the book, Ed Gramleck was
Speaker 1: on the Federal Federal Reserve. He was a member of
Speaker 1: the Board of Governors of the FED. Very insightful way
Speaker 1: ahead of the curve, criticizing subprime lending, predatory lending, and
Speaker 1: a whole slew of different things that uh he brought
Speaker 1: Alan Greenspan's attention, and Greenspan said, don't worry, the marketplace
Speaker 1: will take care of it. And actually Greenspan was right.
Speaker 1: Eventually the marketplace did take care of it. Jeter, we
Speaker 1: went through the Ringer right, just just not quite the
Speaker 1: way I think he anticipated. But you tell a wonderful
Speaker 1: story in the book about Graham Lock and you on
Speaker 1: a ski lift. Yeah. He he came as a visitor
Speaker 1: my my fourth year when I was at Cornell, I
Speaker 1: had written very little. I had various UH issues had
Speaker 1: sort of kept me from putting as much time and
Speaker 1: energy into my writing. So I was, you know today
Speaker 1: they would fire somebody like me in year three. Then
Speaker 1: they kept me on just because I was a good
Speaker 1: teacher in the a big class. It was hard to staff.
Speaker 1: But they would have fired me at next opportunity, I'm
Speaker 1: quite sure. But but but Ned took an interest in
Speaker 1: my work. We became friends. He offered to publish a
Speaker 1: paper if I would write it for a volume he
Speaker 1: was editing, uh and and nobody else had shown any
Speaker 1: interest in what I was doing up until and so
Speaker 1: I happily agreed and wrote the paper, I was pretty
Speaker 1: pleased about it. I gave it to him, and then
Speaker 1: a day or two later he came to my office
Speaker 1: with a hangdog expression, saying that the sponsor of the
Speaker 1: volume that the paper was to have appeared in had
Speaker 1: called him to say the volume had been canceled, and
Speaker 1: it seemed like bad luck to me. I sent the
Speaker 1: paper out to a very selective journal just on lark,
Speaker 1: and it got accepted for publication, which was for me
Speaker 1: a way better outcome. And if it had gone into
Speaker 1: a an edited volume, which hardly anyone reads, and you know,
Speaker 1: isn't isn't really a good career move. But yeah, I
Speaker 1: was incredibly lucky to get that paper accepted where it were,
Speaker 1: And and I had a string of papers that got
Speaker 1: accepted in quick succession with almost no delay. That's never
Speaker 1: happened to me since then. The later papers I've written,
Speaker 1: I'm sure we're at least as good as those early ones.
Speaker 1: But if if I'd had the usual editorial delays even
Speaker 1: with them, I would have been fired the next opportunity.
Speaker 1: So the lucky break that the editor journal is canceled.
Speaker 1: What was it Econometrica that so Econometrica accepted my paper,
Speaker 1: did that success be get the other substit well, then
Speaker 1: I had There was a quick extension of the econometric
Speaker 1: of paper that I thought to write. I sent it out,
Speaker 1: It got accepted quickly. I wrote three more papers the
Speaker 1: next summer. I sent them out for review. They got
Speaker 1: accepted in quick succession by three of the top journals
Speaker 1: and economics. That never happens. You know, all my other
Speaker 1: papers since then have gotten rejected at least once, many
Speaker 1: of them four times, and when they accepted it's after
Speaker 1: a year's delay or three rounds of revisions. So so,
Speaker 1: if he didn't ask you to do this paper, you
Speaker 1: wouldn't have written it. If it wasn't canceled, you wouldn't
Speaker 1: have submitted it. And if none of these sort of
Speaker 1: random things in the car that really ended up getting
Speaker 1: you tenure at Cornell, Yeah, which was so far and
Speaker 1: away a better outcome for me professionally than what would
Speaker 1: have happened, which I also know a little bit about.
Speaker 1: I would have had a very different life except for
Speaker 1: that string of fortunate events. So so the other person
Speaker 1: outside of um Gramleck is a person who wrote a
Speaker 1: book that started me down a path into behavioral economics,
Speaker 1: which is Tom Gilgovich who wrote How We Know It
Speaker 1: Isn't So, which I I found. I don't even remember
Speaker 1: how I found it. Maybe a friend gave it to
Speaker 1: me way back when. And it's it's not a lay
Speaker 1: person book. It's a it's really a little more detailed
Speaker 1: academic book. But it makes clear that the way we
Speaker 1: perceive our own cognition is wildly wrong, and that we're
Speaker 1: really just a series of errors waiting to happen. Um.
