WEBVTT - Professor Richard Thaler: Masters in Business (Audio) 0:00:03.240 --> 0:00:07.560 This is Masters in Business with Barry Ridholts on Bloomberg Radio. 0:00:08.400 --> 0:00:13.720 On today's podcast, I once again have a very special guest. 0:00:14.200 --> 0:00:16.080 I know you guys are tired of hearing me say 0:00:16.120 --> 0:00:19.120 that week after week, but you know what this really 0:00:19.239 --> 0:00:23.200 is a very special guest, Professor Richard Taylor of the 0:00:23.280 --> 0:00:27.920 University of Chicago, perhaps best known as the father of 0:00:28.000 --> 0:00:32.320 behavioral economics. When you look at his body of work, 0:00:32.360 --> 0:00:36.080 when you look at the impact he's had, Professor Taylor 0:00:36.440 --> 0:00:40.800 on the perennial shortlist for a Nobel Prize in Economics, 0:00:41.360 --> 0:00:44.440 what um I think you'll find so fascinating about him 0:00:44.520 --> 0:00:51.600 is not just that he's incredibly intelligence and unbelievably knowledgeable 0:00:51.640 --> 0:00:56.160 about how human behavior in the world of economics differs 0:00:56.200 --> 0:01:00.360 so much from traditional economic theory. But you'll find he's 0:01:00.440 --> 0:01:05.600 somewhat uh, somewhat mischievous and and very amusing and not 0:01:05.760 --> 0:01:11.720 your typical dry academic and certainly not your typical dry economist. 0:01:13.120 --> 0:01:17.240 His background is is really the very very early days 0:01:17.280 --> 0:01:21.520 of behavioral economics. His early mentors were people like Danny 0:01:21.600 --> 0:01:25.560 Knoman and and a most diverse ky Uh. He's worked 0:01:25.600 --> 0:01:29.160 with Bob Schiller for many, many years, for twenty five years. 0:01:29.200 --> 0:01:34.080 They've been co chairs of an nb E er UM 0:01:34.280 --> 0:01:39.960 panel on behavioral economics, and just anybody who's been pursuing 0:01:40.000 --> 0:01:45.119 this field is certainly familiar with his work, starting with UM. 0:01:45.560 --> 0:01:48.120 A lot of anomalies that he's identified in the world 0:01:48.120 --> 0:01:51.520 of economics, including his book The Winner's Curse from so 0:01:51.600 --> 0:01:54.080 long ago. He did a book with Cass Sunstein Colts 0:01:54.600 --> 0:01:59.360 Nudge that's been very influential, and currently he's out promoting 0:01:59.440 --> 0:02:04.160 his latest book called Misbehaving, which really is a mix 0:02:04.200 --> 0:02:08.960 of his own autobiography, which of course paralleled the rise 0:02:09.000 --> 0:02:11.840 of behavioral economics over the past let's call it forty 0:02:11.919 --> 0:02:15.240 or fifty years, and a quick funny story. After we 0:02:15.280 --> 0:02:18.320 finished the interview, he had a head somewhere else downtown, 0:02:18.360 --> 0:02:22.359 and so I walked with him down to his hotel. 0:02:22.400 --> 0:02:24.760 We walked down Lexington Avenue, and let me tell you, 0:02:24.800 --> 0:02:29.600 walking through the streets of Manhattan with Richard Taylor is 0:02:29.639 --> 0:02:33.320 really quite fascinating because there's a running commentary on everything 0:02:33.360 --> 0:02:36.639 that's going on, and and it's quite amusing and quite interesting. 0:02:37.240 --> 0:02:40.480 And he said something that was really has stayed with me. 0:02:40.520 --> 0:02:44.120 It was very interesting. During the interview. You'll hear him 0:02:44.160 --> 0:02:48.760 discuss how traditional economic theory work works really well for 0:02:48.800 --> 0:02:53.000 the small, insignificant decisions we make over and over again. 0:02:53.040 --> 0:02:55.359 That we get good at what spaghetti source to buy 0:02:55.360 --> 0:02:57.919 in the supermarket, you know where to fill up our 0:02:57.960 --> 0:03:00.960 cars with gas, things like that that, let's be honest, 0:03:01.000 --> 0:03:04.080 in the scheme of things, are not very consequential. But 0:03:04.160 --> 0:03:08.480 he also talks about how the big decisions you make 0:03:08.480 --> 0:03:11.040 in life you don't get to make that often. You 0:03:11.080 --> 0:03:15.600 don't get to be that good at making the decisions 0:03:15.639 --> 0:03:17.680 that really matter, You don't have a lot of experience 0:03:17.720 --> 0:03:21.680 with them. His examples were, you choose what field you 0:03:21.720 --> 0:03:27.200 go into where you work saving for retirement, who and 0:03:27.280 --> 0:03:30.440 how often you get married, who you're gonna marry too, 0:03:30.960 --> 0:03:33.120 And I was who are gonna get married to? And 0:03:33.160 --> 0:03:37.200 how often you end up getting married or remarried, and 0:03:37.200 --> 0:03:40.800 and the big decisions, the ones that really impact your life, 0:03:41.880 --> 0:03:45.680 you do once or twice or maybe a handful of times. 