1
00:00:03,240 --> 00:00:07,560
Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.

2
00:00:08,400 --> 00:00:13,720
Speaker 1: On today's podcast, I once again have a very special guest.

3
00:00:14,200 --> 00:00:16,080
Speaker 1: I know you guys are tired of hearing me say

4
00:00:16,120 --> 00:00:19,120
Speaker 1: that week after week, but you know what this really

5
00:00:19,239 --> 00:00:23,200
Speaker 1: is a very special guest, Professor Richard Taylor of the

6
00:00:23,280 --> 00:00:27,920
Speaker 1: University of Chicago, perhaps best known as the father of

7
00:00:28,000 --> 00:00:32,320
Speaker 1: behavioral economics. When you look at his body of work,

8
00:00:32,360 --> 00:00:36,080
Speaker 1: when you look at the impact he's had, Professor Taylor

9
00:00:36,440 --> 00:00:40,800
Speaker 1: on the perennial shortlist for a Nobel Prize in Economics,

10
00:00:41,360 --> 00:00:44,440
Speaker 1: what um I think you'll find so fascinating about him

11
00:00:44,520 --> 00:00:51,600
Speaker 1: is not just that he's incredibly intelligence and unbelievably knowledgeable

12
00:00:51,640 --> 00:00:56,160
Speaker 1: about how human behavior in the world of economics differs

13
00:00:56,200 --> 00:01:00,360
Speaker 1: so much from traditional economic theory. But you'll find he's

14
00:01:00,440 --> 00:01:05,600
Speaker 1: somewhat uh, somewhat mischievous and and very amusing and not

15
00:01:05,760 --> 00:01:11,720
Speaker 1: your typical dry academic and certainly not your typical dry economist.

16
00:01:13,120 --> 00:01:17,240
Speaker 1: His background is is really the very very early days

17
00:01:17,280 --> 00:01:21,520
Speaker 1: of behavioral economics. His early mentors were people like Danny

18
00:01:21,600 --> 00:01:25,560
Speaker 1: Knoman and and a most diverse ky Uh. He's worked

19
00:01:25,600 --> 00:01:29,160
Speaker 1: with Bob Schiller for many, many years, for twenty five years.

20
00:01:29,200 --> 00:01:34,080
Speaker 1: They've been co chairs of an nb E er UM

21
00:01:34,280 --> 00:01:39,960
Speaker 1: panel on behavioral economics, and just anybody who's been pursuing

22
00:01:40,000 --> 00:01:45,119
Speaker 1: this field is certainly familiar with his work, starting with UM.

23
00:01:45,560 --> 00:01:48,120
Speaker 1: A lot of anomalies that he's identified in the world

24
00:01:48,120 --> 00:01:51,520
Speaker 1: of economics, including his book The Winner's Curse from so

25
00:01:51,600 --> 00:01:54,080
Speaker 1: long ago. He did a book with Cass Sunstein Colts

26
00:01:54,600 --> 00:01:59,360
Speaker 1: Nudge that's been very influential, and currently he's out promoting

27
00:01:59,440 --> 00:02:04,160
Speaker 1: his latest book called Misbehaving, which really is a mix

28
00:02:04,200 --> 00:02:08,960
Speaker 1: of his own autobiography, which of course paralleled the rise

29
00:02:09,000 --> 00:02:11,840
Speaker 1: of behavioral economics over the past let's call it forty

30
00:02:11,919 --> 00:02:15,240
Speaker 1: or fifty years, and a quick funny story. After we

31
00:02:15,280 --> 00:02:18,320
Speaker 1: finished the interview, he had a head somewhere else downtown,

32
00:02:18,360 --> 00:02:22,359
Speaker 1: and so I walked with him down to his hotel.

33
00:02:22,400 --> 00:02:24,760
Speaker 1: We walked down Lexington Avenue, and let me tell you,

34
00:02:24,800 --> 00:02:29,600
Speaker 1: walking through the streets of Manhattan with Richard Taylor is

35
00:02:29,639 --> 00:02:33,320
Speaker 1: really quite fascinating because there's a running commentary on everything

36
00:02:33,360 --> 00:02:36,639
Speaker 1: that's going on, and and it's quite amusing and quite interesting.

37
00:02:37,240 --> 00:02:40,480
Speaker 1: And he said something that was really has stayed with me.

38
00:02:40,520 --> 00:02:44,120
Speaker 1: It was very interesting. During the interview. You'll hear him

39
00:02:44,160 --> 00:02:48,760
Speaker 1: discuss how traditional economic theory work works really well for

40
00:02:48,800 --> 00:02:53,000
Speaker 1: the small, insignificant decisions we make over and over again.

41
00:02:53,040 --> 00:02:55,359
Speaker 1: That we get good at what spaghetti source to buy

42
00:02:55,360 --> 00:02:57,919
Speaker 1: in the supermarket, you know where to fill up our

43
00:02:57,960 --> 00:03:00,960
Speaker 1: cars with gas, things like that that, let's be honest,

44
00:03:01,000 --> 00:03:04,080
Speaker 1: in the scheme of things, are not very consequential. But

45
00:03:04,160 --> 00:03:08,480
Speaker 1: he also talks about how the big decisions you make

46
00:03:08,480 --> 00:03:11,040
Speaker 1: in life you don't get to make that often. You

47
00:03:11,080 --> 00:03:15,600
Speaker 1: don't get to be that good at making the decisions

48
00:03:15,639 --> 00:03:17,680
Speaker 1: that really matter, You don't have a lot of experience

49
00:03:17,720 --> 00:03:21,680
Speaker 1: with them. His examples were, you choose what field you

50
00:03:21,720 --> 00:03:27,200
Speaker 1: go into where you work saving for retirement, who and

51
00:03:27,280 --> 00:03:30,440
Speaker 1: how often you get married, who you're gonna marry too,

52
00:03:30,960 --> 00:03:33,120
Speaker 1: And I was who are gonna get married to? And

53
00:03:33,160 --> 00:03:37,200
Speaker 1: how often you end up getting married or remarried, and

54
00:03:37,200 --> 00:03:40,800
Speaker 1: and the big decisions, the ones that really impact your life,

55
00:03:41,880 --> 00:03:45,680
Speaker 1: you do once or twice or maybe a handful of times.

56
00:03:46,040 --> 00:03:47,880
Speaker 1: So you don't get a lot of experience, you don't

57
00:03:47,920 --> 00:03:50,839
Speaker 1: get a lot of skill at it. It's something that

58
00:03:50,960 --> 00:03:54,320
Speaker 1: you hopefully make a right decision, and if you don't,

59
00:03:54,360 --> 00:03:58,200
Speaker 1: the consequences are really significant. And so as we're walking

60
00:03:58,200 --> 00:04:01,000
Speaker 1: down Lexington Avenue in New York City. I start talking

61
00:04:01,040 --> 00:04:03,600
Speaker 1: about that, and I jokingly say to him, Hey, you

62
00:04:03,640 --> 00:04:06,000
Speaker 1: know that thing about you know how many wives you

63
00:04:06,040 --> 00:04:09,040
Speaker 1: have and the impact it has on on your life

64
00:04:09,120 --> 00:04:12,320
Speaker 1: is is kind of interesting. My secret was to marry

65
00:04:12,440 --> 00:04:15,480
Speaker 1: my second wife first. Just skip the whole first marriage,

66
00:04:15,840 --> 00:04:18,480
Speaker 1: the whole disastrous first marriage, go right to the second marriage.

67
00:04:18,880 --> 00:04:21,479
Speaker 1: And he laughed, and then he said something that has

68
00:04:21,520 --> 00:04:25,240
Speaker 1: stayed with me since we did the interview. It's really very,

69
00:04:25,400 --> 00:04:30,000
Speaker 1: very interesting. He said, you can never be happier then

70
00:04:30,080 --> 00:04:34,480
Speaker 1: your spouses. And look, we've all heard the expression happy wife,

71
00:04:34,480 --> 00:04:37,360
Speaker 1: happy life, but stop and think of it in that

72
00:04:37,440 --> 00:04:41,360
Speaker 1: sort of behavioral terms, that the ceiling on your own

73
00:04:41,400 --> 00:04:45,920
Speaker 1: personal happiness is a function of whatever your spouses happiness is.

74
00:04:46,240 --> 00:04:49,159
Speaker 1: And when you put it into that context, it certainly

75
00:04:49,240 --> 00:04:51,960
Speaker 1: makes it clear that, hey, if you make your significant

76
00:04:51,960 --> 00:04:55,159
Speaker 1: other happy, it's going to come back and ultimately raise

77
00:04:55,240 --> 00:04:58,520
Speaker 1: the ceiling for how happy you yourself can be. But

78
00:04:58,960 --> 00:05:02,640
Speaker 1: lots of other comments and phrases like that, where he's

79
00:05:02,720 --> 00:05:06,960
Speaker 1: just looking at it slightly a scan, slightly differently then

80
00:05:07,080 --> 00:05:10,000
Speaker 1: you might consider, and it leads to a lot of insights.

81
00:05:10,080 --> 00:05:13,680
Speaker 1: So I found him to be absolutely fascinating. I wish

82
00:05:13,680 --> 00:05:16,560
Speaker 1: I could have kept him there for another hour. Um,

83
00:05:16,600 --> 00:05:20,400
Speaker 1: without any further ado, here is my conversation with Professor

84
00:05:20,520 --> 00:05:28,159
Speaker 1: Richard Taylor. This is Master's in Business with Barry Ridholts

85
00:05:28,320 --> 00:05:32,440
Speaker 1: on Bloomberg Radio. Once again, I have a fantastic and

86
00:05:32,560 --> 00:05:36,599
Speaker 1: special guest. His name is Dr Richard Thaller. He has

87
00:05:36,640 --> 00:05:40,359
Speaker 1: been called the father of behavioral finance. And I'm just

88
00:05:40,400 --> 00:05:44,400
Speaker 1: gonna give a short version of your curriculum. Vite bachelor's

89
00:05:44,400 --> 00:05:48,000
Speaker 1: degree from Case Western and then a master's and PhD

90
00:05:48,040 --> 00:05:51,080
Speaker 1: from the University of Rochester. Dr Thaller is the author

91
00:05:51,120 --> 00:05:55,200
Speaker 1: of over fifty published papers and notable numerous books, most

92
00:05:55,279 --> 00:06:00,599
Speaker 1: notably The Winner's Curse, Nudge and Misbehaving for Fessa Faler.

93
00:06:00,800 --> 00:06:03,960
Speaker 1: Welcome to Bloomberg, Thanks Berry, happy to be here. I'm

94
00:06:04,040 --> 00:06:07,400
Speaker 1: leaving out half of your CV, will save that for

95
00:06:07,400 --> 00:06:10,560
Speaker 1: for for later. Tell us a little bit about your background.

96
00:06:10,600 --> 00:06:15,440
Speaker 1: How did you find your way to academia. I went

97
00:06:15,480 --> 00:06:18,039
Speaker 1: into academia because I didn't think I was suitable for

98
00:06:18,120 --> 00:06:22,480
Speaker 1: anything else. That's literally true. My father was an actuary,

99
00:06:23,200 --> 00:06:25,440
Speaker 1: and it was a great disappointment to him that I

100
00:06:25,480 --> 00:06:30,520
Speaker 1: didn't follow into his footsteps. But I saw him. I

101
00:06:30,560 --> 00:06:33,040
Speaker 1: grew up in Jersey, worked at Prudential. I saw him

102
00:06:33,080 --> 00:06:36,360
Speaker 1: taking the training every day and not for you, not

103
00:06:36,560 --> 00:06:42,400
Speaker 1: for me, and I'm the world's were subordinate. So academia

104
00:06:42,480 --> 00:06:46,479
Speaker 1: seemed like a good choice. And you know, I was

105
00:06:46,600 --> 00:06:49,840
Speaker 1: kind of good in math and kind of good in economics,

106
00:06:49,880 --> 00:06:54,119
Speaker 1: so I went into economics. So you start out as

107
00:06:54,240 --> 00:06:57,159
Speaker 1: a was it a graduate school student at Stanford or

108
00:06:57,240 --> 00:07:01,599
Speaker 1: right after being a graduate student? Uh? Yeah, after being

109
00:07:01,640 --> 00:07:05,120
Speaker 1: graduate student and uh and teaching for a couple of

110
00:07:05,200 --> 00:07:11,480
Speaker 1: years is the Stanford episode. Um, you had some really

111
00:07:11,520 --> 00:07:17,080
Speaker 1: influential mentors. Yeah. I I claimed to have discovered Daniel

112
00:07:17,160 --> 00:07:21,040
Speaker 1: Kneman and Amos Tversky in the same sense in which

113
00:07:21,080 --> 00:07:25,320
Speaker 1: Columbus discovered America. I mean it was here. Came to

114
00:07:25,440 --> 00:07:27,600
Speaker 1: as a surprise to the people who were living here

115
00:07:27,640 --> 00:07:33,160
Speaker 1: at the time. Yeah, so uh, Conlimen Diversky came to

116
00:07:33,800 --> 00:07:37,960
Speaker 1: as a surprise to economists. So I claimed to be

117
00:07:38,000 --> 00:07:41,840
Speaker 1: the first economists who have discovered them. And I had

118
00:07:41,920 --> 00:07:48,280
Speaker 1: been interested in weird stuff. People do weird from the

119
00:07:48,400 --> 00:07:57,480
Speaker 1: perspective of economists. So economists have this creature they study

120
00:07:57,560 --> 00:08:01,520
Speaker 1: that comes with the Latin term homo econonomicus. I just

121
00:08:01,640 --> 00:08:05,720
Speaker 1: like calling them econs economic man, economic man, or we

122
00:08:05,720 --> 00:08:09,120
Speaker 1: should say economic person. Come on, Barry, we have to

123
00:08:09,200 --> 00:08:12,320
Speaker 1: be you know century. You work in academia, so you

124
00:08:12,320 --> 00:08:15,679
Speaker 1: have to be more politically career. Yeah right, so economic person,

125
00:08:16,160 --> 00:08:21,280
Speaker 1: but I call him econs. And econs are as smart

126
00:08:21,320 --> 00:08:25,840
Speaker 1: as the smartest economist, or possibly even as smart as

127
00:08:25,880 --> 00:08:29,600
Speaker 1: the smartest economist thinks he is, which is much smarter,

128
00:08:29,840 --> 00:08:34,600
Speaker 1: which is right, which is really really smart. Um. They

129
00:08:34,640 --> 00:08:38,840
Speaker 1: have perfect willpower, never have to die because they weigh

130
00:08:38,840 --> 00:08:44,439
Speaker 1: exactly the right amount. No hangovers, uh saving for retirement,

131
00:08:44,480 --> 00:08:48,320
Speaker 1: piece of cake. They calculate how much they need, how

132
00:08:48,440 --> 00:08:54,199
Speaker 1: much they're gonna earn on their investments, implement so needlessness.

