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Maximizing Luck: Masters in Business with Judd Kessler · Masters in Business

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  Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. This is Masters in
• 0:11
  Speaker 1: Business with Barry Ritholts on Bloomberg Radio.
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  Speaker 2: This week on the podcast, another extra special guest, Judd Kessler,
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  Speaker 2: Wharton professor, author of Lucky by Design, tells us about
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  Speaker 2: market design, how we allocate scarce resources for everything from
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  Speaker 2: Taylor Swift tickets to kidneys. I thought the book was
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  Speaker 2: really interesting, kind of wonky economic analysis, but fascinating, and
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  Speaker 2: the conversation absolutely fascinating. Also with no further ado, my
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  Speaker 2: interview of Professor Judd Kesler. So I found the book
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  Speaker 2: to be really fascinating look at market design, which is
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  Speaker 2: an area that we don't usually think about. We'll talk
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  Speaker 2: about the book in a few moments. I want to
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  Speaker 2: start with your best bachelor's, masters and PhD from Harvard,
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  Speaker 2: But that wasn't enough. You get a master's in philosophy
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  Speaker 2: from Cambridge. What was the career plan?
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  Speaker 3: So the career plan was to go to college and
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  Speaker 3: then find a career not in academia. That was not
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  Speaker 3: something that I even thought of as an option. I
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  Speaker 3: was an econ major. I thought I'd be a consultant.
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  Speaker 3: I accepted a Bay New York offer to take after graduation.
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  Speaker 3: But senior year of college I wrote a thesis under
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  Speaker 3: a supervisor named Alvin Roth, and I loved it. It
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  Speaker 3: was my first experience doing research, and I thought, this
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  Speaker 3: is really fun. I'm in the cutting edge of this
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  Speaker 3: topic that I chose that interests me, and so that
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  Speaker 3: made me think, all right, maybe I should give it
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  Speaker 3: a shot. So that was the trip to Cambridge, England,
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  Speaker 3: was me doing an mfil in economics to see, you know,
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  Speaker 3: is this something that I might want to pursue as
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  Speaker 3: a career. I didn't love the pedagogy in England, so
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  Speaker 3: the courses I wasn't enjoying. But every day I'd come
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  Speaker 3: home and think, oh, there's some research questions that that
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  Speaker 3: lecture prompted. And I realized, oh, the research is keeping
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  Speaker 3: me engaged in this program. Even though I don't love
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  Speaker 3: the coursework, I probably should be doing this full time.
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  Speaker 2: What was the research topic in your senior year that
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  Speaker 2: led you to heading to Inland?
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  Speaker 3: So it was a experiment. So I'm an experimental economist.
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  Speaker 3: Most of my not all of it, but most of
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  Speaker 3: my research is experimental, meaning undergrads are coming into the
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  Speaker 3: lab playing a game I've designed or we're doing some
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  Speaker 3: experimentation in the field where people are going about their lives.
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  Speaker 3: They don't realize that half of them are getting one
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  Speaker 3: version of an experience and half forgetting the other, and
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  Speaker 3: we're seeing what the effect is. So my undergrad thesis
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  Speaker 3: was trying to understand how pairs of people could contribute
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  Speaker 3: to public go to things that benefited both of them.
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  Speaker 3: And I learned about, you know, everything that I could
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  Speaker 3: learn about public good provision, and I varied both the
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  Speaker 3: structure of the game and how the benefits of the
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  Speaker 3: public good were split across people. And this was something
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  Speaker 3: that had never been done before. And my advisor, Al
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  Speaker 3: was very encouraging, enthusiastic funded the research study. And I
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  Speaker 3: had this experience of looking at the data and thinking,
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  Speaker 3: this is the.
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  Speaker 4: First I'm the first person. I'm on the frontier.
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  Speaker 3: I'm never going to be an astronaut, but I'm on
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  Speaker 3: the frontier here exploring the answer to this question that
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  Speaker 3: interests me.
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  Speaker 4: I'm looking at the data and discovering the answer.
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  Speaker 2: So this sounds like it's a cross section of game
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  Speaker 2: theory and behavioral economics.