0:03:46.040 --> 0:03:47.880 So you don't get a lot of experience, you don't 0:03:47.920 --> 0:03:50.839 get a lot of skill at it. It's something that 0:03:50.960 --> 0:03:54.320 you hopefully make a right decision, and if you don't, 0:03:54.360 --> 0:03:58.200 the consequences are really significant. And so as we're walking 0:03:58.200 --> 0:04:01.000 down Lexington Avenue in New York City. I start talking 0:04:01.040 --> 0:04:03.600 about that, and I jokingly say to him, Hey, you 0:04:03.640 --> 0:04:06.000 know that thing about you know how many wives you 0:04:06.040 --> 0:04:09.040 have and the impact it has on on your life 0:04:09.120 --> 0:04:12.320 is is kind of interesting. My secret was to marry 0:04:12.440 --> 0:04:15.480 my second wife first. Just skip the whole first marriage, 0:04:15.840 --> 0:04:18.480 the whole disastrous first marriage, go right to the second marriage. 0:04:18.880 --> 0:04:21.479 And he laughed, and then he said something that has 0:04:21.520 --> 0:04:25.240 stayed with me since we did the interview. It's really very, 0:04:25.400 --> 0:04:30.000 very interesting. He said, you can never be happier then 0:04:30.080 --> 0:04:34.480 your spouses. And look, we've all heard the expression happy wife, 0:04:34.480 --> 0:04:37.360 happy life, but stop and think of it in that 0:04:37.440 --> 0:04:41.360 sort of behavioral terms, that the ceiling on your own 0:04:41.400 --> 0:04:45.920 personal happiness is a function of whatever your spouses happiness is. 0:04:46.240 --> 0:04:49.159 And when you put it into that context, it certainly 0:04:49.240 --> 0:04:51.960 makes it clear that, hey, if you make your significant 0:04:51.960 --> 0:04:55.159 other happy, it's going to come back and ultimately raise 0:04:55.240 --> 0:04:58.520 the ceiling for how happy you yourself can be. But 0:04:58.960 --> 0:05:02.640 lots of other comments and phrases like that, where he's 0:05:02.720 --> 0:05:06.960 just looking at it slightly a scan, slightly differently then 0:05:07.080 --> 0:05:10.000 you might consider, and it leads to a lot of insights. 0:05:10.080 --> 0:05:13.680 So I found him to be absolutely fascinating. I wish 0:05:13.680 --> 0:05:16.560 I could have kept him there for another hour. Um, 0:05:16.600 --> 0:05:20.400 without any further ado, here is my conversation with Professor 0:05:20.520 --> 0:05:28.159 Richard Taylor. This is Master's in Business with Barry Ridholts 0:05:28.320 --> 0:05:32.440 on Bloomberg Radio. Once again, I have a fantastic and 0:05:32.560 --> 0:05:36.599 special guest. His name is Dr Richard Thaller. He has 0:05:36.640 --> 0:05:40.359 been called the father of behavioral finance. And I'm just 0:05:40.400 --> 0:05:44.400 gonna give a short version of your curriculum. Vite bachelor's 0:05:44.400 --> 0:05:48.000 degree from Case Western and then a master's and PhD 0:05:48.040 --> 0:05:51.080 from the University of Rochester. Dr Thaller is the author 0:05:51.120 --> 0:05:55.200 of over fifty published papers and notable numerous books, most 0:05:55.279 --> 0:06:00.599 notably The Winner's Curse, Nudge and Misbehaving for Fessa Faler. 0:06:00.800 --> 0:06:03.960 Welcome to Bloomberg, Thanks Berry, happy to be here. I'm 0:06:04.040 --> 0:06:07.400 leaving out half of your CV, will save that for 0:06:07.400 --> 0:06:10.560 for for later. Tell us a little bit about your background. 