133
00:08:54,280 --> 00:08:59,959
Speaker 1: Oh one other thing, they're jerks. So these uh rational

134
00:09:00,080 --> 00:09:05,920
Speaker 1: economic man. Will you know I left my cell phone

135
00:09:06,200 --> 00:09:09,520
Speaker 1: outside the door to charge. If an econ walked by,

136
00:09:09,800 --> 00:09:11,760
Speaker 1: he would take it. He would take it. So so

137
00:09:11,880 --> 00:09:16,120
Speaker 1: let me throw a quote of yours to put this succinctly.

138
00:09:16,800 --> 00:09:20,840
Speaker 1: Conventional economics assumes that people are highly rational, in fact,

139
00:09:21,160 --> 00:09:26,160
Speaker 1: superrational and unemotional. They could calculate like a computer and

140
00:09:26,240 --> 00:09:29,560
Speaker 1: have no self control problems. So so how does this

141
00:09:29,679 --> 00:09:34,840
Speaker 1: manifest itself. This this obvious falsehood about the way humans behave.

142
00:09:35,240 --> 00:09:38,840
Speaker 1: How does this manifest itself in terms of the way

143
00:09:38,880 --> 00:09:43,760
Speaker 1: economics progresses. Well, take the problem of saving for retirement.

144
00:09:44,400 --> 00:09:49,240
Speaker 1: It's one one of the biggest financial decisions that we

145
00:09:49,320 --> 00:09:53,079
Speaker 1: have to make in our lifetime. One is how much

146
00:09:53,200 --> 00:09:56,719
Speaker 1: education to get and what type, second is who to

147
00:09:56,840 --> 00:10:01,920
Speaker 1: marry and how often, And the third is saving for retirement,

148
00:10:02,480 --> 00:10:04,480
Speaker 1: throwing buying a house, and you pretty much have the

149
00:10:04,480 --> 00:10:08,920
Speaker 1: big ones. So you know, that's a piece of cake

150
00:10:09,160 --> 00:10:12,360
Speaker 1: for econs. And it used to be a piece of

151
00:10:12,400 --> 00:10:16,559
Speaker 1: cake for my father's generation because there were pensions and

152
00:10:16,760 --> 00:10:21,200
Speaker 1: you would work at prudential for your life and then

153
00:10:21,240 --> 00:10:25,120
Speaker 1: they would give you an annuity, and retiring was easy.

154
00:10:25,200 --> 00:10:29,840
Speaker 1: You never had to think about anything. So then you know,

155
00:10:29,880 --> 00:10:33,319
Speaker 1: we invent the four one K and now people have

156
00:10:33,400 --> 00:10:37,000
Speaker 1: to figure out whether to join, how much to put in,

157
00:10:37,280 --> 00:10:42,320
Speaker 1: how to invest it, and then how to draw it down,

158
00:10:42,360 --> 00:10:47,520
Speaker 1: which is very hard. And so the idea of this

159
00:10:47,559 --> 00:10:53,160
Speaker 1: perfect per perfectly rational person making all the right choices, unemotionally,

160
00:10:53,600 --> 00:10:57,600
Speaker 1: with good self control and perfectly calculated to their needs,

161
00:10:58,160 --> 00:11:02,120
Speaker 1: that clearly doesn't exist. It clearly doesn't exist. And notice

162
00:11:02,480 --> 00:11:05,320
Speaker 1: if the world was full of full of people like that.

163
00:11:06,280 --> 00:11:09,440
Speaker 1: Then the four O one K is unambiguously a big

164
00:11:09,480 --> 00:11:15,560
Speaker 1: improvement because it's portable and you can customize it, and

165
00:11:15,600 --> 00:11:20,079
Speaker 1: we all know what's best for ourselves if we're econs.

166
00:11:20,360 --> 00:11:23,760
Speaker 1: The the the dal Bar numbers each year show that

167
00:11:24,160 --> 00:11:28,160
Speaker 1: the average return over the course of thirty years has

168
00:11:28,160 --> 00:11:31,440
Speaker 1: been about three for four O one K investors. Yeah,

169
00:11:31,559 --> 00:11:33,920
Speaker 1: and they have a great tendency to buy high and

170
00:11:33,960 --> 00:11:39,920
Speaker 1: sell low. They massively got out of equities, uh, starting

171
00:11:39,920 --> 00:11:44,319
Speaker 1: in about two thousand six, and flows didn't turn positive

172
00:11:44,360 --> 00:11:48,719
Speaker 1: until during which time the market had doubled. Why is

173
00:11:48,760 --> 00:11:54,280
Speaker 1: it so challenging to get economists to actually understand people

174
00:11:54,320 --> 00:11:57,560
Speaker 1: don't behave this way in the real world. Well, let's

175
00:11:57,600 --> 00:12:01,120
Speaker 1: just say that one of the things that you have

176
00:12:01,240 --> 00:12:05,560
Speaker 1: trouble with is the economic concept of sunk costs. I

177
00:12:05,600 --> 00:12:08,920
Speaker 1: was going through your list of mentors. Pretty much your

178
00:12:08,960 --> 00:12:15,040
Speaker 1: early mentors are all almost all nobile laureates. I've been lucky.

179
00:12:15,200 --> 00:12:17,040
Speaker 1: You know how to pick them. Yeah, you definitely know

180
00:12:17,040 --> 00:12:19,160
Speaker 1: how to pick them. So before the break, we were

181
00:12:19,240 --> 00:12:23,480
Speaker 1: discussing sunk costs, and I had asked you, why is

182
00:12:23,480 --> 00:12:28,839
Speaker 1: it that economists just won't recognize some of the reality

183
00:12:28,880 --> 00:12:31,280
Speaker 1: of the way humans behave in the real world. And

184
00:12:31,280 --> 00:12:35,080
Speaker 1: and your answer was My answer was, uh, you know,

185
00:12:36,240 --> 00:12:39,080
Speaker 1: a bit cheeky as I tend to be, which is

186
00:12:39,160 --> 00:12:42,760
Speaker 1: that economists teach people that they should ignore what they

187
00:12:42,840 --> 00:12:47,480
Speaker 1: call sunk costs, meaning if that dessert doesn't taste very good,

188
00:12:47,679 --> 00:12:50,400
Speaker 1: you should need it just because you paid twenty bucks

189
00:12:50,440 --> 00:12:54,960
Speaker 1: for it. And economists have trouble following their own advice,

190
00:12:55,559 --> 00:12:58,319
Speaker 1: and they had a lot invested in the rational economic

191
00:12:58,400 --> 00:13:01,440
Speaker 1: model and weren't gonna give it up without a fight.

192
00:13:02,320 --> 00:13:05,959
Speaker 1: Isn't that the nature of so many ideologies that there's

193
00:13:06,000 --> 00:13:09,440
Speaker 1: all this time and effort, there's this endownment effect that

194
00:13:09,520 --> 00:13:12,160
Speaker 1: it's yours, you've done, You've done the work, you've done

195
00:13:12,200 --> 00:13:15,760
Speaker 1: the heavy lifting. Very difficult to just oh this is wrong,

196
00:13:15,840 --> 00:13:18,240
Speaker 1: let me move on and find a new philosophy. Yeah,

197
00:13:18,280 --> 00:13:22,080
Speaker 1: that's true. And you know I often say that I

198
00:13:22,120 --> 00:13:25,439
Speaker 1: don't think in forty years I've changed in anybody's mind.

199
00:13:26,000 --> 00:13:28,600
Speaker 1: I disagree with that statement. I know you've said that,

200
00:13:28,920 --> 00:13:31,960
Speaker 1: but you've actually changed a lot of people's If not

201
00:13:32,080 --> 00:13:36,920
Speaker 1: change their minds, certainly change their perspectives and enlighten them somewhat. Well,

202
00:13:36,960 --> 00:13:42,800
Speaker 1: but not not economists. So, I mean, the field is growing,

203
00:13:43,000 --> 00:13:45,880
Speaker 1: and uh, there are lots of great people in it,

204
00:13:45,960 --> 00:13:49,880
Speaker 1: but they're young, and so my strategy from the beginning

205
00:13:50,080 --> 00:13:54,199
Speaker 1: was corrupt the youth. Don't try to you know, there's

206
00:13:54,240 --> 00:13:58,880
Speaker 1: this old line science much on funeral by funeral and

207
00:13:58,960 --> 00:14:02,800
Speaker 1: funeral at a time, and uh, you know, there's no

208
00:14:02,880 --> 00:14:07,480
Speaker 1: point in trying to convince those guys. But young impressionable

209
00:14:07,480 --> 00:14:10,960
Speaker 1: graduate students, you know, you can have your way with them.

210
00:14:11,200 --> 00:14:15,320
Speaker 1: That's hilarious. So don't even bother convincing the old fogies.

211
00:14:15,400 --> 00:14:18,000
Speaker 1: Just go right for the kids. Yeah, it's a it's

212
00:14:18,040 --> 00:14:21,680
Speaker 1: a good long term strategy. Yeah, you know, I was

213
00:14:21,760 --> 00:14:24,720
Speaker 1: playing a long game. You have good impulse control. I

214
00:14:24,800 --> 00:14:28,120
Speaker 1: have to work on that. That's really interesting. So let's

215
00:14:28,120 --> 00:14:33,000
Speaker 1: move a little more specifically to the efficient market hypothesis. Um,

216
00:14:33,240 --> 00:14:35,480
Speaker 1: you once said, I love I love a lot of

217
00:14:35,560 --> 00:14:38,320
Speaker 1: your quotes. We don't want to throw away the efficient

218
00:14:38,360 --> 00:14:41,360
Speaker 1: market hypothesis. We just don't want to believe it's true.

219
00:14:41,600 --> 00:14:44,960
Speaker 1: Explain what you mean by that. Yeah, So all of

220
00:14:45,080 --> 00:14:50,640
Speaker 1: behavioral economics and behavioral finance starts with rational models, and

221
00:14:51,000 --> 00:14:54,640
Speaker 1: they give us a benchmark, and it really wouldn't really

222
00:14:54,640 --> 00:15:00,880
Speaker 1: be possible to do behavioral economics without that rational benchmark. So,

223
00:15:01,280 --> 00:15:04,840
Speaker 1: you know, the official market hypothesis really has two components.

224
00:15:05,160 --> 00:15:07,800
Speaker 1: One is that you can't beat the market, and the

225
00:15:07,840 --> 00:15:11,680
Speaker 1: other is that prices are right, that asset prices are

226
00:15:11,720 --> 00:15:16,400
Speaker 1: equal to their intrinsic value. Now, those are very useful

227
00:15:17,240 --> 00:15:23,320
Speaker 1: starting points, no hypotheses, right, and the beauty is that

228
00:15:23,440 --> 00:15:29,080
Speaker 1: they're testable and so over long periods of time. And yeah,

229
00:15:29,120 --> 00:15:33,560
Speaker 1: well sometimes, like let's take the prices right. Here's an

230
00:15:33,560 --> 00:15:40,560
Speaker 1: amusing story. There's a closed and mutual fund, which, if

231
00:15:40,680 --> 00:15:43,000
Speaker 1: listeners don't know, these are mutual funds that you have

232
00:15:43,080 --> 00:15:47,720
Speaker 1: to buy and sell on exchanges, which means that their

233
00:15:47,760 --> 00:15:51,520
Speaker 1: prices can deviate from the value of the assets they own,

234
00:15:51,600 --> 00:15:54,200
Speaker 1: as opposed to traditional mutual funds where you can only

235
00:15:54,240 --> 00:15:55,800
Speaker 1: sell at the end buy or sell at the end

236
00:15:55,800 --> 00:15:58,840
Speaker 1: of the day, and it reflects a calculation of everything

237
00:15:58,880 --> 00:16:03,840
Speaker 1: that's held with that that bucket exactly. Now, the fact

238
00:16:03,960 --> 00:16:06,840
Speaker 1: that the prices sometimes differ from the value of the

239
00:16:06,880 --> 00:16:09,920
Speaker 1: assets is already embarrassing, but not as bad as the story.

240
00:16:09,920 --> 00:16:13,760
Speaker 1: I'm gonna tell you. There's a small closed end fund

241
00:16:14,160 --> 00:16:17,280
Speaker 1: that happens to have the ticker symbol. See you be

242
00:16:17,600 --> 00:16:22,840
Speaker 1: a Cuba Yeah. Now, needless to say, they don't own

243
00:16:22,960 --> 00:16:27,120
Speaker 1: any assets in Cuba because A it's against the law

244
00:16:27,480 --> 00:16:31,880
Speaker 1: and B there aren't any right. Nevertheless, and for years

245
00:16:31,920 --> 00:16:34,960
Speaker 1: it was selling at about a fifteen percent discount to

246
00:16:35,040 --> 00:16:40,080
Speaker 1: its event President Obama made his announcement of his intention

247
00:16:40,760 --> 00:16:46,560
Speaker 1: to ease relations with Cuba, the Cuba Fund went to

248
00:16:46,600 --> 00:16:51,480
Speaker 1: a seventy premium. The next day after the presidential announcement,

249
00:16:51,560 --> 00:16:55,400
Speaker 1: it was up almost fifty. A week later it was up.

250
00:16:56,600 --> 00:17:01,440
Speaker 1: How inefficient is that? Not efficient? And you know efficient

251
00:17:01,480 --> 00:17:04,040
Speaker 1: market defenders was like, oh, look, this is one little,

252
00:17:04,080 --> 00:17:07,640
Speaker 1: tiny example, but there are hundreds of the right and

253
00:17:07,760 --> 00:17:10,520
Speaker 1: we study these little examples. I call them the fruit

254
00:17:10,600 --> 00:17:16,280
Speaker 1: flies of finance because no one can possibly defend this.

255
00:17:16,760 --> 00:17:23,160
Speaker 1: It's still several months later, selling above really above net

256
00:17:23,200 --> 00:17:27,880
Speaker 1: asset value here. But Jobo, we're opening relations with Cuba.