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  Speaker 4: Fair description, exactly right. And it's a paper.
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  Speaker 3: You know, I've since become an academic, and I've been
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  Speaker 3: writing research papers for a long time. This one was
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  Speaker 3: never published, and the reason was that in my twenties
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  Speaker 3: and even into my thirties, I didn't really know how
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  Speaker 3: to motivate it.
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  Speaker 4: I didn't know what it was about.
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  Speaker 3: You know, at a deep level, I knew what I
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  Speaker 3: had done, and I knew that it was new and different.
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  Speaker 3: But I finally cracked the code in my late thirties
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  Speaker 3: because what I had studied, unbeknownst to me was how
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  Speaker 3: couples allocate effort to construct public goods in their household.
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  Speaker 2: Does that mean who cooks, who cleans, who gets the kids,
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  Speaker 2: who basically pays the bills? Is it just that simple?
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  Speaker 4: Exactly?
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  Speaker 3: Well, it's the game was we each put in some effort.
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  Speaker 3: Sometimes the production is split evenly between the two, and
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  Speaker 3: sometimes it's split unevenly, so one person gets more of
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  Speaker 3: the output and the other person gets less.
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  Speaker 4: And what I.
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  Speaker 3: Found was that in some structures where we each have
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  Speaker 3: to match each other's contribution to general rate and output,
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  Speaker 3: then the inequality didn't matter. Pairs of people, these are
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  Speaker 3: random strangers. They're able to contribute at high levels. It's
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  Speaker 3: when we're contributing to the public good and one of
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  Speaker 3: us can cut back and kind of free ride off.
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  Speaker 4: Of the other one.
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  Speaker 3: When we split it equally, we're able to sustain with
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  Speaker 3: the pair, you know, high levels of contribution. But when
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  Speaker 3: we're split unequally and one of us can free ride
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  Speaker 3: off each other, the contribution collapses.
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  Speaker 2: I was going to say that sounds like a recipe
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  Speaker 2: for a divorce.
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  Speaker 3: Well, you know, the reason I was able to later
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  Speaker 3: understand what I had studied in my twenties was those
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  Speaker 3: are the situations where, you know, my wife and I
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  Speaker 3: have conflicts when we both need to contribute for the
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  Speaker 3: public good to be provided, Like we both have to
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  Speaker 3: be diligent with bedtimes with our kids because of one
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  Speaker 3: of us slips.
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  Speaker 4: Then the kids schedule in them up.
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  Speaker 3: Then you know, it doesn't matter if I care more
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  Speaker 3: about that or my wife we kind of both realize
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  Speaker 3: we have to at the same level, or or we
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  Speaker 3: both lose.
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  Speaker 2: Where does it sort of where does that gap between effort? Yeah,
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  Speaker 2: how does that manifest?
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  Speaker 3: So if one of us cares more about say the
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  Speaker 3: kids eating vegetables for.
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  Speaker 2: How does it house neat? Yeah?
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  Speaker 3: Yeah, for us, it's you know, the health helpful eating.
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  Speaker 3: One of us might care more than the other. And
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  Speaker 3: in that case, you know, if my wife cares more
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  Speaker 3: and I free write off of her, she fed them
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  Speaker 3: a healthy lunch, say yesterday, uh, and then I can
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  Speaker 3: feed them a less healthy dinner when it's my turn.
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  Speaker 4: That's where the recipe for a disaster.
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  Speaker 2: Those are O missions? What about co missions? What about
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  Speaker 2: doing things positively where one of you might slip? How
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  Speaker 2: does that manifest?
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  Speaker 5: Oh?
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  Speaker 3: I mean most of the things I'm thinking of are like,
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  Speaker 3: are we giving them too much screen time?
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  Speaker 2: Oh?
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  Speaker 4: I guess we could.
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  Speaker 3: It could be uh reading them books at night, you know.
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  Speaker 3: I mean, so we both care a lot about this,
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  Speaker 3: so well we'll do it. But if you know, if
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  Speaker 3: one of us cared more, that would be a recipe
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  Speaker 3: for a disaster, because that person would read to the
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  Speaker 3: kids and the other person would say, you know what,
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  Speaker 3: like you got read to last night, I won't do
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  Speaker 3: it right, And that's when the trouble.