0:06:10.600 --> 0:06:15.440 How did you find your way to academia. I went 0:06:15.480 --> 0:06:18.039 into academia because I didn't think I was suitable for 0:06:18.120 --> 0:06:22.480 anything else. That's literally true. My father was an actuary, 0:06:23.200 --> 0:06:25.440 and it was a great disappointment to him that I 0:06:25.480 --> 0:06:30.520 didn't follow into his footsteps. But I saw him. I 0:06:30.560 --> 0:06:33.040 grew up in Jersey, worked at Prudential. I saw him 0:06:33.080 --> 0:06:36.360 taking the training every day and not for you, not 0:06:36.560 --> 0:06:42.400 for me, and I'm the world's were subordinate. So academia 0:06:42.480 --> 0:06:46.479 seemed like a good choice. And you know, I was 0:06:46.600 --> 0:06:49.840 kind of good in math and kind of good in economics, 0:06:49.880 --> 0:06:54.119 so I went into economics. So you start out as 0:06:54.240 --> 0:06:57.159 a was it a graduate school student at Stanford or 0:06:57.240 --> 0:07:01.599 right after being a graduate student? Uh? Yeah, after being 0:07:01.640 --> 0:07:05.120 graduate student and uh and teaching for a couple of 0:07:05.200 --> 0:07:11.480 years is the Stanford episode. Um, you had some really 0:07:11.520 --> 0:07:17.080 influential mentors. Yeah. I I claimed to have discovered Daniel 0:07:17.160 --> 0:07:21.040 Kneman and Amos Tversky in the same sense in which 0:07:21.080 --> 0:07:25.320 Columbus discovered America. I mean it was here. Came to 0:07:25.440 --> 0:07:27.600 as a surprise to the people who were living here 0:07:27.640 --> 0:07:33.160 at the time. Yeah, so uh, Conlimen Diversky came to 0:07:33.800 --> 0:07:37.960 as a surprise to economists. So I claimed to be 0:07:38.000 --> 0:07:41.840 the first economists who have discovered them. And I had 0:07:41.920 --> 0:07:48.280 been interested in weird stuff. People do weird from the 0:07:48.400 --> 0:07:57.480 perspective of economists. So economists have this creature they study 0:07:57.560 --> 0:08:01.520 that comes with the Latin term homo econonomicus. I just 0:08:01.640 --> 0:08:05.720 like calling them econs economic man, economic man, or we 0:08:05.720 --> 0:08:09.120 should say economic person. Come on, Barry, we have to 0:08:09.200 --> 0:08:12.320 be you know century. You work in academia, so you 0:08:12.320 --> 0:08:15.679 have to be more politically career. Yeah right, so economic person, 0:08:16.160 --> 0:08:21.280 but I call him econs. And econs are as smart 0:08:21.320 --> 0:08:25.840 as the smartest economist, or possibly even as smart as 0:08:25.880 --> 0:08:29.600 the smartest economist thinks he is, which is much smarter, 0:08:29.840 --> 0:08:34.600 which is right, which is really really smart. Um. They 0:08:34.640 --> 0:08:38.840 have perfect willpower, never have to die because they weigh 0:08:38.840 --> 0:08:44.439 exactly the right amount. No hangovers, uh saving for retirement, 0:08:44.480 --> 0:08:48.320 piece of cake. They calculate how much they need, how 0:08:48.440 --> 0:08:54.199 much they're gonna earn on their investments, implement so needlessness. 0:08:54.280 --> 0:08:59.959 Oh one other thing, they're jerks. So these uh rational 0:09:00.080 --> 0:09:05.920 economic man. Will you know I left my cell phone 0:09:06.200 --> 0:09:09.520 outside the door to charge. If an econ walked by, 0:09:09.800 --> 0:09:11.760 he would take it. He would take it. So so 0:09:11.880 --> 0:09:16.120 let me throw a quote of yours to put this succinctly. 0:09:16.800 --> 0:09:20.840 Conventional economics assumes that people are highly rational, in fact, 0:09:21.160 --> 0:09:26.160 superrational and unemotional. They could calculate like a computer and 0:09:26.240 --> 0:09:29.560 have no self control problems. So so how does this 0:09:29.679 --> 0:09:34.840 manifest itself. This this obvious falsehood about the way humans behave. 0:09:35.240 --> 0:09:38.840 How does this manifest itself in terms of the way 0:09:38.880 --> 0:09:43.760 economics progresses. Well, take the problem of saving for retirement. 