257
00:17:28,200 --> 00:17:30,080
Speaker 1: Why could you? Why are you so negative on a

258
00:17:30,080 --> 00:17:33,240
Speaker 1: closed and fun called Cuba just because it does nothing

259
00:17:33,280 --> 00:17:36,280
Speaker 1: whatsoever to do with Cuba? Yeah? Well, and noticed that

260
00:17:36,320 --> 00:17:41,160
Speaker 1: they're they're holdings are public information. Yeah, and you can

261
00:17:41,200 --> 00:17:46,120
Speaker 1: buy those stocks on your own for a hundred dollars.

262
00:17:46,280 --> 00:17:50,160
Speaker 1: Why would you pay a hundred and forty that's unbelievable. Well,

263
00:17:50,240 --> 00:17:55,080
Speaker 1: markets are not perfectly efficients, they're kind of sort of

264
00:17:55,080 --> 00:18:00,399
Speaker 1: eventually will get around to it efficient. Well maybe maybe.

265
00:18:00,600 --> 00:18:02,840
Speaker 1: So here's what I would say. The part that you

266
00:18:02,880 --> 00:18:07,240
Speaker 1: can't beat the market is approximately true. Some people can

267
00:18:07,280 --> 00:18:11,160
Speaker 1: on rare occasion. Good luck picking them in advance. That's right.

268
00:18:11,440 --> 00:18:14,600
Speaker 1: And look, I mean what we know is most active

269
00:18:14,600 --> 00:18:20,399
Speaker 1: managers underperformed, and that's kind of the best evidence in

270
00:18:20,480 --> 00:18:25,040
Speaker 1: favor of the efficient market hypothesis. And that's before fees, cost,

271
00:18:25,160 --> 00:18:27,359
Speaker 1: taxes time. Yeah, it depends on how you do it,

272
00:18:27,400 --> 00:18:32,040
Speaker 1: but there's certainly they're certainly not beating the market after fees.

273
00:18:32,359 --> 00:18:36,160
Speaker 1: But although it's the best evidence for the efficient market hypothesis,

274
00:18:36,480 --> 00:18:40,160
Speaker 1: it's also the most evidence against because where is most

275
00:18:40,160 --> 00:18:44,320
Speaker 1: of the money inactive funds? Yeah? Van Guard has grown

276
00:18:44,320 --> 00:18:47,880
Speaker 1: a lot that exception. Yeah, and there's still a third

277
00:18:47,920 --> 00:18:53,200
Speaker 1: of their three trillion dollars is still actively managed. So

278
00:18:53,200 --> 00:18:57,480
Speaker 1: so I think it's approximately right, And listeners would be

279
00:18:57,520 --> 00:19:00,560
Speaker 1: well advised to just say I can't do it. Is

280
00:19:00,560 --> 00:19:04,200
Speaker 1: it just inherent in human behavior that we're going to

281
00:19:04,280 --> 00:19:07,080
Speaker 1: get booms and bus markets are gonna rally and crash,

282
00:19:07,119 --> 00:19:10,440
Speaker 1: and that's just the way it's gonna be. I think

283
00:19:10,640 --> 00:19:13,280
Speaker 1: we're subject to that risk, but I think there are

284
00:19:13,280 --> 00:19:15,800
Speaker 1: things we could do to mitigate it. And let's talk

285
00:19:15,840 --> 00:19:20,960
Speaker 1: a little bit about choice, architecture and nudge, which refers

286
00:19:20,960 --> 00:19:25,920
Speaker 1: obviously to the book you wrote with Cassnstein. Yes, so

287
00:19:26,000 --> 00:19:30,639
Speaker 1: the idea of nudge is that because we're dealing with

288
00:19:30,720 --> 00:19:34,639
Speaker 1: humans rather than e cons, they sometimes need help, and

289
00:19:35,760 --> 00:19:39,200
Speaker 1: can we think of ways to help them that don't

290
00:19:39,280 --> 00:19:42,359
Speaker 1: force anybody to do anything. So that was the conceit

291
00:19:42,520 --> 00:19:45,879
Speaker 1: of the book. In other words, you're not mandating anything,

292
00:19:45,920 --> 00:19:50,520
Speaker 1: do it, no bands, how much can you do with

293
00:19:50,560 --> 00:19:53,879
Speaker 1: those restrictions, So you're just you're just kind of just

294
00:19:53,960 --> 00:19:56,280
Speaker 1: kind of nudging is the right words, just kind of

295
00:19:56,359 --> 00:19:59,960
Speaker 1: nudging them into the right choice. There's an interesting little

296
00:20:00,000 --> 00:20:04,200
Speaker 1: little bit of behavioral engineering, which is and I see

297
00:20:04,200 --> 00:20:05,720
Speaker 1: it here in New York. I come up out of

298
00:20:05,720 --> 00:20:08,760
Speaker 1: a subway to get to my office because it's the

299
00:20:08,760 --> 00:20:13,320
Speaker 1: fastest way to get around town. And it's a double escalator.

300
00:20:13,400 --> 00:20:16,119
Speaker 1: I mean, this thing just goes on forever, and about

301
00:20:16,119 --> 00:20:19,800
Speaker 1: half the people stand on the escalator and half people walk.

302
00:20:20,280 --> 00:20:23,359
Speaker 1: But sometimes you get people who don't understand the social

303
00:20:23,480 --> 00:20:26,280
Speaker 1: norms and they stand on the left side instead of

304
00:20:26,280 --> 00:20:29,119
Speaker 1: standing on the right side. I'm in an airport or

305
00:20:29,200 --> 00:20:33,760
Speaker 1: somewhere in maybe it was Brussels, and I see this

306
00:20:34,080 --> 00:20:38,280
Speaker 1: escalator and on the right hand side are two ft

307
00:20:38,320 --> 00:20:41,800
Speaker 1: on each step two to two. On the left hand

308
00:20:41,840 --> 00:20:45,640
Speaker 1: side is alternates left and right. And it made it clear, oh,

309
00:20:45,720 --> 00:20:49,639
Speaker 1: this is the walking half and that whole issue. You

310
00:20:49,760 --> 00:20:53,080
Speaker 1: never ran into the person who don't understand the social etiquette.

311
00:20:53,160 --> 00:20:55,880
Speaker 1: And if you're standing slow traffic moved to the right.

312
00:20:56,160 --> 00:20:59,359
Speaker 1: It was amazing and it was so simple and very effective.

313
00:20:59,720 --> 00:21:04,080
Speaker 1: You know, people have lots of misconceptions about nudge. One

314
00:21:04,359 --> 00:21:08,320
Speaker 1: is that it has to be sneaky. These notice these

315
00:21:08,359 --> 00:21:12,800
Speaker 1: things are the opposite of right. Look. My favorite nudge,

316
00:21:12,840 --> 00:21:15,440
Speaker 1: one that I claim has saved my life many times,

317
00:21:16,000 --> 00:21:20,600
Speaker 1: is in London at street corners, there's a sign at

318
00:21:20,640 --> 00:21:25,280
Speaker 1: your feet look right because the cars are coming from

319
00:21:25,280 --> 00:21:30,160
Speaker 1: the wrong direction if you're from Europe or America, and

320
00:21:30,240 --> 00:21:35,159
Speaker 1: so you know, many years of looking for cars coming

321
00:21:35,800 --> 00:21:39,879
Speaker 1: from your left, all of a sudden boom, so you

322
00:21:39,920 --> 00:21:44,119
Speaker 1: know there's nothing sneaky about that. Nobody tells you you

323
00:21:44,200 --> 00:21:48,520
Speaker 1: have to look at it, but several double decker busses

324
00:21:48,600 --> 00:21:51,960
Speaker 1: haven't hit me because of that look right. So, you know,

325
00:21:52,280 --> 00:21:55,119
Speaker 1: a couple of years ago, I wrote this thing for

326
00:21:55,240 --> 00:21:57,840
Speaker 1: tourists coming to New York City, and one of the

327
00:21:57,920 --> 00:22:01,199
Speaker 1: things was there are many one way streets, but the

328
00:22:01,240 --> 00:22:06,040
Speaker 1: bicyclists don't have h any obligation apparently to follow that.

329
00:22:06,320 --> 00:22:09,000
Speaker 1: So when you step off the curb, look left and

330
00:22:09,160 --> 00:22:11,159
Speaker 1: right to make sure you don't. And let me tell

331
00:22:11,200 --> 00:22:14,400
Speaker 1: you how many times I've just missed the bicyclists because

332
00:22:14,400 --> 00:22:17,040
Speaker 1: I happen to look right. It's the same, it's the

333
00:22:17,040 --> 00:22:21,320
Speaker 1: same exact thing. So this really is kind of consistent

334
00:22:21,400 --> 00:22:25,159
Speaker 1: with the philosophy at the University of Chicago, which is

335
00:22:25,240 --> 00:22:29,360
Speaker 1: really known as a libertarian, a sort of right leaning

336
00:22:29,440 --> 00:22:36,040
Speaker 1: philosophical um efficient market hypothesis place. Are you considered a

337
00:22:36,040 --> 00:22:39,240
Speaker 1: bit of a heretic there because you really don't fit

338
00:22:39,320 --> 00:22:43,560
Speaker 1: the mold of of Chicago economists. I think heretic would

339
00:22:43,560 --> 00:22:48,800
Speaker 1: be one of the more polite terms that I've been called. Uh,

340
00:22:48,880 --> 00:22:55,280
Speaker 1: you know, we called our philosophy libertarian paternalism. Libertarian paternalism.

341
00:22:56,359 --> 00:23:00,119
Speaker 1: The libertarians were mad that we stole their word, and

342
00:23:00,240 --> 00:23:05,480
Speaker 1: everybody hates paternalists. They just think of paternalists as Ralph Nader. So,

343
00:23:06,480 --> 00:23:11,000
Speaker 1: but what we've by libertarian, we use it as an adjective,

344
00:23:11,880 --> 00:23:16,800
Speaker 1: and by paternalism we mean helping people achieve their goals,

345
00:23:16,840 --> 00:23:20,640
Speaker 1: like not getting run over by a bus. So if

346
00:23:20,680 --> 00:23:23,479
Speaker 1: we can do that without forcing anybody to do anything,

347
00:23:23,720 --> 00:23:27,399
Speaker 1: why wouldn't we known as the father of behavioral economics.

348
00:23:27,800 --> 00:23:29,919
Speaker 1: I'm about halfway through the book and I found it

349
00:23:29,960 --> 00:23:36,080
Speaker 1: to be both informative and amusing, which is an unusual combination.

350
00:23:36,240 --> 00:23:40,240
Speaker 1: So let's talk a little bit about theory induced blindness.

351
00:23:40,280 --> 00:23:44,640
Speaker 1: I know you're gonna be seeing your mentor um Daniel Kneman,

352
00:23:45,000 --> 00:23:49,639
Speaker 1: and you mentioned um. That's a quote of his. He

353
00:23:49,760 --> 00:23:53,840
Speaker 1: called theory induced blindness the refusal to see facts when

354
00:23:53,880 --> 00:23:57,720
Speaker 1: it disagrees with a theory or ideology. Some people call

355
00:23:57,800 --> 00:24:01,760
Speaker 1: that cognitive dissidence. Is there any difference between No, I

356
00:24:01,800 --> 00:24:04,879
Speaker 1: think I think this is a different concept. So the

357
00:24:04,960 --> 00:24:07,440
Speaker 1: idea is that if you have a certain lens that

358
00:24:07,520 --> 00:24:12,840
Speaker 1: you look at things through, then you're gonna see everything

359
00:24:13,200 --> 00:24:17,200
Speaker 1: to be consistent with your point of view. And so,

360
00:24:17,359 --> 00:24:21,720
Speaker 1: you know, it's like people have various views about the

361
00:24:21,800 --> 00:24:26,200
Speaker 1: economy from the left and from the right, and every

362
00:24:26,400 --> 00:24:29,160
Speaker 1: you know, every time there's a bit of news, they'll

363
00:24:29,160 --> 00:24:33,160
Speaker 1: find a way of interpreting that piece of news as

364
00:24:33,640 --> 00:24:36,639
Speaker 1: just confirming what they've always thought. Where I see that

365
00:24:36,720 --> 00:24:39,680
Speaker 1: every day is the bullbear debate that takes place in

366
00:24:39,720 --> 00:24:42,960
Speaker 1: the media and in print, And no matter what the

367
00:24:43,040 --> 00:24:46,840
Speaker 1: data point is, the bulls who are long equities are

368
00:24:46,880 --> 00:24:49,720
Speaker 1: gonna explain why this is good for the markets, and

369
00:24:49,720 --> 00:24:53,199
Speaker 1: the bears just try out a counter argument, this is

370
00:24:53,240 --> 00:24:56,879
Speaker 1: proof that we're all going to die. It's amazing with

371
00:24:56,920 --> 00:24:59,800
Speaker 1: the same data points, how people just focus on what

372
00:25:00,080 --> 00:25:03,320
Speaker 1: justifies Now how much of that is selective perception and

373
00:25:03,359 --> 00:25:06,160
Speaker 1: how much of that is just you know, we see

374
00:25:06,200 --> 00:25:11,600
Speaker 1: that which agrees with us. The psychologist called this confirmation bias. Yes,

375
00:25:12,200 --> 00:25:16,600
Speaker 1: so well, go out looking for evidence that supports our

376
00:25:16,640 --> 00:25:19,680
Speaker 1: point of view. I mean, but but theory should show

377
00:25:19,800 --> 00:25:23,320
Speaker 1: should be a hundred percent of trading at or pretty

378
00:25:23,400 --> 00:25:27,119
Speaker 1: close to intrinsic value. So the fact that you're finding

379
00:25:27,160 --> 00:25:33,320
Speaker 1: one that's below one day and above that really shows that, hey,

380
00:25:33,359 --> 00:25:35,800
Speaker 1: that theory is a little bit off. It's what we

381
00:25:35,880 --> 00:25:41,320
Speaker 1: call an anomaly. Mental accounting. What is mental accounting? So

382
00:25:41,600 --> 00:25:45,080
Speaker 1: mental accounting is the think of it as the financial

383
00:25:45,119 --> 00:25:53,400
Speaker 1: accounting of people and economists tell us that money is fungible.

384
00:25:54,200 --> 00:25:56,840
Speaker 1: If you want to impress people at a cocktail party,

385
00:25:57,080 --> 00:26:01,960
Speaker 1: use fungible. It just means there's no aables. But of

386
00:26:02,000 --> 00:26:05,600
Speaker 1: course people put labels on stuff. You go to the casino,

387
00:26:05,720 --> 00:26:08,200
Speaker 1: you can see this. A guy wins some money early

388
00:26:08,240 --> 00:26:11,040
Speaker 1: in the even playing with house money exactly. That's the

389
00:26:11,119 --> 00:26:14,200
Speaker 1: expression playing with the house money. What does that mean?