Speaker 1: And you've you, I believe in. I don't remember which
Speaker 1: book it was you referenced some of Yeah. Tom Gilovich
Speaker 1: is in fact a very close friend. We've been collaborators
Speaker 1: for decades. Uh. He saved my life once. Uh really
Speaker 1: there was literally literally Yeah. No, he and I played
Speaker 1: tennis regularly. Oh, you mentioned we were playing tennis one
Speaker 1: sat morning. In the second set, we were seated on
Speaker 1: the bench during a changeover. He tells me this, I
Speaker 1: don't have any recollection, he says. The next scene, knows
Speaker 1: I'm lying motionless on the court, no breath, no pulse.
Speaker 1: He kneels to investigate, realizes this looks uh not quite right,
Speaker 1: and he yells out for somebody to call nine one one,
Speaker 1: and then he flips me over onto my back and
Speaker 1: starts pounding on my chest. You know, you've seen that
Speaker 1: many times in movies, so have I. So had He'd
Speaker 1: never been trained to do it, but just started pounding
Speaker 1: on your chest. He said. Uh. One of his Israeli
Speaker 1: graduate students who had been in the military had told
Speaker 1: him once that if you don't break the victim's breastbone,
Speaker 1: you weren't trying hard enough. So he he No, he
Speaker 1: didn't break break my breastbone. I don't think they never
Speaker 1: told me if he did. But he got a cough
Speaker 1: out of me after what seemed like forever, but then
Speaker 1: I went dead again, and he was about to give
Speaker 1: up hope when in through the doors of the tennis
Speaker 1: facility comes in the MT team. They cut my shirt off,
Speaker 1: they put the paddles on me, They rushed me to
Speaker 1: the hospital. They put me on a helicopter and fly
Speaker 1: me to a bigger hospital in Pennsylvania. They put me
Speaker 1: on ice overnight. Three days later, I'm beginning to uh
Speaker 1: come out of the fog, and I'm told by the
Speaker 1: medical people in Pennsylvania that I suffered sudden cardiac death
Speaker 1: just like that, not a heart attack. I died on
Speaker 1: the tennis court. Of the people who who don't get
Speaker 1: im media attention never revive the two percent, they told me,
Speaker 1: the two percent who do make it, you don't want
Speaker 1: to see them. They're they're all kind of messed up,
Speaker 1: typically long standing. But if you're without that, lots lots
Speaker 1: of problems for you. And and uh, for some reason,
Speaker 1: I escaped all that. And the reason had to have
Speaker 1: been that the ambulance came as quickly as it did.
Speaker 1: But that was the mystery. How did an ambulance come
Speaker 1: so fast when we were six miles out of town
Speaker 1: and the ambulances are dispatched away from the other side
Speaker 1: of Itha. And what I learned was that there had
Speaker 1: been two auto accidents close to the tennis center that
Speaker 1: had occurred before I collapsed. Two ambulances are well on
Speaker 1: their way to those accidents. One of them. The injuries
Speaker 1: aren't serious, so when the call comes to that one,
Speaker 1: they say, divert to the tennis center. We got something
Speaker 1: more important for you. And they were there. And except
Speaker 1: for that, I'm I'm a dead man. So not a coincidence.
Speaker 1: You you write a book on the road right about
Speaker 1: what you know that's what they tell authors, And I
Speaker 1: tell people I'm probably the luckiest person they know. Maybe
Speaker 1: that's not true, but I'm certainly one of the luckiest.
Speaker 1: That's pretty fascinating. Um, so let's talk about other books.
Speaker 1: What what are some of your favorite books that perhaps
Speaker 1: you haven't written, you have not written. Uh. Tom Shelling's
Speaker 1: book US, in which I didn't mention the title of
Speaker 1: is Micromotives and macro Behavior. Absolutely wonderful book. If you
Speaker 1: liked grow Behavior all right, if you liked Tom Gilovich's book,
Speaker 1: it's it's sort of aimed at that same slice of
Speaker 1: the market for the intelligent, curious person. I mentioned Duncan
Speaker 1: Watts's book. I think I actually have that at home.
Speaker 1: That is a fabulous book. Is the Mona Lisa famous
Speaker 1: because it's a great painting, No, says Duncan. He says
Speaker 1: it's famous because it's famous. It's famous because it was stolen.
Speaker 1: Prior to that, nobody really gave a damn about it
Speaker 1: until nineteen eleven. Then it was stolen from the Louver.
Speaker 1: Not a big picture, by the way, everybody thinks it's
Speaker 1: John It's no big deal when you see it. At
Speaker 1: least that was my my reaction and his two. And
Speaker 1: so he saw that there were two Leonardo canvases in
Speaker 1: the very next gal Nobody seemed to be crowding around
Speaker 1: to look at them, but there were three people elbowing
Speaker 1: one the other side to see the Mona Lisa. And
Speaker 1: so he did a little digging and he found that
Speaker 1: until nineteen eleven, nobody cared about the Mona Lisa. Then
Speaker 1: it got stolen. Took two years for them to resolve
Speaker 1: the crime. They arrested the Italian custodian who stole it.