0:09:44.400 --> 0:09:49.240 It's one one of the biggest financial decisions that we 0:09:49.320 --> 0:09:53.079 have to make in our lifetime. One is how much 0:09:53.200 --> 0:09:56.719 education to get and what type, second is who to 0:09:56.840 --> 0:10:01.920 marry and how often, And the third is saving for retirement, 0:10:02.480 --> 0:10:04.480 throwing buying a house, and you pretty much have the 0:10:04.480 --> 0:10:08.920 big ones. So you know, that's a piece of cake 0:10:09.160 --> 0:10:12.360 for econs. And it used to be a piece of 0:10:12.400 --> 0:10:16.559 cake for my father's generation because there were pensions and 0:10:16.760 --> 0:10:21.200 you would work at prudential for your life and then 0:10:21.240 --> 0:10:25.120 they would give you an annuity, and retiring was easy. 0:10:25.200 --> 0:10:29.840 You never had to think about anything. So then you know, 0:10:29.880 --> 0:10:33.319 we invent the four one K and now people have 0:10:33.400 --> 0:10:37.000 to figure out whether to join, how much to put in, 0:10:37.280 --> 0:10:42.320 how to invest it, and then how to draw it down, 0:10:42.360 --> 0:10:47.520 which is very hard. And so the idea of this 0:10:47.559 --> 0:10:53.160 perfect per perfectly rational person making all the right choices, unemotionally, 0:10:53.600 --> 0:10:57.600 with good self control and perfectly calculated to their needs, 0:10:58.160 --> 0:11:02.120 that clearly doesn't exist. It clearly doesn't exist. And notice 0:11:02.480 --> 0:11:05.320 if the world was full of full of people like that. 0:11:06.280 --> 0:11:09.440 Then the four O one K is unambiguously a big 0:11:09.480 --> 0:11:15.560 improvement because it's portable and you can customize it, and 0:11:15.600 --> 0:11:20.079 we all know what's best for ourselves if we're econs. 0:11:20.360 --> 0:11:23.760 The the the dal Bar numbers each year show that 0:11:24.160 --> 0:11:28.160 the average return over the course of thirty years has 0:11:28.160 --> 0:11:31.440 been about three for four O one K investors. Yeah, 0:11:31.559 --> 0:11:33.920 and they have a great tendency to buy high and 0:11:33.960 --> 0:11:39.920 sell low. They massively got out of equities, uh, starting 0:11:39.920 --> 0:11:44.319 in about two thousand six, and flows didn't turn positive 0:11:44.360 --> 0:11:48.719 until during which time the market had doubled. Why is 0:11:48.760 --> 0:11:54.280 it so challenging to get economists to actually understand people 0:11:54.320 --> 0:11:57.560 don't behave this way in the real world. Well, let's 0:11:57.600 --> 0:12:01.120 just say that one of the things that you have 0:12:01.240 --> 0:12:05.560 trouble with is the economic concept of sunk costs. I 0:12:05.600 --> 0:12:08.920 was going through your list of mentors. Pretty much your 0:12:08.960 --> 0:12:15.040 early mentors are all almost all nobile laureates. I've been lucky. 0:12:15.200 --> 0:12:17.040 You know how to pick them. Yeah, you definitely know 0:12:17.040 --> 0:12:19.160 how to pick them. So before the break, we were 0:12:19.240 --> 0:12:23.480 discussing sunk costs, and I had asked you, why is 0:12:23.480 --> 0:12:28.839 it that economists just won't recognize some of the reality 0:12:28.880 --> 0:12:31.280 of the way humans behave in the real world. And 0:12:31.280 --> 0:12:35.080 and your answer was My answer was, uh, you know, 0:12:36.240 --> 0:12:39.080 a bit cheeky as I tend to be, which is 0:12:39.160 --> 0:12:42.760 that economists teach people that they should ignore what they 0:12:42.840 --> 0:12:47.480 call sunk costs, meaning if that dessert doesn't taste very good, 0:12:47.679 --> 0:12:50.400 you should need it just because you paid twenty bucks 0:12:50.440 --> 0:12:54.960 for it. And economists have trouble following their own advice, 0:12:55.559 --> 0:12:58.319 and they had a lot invested in the rational economic 0:12:58.400 --> 0:13:01.440 model and weren't gonna give it up without a fight. 0:13:02.320 --> 0:13:05.959 Isn't that the nature of so many ideologies that there's 0:13:06.000 --> 0:13:09.440 all this time and effort, there's this endownment effect that 0:13:09.520 --> 0:13:12.160 it's yours, you've done, You've done the work, you've done 0:13:12.200 --> 0:13:15.760 the heavy lifting. Very difficult to just oh this is wrong, 0:13:15.840 --> 0:13:18.240 let me move on and find a new philosophy. Yeah, 0:13:18.280 --> 0:13:22.080 that's true. And you know I often say that I 0:13:22.120 --> 0:13:25.439 don't think in forty years I've changed in anybody's mind. 0:13:26.000 --> 0:13:28.600 I disagree with that statement. I know you've said that, 0:13:28.920 --> 0:13:31.960 but you've actually changed a lot of people's If