390
00:26:14,400 --> 00:26:17,360
Speaker 1: The casino is called the house so it's like you're

391
00:26:17,400 --> 00:26:21,480
Speaker 1: playing with their money. Well, suppose you won five dollars

392
00:26:21,520 --> 00:26:24,280
Speaker 1: you put in your right pocket. You brought five hundred

393
00:26:24,280 --> 00:26:27,320
Speaker 1: dollars to gamble, that's in your left pocket. Both of

394
00:26:27,359 --> 00:26:30,320
Speaker 1: them will buy something pretty nice if you get home.

395
00:26:30,880 --> 00:26:33,879
Speaker 1: But the one the house money, easy come, easy go,

396
00:26:35,080 --> 00:26:38,280
Speaker 1: and it's entertainment. You're you're just putting that in a

397
00:26:38,320 --> 00:26:43,480
Speaker 1: different So you know, that sounds like small potatoes. But

398
00:26:44,000 --> 00:26:49,760
Speaker 1: during the nine nineties technology, oh sure, during that boom,

399
00:26:50,000 --> 00:26:54,160
Speaker 1: everybody thought they were playing with the house money. And

400
00:26:54,400 --> 00:26:58,400
Speaker 1: four one K investors were just increasing and increasing their

401
00:26:58,440 --> 00:27:02,399
Speaker 1: equity exposure. And at the time, I said, one of

402
00:27:02,480 --> 00:27:09,600
Speaker 1: two things is true. Either they've understood that equities outperformed bonds,

403
00:27:10,640 --> 00:27:14,640
Speaker 1: or they think stock prices only go up. The only

404
00:27:14,680 --> 00:27:18,840
Speaker 1: thing that will give us an answer is a crash. Fortunately,

405
00:27:18,880 --> 00:27:21,320
Speaker 1: we got a crash, and we got an answer. You know,

406
00:27:21,400 --> 00:27:24,960
Speaker 1: I've had this conversation with people that this was early

407
00:27:25,000 --> 00:27:28,240
Speaker 1: in my career, and I remember getting the calls from

408
00:27:28,240 --> 00:27:31,919
Speaker 1: people who were significantly older than me saying, hey, I

409
00:27:31,960 --> 00:27:34,440
Speaker 1: got a ton of profits. I'm rolling a little money

410
00:27:34,440 --> 00:27:37,480
Speaker 1: out into real estate. I'm picking up that vacation house,

411
00:27:38,040 --> 00:27:41,720
Speaker 1: or I'm trading up to a bigger property. But they

412
00:27:41,720 --> 00:27:44,679
Speaker 1: were really the exception. You you it was rational, It

413
00:27:44,720 --> 00:27:47,119
Speaker 1: made sense. I think most people wish they could go

414
00:27:47,160 --> 00:27:51,520
Speaker 1: back and buy real estate. As that said, you really

415
00:27:51,520 --> 00:27:54,480
Speaker 1: didn't see a whole lot of it. And anytime people sold,

416
00:27:54,920 --> 00:27:58,000
Speaker 1: at least in the until two thousand, they seem to

417
00:27:58,080 --> 00:28:02,639
Speaker 1: have regretted this LD decision. Yeah, because uh, you know,

418
00:28:03,160 --> 00:28:07,479
Speaker 1: everything was upside down during that period. The most the

419
00:28:07,520 --> 00:28:14,439
Speaker 1: most value you know, puffetted poorly that period. All value

420
00:28:14,480 --> 00:28:18,080
Speaker 1: investors were getting crushed and you had to just be patient.

421
00:28:18,359 --> 00:28:22,160
Speaker 1: But meanwhile your neighbors were getting rich. It was hard

422
00:28:22,200 --> 00:28:25,080
Speaker 1: to do so, so why do why is it this

423
00:28:25,200 --> 00:28:28,240
Speaker 1: mental accounting? Why do we love bargains so much? You

424
00:28:28,320 --> 00:28:32,440
Speaker 1: tell one of the anomaly stories about when J. C.

425
00:28:32,640 --> 00:28:36,400
Speaker 1: Pennies de started to get rid of the fake prices

426
00:28:36,400 --> 00:28:39,680
Speaker 1: with the artificial mark downs and just have one price

427
00:28:40,000 --> 00:28:43,959
Speaker 1: and it was a disaster. People like deals, even if

428
00:28:44,000 --> 00:28:47,400
Speaker 1: they know it's nonsense. And you know, even rich guys

429
00:28:47,480 --> 00:28:51,560
Speaker 1: like deals. You know, there are plenty of rich guys

430
00:28:51,920 --> 00:28:56,520
Speaker 1: traveling in December to get their one k on, you know,

431
00:28:57,720 --> 00:29:02,520
Speaker 1: to get more miles and um so totally hit the

432
00:29:02,560 --> 00:29:05,560
Speaker 1: next break point and get all these three miles right.

433
00:29:06,160 --> 00:29:09,520
Speaker 1: And you know you you go to Costco, the big

434
00:29:09,560 --> 00:29:14,240
Speaker 1: discount retailer, you see a parking lot full of fancy

435
00:29:14,520 --> 00:29:17,800
Speaker 1: Mercedes SUVs. With my wife pointed out, we went to

436
00:29:17,880 --> 00:29:21,320
Speaker 1: Target a few weekends ago and there is this Rolls

437
00:29:21,440 --> 00:29:24,400
Speaker 1: Royce Wraith in the parking lot, which is a three

438
00:29:24,480 --> 00:29:27,960
Speaker 1: hundred and fifty thousand dollar car at Target. I guess

439
00:29:28,000 --> 00:29:30,440
Speaker 1: he needed a lot of talk. Yeah, yeah. I used

440
00:29:30,480 --> 00:29:35,080
Speaker 1: to tease my father who was driving around in a

441
00:29:35,120 --> 00:29:40,600
Speaker 1: fancy BMW looking for the cheapest price for gas, and

442
00:29:40,640 --> 00:29:43,920
Speaker 1: I said, you know, Dad, how much gas are you

443
00:29:44,040 --> 00:29:47,200
Speaker 1: using to find the cheapest price? But he had to

444
00:29:47,240 --> 00:29:51,200
Speaker 1: find the cheapest price. You had mentioned casinos earlier. Um

445
00:29:51,400 --> 00:29:54,600
Speaker 1: Twain once called gambling a tax on the stupid. Do

446
00:29:54,680 --> 00:29:58,880
Speaker 1: you agree or disagree with that? You know? I, um,

447
00:29:58,920 --> 00:30:02,920
Speaker 1: I think it's mostly right. Um why do we Why

448
00:30:02,920 --> 00:30:06,200
Speaker 1: do people love gambling? They like the thrill, you know.

449
00:30:06,800 --> 00:30:09,840
Speaker 1: And there are some things like horse racing would be

450
00:30:09,960 --> 00:30:13,760
Speaker 1: unbelievably boring if you didn't have some action, right. And

451
00:30:13,840 --> 00:30:16,800
Speaker 1: of course the betting is irrational because the rate of

452
00:30:16,840 --> 00:30:25,719
Speaker 1: return is minus seventeen per twenty minutes, because that's the take, right, So, um,

453
00:30:25,760 --> 00:30:28,120
Speaker 1: it's funny you say that. So I'm on a cruise

454
00:30:28,160 --> 00:30:31,480
Speaker 1: with my my wife and we're walking through the casino

455
00:30:31,640 --> 00:30:34,200
Speaker 1: to get to the other side of the ship, and

456
00:30:34,240 --> 00:30:37,520
Speaker 1: we just walked by one of the tables and I noticed,

457
00:30:38,160 --> 00:30:40,280
Speaker 1: because I have a bit of a I have a

458
00:30:40,320 --> 00:30:43,280
Speaker 1: head for math. I say to her, Notice that this

459
00:30:43,320 --> 00:30:46,000
Speaker 1: pays two to one, but you have three chances to lose,

460
00:30:46,040 --> 00:30:48,120
Speaker 1: and that pays three to one, and you have four

461
00:30:48,200 --> 00:30:50,880
Speaker 1: chances to lose. And it was a roulette table, and

462
00:30:50,880 --> 00:30:53,080
Speaker 1: I can look at all the odds. The odds are

463
00:30:53,120 --> 00:30:57,600
Speaker 1: relatively bad relative to the risk. And she teaches fashion,

464
00:30:57,600 --> 00:31:01,160
Speaker 1: illustration and design, so she's a visual person. And she says,

465
00:31:01,200 --> 00:31:02,920
Speaker 1: I don't know about that, but they certainly seemed to

466
00:31:02,960 --> 00:31:05,200
Speaker 1: be sweeping up a whole lot more chips than they're

467
00:31:05,240 --> 00:31:07,760
Speaker 1: handing out each each roll. And I'm like, oh, well,

468
00:31:07,800 --> 00:31:10,400
Speaker 1: that's the other way to to look at it. And

469
00:31:10,480 --> 00:31:13,200
Speaker 1: yet people sit at the tables and play for hours

470
00:31:13,200 --> 00:31:16,480
Speaker 1: and hours. So I'll give you my favorite recent mental

471
00:31:16,520 --> 00:31:21,920
Speaker 1: accounting story, which is, in the early days of the

472
00:31:21,960 --> 00:31:28,440
Speaker 1: financial crisis, the price of gasoline fell. What did people do? Remember,

473
00:31:28,560 --> 00:31:33,800
Speaker 1: everybody was belt tightening on all fronts except one. People

474
00:31:33,840 --> 00:31:39,840
Speaker 1: were splurging on premium gas. On premium gas, premium gas

475
00:31:39,880 --> 00:31:42,640
Speaker 1: because they have a gas budget and they have been

476
00:31:42,680 --> 00:31:45,000
Speaker 1: paying a hundred bucks a week to fill up the

477
00:31:45,040 --> 00:31:49,280
Speaker 1: tank and now it was only fifty and they're thinking, oh,

478
00:31:49,280 --> 00:31:51,880
Speaker 1: well gas, it's cheap, all right, I'll splurge on by

479
00:31:52,080 --> 00:31:54,400
Speaker 1: premium Eber, what's on? What? What of the fact that

480
00:31:54,560 --> 00:31:57,440
Speaker 1: unless you have an engine designed for premium gas, that

481
00:31:57,520 --> 00:32:00,880
Speaker 1: extra octane just goes out the tailpod? You know, Uh,

482
00:32:01,000 --> 00:32:03,360
Speaker 1: there's a lot of money left in the gas budget.

483
00:32:03,520 --> 00:32:06,239
Speaker 1: So so just by premium gas just for you know,

484
00:32:06,320 --> 00:32:09,760
Speaker 1: it's completely stupid, but you know, what can you do?

485
00:32:10,600 --> 00:32:12,880
Speaker 1: So let's talk a little bit about self control. That's

486
00:32:12,920 --> 00:32:15,320
Speaker 1: another chapter in the book. That's another one of your

487
00:32:15,840 --> 00:32:20,760
Speaker 1: favorite topics. People really seem to lack all manner of

488
00:32:20,800 --> 00:32:26,160
Speaker 1: self control. How does that manifest itself economically? Well, you know,

489
00:32:26,200 --> 00:32:31,040
Speaker 1: we talked about saving, not especially United States, not especially

490
00:32:31,120 --> 00:32:34,400
Speaker 1: high savings rates. You know, we went through a decade

491
00:32:34,440 --> 00:32:38,360
Speaker 1: where we had negative saving rates. And you know, this

492
00:32:38,440 --> 00:32:42,240
Speaker 1: is the place, the domain where behavior economists have had

493
00:32:42,280 --> 00:32:46,840
Speaker 1: their biggest impact, and we've managed to change the way.

494
00:32:46,920 --> 00:32:51,160
Speaker 1: Most four one K plans work with two small changes,

495
00:32:51,320 --> 00:32:55,200
Speaker 1: but one automatic enrollment. So you start a new job

496
00:32:55,200 --> 00:32:56,720
Speaker 1: at a company that has a four oh one K

497
00:32:57,440 --> 00:33:01,760
Speaker 1: and you're automatically enrolled unless you doubt is. You have

498
00:33:01,840 --> 00:33:05,800
Speaker 1: to fill out a form not to join. And that

499
00:33:06,240 --> 00:33:13,480
Speaker 1: raised enrollment in the first year from about to huge

500
00:33:13,520 --> 00:33:16,800
Speaker 1: juge difference and a completely trivial change. And what was

501
00:33:16,800 --> 00:33:19,080
Speaker 1: he in the last thirty seconds? What was the other?

502
00:33:19,400 --> 00:33:21,880
Speaker 1: The other one is what I call save more tomorrow,

503
00:33:22,400 --> 00:33:26,120
Speaker 1: which is get people to agree to increase their saving

504
00:33:26,240 --> 00:33:29,080
Speaker 1: rates every time they get a raise, and that has

505
00:33:29,080 --> 00:33:32,680
Speaker 1: an impact and therefore they're contributing more. We've been speaking

506
00:33:32,680 --> 00:33:36,600
Speaker 1: with Professor Richard Taylor of the University of Chicago, author

507
00:33:36,640 --> 00:33:42,000
Speaker 1: of the book Misbehaving Um The History and making of

508
00:33:42,080 --> 00:33:45,760
Speaker 1: behavioral economics. If you enjoy these conversations, be sure and

509
00:33:45,840 --> 00:33:49,800
Speaker 1: check out our continuing chat, which you can find on

510
00:33:49,840 --> 00:33:53,480
Speaker 1: Bloomberg dot com and on Apple iTunes. Check out my

511
00:33:53,600 --> 00:33:56,280
Speaker 1: daily column on Bloomberg View dot com and follow me

512
00:33:56,320 --> 00:33:59,960
Speaker 1: on Twitter at Ridholts. I'm Barry Ridholts. You've been listening

513
00:34:00,000 --> 00:34:05,200
Speaker 1: to Masters in Business on Bloomberg Radio. Hi, this is

514
00:34:05,240 --> 00:34:08,800
Speaker 1: Barry Ridhult. You're listening to Masters in Business on Bloomberg Radio.

515
00:34:09,000 --> 00:34:13,600
Speaker 1: This is our podcast portion where only you folks lucky

516
00:34:13,680 --> 00:34:18,239
Speaker 1: enough to go to SoundCloud or Bloomberg dot com or iTunes.