Speaker 1: Then again, the paintings splashed across the newspapers all around
Speaker 1: the world, first time that had ever happened. And so
Speaker 1: now it's a symbol of Western culture, quite quite amazing,
Speaker 1: pure chance that it got to be that. Uh and
Speaker 1: what was the name of Duncan's book? Everything is obvious
Speaker 1: and then there's an asterisk, and in parenthesis beneath its asterisk.
Speaker 1: Once you know the answer, I'm gonna have to take
Speaker 1: a look. I'm pretty sure that's sitting in my queue
Speaker 1: waiting to be to be read. So so let me
Speaker 1: get to my last two favorite questions I asked all
Speaker 1: my guests. So a millennial or a recent college ad
Speaker 1: comes up to you and says, I'm interested in a
Speaker 1: career in economics. What sort of advice do you give them?
Speaker 1: I tell people to try to think of a time
Speaker 1: when they felt completely immersed in some activity, that the
Speaker 1: hours went by without them being conscious of time flying
Speaker 1: by it all, and to try and find a career
Speaker 1: where you would be doing that activity much of the time.
Speaker 1: If you if you can find something that you can
Speaker 1: engage with at that level, you will become an expert
Speaker 1: at it because you'll care so much about it. Won't
Speaker 1: seem like you're working hard to become an expert. It'll
Speaker 1: just be an organic process. And if you want to
Speaker 1: be a success, I think becoming developing deep expertise at
Speaker 1: something is the route to take In today's climate. We
Speaker 1: were talking about winner take all markets. You know, being
Speaker 1: the third best person that something isn't gonna do much
Speaker 1: for you. If you're the best at something, though, even
Speaker 1: it's if it's something that not that many people care about,
Speaker 1: there's often a lucrative niche for you. There's very least
Speaker 1: you're gonna be doing something you like that. There's a
Speaker 1: number of studies that talk about having an expertise, having
Speaker 1: a sense of control and actually being able to affect
Speaker 1: the outcome that that leads to workers satisfaction and and
Speaker 1: so you're giving that exact advice um to millennials, exact advice,
Speaker 1: you know. Charlie mungerh Warren, Buffett's second in command, said
Speaker 1: that if if you want to get what you want,
Speaker 1: a good strategy is to try to deserve what you want.
Speaker 1: Makes sense, and and getting really good at something that's
Speaker 1: that's how you most likely to get what you want.
Speaker 1: My final question, what do you know today about skill
Speaker 1: and about income inequality, about economics that you wish you
Speaker 1: understood better in the beginning of your career twenty plus
Speaker 1: years ago. You know, most people, as I say in
Speaker 1: the book, tend to overlook the role of luck in
Speaker 1: their lives. That hasn't been true of me. Not so
Speaker 1: much because I think I'm more observant or or perspicacious
Speaker 1: than the typical person. I think luck has had a
Speaker 1: much more obvious effect in my life. I would not
Speaker 1: advise anybody to organize his life the way I've done.
Speaker 1: You know, I think I've stumbled into a career that's
Speaker 1: been in so many ways just the right career for myself.
Speaker 1: I think if if you're more systematic about it and
Speaker 1: and today, I probably wouldn't have succeeded. I think the
Speaker 1: doors start closing at younger ages. Now you have to
Speaker 1: be I have credentials, solid line even to get into
Speaker 1: a good school. Now. It wasn't so much true when
Speaker 1: I was. But I think, you know, finding something that
Speaker 1: you you like and you can get lost in would
Speaker 1: be the same advice I'd give to somebody almost at
Speaker 1: any age. So if you're if you're a parent, you've
Speaker 1: got kids, uh, you know, kids don't like everything that
Speaker 1: they do, uh, and their reactions to the various activities
Speaker 1: that you urge them to try or instructive, So pay attention.
Speaker 1: Do they love something? You know, open some doors and
Speaker 1: see if you can get them more deeply involved in
Speaker 1: that thing that they love. Thanks Bob, this has been
Speaker 1: absolutely fascinating, and thank you for being so generous with
Speaker 1: your time. Thank you Berry. It was just an absolute
Speaker 1: pleasure for me to get to come down. If you've
Speaker 1: enjoyed this conversation, be sure and look up an inch
Speaker 1: or down an inch on Apple iTunes and you can
Speaker 1: see the other ninety or so such chats that we've had.
Speaker 1: I would be remiss if I omitted Taylor Rigs for
Speaker 1: helping to organize each of these conversations, and Charlie Vollmer,
Speaker 1: who is our chief engineer here. Uh, you've been listening
Speaker 1: to Masters in Business on Bloomberg Radio