not 0:13:32.080 --> 0:13:36.920 change their minds, certainly change their perspectives and enlighten them somewhat. Well, 0:13:36.960 --> 0:13:42.800 but not not economists. So, I mean, the field is growing, 0:13:43.000 --> 0:13:45.880 and uh, there are lots of great people in it, 0:13:45.960 --> 0:13:49.880 but they're young, and so my strategy from the beginning 0:13:50.080 --> 0:13:54.199 was corrupt the youth. Don't try to you know, there's 0:13:54.240 --> 0:13:58.880 this old line science much on funeral by funeral and 0:13:58.960 --> 0:14:02.800 funeral at a time, and uh, you know, there's no 0:14:02.880 --> 0:14:07.480 point in trying to convince those guys. But young impressionable 0:14:07.480 --> 0:14:10.960 graduate students, you know, you can have your way with them. 0:14:11.200 --> 0:14:15.320 That's hilarious. So don't even bother convincing the old fogies. 0:14:15.400 --> 0:14:18.000 Just go right for the kids. Yeah, it's a it's 0:14:18.040 --> 0:14:21.680 a good long term strategy. Yeah, you know, I was 0:14:21.760 --> 0:14:24.720 playing a long game. You have good impulse control. I 0:14:24.800 --> 0:14:28.120 have to work on that. That's really interesting. So let's 0:14:28.120 --> 0:14:33.000 move a little more specifically to the efficient market hypothesis. Um, 0:14:33.240 --> 0:14:35.480 you once said, I love I love a lot of 0:14:35.560 --> 0:14:38.320 your quotes. We don't want to throw away the efficient 0:14:38.360 --> 0:14:41.360 market hypothesis. We just don't want to believe it's true. 0:14:41.600 --> 0:14:44.960 Explain what you mean by that. Yeah, So all of 0:14:45.080 --> 0:14:50.640 behavioral economics and behavioral finance starts with rational models, and 0:14:51.000 --> 0:14:54.640 they give us a benchmark, and it really wouldn't really 0:14:54.640 --> 0:15:00.880 be possible to do behavioral economics without that rational benchmark. So, 0:15:01.280 --> 0:15:04.840 you know, the official market hypothesis really has two components. 0:15:05.160 --> 0:15:07.800 One is that you can't beat the market, and the 0:15:07.840 --> 0:15:11.680 other is that prices are right, that asset prices are 0:15:11.720 --> 0:15:16.400 equal to their intrinsic value. Now, those are very useful 0:15:17.240 --> 0:15:23.320 starting points, no hypotheses, right, and the beauty is that 0:15:23.440 --> 0:15:29.080 they're testable and so over long periods of time. And yeah, 0:15:29.120 --> 0:15:33.560 well sometimes, like let's take the prices right. Here's an 0:15:33.560 --> 0:15:40.560 amusing story. There's a closed and mutual fund, which, if 0:15:40.680 --> 0:15:43.000 listeners don't know, these are mutual funds that you have 0:15:43.080 --> 0:15:47.720 to buy and sell on exchanges, which means that their 0:15:47.760 --> 0:15:51.520 prices can deviate from the value of the assets they own, 0:15:51.600 --> 0:15:54.200 as opposed to traditional mutual funds where you can only 0:15:54.240 --> 0:15:55.800 sell at the end buy or sell at the end 0:15:55.800 --> 0:15:58.840 of the day, and it reflects a calculation of everything 0:15:58.880 --> 0:16:03.840 that's held with that that bucket exactly. Now, the fact 0:16:03.960 --> 0:16:06.840 that the prices sometimes differ from the value of the 0:16:06.880 --> 0:16:09.920 assets is already embarrassing, but not as bad as the story. 0:16:09.920 --> 0:16:13.760 I'm gonna tell you. There's a small closed end fund 0:16:14.160 --> 0:16:17.280 that happens to have the ticker symbol. See you be 0:16:17.600 --> 0:16:22.840 a Cuba Yeah. Now, needless to say, they don't own 0:16:22.960 --> 0:16:27.120 any assets in Cuba because A it's against the law 0:16:27.480 --> 0:16:31.880 and B there aren't any right. Nevertheless, and for years 0:16:31.920 --> 0:16:34.960 it was selling at about a fifteen percent discount to 0:16:35.040 --> 0:16:40.080 its event President Obama made his announcement of his intention 0:16:40.760 --> 0:16:46.560 to ease relations with Cuba, the Cuba Fund went to 0:16:46.600 --> 0:16:51.480 a seventy premium. The next day after the presidential announcement, 0:16:51.560 --> 0:16:55.400 it was up almost fifty. A week later it was up. 0:16:56.600 --> 0:17:01.440 How inefficient