517
00:34:18,719 --> 00:34:20,719
Speaker 1: I don't have to tell you if you're listening to this,

518
00:34:20,880 --> 00:34:23,960
Speaker 1: you already have found the podcast portion and we just

519
00:34:24,040 --> 00:34:28,959
Speaker 1: kinda take our earpieces out and relax and have some fun. Um.

520
00:34:29,040 --> 00:34:32,960
Speaker 1: I didn't get to mention. I'm some of your curriculum, Vita,

521
00:34:33,080 --> 00:34:35,880
Speaker 1: And I know you said it's way too long, but

522
00:34:36,120 --> 00:34:39,719
Speaker 1: you do something with Professor Bob Schiller that's kind of interesting.

523
00:34:40,160 --> 00:34:43,360
Speaker 1: You guys are the you're the co director of the

524
00:34:43,440 --> 00:34:49,160
Speaker 1: Behavioral Economics Project at National Bureau of Economic Research. Um,

525
00:34:49,200 --> 00:34:52,640
Speaker 1: Professor Schiller is your co director? Is that right? We've

526
00:34:52,640 --> 00:34:57,160
Speaker 1: been doing this for I think over twenty five years. Really,

527
00:34:57,200 --> 00:35:01,040
Speaker 1: So here's what I find fascinating, and there are amazing parallels.

528
00:35:01,480 --> 00:35:06,880
Speaker 1: So Bob Schiller is also a behavioralist. He he thinks

529
00:35:06,960 --> 00:35:11,239
Speaker 1: people make mistakes, markets get crazy, we have bubbles, we

530
00:35:11,280 --> 00:35:14,520
Speaker 1: have crashes. One of his very best friends is Warton

531
00:35:14,600 --> 00:35:20,440
Speaker 1: Professor Jeremy Siegel couldn't be more opposite philosophically then than

532
00:35:20,520 --> 00:35:23,880
Speaker 1: Professor Schiller. He stocks for the long run. Oh we

533
00:35:23,960 --> 00:35:26,880
Speaker 1: can never you know, let's not worry about this. If

534
00:35:26,880 --> 00:35:29,319
Speaker 1: you're thinking long term, you have to be long equities.

535
00:35:29,640 --> 00:35:32,720
Speaker 1: Bob is you know things look a little pricey. Here's

536
00:35:32,760 --> 00:35:36,440
Speaker 1: my Schiller cape. And then I look at you and

537
00:35:36,480 --> 00:35:39,960
Speaker 1: you're at University of Chicago. You're the father of behavioral economics.

538
00:35:40,400 --> 00:35:44,719
Speaker 1: And your golf buddy is Eugene Fama, who couldn't be

539
00:35:44,760 --> 00:35:48,520
Speaker 1: more opposite in terms of philosophy than you are. How

540
00:35:48,600 --> 00:35:53,560
Speaker 1: did that relationship develop? You know, when I first arrived

541
00:35:53,600 --> 00:36:00,000
Speaker 1: at the University of Chicago, UH, a reporter asked UH

542
00:36:00,080 --> 00:36:05,319
Speaker 1: couple of distinguished financial economists why they had allowed this

543
00:36:05,440 --> 00:36:11,319
Speaker 1: to happen. One I'll make you read the book to

544
00:36:11,360 --> 00:36:16,480
Speaker 1: find out who said he didn't block it? Because each

545
00:36:16,600 --> 00:36:20,359
Speaker 1: generation has to make their own mistakes. That's hilarious, A

546
00:36:20,480 --> 00:36:26,320
Speaker 1: very warm welcome to a new colleague. Jean said, Oh,

547
00:36:26,400 --> 00:36:31,160
Speaker 1: we hired him because we wanted to be him. Um,

548
00:36:31,200 --> 00:36:33,600
Speaker 1: we wanted him nearby so we could keep an eye

549
00:36:33,640 --> 00:36:37,680
Speaker 1: on him. That's very funny. Also, yeah, so but a

550
00:36:37,719 --> 00:36:41,160
Speaker 1: little nicer and a little tongue in cheeks, a little

551
00:36:41,680 --> 00:36:49,880
Speaker 1: half joking exactly exactly. And uh, you know, Jean, what

552
00:36:50,040 --> 00:36:53,719
Speaker 1: Jean says is and I agree with this that he

553
00:36:53,840 --> 00:36:59,719
Speaker 1: and I agree about almost all the facts. We dis

554
00:37:00,000 --> 00:37:03,920
Speaker 1: agree about the interpretations. Yeah, but you agree that there

555
00:37:03,920 --> 00:37:08,279
Speaker 1: are bubbles. He sort of has ducked that question. What's

556
00:37:08,320 --> 00:37:13,120
Speaker 1: a bubble? What's a bubble? Right? Look, but what's his

557
00:37:13,200 --> 00:37:17,240
Speaker 1: real objection is that we can't predict when a bubble

558
00:37:17,320 --> 00:37:21,400
Speaker 1: is going to end, which is true. Okay, and you know,

559
00:37:21,560 --> 00:37:24,760
Speaker 1: Bob has had a pretty good run of love with it. No, no,

560
00:37:24,920 --> 00:37:28,320
Speaker 1: you know, look, Bob is my buddy for twenty five years.

561
00:37:28,360 --> 00:37:32,320
Speaker 1: But he was warning when did he give the speech

562
00:37:32,320 --> 00:37:38,239
Speaker 1: to Alan Greenspan four years early? But he wasn't saying

563
00:37:38,239 --> 00:37:40,320
Speaker 1: it's a bubble get out. He was saying, hey, things

564
00:37:40,360 --> 00:37:42,640
Speaker 1: have gone well, you know, but kind of what we've

565
00:37:42,680 --> 00:37:44,600
Speaker 1: been here in the past few years. Yeah, but like

566
00:37:46,200 --> 00:37:49,960
Speaker 1: you know, he was, his hair was on fire. And

567
00:37:50,200 --> 00:37:54,719
Speaker 1: you know two thousand you know, so um and my

568
00:37:54,840 --> 00:37:58,360
Speaker 1: selective perception and confirmation biases that I only saw the

569
00:37:58,400 --> 00:38:01,520
Speaker 1: two thousand one and the norther earlier, but I do

570
00:38:01,640 --> 00:38:05,280
Speaker 1: remember the he's the one who planted a rational zuberance

571
00:38:05,320 --> 00:38:09,040
Speaker 1: and exactly and then and then Greenspan gave him that phrase,

572
00:38:09,280 --> 00:38:14,560
Speaker 1: which Bob never used. Um and and he turned it

573
00:38:14,560 --> 00:38:17,080
Speaker 1: into a best selling book, which happened to come out

574
00:38:17,080 --> 00:38:21,200
Speaker 1: in two thousand, which was lucky, good timing, good timing. Well,

575
00:38:21,239 --> 00:38:26,120
Speaker 1: he was pretty dead on with the housing again, you know. Again,

576
00:38:26,760 --> 00:38:32,160
Speaker 1: he started warning that house prices are looking pretty scary,

577
00:38:32,360 --> 00:38:37,040
Speaker 1: especially in places like Vegas and Scottsdale. But they kept

578
00:38:37,040 --> 00:38:41,040
Speaker 1: going up for a couple more years. So so jeans

579
00:38:41,160 --> 00:38:46,359
Speaker 1: right that calling tops and bottoms. There's nobody who's good

580
00:38:46,360 --> 00:38:52,160
Speaker 1: at that. And now I think it was pretty obvious

581
00:38:52,320 --> 00:38:54,880
Speaker 1: in both of those cases that there was a bubble

582
00:38:54,920 --> 00:39:01,520
Speaker 1: going on. But you know, I thought Amazon was ridiculously

583
00:39:01,640 --> 00:39:07,560
Speaker 1: priced in and you know, some people would argue it was. Yeah,

584
00:39:07,600 --> 00:39:11,680
Speaker 1: and but I had a guy in my class. I

585
00:39:11,719 --> 00:39:16,320
Speaker 1: was teaching a PhD class in behavioral finance, And I said, Amazon,

586
00:39:16,480 --> 00:39:19,520
Speaker 1: who buys this? And there's a guy who raises his

587
00:39:19,560 --> 00:39:23,120
Speaker 1: hand and he bought it at the I p O.

588
00:39:24,000 --> 00:39:29,520
Speaker 1: And he says, well, this is so it wasn't that old.

589
00:39:30,239 --> 00:39:34,239
Speaker 1: And he's still holding onto it. I don't know, I

590
00:39:34,560 --> 00:39:39,680
Speaker 1: don't know, but um so each weekend class, you know,

591
00:39:39,840 --> 00:39:43,879
Speaker 1: I'm teasing him about this, and each weekend class he's

592
00:39:43,920 --> 00:39:47,320
Speaker 1: getting richer. And you know, at the end of the quarter,

593
00:39:48,080 --> 00:39:50,239
Speaker 1: I gave m an a I said, what the hell

594
00:39:50,520 --> 00:39:54,160
Speaker 1: he knows more than me. You know, people forget that

595
00:39:54,320 --> 00:40:01,000
Speaker 1: in nineteen the NASDAC was up eight five and in

596
00:40:01,200 --> 00:40:04,279
Speaker 1: ninety nine it more than double do was up more.

597
00:40:05,160 --> 00:40:08,280
Speaker 1: And that's just you could throw a dart at any

598
00:40:08,320 --> 00:40:11,200
Speaker 1: tech stock and you're making crazy money. Of course, you

599
00:40:11,239 --> 00:40:14,640
Speaker 1: subsequently ended up with a not too far off from

600
00:40:14,680 --> 00:40:20,040
Speaker 1: the twenty nine crash um subsequent debacle starting in March

601
00:40:20,080 --> 00:40:23,920
Speaker 1: two thousand, but Amazon is one of the survivors. It's

602
00:40:23,920 --> 00:40:27,480
Speaker 1: still still making a money. The The example I always

603
00:40:27,640 --> 00:40:30,560
Speaker 1: give people when they say, imagine if you bought the

604
00:40:30,600 --> 00:40:33,160
Speaker 1: I p O of Amazon or or Apple, and my

605
00:40:33,239 --> 00:40:36,720
Speaker 1: answer is always how many of the original IPO holders

606
00:40:36,719 --> 00:40:39,400
Speaker 1: of Apple? Do you think are still long Apple that

607
00:40:39,840 --> 00:40:42,799
Speaker 1: that people buy it and then they can't. They're afraid of,

608
00:40:43,360 --> 00:40:45,160
Speaker 1: oh my god, I'm gonna lose it. We'll talk a

609
00:40:45,239 --> 00:40:49,160
Speaker 1: little bit about um prospect theory and about why people

610
00:40:49,200 --> 00:40:52,080
Speaker 1: seem to heat losses so much more than they like

611
00:40:52,280 --> 00:40:55,239
Speaker 1: gains in a little while. But how many people who

612
00:40:55,360 --> 00:41:00,440
Speaker 1: bought Apple even fifteen years ago are still long with today. Well,

613
00:41:00,520 --> 00:41:04,680
Speaker 1: it's very hard to People have a tendency to get

614
00:41:04,840 --> 00:41:07,720
Speaker 1: rid of their winners too quickly and to hold onto

615
00:41:07,719 --> 00:41:10,200
Speaker 1: their losers too long. And that's the exact op I

616
00:41:10,200 --> 00:41:13,280
Speaker 1: started as a trader in this business. It's the exact opposite.

617
00:41:13,320 --> 00:41:15,479
Speaker 1: You have to let the runners, winners run. You gotta

618
00:41:15,560 --> 00:41:20,160
Speaker 1: let them run. And but and you gotta be willing

619
00:41:20,200 --> 00:41:23,279
Speaker 1: to admit you made a mistake, and you started to

620
00:41:23,320 --> 00:41:27,839
Speaker 1: get into loss of version. Lots of evidence shows that

621
00:41:28,360 --> 00:41:32,879
Speaker 1: loss is hurt about twice as much as games feel good.

622
00:41:33,080 --> 00:41:35,839
Speaker 1: So I have to ask why I have my own

623
00:41:35,920 --> 00:41:40,040
Speaker 1: pet theory, which is very esoteric. I'm really curious as

624
00:41:40,080 --> 00:41:44,359
Speaker 1: to why you think, what why that is that losses hurt?

625
00:41:44,600 --> 00:41:48,040
Speaker 1: Think we're just hard wired that way. Amos Tversky, one

626
00:41:48,080 --> 00:41:52,720
Speaker 1: of my psychology mentors, had a joke that there once

627
00:41:52,800 --> 00:41:57,520
Speaker 1: were species that didn't exhibit loss of version, and they're

628
00:41:57,560 --> 00:42:04,240
Speaker 1: now extinct. So if you're right near subsistence, it makes

629
00:42:04,360 --> 00:42:08,480
Speaker 1: really good sense to be loss of verse right now

630
00:42:08,640 --> 00:42:13,680
Speaker 1: for those of us who if we lose two thousand dollars,

631
00:42:14,280 --> 00:42:18,880
Speaker 1: we're not gonna failed to make our mortgage payment or

632
00:42:18,960 --> 00:42:25,720
Speaker 1: stop eating. Uh no longer. You know, the the evolutionary

633
00:42:25,800 --> 00:42:30,239
Speaker 1: cycle is very slow, and so it made sense to

634
00:42:30,320 --> 00:42:34,000
Speaker 1: be loss of verse when losing something meant you starved

635
00:42:34,040 --> 00:42:38,040
Speaker 1: to death. But but now you know, people do stupid

636
00:42:38,080 --> 00:42:43,120
Speaker 1: things like by extended warranties twenty seven billion dollars a

637
00:42:43,239 --> 00:42:48,600
Speaker 1: year industry, and most of it is for stuff that

638
00:42:48,920 --> 00:42:53,239
Speaker 1: is just it's disposable. Yeah, that that I forgot. What

639
00:42:53,400 --> 00:42:56,240
Speaker 1: even the last washing machine we just brought a washing machine.

640
00:42:56,480 --> 00:42:59,920
Speaker 1: We moved in September November October. We bought washer and

641
00:43:00,000 --> 00:43:04,080
Speaker 1: a dryer and they were nice, but they weren't, you know,

642
00:43:04,200 --> 00:43:07,440
Speaker 1: crazy expensive, and they start pitching you in the Washington.