is that? Not efficient? And you know efficient 0:17:01.480 --> 0:17:04.040 market defenders was like, oh, look, this is one little, 0:17:04.080 --> 0:17:07.640 tiny example, but there are hundreds of the right and 0:17:07.760 --> 0:17:10.520 we study these little examples. I call them the fruit 0:17:10.600 --> 0:17:16.280 flies of finance because no one can possibly defend this. 0:17:16.760 --> 0:17:23.160 It's still several months later, selling above really above net 0:17:23.200 --> 0:17:27.880 asset value here. But Jobo, we're opening relations with Cuba. 0:17:28.200 --> 0:17:30.080 Why could you? Why are you so negative on a 0:17:30.080 --> 0:17:33.240 closed and fun called Cuba just because it does nothing 0:17:33.280 --> 0:17:36.280 whatsoever to do with Cuba? Yeah? Well, and noticed that 0:17:36.320 --> 0:17:41.160 they're they're holdings are public information. Yeah, and you can 0:17:41.200 --> 0:17:46.120 buy those stocks on your own for a hundred dollars. 0:17:46.280 --> 0:17:50.160 Why would you pay a hundred and forty that's unbelievable. Well, 0:17:50.240 --> 0:17:55.080 markets are not perfectly efficients, they're kind of sort of 0:17:55.080 --> 0:18:00.399 eventually will get around to it efficient. Well maybe maybe. 0:18:00.600 --> 0:18:02.840 So here's what I would say. The part that you 0:18:02.880 --> 0:18:07.240 can't beat the market is approximately true. Some people can 0:18:07.280 --> 0:18:11.160 on rare occasion. Good luck picking them in advance. That's right. 0:18:11.440 --> 0:18:14.600 And look, I mean what we know is most active 0:18:14.600 --> 0:18:20.399 managers underperformed, and that's kind of the best evidence in 0:18:20.480 --> 0:18:25.040 favor of the efficient market hypothesis. And that's before fees, cost, 0:18:25.160 --> 0:18:27.359 taxes time. Yeah, it depends on how you do it, 0:18:27.400 --> 0:18:32.040 but there's certainly they're certainly not beating the market after fees. 0:18:32.359 --> 0:18:36.160 But although it's the best evidence for the efficient market hypothesis, 0:18:36.480 --> 0:18:40.160 it's also the most evidence against because where is most 0:18:40.160 --> 0:18:44.320 of the money inactive funds? Yeah? Van Guard has grown 0:18:44.320 --> 0:18:47.880 a lot that exception. Yeah, and there's still a third 0:18:47.920 --> 0:18:53.200 of their three trillion dollars is still actively managed. So 0:18:53.200 --> 0:18:57.480 so I think it's approximately right, And listeners would be 0:18:57.520 --> 0:19:00.560 well advised to just say I can't do it. Is 0:19:00.560 --> 0:19:04.200 it just inherent in human behavior that we're going to 0:19:04.280 --> 0:19:07.080 get booms and bus markets are gonna rally and crash, 0:19:07.119 --> 0:19:10.440 and that's just the way it's gonna be. I think 0:19:10.640 --> 0:19:13.280 we're subject to that risk, but I think there are 0:19:13.280 --> 0:19:15.800 things we could do to mitigate it. And let's talk 0:19:15.840 --> 0:19:20.960 a little bit about choice, architecture and nudge, which refers 0:19:20.960 --> 0:19:25.920 obviously to the book you wrote with Cassnstein. Yes, so 0:19:26.000 --> 0:19:30.639 the idea of nudge is that because we're dealing with 0:19:30.720 --> 0:19:34.639 humans rather than e cons, they sometimes need help, and 0:19:35.760 --> 0:19:39.200 can we think of ways to help them that don't 0:19:39.280 --> 0:19:42.359 force anybody to do anything. So that was the conceit 0:19:42.520 --> 0:19:45.879 of the book. In other words, you're not mandating anything, 0:19:45.920 --> 0:19:50.520 do it, no bands, how much can you do with 0:19:50.560 --> 0:19:53.879 those restrictions, So you're just you're just kind of just 0:19:53.960 --> 0:19:56.280 kind of nudging is the right words, just kind of 0:19:56.359 --> 0:19:59.960 nudging them into the right choice. There's an interesting little 0:20:00.000 --> 0:20:04.200 little bit of behavioral engineering, which is and I see 0:20:04.200 --> 0:20:05.720 it here in New York. I come up out of 0:20:05.720 --> 0:20:08.760 a subway to get to my office because it's the 0:20:08.760 --> 0:20:13.320 fastest way to get around town. And it's a double escalator. 