643
00:43:07,920 --> 00:43:09,759
Speaker 1: I'm gonna throw that that breaks, You're gonna fix it,

644
00:43:09,800 --> 00:43:11,680
Speaker 1: and if you don't fix it, I'm thrown away and

645
00:43:11,680 --> 00:43:13,920
Speaker 1: I'm buying a new one. I'm not gonna Why do

646
00:43:14,000 --> 00:43:17,200
Speaker 1: I need to spend more money on the possibility of

647
00:43:17,280 --> 00:43:20,240
Speaker 1: this breaking. You know what people have to think about

648
00:43:20,520 --> 00:43:27,000
Speaker 1: is they're making money selling you that policy, and the

649
00:43:27,120 --> 00:43:32,359
Speaker 1: salesman at the especially making money is making money. That

650
00:43:32,400 --> 00:43:36,320
Speaker 1: means you're losing money. They're making more money. In college,

651
00:43:36,360 --> 00:43:40,359
Speaker 1: I worked part time in an electronics store, and they

652
00:43:40,400 --> 00:43:44,000
Speaker 1: would make more money on the extended warranties than they

653
00:43:44,000 --> 00:43:46,560
Speaker 1: would make on the products. So here's an example of

654
00:43:46,600 --> 00:43:52,880
Speaker 1: mental accounting. What people should do is say, every time

655
00:43:53,000 --> 00:43:56,480
Speaker 1: somebody offers me an extended warranty, I'm going to take

656
00:43:56,520 --> 00:44:01,480
Speaker 1: that money and put it into a special save and

657
00:44:01,520 --> 00:44:05,279
Speaker 1: then anytime anything goes Yeah, I had a I had

658
00:44:05,280 --> 00:44:09,480
Speaker 1: a friend at at Cornell who had here was his

659
00:44:09,560 --> 00:44:13,319
Speaker 1: mental accounting trick. At the beginning of the year, he

660
00:44:13,360 --> 00:44:17,959
Speaker 1: would set aside money for the United Way, say five

661
00:44:18,040 --> 00:44:22,560
Speaker 1: grand he's gonna give. Then anything bad happens to him,

662
00:44:22,760 --> 00:44:25,920
Speaker 1: he deducts it from what he's going to give to

663
00:44:25,960 --> 00:44:29,880
Speaker 1: the United Way. Nothing. So he was totally insured. So

664
00:44:29,920 --> 00:44:32,279
Speaker 1: he had an insurance policy. And at the end, if

665
00:44:32,280 --> 00:44:34,680
Speaker 1: he had a good year, you're not away. Got five grants.

666
00:44:34,800 --> 00:44:37,880
Speaker 1: Yeah that's funny. You know, a speeding ticket, no problem,

667
00:44:38,160 --> 00:44:41,960
Speaker 1: comes out of United Way, you know, And one year

668
00:44:42,280 --> 00:44:47,560
Speaker 1: the roof blew off his vacation home in North Carolina,

669
00:44:48,880 --> 00:44:52,040
Speaker 1: and I told him, look, the reason why you weren't

670
00:44:52,080 --> 00:44:55,680
Speaker 1: covered is you're too cheap to give United Way enough

671
00:44:55,719 --> 00:44:59,360
Speaker 1: money to cover the roof. Right, That's that's unbelievable. So

672
00:44:59,480 --> 00:45:02,560
Speaker 1: in other words, he didn't have homeowners insurance, had insurance,

673
00:45:02,600 --> 00:45:05,919
Speaker 1: but you know he didn't have insurance for the deductible.

674
00:45:07,480 --> 00:45:12,040
Speaker 1: That that's that's pretty fascinating mental accounting insurance. So let

675
00:45:12,080 --> 00:45:14,680
Speaker 1: me keep working my way. So my my pet theory

676
00:45:14,760 --> 00:45:19,240
Speaker 1: on on why people hate losses more than they like gains.

677
00:45:19,920 --> 00:45:23,640
Speaker 1: Gains represent a temporary increase in your standard of living.

678
00:45:23,960 --> 00:45:28,319
Speaker 1: It's temporary, and we all know behaviors have taught us, Hey,

679
00:45:28,360 --> 00:45:30,040
Speaker 1: you go out and buy a bigger car, or a

680
00:45:30,040 --> 00:45:33,879
Speaker 1: bigger house, or a nicer television or whatever, and six

681
00:45:33,920 --> 00:45:36,960
Speaker 1: months later that just becomes your benchmark, your frame or reference,

682
00:45:37,360 --> 00:45:41,800
Speaker 1: and whatever benefits accrue to that um For the most part,

683
00:45:42,040 --> 00:45:46,960
Speaker 1: don't really, Most people don't feel. I'm an exception with cars,

684
00:45:47,040 --> 00:45:50,399
Speaker 1: and I could tell you my wife's car. Every time

685
00:45:50,440 --> 00:45:52,799
Speaker 1: I drive this, We've had this for two years. It's

686
00:45:52,800 --> 00:45:56,520
Speaker 1: an utter thrill. The car I forced her to get. Um,

687
00:45:57,600 --> 00:46:00,319
Speaker 1: it's just this little rocket ship and it's a dull light.

688
00:46:00,600 --> 00:46:03,720
Speaker 1: Other than getting pulled of speeding tickets, it's a delight.

689
00:46:04,160 --> 00:46:06,560
Speaker 1: And I'm aware as I'm doing this, I'm like, you know,

690
00:46:06,640 --> 00:46:09,880
Speaker 1: it's two years and the thrill is not yet gone,

691
00:46:10,200 --> 00:46:13,120
Speaker 1: but I know that it's about six months for most

692
00:46:13,120 --> 00:46:18,080
Speaker 1: people for most things. And so you're onto a basic

693
00:46:18,160 --> 00:46:21,839
Speaker 1: fact of life, which is that we adapt to our

694
00:46:21,880 --> 00:46:27,120
Speaker 1: surroundings and to the upside. And then yeah, I mean, look,

695
00:46:27,680 --> 00:46:32,399
Speaker 1: when you're a grad student, you don't feel poor because

696
00:46:32,480 --> 00:46:35,920
Speaker 1: you're living with a bunch of other grad students and

697
00:46:36,040 --> 00:46:41,320
Speaker 1: you know you've all got secondhand furniture and Macaronian cheese. Yeah,

698
00:46:41,560 --> 00:46:45,160
Speaker 1: and you know it's temporary. And now you know, if

699
00:46:45,200 --> 00:46:48,520
Speaker 1: we had to go back to live in like yeah,

700
00:46:48,640 --> 00:46:51,760
Speaker 1: but you know we were happy, then you're sure. So

701
00:46:52,239 --> 00:46:57,120
Speaker 1: you know that. And so that's the first basic fact

702
00:46:57,160 --> 00:47:01,200
Speaker 1: of human nature. And then the second is that improvements

703
00:47:01,520 --> 00:47:08,000
Speaker 1: make us happy, but decriments make us miserable. Right, so

704
00:47:08,000 --> 00:47:11,120
Speaker 1: so so the loss of version thesis. So not only

705
00:47:11,239 --> 00:47:14,759
Speaker 1: the gains temporary, but and this sort of traces back

706
00:47:14,760 --> 00:47:17,200
Speaker 1: to what you said about people on the edge when

707
00:47:17,239 --> 00:47:20,920
Speaker 1: you lose money. In that mental accounting that we do,

708
00:47:21,080 --> 00:47:23,840
Speaker 1: that loss of the average salary in the United States

709
00:47:23,880 --> 00:47:27,719
Speaker 1: is about fifty dollars. You lose a thousand dollars, that

710
00:47:27,800 --> 00:47:30,680
Speaker 1: means that a week of your life is gone and

711
00:47:30,719 --> 00:47:33,000
Speaker 1: you have nothing to show for it. You work that week,

712
00:47:33,040 --> 00:47:37,040
Speaker 1: you've got a thousand, you lose it. That's a significant loss.

713
00:47:37,400 --> 00:47:42,520
Speaker 1: It's a permanent loss versus the benefit the temporary. Hey,

714
00:47:42,560 --> 00:47:44,760
Speaker 1: here's a thousand dollars. You could buy some nice stuff,

715
00:47:44,760 --> 00:47:47,719
Speaker 1: you could do things, but it's only temporary. I mean,

716
00:47:47,760 --> 00:47:50,680
Speaker 1: that's the only way I've been able to rationalize why

717
00:47:50,800 --> 00:47:54,480
Speaker 1: we despise the losses so much more than we enjoy

718
00:47:54,520 --> 00:47:59,719
Speaker 1: the game. I'm not much for evolutionary stories, but this one,

719
00:47:59,800 --> 00:48:03,920
Speaker 1: I think is just we're just hardwired that and uh,

720
00:48:04,080 --> 00:48:07,399
Speaker 1: maybe in another fifty thousand years will get over it,

721
00:48:07,920 --> 00:48:12,640
Speaker 1: but not anytime soon. There's a book I'm almost one reading,

722
00:48:12,719 --> 00:48:16,240
Speaker 1: actually put it down to start yours, called Last Ape Standing,

723
00:48:16,239 --> 00:48:19,000
Speaker 1: and it looks at the past ten million years and

724
00:48:19,000 --> 00:48:23,000
Speaker 1: that they were approximately thirty species of either human like

725
00:48:23,320 --> 00:48:28,239
Speaker 1: or near human, and how the way they've evolved led

726
00:48:28,280 --> 00:48:31,120
Speaker 1: to some to thrive and some to not make it

727
00:48:31,560 --> 00:48:33,799
Speaker 1: and we happen to be the last ape standing. And

728
00:48:33,840 --> 00:48:36,880
Speaker 1: it's a lot of the decision making that that we

729
00:48:37,000 --> 00:48:40,919
Speaker 1: see today. A lot of these what you mentioned is hardwired. Well,

730
00:48:41,000 --> 00:48:44,799
Speaker 1: sometimes the hardwiring send you down the wrong path and hey,

731
00:48:44,840 --> 00:48:48,480
Speaker 1: you ain't around anymore. Well, and you know, we got

732
00:48:48,520 --> 00:48:54,520
Speaker 1: hardwired to win that battle with the other sapiens, and

733
00:48:54,960 --> 00:48:58,880
Speaker 1: uh it came. You know, there were pros and cons.

734
00:48:58,960 --> 00:49:02,160
Speaker 1: We're all bad back X. That'll teach you to walk

735
00:49:02,239 --> 00:49:05,600
Speaker 1: up right for a thousand years, to say the least.

736
00:49:05,880 --> 00:49:08,239
Speaker 1: Let's talk a little bit about the winner's curse. We

737
00:49:08,320 --> 00:49:11,719
Speaker 1: kind of skipped over that earlier. What exactly is the

738
00:49:11,760 --> 00:49:15,799
Speaker 1: winner's curse? The idea of the winner's curse? This was

739
00:49:15,880 --> 00:49:21,480
Speaker 1: discovered actually by a couple of engineers at arkellar is

740
00:49:21,800 --> 00:49:29,560
Speaker 1: Arco old Oil come at Lanta Richmond, exactly, Lanta rich Field,

741
00:49:29,640 --> 00:49:33,960
Speaker 1: rich Field. So what the here's what they discovered. They

742
00:49:34,040 --> 00:49:39,920
Speaker 1: discovered that when they were bidding for oil leases. Uh,

743
00:49:40,000 --> 00:49:44,320
Speaker 1: every time they want a lease, there was less oil

744
00:49:44,360 --> 00:49:47,120
Speaker 1: in the ground than they expected. Not every time, but

745
00:49:47,239 --> 00:49:53,040
Speaker 1: on average. Now, they're pretty good geologists, and they couldn't

746
00:49:53,080 --> 00:49:56,839
Speaker 1: figure out why they were so unlucky. And then they

747
00:49:56,920 --> 00:50:00,400
Speaker 1: had the insight, well, there's a reason we won the

748
00:50:00,440 --> 00:50:04,520
Speaker 1: auction paid too much. We paid too much. So and

749
00:50:04,800 --> 00:50:09,359
Speaker 1: the lesson is, the more bidders there are, the more

750
00:50:09,480 --> 00:50:13,640
Speaker 1: likely it is that if you win the auction, you lost.

751
00:50:14,760 --> 00:50:18,560
Speaker 1: That's really interesting. So if there's something that you want

752
00:50:18,719 --> 00:50:22,239
Speaker 1: that you're bidding at auction four, you should bid a

753
00:50:22,320 --> 00:50:25,160
Speaker 1: moderate price and either you get lucky and you pay

754
00:50:25,160 --> 00:50:28,479
Speaker 1: that under price, or if you get enthusiastic and bid

755
00:50:28,480 --> 00:50:32,600
Speaker 1: too much, that's a that's a losing situation. And live

756
00:50:32,640 --> 00:50:36,600
Speaker 1: auctions have a way. People get carried away. They certainly did.

757
00:50:36,840 --> 00:50:40,880
Speaker 1: The only way to rationally participate in an auction is

758
00:50:40,960 --> 00:50:43,759
Speaker 1: to submit your bid and be done with it, and yeah,

759
00:50:44,120 --> 00:50:47,000
Speaker 1: and walk away. So figure out the intrinsic value, apply

760
00:50:47,080 --> 00:50:50,319
Speaker 1: a reasonable discount, submit that in writing, and find out

761
00:50:50,320 --> 00:50:53,040
Speaker 1: the next day did I win or not, because if

762
00:50:53,080 --> 00:50:56,600
Speaker 1: you go in person, you're doomed. A friend of mine

763
00:50:56,719 --> 00:51:01,400
Speaker 1: dragged me to an antique watch auction that took place

764
00:51:01,440 --> 00:51:05,040
Speaker 1: in in Uptown in man hour from where we are. Yeah,

765
00:51:05,040 --> 00:51:07,359
Speaker 1: it's still uptown from here. And I looked at all

766
00:51:07,400 --> 00:51:09,640
Speaker 1: these and they come out with the white gloves and

767
00:51:09,680 --> 00:51:12,440
Speaker 1: they bring this watch is four thousand dollars, and this

768
00:51:12,560 --> 00:51:17,480
Speaker 1: watch is ars in this watch is it's was just insane.

769
00:51:17,520 --> 00:51:23,160
Speaker 1: That's a whole different universe of collectibles. And I watched

770
00:51:23,320 --> 00:51:26,600
Speaker 1: online the auction go off, and there were some things

771
00:51:26,640 --> 00:51:30,279
Speaker 1: I thought were really interesting, and I had the slightest

772
00:51:30,360 --> 00:51:34,320
Speaker 1: idea of I would love to pay, you know, steal

773
00:51:34,360 --> 00:51:38,480
Speaker 1: that for below. But auctions are pretty good at getting

774
00:51:38,520 --> 00:51:41,759
Speaker 1: people at the very least a bid fair value and

775
00:51:41,880 --> 00:51:44,120
Speaker 1: most of the time to bid above, and then there's

776
00:51:44,160 --> 00:51:46,600
Speaker 1: the hammer cost on top of it. Well that's right.

777
00:51:46,680 --> 00:51:51,120
Speaker 1: But a colleague of mine, that Chicago booth called Devon Pope,

778
00:51:51,680 --> 00:51:57,279
Speaker 1: has studied, uh, the auctioneers. It turns out that there

779
00:51:57,320 --> 00:52:01,200
Speaker 1: are some. There are good and bad auctioneers. Not surprising,

780
00:52:02,040 --> 00:52:04,200
Speaker 1: but again, in a world of econs, it wouldn't be

781
00:52:04,239 --> 00:52:08,560
Speaker 1: true because we would all bid up to our reservation

782
00:52:08,640 --> 00:52:12,359
Speaker 1: price and stop. So what is it that the good

783
00:52:12,400 --> 00:52:16,000
Speaker 1: auctioneers are getting people to do that? The bad or not? Yeah,

784
00:52:16,040 --> 00:52:23,680
Speaker 1: I don't remember the just all all. The headline of

785
00:52:23,760 --> 00:52:28,120
Speaker 1: the is they're different. Just like they're good baseball pitchers

786
00:52:28,160 --> 00:52:31,719
Speaker 1: and bad ones, there are good auctioneers and bad ones.

787
00:52:32,160 --> 00:52:35,000
Speaker 1: And the only reason that would only be surprising if

788
00:52:35,000 --> 00:52:37,919
Speaker 1: you're an economist, because there shouldn't be There should be

789
00:52:38,560 --> 00:52:41,960
Speaker 1: only good because so much money getting you know, it's

790
00:52:42,000 --> 00:52:45,399
Speaker 1: a huge incentive to get a good auctioneer if you're

791
00:52:45,400 --> 00:52:47,799
Speaker 1: the one. You know, if you've ever gone to like

792
00:52:47,880 --> 00:52:53,720
Speaker 1: a charity auction, if there's a good auctioneer, they raise

793
00:52:53,760 --> 00:52:57,440
Speaker 1: a lot of money. Really, then, you know, they just

794
00:52:57,960 --> 00:53:02,760
Speaker 1: they just have their ways of people get emotionally excited,

795
00:53:02,800 --> 00:53:07,560
Speaker 1: they get into its enthusiastic right, and then they'll there's

796
00:53:07,600 --> 00:53:11,480
Speaker 1: a good trick which is they'll have two people bidding

797
00:53:11,920 --> 00:53:16,600
Speaker 1: on like a week in some villa in Italy, and

798
00:53:17,040 --> 00:53:20,440
Speaker 1: uh one bids twenty grand and the other wins it

799
00:53:20,440 --> 00:53:26,560
Speaker 1: at one and the guy finally says on call, and

800
00:53:26,560 --> 00:53:29,279
Speaker 1: then he says, okay, I happened to have a second week,

801
00:53:30,360 --> 00:53:35,520
Speaker 1: and then he sells the second week to the and

802
00:53:35,880 --> 00:53:38,200
Speaker 1: so yeah, there's a lot of skill in that. So

803
00:53:38,960 --> 00:53:41,839
Speaker 1: let's talk a bit about these biases that are so

804
00:53:42,160 --> 00:53:46,319
Speaker 1: challenging to overcome. Why is it the are we just

805
00:53:46,440 --> 00:53:49,400
Speaker 1: creatures of habit is the way we're wired. Why do

806
00:53:49,520 --> 00:53:55,799
Speaker 1: people find these inherent issues so challenging to to circumvent?

807
00:53:56,280 --> 00:54:00,160
Speaker 1: You know again, I mean it's you know, it's like

808
00:54:00,280 --> 00:54:04,160
Speaker 1: asking why we have bad backs, um, you know, or

809
00:54:04,200 --> 00:54:08,360
Speaker 1: why why we can't run as fast as UH or

810
00:54:08,480 --> 00:54:13,640
Speaker 1: same bolt. UH. We're built that way, and you know,

811
00:54:13,840 --> 00:54:18,239
Speaker 1: in many domains we recognize it. So you know, if

812
00:54:18,280 --> 00:54:23,719
Speaker 1: my wife sends me to the store to UH to

813
00:54:23,840 --> 00:54:27,360
Speaker 1: pick up some groceries, if there are more than two items,

814
00:54:27,400 --> 00:54:30,759
Speaker 1: I need a list, you know, I you know, I

815
00:54:30,880 --> 00:54:33,960
Speaker 1: understand my memory. My wife hasn't figured that out yet.

816
00:54:34,000 --> 00:54:37,239
Speaker 1: You know, she's like, where's the juice? You know? You know,

817
00:54:37,440 --> 00:54:40,960
Speaker 1: so we all understand at some level. You know, we

818
00:54:41,040 --> 00:54:43,600
Speaker 1: sett alarm clocks if we have to get up early

819
00:54:43,600 --> 00:54:48,319
Speaker 1: in the morning, and so we're not perfect, and it's

820
00:54:48,400 --> 00:54:52,160
Speaker 1: just silly to think that we are perfect. And you know,

821
00:54:52,440 --> 00:54:56,800
Speaker 1: as you mentioned earlier in the show, there there's nothing

822
00:54:56,800 --> 00:55:01,279
Speaker 1: wrong with theories that assume everyone's perfec. The only thing

823
00:55:01,320 --> 00:55:05,360
Speaker 1: that's wrong is in believing that those theories are true. So,

824
00:55:05,800 --> 00:55:11,000
Speaker 1: you know, green Span was convinced there couldn't be a

825
00:55:11,080 --> 00:55:17,600
Speaker 1: technology bubble because asset prices are equal to their intrinsic value,

826
00:55:17,680 --> 00:55:20,880
Speaker 1: the rational of course. And you know, meanwhile, companies are

827
00:55:20,920 --> 00:55:24,319
Speaker 1: selling for a hundred times sales and they're computing that

828
00:55:24,400 --> 00:55:28,960
Speaker 1: because there are no profits and you know, we're all

829
00:55:28,960 --> 00:55:32,200
Speaker 1: looking at this and saying this is completely crazy. But

830
00:55:32,280 --> 00:55:36,040
Speaker 1: then the market goes up another and you start to wonder,

831
00:55:36,680 --> 00:55:40,480
Speaker 1: maybe this time is different. One of my missing Yeah,

832
00:55:40,480 --> 00:55:43,600
Speaker 1: I'm not seeing that. Although he did do a mia

833
00:55:43,680 --> 00:55:47,960
Speaker 1: kalpa post Financial Price did do a mia kalpa, that's right.

834
00:55:49,400 --> 00:55:54,000
Speaker 1: He believed that reputation would have prevented banks from doing

835
00:55:54,040 --> 00:55:56,640
Speaker 1: the really dumb things they did. You know what bank

836
00:55:56,760 --> 00:55:58,839
Speaker 1: is going to risk a hundred and fifty eight year

837
00:55:59,360 --> 00:56:03,320
Speaker 1: reputation and as Lehman Brothers and bear Stearns and everybody

838
00:56:03,320 --> 00:56:06,360
Speaker 1: else did, and now they're no longer. Yeah, and I

839
00:56:06,480 --> 00:56:08,960
Speaker 1: think in a lot of that, a lot of the companies.

840
00:56:10,120 --> 00:56:13,960
Speaker 1: There's something I talked about in the book is, uh,

841
00:56:14,120 --> 00:56:17,760
Speaker 1: you know, economists have the theory they called agency theory

842
00:56:17,760 --> 00:56:22,880
Speaker 1: about principles and agents. And the idea is usually the

843
00:56:22,920 --> 00:56:27,480
Speaker 1: principle is the owner, so the shareholders the shareholders or

844
00:56:27,600 --> 00:56:31,160
Speaker 1: you know Bloomberg. It would be Mr Bloomberg, right, so

845
00:56:31,280 --> 00:56:34,319
Speaker 1: he would be the principle. And uh, then you know

846
00:56:34,360 --> 00:56:38,200
Speaker 1: he's got guys like you working for him, and you're shirking.

847
00:56:38,719 --> 00:56:41,600
Speaker 1: That's the kind of and the the usual idea is

848
00:56:42,080 --> 00:56:48,240
Speaker 1: that things go wrong because the agent, the employee isn't

849
00:56:48,800 --> 00:56:51,800
Speaker 1: doing their job. I think in a lot of cases

850
00:56:51,960 --> 00:56:55,720
Speaker 1: it's what I call it dumb principle problem. Right. So

851
00:56:56,239 --> 00:57:00,960
Speaker 1: you know, let's take the banks that we're paying mortgage

852
00:57:01,000 --> 00:57:09,440
Speaker 1: brokers two grand up pop to sell mortgages without any documentation. Now,

853
00:57:09,840 --> 00:57:13,360
Speaker 1: I'm not blaming the mortgage broker. That's what he's getting

854
00:57:13,360 --> 00:57:16,720
Speaker 1: paid to do. I'll take it a step further. Those

855
00:57:16,760 --> 00:57:20,920
Speaker 1: mortgages had a warranty on them that was often ninety

856
00:57:21,040 --> 00:57:25,560
Speaker 1: days three months. So you're selling a thirty year mortgage.

857
00:57:25,680 --> 00:57:29,200
Speaker 1: You've basically told this mortgage broker, go find me someone

858
00:57:29,240 --> 00:57:32,920
Speaker 1: who's gonna at least make the first three, first three

859
00:57:33,440 --> 00:57:39,240
Speaker 1: out of three sixty payments. Crazy, right, So you know,

860
00:57:39,440 --> 00:57:43,480
Speaker 1: dumb principle. Dumb principle. And you know, I think in

861
00:57:43,520 --> 00:57:47,440
Speaker 1: a lot of cases, Uh, you know, if we think

862
00:57:47,480 --> 00:57:54,480
Speaker 1: of the big catastrophes like Barings and Barkley's and um,

863
00:57:55,040 --> 00:58:00,720
Speaker 1: what we had were CEOs who didn't understand what the

864
00:58:00,800 --> 00:58:03,520
Speaker 1: people that we're working for them were doing. That's a

865
00:58:03,600 --> 00:58:07,280
Speaker 1: dumb principle problem. Yeah, it's a dumb principle. That's fascinating.

866
00:58:07,360 --> 00:58:10,680
Speaker 1: So we've talked about finance. We've talked about how irrational

867
00:58:10,720 --> 00:58:13,680
Speaker 1: people can be in the markets. Let's talk about fairness

868
00:58:14,120 --> 00:58:18,200
Speaker 1: where people and fairness games where people are willing to

869
00:58:18,240 --> 00:58:22,440
Speaker 1: give up benefit to themselves even if they think something

870
00:58:22,560 --> 00:58:26,880
Speaker 1: is because they think something is not fair. A classic

871
00:58:26,960 --> 00:58:36,080
Speaker 1: experiment is something called the ultimatum game. So, um, let's say, uh,

872
00:58:36,120 --> 00:58:40,880
Speaker 1: the experiment or gives me a hundred dollars and he

873
00:58:41,000 --> 00:58:44,280
Speaker 1: tells me to make you an offer of some share

874
00:58:44,280 --> 00:58:48,439
Speaker 1: of the hundred, and the rules are either you take

875
00:58:48,480 --> 00:58:51,440
Speaker 1: it and you get what I offer you, or you

876
00:58:51,520 --> 00:58:53,640
Speaker 1: say no, in which case we both get nothing. So

877
00:58:53,680 --> 00:58:57,000
Speaker 1: it's it's an all or nothing since ultimatum. That's why

878
00:58:57,000 --> 00:59:00,760
Speaker 1: it's called the ultimatum game. Now, let's suppose I'll offer

879
00:59:00,800 --> 00:59:06,680
Speaker 1: you two dollars out of my hundred. Well, I don't

880
00:59:06,720 --> 00:59:09,960
Speaker 1: need two dollars, you're keeping. The hell with you? Go jump.

881
00:59:11,200 --> 00:59:14,840
Speaker 1: So what we find is in that game, if you

882
00:59:15,000 --> 00:59:19,560
Speaker 1: offer less than about you're likely to get turned down.

883
00:59:20,080 --> 00:59:22,840
Speaker 1: That's amazing. And why is that Because to this person

884
00:59:23,280 --> 00:59:28,080
Speaker 1: making that decision, it's free money. It's free money. It's uh.

885
00:59:28,200 --> 00:59:32,480
Speaker 1: But you know they say, the hell the hell with you?

886
00:59:33,120 --> 00:59:39,400
Speaker 1: I mean, that's not fair. And um, you know. Uh,

887
00:59:39,800 --> 00:59:43,400
Speaker 1: my friend Danny Kaneman and I did a study way back.