0:20:13.400 --> 0:20:16.119 I mean, this thing just goes on forever, and about 0:20:16.119 --> 0:20:19.800 half the people stand on the escalator and half people walk. 0:20:20.280 --> 0:20:23.359 But sometimes you get people who don't understand the social 0:20:23.480 --> 0:20:26.280 norms and they stand on the left side instead of 0:20:26.280 --> 0:20:29.119 standing on the right side. I'm in an airport or 0:20:29.200 --> 0:20:33.760 somewhere in maybe it was Brussels, and I see this 0:20:34.080 --> 0:20:38.280 escalator and on the right hand side are two ft 0:20:38.320 --> 0:20:41.800 on each step two to two. On the left hand 0:20:41.840 --> 0:20:45.640 side is alternates left and right. And it made it clear, oh, 0:20:45.720 --> 0:20:49.639 this is the walking half and that whole issue. You 0:20:49.760 --> 0:20:53.080 never ran into the person who don't understand the social etiquette. 0:20:53.160 --> 0:20:55.880 And if you're standing slow traffic moved to the right. 0:20:56.160 --> 0:20:59.359 It was amazing and it was so simple and very effective. 0:20:59.720 --> 0:21:04.080 You know, people have lots of misconceptions about nudge. One 0:21:04.359 --> 0:21:08.320 is that it has to be sneaky. These notice these 0:21:08.359 --> 0:21:12.800 things are the opposite of right. Look. My favorite nudge, 0:21:12.840 --> 0:21:15.440 one that I claim has saved my life many times, 0:21:16.000 --> 0:21:20.600 is in London at street corners, there's a sign at 0:21:20.640 --> 0:21:25.280 your feet look right because the cars are coming from 0:21:25.280 --> 0:21:30.160 the wrong direction if you're from Europe or America, and 0:21:30.240 --> 0:21:35.159 so you know, many years of looking for cars coming 0:21:35.800 --> 0:21:39.879 from your left, all of a sudden boom, so you 0:21:39.920 --> 0:21:44.119 know there's nothing sneaky about that. Nobody tells you you 0:21:44.200 --> 0:21:48.520 have to look at it, but several double decker busses 0:21:48.600 --> 0:21:51.960 haven't hit me because of that look right. So, you know, 0:21:52.280 --> 0:21:55.119 a couple of years ago, I wrote this thing for 0:21:55.240 --> 0:21:57.840 tourists coming to New York City, and one of the 0:21:57.920 --> 0:22:01.199 things was there are many one way streets, but the 0:22:01.240 --> 0:22:06.040 bicyclists don't have h any obligation apparently to follow that. 0:22:06.320 --> 0:22:09.000 So when you step off the curb, look left and 0:22:09.160 --> 0:22:11.159 right to make sure you don't. And let me tell 0:22:11.200 --> 0:22:14.400 you how many times I've just missed the bicyclists because 0:22:14.400 --> 0:22:17.040 I happen to look right. It's the same, it's the 0:22:17.040 --> 0:22:21.320 same exact thing. So this really is kind of consistent 0:22:21.400 --> 0:22:25.159 with the philosophy at the University of Chicago, which is 0:22:25.240 --> 0:22:29.360 really known as a libertarian, a sort of right leaning 0:22:29.440 --> 0:22:36.040 philosophical um efficient market hypothesis place. Are you considered a 0:22:36.040 --> 0:22:39.240 bit of a heretic there because you really don't fit 0:22:39.320 --> 0:22:43.560 the mold of of Chicago economists. I think heretic would 0:22:43.560 --> 0:22:48.800 be one of the more polite terms that I've been called. Uh, 0:22:48.880 --> 0:22:55.280 you know, we called our philosophy libertarian paternalism. Libertarian paternalism. 0:22:56.359 --> 0:23:00.119 The libertarians were mad that we stole their word, and 0:23:00.240 --> 0:23:05.480 everybody hates paternalists. They just think of paternalists as Ralph Nader. So, 0:23:06.480 --> 0:23:11.000 but what we've by libertarian, we use it as an adjective, 0:23:11.880 --> 0:23:16.800 and by paternalism we mean helping people achieve their goals, 0:23:16.840 --> 0:23:20.640 like not getting run over by a bus. So if 0:23:20.680 --> 0:23:23.479 we can do that without forcing anybody to do anything, 0:23:23.720 --> 0:23:27.399 why wouldn't we known as the father of behavioral economics. 0:23:27.800 --> 0:23:29.919 I'm about halfway through the book and I found it 0:23:29.960 --> 0:23:36.080 to be both informative and amusing, which is an unusual combination. 0:23:36.240 --> 0:23:40.240 So let's talk a little bit about theory induced blindness. 