888
00:59:46,000 --> 00:59:49,960
Speaker 1: Uh what pisces people off? Right? Uh? Well, the more

889
00:59:50,000 --> 00:59:53,520
Speaker 1: polite term was what people think is fair? And we

890
00:59:53,560 --> 00:59:57,880
Speaker 1: had an example. There's a blizzard. A hardware store has

891
00:59:57,920 --> 01:00:01,360
Speaker 1: been selling snow shovels for fift doers. They raised the

892
01:00:01,400 --> 01:00:04,680
Speaker 1: price to twenty dollars the morning after a blizzard. Is

893
01:00:04,720 --> 01:00:08,240
Speaker 1: that fair? Well, people hated it, you know, they all

894
01:00:08,280 --> 01:00:16,120
Speaker 1: hated it. Price gouging, Yeah, right, exactly. Now think about Uber, right,

895
01:00:16,200 --> 01:00:20,520
Speaker 1: they do search price surge pricing. Now, at some level,

896
01:00:20,560 --> 01:00:24,720
Speaker 1: search pricing makes total sense in the raader demand finite

897
01:00:24,720 --> 01:00:27,600
Speaker 1: supply prices. But we're all used to the fact that

898
01:00:27,680 --> 01:00:30,200
Speaker 1: if you want to buy an airline ticket at Christmas

899
01:00:30,800 --> 01:00:34,040
Speaker 1: and a hotel room at Aspen, you're gonna pay more

900
01:00:34,840 --> 01:00:38,200
Speaker 1: than two weeks earlier. They even call that. Hey it's

901
01:00:38,280 --> 01:00:44,320
Speaker 1: high season, it's prime season. But you do it in

902
01:00:44,360 --> 01:00:48,320
Speaker 1: a blizzard, you're gonna make people mad. Well, you're gouging

903
01:00:48,400 --> 01:00:54,080
Speaker 1: your advance. Think of the very word gouging, the literal

904
01:00:54,680 --> 01:00:59,680
Speaker 1: means PoCA hole and that's the way people feel. So

905
01:01:00,800 --> 01:01:04,720
Speaker 1: my opinion about Uber is that they should cap the

906
01:01:04,840 --> 01:01:12,920
Speaker 1: search and to sor to reduce animus and maintain a reputation. Yeah,

907
01:01:13,000 --> 01:01:17,360
Speaker 1: and and it makes sense because they're fighting a political

908
01:01:17,440 --> 01:01:22,200
Speaker 1: battle in every city as to whether they can operate

909
01:01:22,240 --> 01:01:25,680
Speaker 1: and whether they can go to the airport. They can't

910
01:01:25,680 --> 01:01:28,520
Speaker 1: afford to be making people mad, at least not in

911
01:01:28,560 --> 01:01:33,880
Speaker 1: the beginning. And you know, there's it never makes sense

912
01:01:34,400 --> 01:01:38,960
Speaker 1: to make people mad. I mean, you're in this for

913
01:01:39,000 --> 01:01:44,800
Speaker 1: the long run. There most businesses have learned this. So

914
01:01:45,160 --> 01:01:51,080
Speaker 1: after a hurricane down to Florida, the cheapest place to

915
01:01:51,200 --> 01:01:56,840
Speaker 1: buy plywood, Walmart is Walmart in Florida. Their notorious for

916
01:01:56,920 --> 01:02:02,400
Speaker 1: anticipating weather and shipping extra whatever it is, extra ply

917
01:02:02,560 --> 01:02:05,320
Speaker 1: whatever is needed if and it generates a lot of

918
01:02:05,320 --> 01:02:07,960
Speaker 1: good will, a lot of goodwill. Now there will also

919
01:02:08,040 --> 01:02:13,200
Speaker 1: be a guy in Atlanta who will load up his

920
01:02:13,360 --> 01:02:16,920
Speaker 1: truck with plywood, sell it off the back of the

921
01:02:17,000 --> 01:02:22,400
Speaker 1: truck for market price. Both Walmart and that guy are

922
01:02:22,440 --> 01:02:26,640
Speaker 1: being rational. Walmart's playing the long game, and that guy

923
01:02:26,720 --> 01:02:29,600
Speaker 1: is just doing a one off. Hey, it's not my reputation,

924
01:02:29,600 --> 01:02:32,200
Speaker 1: not my business in Florida. I'm selling this plywood and

925
01:02:32,240 --> 01:02:36,640
Speaker 1: going back to Atlanta. So you know, we've all had

926
01:02:36,680 --> 01:02:41,320
Speaker 1: the experience in New York. It's raining, can disappear, cabs disappear,

927
01:02:42,160 --> 01:02:46,760
Speaker 1: some guy in a black car pulls up right, and

928
01:02:47,200 --> 01:02:49,960
Speaker 1: you know, you pay unless you want to get wet,

929
01:02:50,240 --> 01:02:54,760
Speaker 1: unless you want to get wet. But uh, if if

930
01:02:54,800 --> 01:02:58,240
Speaker 1: a cab driver pulled up and let's say it's a

931
01:02:58,280 --> 01:03:02,000
Speaker 1: six dollar fair normally and he says it's raining, it'll

932
01:03:02,000 --> 01:03:05,720
Speaker 1: be twenty bucks, you're gonna write down is that would

933
01:03:05,760 --> 01:03:08,120
Speaker 1: be very very unhappy. But you put up with it

934
01:03:08,160 --> 01:03:11,960
Speaker 1: from over because it's a different choice. It's a third option.

935
01:03:12,080 --> 01:03:15,440
Speaker 1: It's a third option. But I think they could, uh,

936
01:03:15,520 --> 01:03:17,680
Speaker 1: they could do better. So let me ask you some

937
01:03:17,760 --> 01:03:20,520
Speaker 1: of my favorite questions that that I ask all of

938
01:03:20,560 --> 01:03:23,919
Speaker 1: my guests. These are these are some regular ones. Let's

939
01:03:23,960 --> 01:03:26,800
Speaker 1: start with an easy one. What are some of your

940
01:03:26,840 --> 01:03:30,040
Speaker 1: favorite books? And and they can but don't have to

941
01:03:30,080 --> 01:03:33,640
Speaker 1: be economic books. What books do you really have you

942
01:03:33,720 --> 01:03:37,720
Speaker 1: really enjoyed? Maybe my favorite book of all time is

943
01:03:37,760 --> 01:03:40,840
Speaker 1: Catch twenty two. I love Joseph Heller. That book was

944
01:03:40,960 --> 01:03:43,960
Speaker 1: just I read that in college and just that's some

945
01:03:44,040 --> 01:03:47,120
Speaker 1: catch that Catch twenty two. Yeah, it's a fantastic catch.

946
01:03:47,480 --> 01:03:50,960
Speaker 1: Here's a weird thing. It's not I'm kindle. That's funny

947
01:03:51,000 --> 01:03:55,320
Speaker 1: because it's I've been I've been meaning to reread it.

948
01:03:55,320 --> 01:03:58,640
Speaker 1: It's really it's sold something like twenty eight million copies.

949
01:03:59,200 --> 01:04:01,960
Speaker 1: I wonder if the date has not is the reason

950
01:04:02,000 --> 01:04:06,120
Speaker 1: why it was published pre Kindle, so there's no obligation

951
01:04:06,240 --> 01:04:09,520
Speaker 1: for it to show up that way. Um if you like,

952
01:04:09,680 --> 01:04:12,800
Speaker 1: if you like Hellar, were you a Vonnegut fan at all? Yeah?

953
01:04:12,920 --> 01:04:19,240
Speaker 1: I loves so fantastic catch um so the two big ones.

954
01:04:19,240 --> 01:04:23,600
Speaker 1: Slaughter House five always comes up every time, um, catch

955
01:04:23,640 --> 01:04:25,800
Speaker 1: twenty two comes up, but a few of his other

956
01:04:25,840 --> 01:04:28,720
Speaker 1: ones were just Cat's Cradle is just so good. You know.

957
01:04:28,800 --> 01:04:32,280
Speaker 1: There's a book that that many people know that I

958
01:04:32,400 --> 01:04:39,000
Speaker 1: read because I was there about called Gallopagus Callous. I

959
01:04:39,040 --> 01:04:41,880
Speaker 1: think that's the title. Maybe it's not the title, but

960
01:04:42,040 --> 01:04:49,880
Speaker 1: it's a book that takes place and to the Gallopagus

961
01:04:49,920 --> 01:04:52,520
Speaker 1: book that's in the back of my head. Douglas Adams,

962
01:04:52,560 --> 01:04:55,920
Speaker 1: who wrote The Hitchhiker's Guide to the Galaxy, he did

963
01:04:55,960 --> 01:04:58,880
Speaker 1: a book called Last Chance to See and he talked

964
01:04:58,880 --> 01:05:01,320
Speaker 1: about by the way you want to go see this

965
01:05:01,400 --> 01:05:03,320
Speaker 1: is not going to be here for another hundred years.

966
01:05:03,640 --> 01:05:06,400
Speaker 1: If you want to go see this, go take a look.

967
01:05:06,400 --> 01:05:08,160
Speaker 1: If you want to go see that, Go go take

968
01:05:08,160 --> 01:05:10,360
Speaker 1: a look. So here's another book. And this is a

969
01:05:10,400 --> 01:05:14,440
Speaker 1: book I went back and reread while I was writing

970
01:05:14,520 --> 01:05:21,440
Speaker 1: my book, and it's Richard Feynman's surely you must be joking. Yeah,

971
01:05:22,040 --> 01:05:24,760
Speaker 1: it's on audio now. Also you could get the versions

972
01:05:24,800 --> 01:05:29,320
Speaker 1: of him narrating some of his speeches and some stuff. Yeah,

973
01:05:29,360 --> 01:05:35,640
Speaker 1: his stuff is wonderful. So in some ways, writing this

974
01:05:35,720 --> 01:05:41,680
Speaker 1: book wasn't my final act of misbehaving. You know, the

975
01:05:41,720 --> 01:05:47,280
Speaker 1: title technically refers to the fact that people misbehave according

976
01:05:47,320 --> 01:05:53,040
Speaker 1: to economists, but a second meaning is that by pointing

977
01:05:53,080 --> 01:05:57,160
Speaker 1: that out during my career, I was misbehaving. Well, you

978
01:05:57,200 --> 01:06:00,240
Speaker 1: didn't conform to what reforms they were expecting you do.

979
01:06:01,760 --> 01:06:05,080
Speaker 1: And then the third act was writing the book the

980
01:06:05,080 --> 01:06:09,720
Speaker 1: way I did because my publisher assured me that there's

981
01:06:09,760 --> 01:06:12,840
Speaker 1: no market for a book like this, Right, they're very

982
01:06:12,880 --> 01:06:16,480
Speaker 1: bad at predicting these sorts. But that's true in television

983
01:06:16,520 --> 01:06:20,240
Speaker 1: and film. And you know that's the famous William Goldman line.

984
01:06:20,280 --> 01:06:23,880
Speaker 1: Nobody knows anything talking about Hollywood that they would make

985
01:06:23,920 --> 01:06:25,680
Speaker 1: these if it was up to them, they would just

986
01:06:25,720 --> 01:06:29,600
Speaker 1: make sequels of what was originally successful. But you gotta

987
01:06:29,600 --> 01:06:32,040
Speaker 1: at least try something to see what's going to be successful.

988
01:06:32,280 --> 01:06:36,800
Speaker 1: So Synman's book, you know you've read it. It's a

989
01:06:36,840 --> 01:06:42,040
Speaker 1: bunch of stories, uh, and some of them are very funny.

990
01:06:42,040 --> 01:06:46,160
Speaker 1: He's a funny guy. And but but there's no physics.

991
01:06:47,240 --> 01:06:50,200
Speaker 1: So the book I wanted to write is as it

992
01:06:50,240 --> 01:06:55,120
Speaker 1: would be if Fynman had tried to explain physics in

993
01:06:55,200 --> 01:06:57,880
Speaker 1: that book. Got it. I don't know whether you think

994
01:06:58,000 --> 01:07:00,000
Speaker 1: I achieved that, but that was what I was trying

995
01:07:00,200 --> 01:07:02,960
Speaker 1: to do. So let me ask you. My next question

996
01:07:03,080 --> 01:07:05,200
Speaker 1: is what sort of advice would you give to a

997
01:07:05,320 --> 01:07:09,760
Speaker 1: young economic student or a millennial either just entering grad

998
01:07:09,800 --> 01:07:17,120
Speaker 1: school or just starting their career today? Find your own problem,

999
01:07:17,120 --> 01:07:21,439
Speaker 1: to work on your own problem. Yeah, don't don't be

1000
01:07:21,600 --> 01:07:26,480
Speaker 1: your advisor's research assistant. And it may cost you a

1001
01:07:26,600 --> 01:07:31,680
Speaker 1: year um because it's the easy thing to do is

1002
01:07:33,000 --> 01:07:39,800
Speaker 1: do a variation on your advisor's life work. And uh,

1003
01:07:40,600 --> 01:07:42,800
Speaker 1: that doesn't put you in good standing for the rest

1004
01:07:42,800 --> 01:07:48,640
Speaker 1: of you know, I think you know the My book

1005
01:07:48,720 --> 01:07:56,520
Speaker 1: starts out with this story about Daniel Kheman having a

1006
01:07:56,520 --> 01:08:00,720
Speaker 1: an interview with Roger Lowenstein, the guy who wrote When

1007
01:08:01,920 --> 01:08:05,960
Speaker 1: Another Right, and I just had lunch with him not

1008
01:08:06,000 --> 01:08:09,160
Speaker 1: too long. He's so insightful. Roger, Yeah, he's a great guy.

1009
01:08:09,400 --> 01:08:14,520
Speaker 1: So the story is that Roger was writing a piece

1010
01:08:14,560 --> 01:08:16,880
Speaker 1: about me for the New York Times magazine. You were

1011
01:08:16,920 --> 01:08:20,479
Speaker 1: in the room while while, Um, Danny was actually having

1012
01:08:20,479 --> 01:08:23,080
Speaker 1: the conversation. So Danny said, you want to stay for this,

1013
01:08:23,720 --> 01:08:28,639
Speaker 1: and I said sure, And then he starts explaining, UH,

1014
01:08:28,760 --> 01:08:34,040
Speaker 1: to Roger, Sailor's best quality, what really makes him special

1015
01:08:34,840 --> 01:08:40,719
Speaker 1: is that he's lazy. And I'm I'm waving my hands

1016
01:08:40,760 --> 01:08:43,920
Speaker 1: in the air and shaking my head and saying, you know,

1017
01:08:45,000 --> 01:08:48,080
Speaker 1: come on, I admit to being lazy, but is it

1018
01:08:48,240 --> 01:08:55,240
Speaker 1: my best quality? And uh, Danny still sticks to that story.

1019
01:08:55,280 --> 01:08:58,240
Speaker 1: I love that. That's a great story. Professor Taylor, thank

1020
01:08:58,280 --> 01:09:01,280
Speaker 1: you so much for being so generous with your time. Um,

1021
01:09:01,320 --> 01:09:03,439
Speaker 1: we're gonna wrap right here. I know you have a

1022
01:09:03,439 --> 01:09:06,080
Speaker 1: place to go to from here, and I will see

1023
01:09:06,080 --> 01:09:09,479
Speaker 1: you on the radio tomorrow. For those of you are listening,

1024
01:09:09,600 --> 01:09:12,880
Speaker 1: we've been having a conversation with Professor Richard Taylor of

1025
01:09:12,920 --> 01:09:15,559
Speaker 1: the University of Chicago. Be sure and check out some

1026
01:09:15,640 --> 01:09:18,360
Speaker 1: of our other UH podcast You can look an inch

1027
01:09:18,439 --> 01:09:21,120
Speaker 1: up or an inch down and end up checking them out.

1028
01:09:22,120 --> 01:09:28,320
Speaker 1: Checkout Professor Taylor's Twitter handle at our Underscore Taylor at Twitter.

1029
01:09:28,760 --> 01:09:31,639
Speaker 1: I'm Barry Retults. You've been listening to Masters in Business

1030
01:09:31,880 --> 01:09:32,920
Speaker 1: on Bloomberg Radio