0:23:40.280 --> 0:23:44.640 I know you're gonna be seeing your mentor um Daniel Kneman, 0:23:45.000 --> 0:23:49.639 and you mentioned um. That's a quote of his. He 0:23:49.760 --> 0:23:53.840 called theory induced blindness the refusal to see facts when 0:23:53.880 --> 0:23:57.720 it disagrees with a theory or ideology. Some people call 0:23:57.800 --> 0:24:01.760 that cognitive dissidence. Is there any difference between No, I 0:24:01.800 --> 0:24:04.879 think I think this is a different concept. So the 0:24:04.960 --> 0:24:07.440 idea is that if you have a certain lens that 0:24:07.520 --> 0:24:12.840 you look at things through, then you're gonna see everything 0:24:13.200 --> 0:24:17.200 to be consistent with your point of view. And so, 0:24:17.359 --> 0:24:21.720 you know, it's like people have various views about the 0:24:21.800 --> 0:24:26.200 economy from the left and from the right, and every 0:24:26.400 --> 0:24:29.160 you know, every time there's a bit of news, they'll 0:24:29.160 --> 0:24:33.160 find a way of interpreting that piece of news as 0:24:33.640 --> 0:24:36.639 just confirming what they've always thought. Where I see that 0:24:36.720 --> 0:24:39.680 every day is the bullbear debate that takes place in 0:24:39.720 --> 0:24:42.960 the media and in print, And no matter what the 0:24:43.040 --> 0:24:46.840 data point is, the bulls who are long equities are 0:24:46.880 --> 0:24:49.720 gonna explain why this is good for the markets, and 0:24:49.720 --> 0:24:53.199 the bears just try out a counter argument, this is 0:24:53.240 --> 0:24:56.879 proof that we're all going to die. It's amazing with 0:24:56.920 --> 0:24:59.800 the same data points, how people just focus on what 0:25:00.080 --> 0:25:03.320 justifies Now how much of that is selective perception and 0:25:03.359 --> 0:25:06.160 how much of that is just you know, we see 0:25:06.200 --> 0:25:11.600 that which agrees with us. The psychologist called this confirmation bias. Yes, 0:25:12.200 --> 0:25:16.600 so well, go out looking for evidence that supports our 0:25:16.640 --> 0:25:19.680 point of view. I mean, but but theory should show 0:25:19.800 --> 0:25:23.320 should be a hundred percent of trading at or pretty 0:25:23.400 --> 0:25:27.119 close to intrinsic value. So the fact that you're finding 0:25:27.160 --> 0:25:33.320 one that's below one day and above that really shows that, hey, 0:25:33.359 --> 0:25:35.800 that theory is a little bit off. It's what we 0:25:35.880 --> 0:25:41.320 call an anomaly. Mental accounting. What is mental accounting? So 0:25:41.600 --> 0:25:45.080 mental accounting is the think of it as the financial 0:25:45.119 --> 0:25:53.400 accounting of people and economists tell us that money is fungible. 0:25:54.200 --> 0:25:56.840 If you want to impress people at a cocktail party, 0:25:57.080 --> 0:26:01.960 use fungible. It just means there's no aables. But of 0:26:02.000 --> 0:26:05.600 course people put labels on stuff. You go to the casino, 0:26:05.720 --> 0:26:08.200 you can see this. A guy wins some money early 0:26:08.240 --> 0:26:11.040 in the even playing with house money exactly. That's the 0:26:11.119 --> 0:26:14.200 expression playing with the house money. What does that mean? 0:26:14.400 --> 0:26:17.360 The casino is called the house so it's like you're 0:26:17.400 --> 0:26:21.480 playing with their money. Well, suppose you won five dollars 0:26:21.520 --> 0:26:24.280 you put in your right pocket. You brought five hundred 0:26:24.280 --> 0:26:27.320 dollars to gamble, that's in your left pocket. Both of 0:26:27.359 --> 0:26:30.320 them will buy something pretty nice if you get home. 0:26:30.880 --> 0:26:33.879 But the one the house money, easy come, easy go, 0:26:35.080 --> 0:26:38.280 and it's entertainment. You're you're just putting that in a 0:26:38.320 --> 0:26:43.480 different So you know, that sounds like small potatoes. But 0:26:44.000 --> 0:26:49.760 during the nine nineties technology, oh sure, during that boom, 0:26:50.000 --> 0:26:54.160 everybody thought they were playing with the house money. And 0:26:54.400 --> 0:26:58.400 four one K investors were just increasing and increasing their 0:26:58.440 --> 0:27:02.399