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  Speaker 4: Yeah, that's when trouble started.
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  Speaker 3: So that was my first academic research was exploring those
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  Speaker 3: kinds of dynamics in two person games.
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  Speaker 2: How do you go from that to studying market design?
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  Speaker 3: So this was Alvin Roth the mentor that I mentioned.
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  Speaker 3: He was my undergrad thesis advisor. And when I was
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  Speaker 3: getting my PhD, I committed a kind of sin, of
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  Speaker 3: academic sin, which is you're not supposed to go back
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  Speaker 3: to the institution you did your undergrad degree to get
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  Speaker 3: your PhD. But I wanted to work with Al, so
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  Speaker 3: I kind of I cheated a little bit. I went
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  Speaker 3: back to Harvard, but it was technically a Harvard Business
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  Speaker 3: School PhD joint with the Econ Department, so I pretended, oh,
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  Speaker 3: I'm getting a different angle on this. I ended up
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  Speaker 3: being helpful because being at the Business school helped me
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  Speaker 3: transition to mind current job as a Wharton professor. But
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  Speaker 3: I went back to work with Al, and he was
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  Speaker 3: doing both He was doing experimental work and he was
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  Speaker 3: doing market design work. And I had gotten exposure to
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  Speaker 3: both of them in his course courses as an undergrad
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  Speaker 3: and an early PhD student. And the research that kind
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  Speaker 3: of transitioned me was on organ donation and organ allocation.
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  Speaker 2: The book has some fascinating data points on that. We'll
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  Speaker 2: talk about that in a bit. I want to stay
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  Speaker 2: with your background. You end up winning the Vernon Smith
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  Speaker 2: Scholar Prize in twenty twenty one. What work was that for?
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  Speaker 3: So that was for a line of work starting with
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  Speaker 3: this organ allocation work, because that was both a public
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  Speaker 3: good study like I described in the earlier work and
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  Speaker 3: policy relevant. And so the Vernon Smith Prize is for
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  Speaker 3: somebody who's contributed with experimental research in a bunch of
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  Speaker 3: areas and I had you know, I'd done that, I'd
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  Speaker 3: done that in organ allocation, done that, and of course allocation.
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  Speaker 3: I had done work on summer youth employment, but kind
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  Speaker 3: of always with this experimental lens to try to understand
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  Speaker 3: what the effects were.
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  Speaker 2: And what's kind of fascinating is you're clicking off a
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  Speaker 2: lot of chapters in the book, which are how do
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  Speaker 2: we allocate scarce resources when there are a variety of
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  Speaker 2: different ways to do it. Sometimes it's lottery, sometimes it's effort.
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  Speaker 2: Sometimes it's people paying more to get it, which really
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  Speaker 2: is I never thought of those things as market design,
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  Speaker 2: and yet most people look at those things as just hey,
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  Speaker 2: you got lucky. You got the summer job or the
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  Speaker 2: course you wanted, or the kidney you needed because you
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  Speaker 2: signed up. A big theme of the book is, hey,
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  Speaker 2: this is in luck. This is recognizing all of these
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  Speaker 2: market design structures and figuring out the rules and playing
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  Speaker 2: them as well as you can.
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  Speaker 3: Exactly right in the book. I call these hidden markets
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  Speaker 3: because they're not the markets that we always think of.
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  Speaker 3: When we think of markets, we think of the farmer's
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  Speaker 3: market where you're paying a price for produce. We think
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  Speaker 3: of the stock market where you're paying a price for
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  Speaker 3: equity and publicly traded companies. But there are all of
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  Speaker 3: these markets where you're trying to allocate a scarce resource.
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  Speaker 3: You might have a price that gets paid, but it's
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  Speaker 3: not doing all of the work. There's something else that
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  Speaker 3: is deciding who gets access to the scarce resource. And
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  Speaker 3: then there are markets where there is no price. We've
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  Speaker 3: decided that we want to do the allocation without having
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  Speaker 3: folks pay. We want to distribute it in some other way.
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  Speaker 3: And these are areas that market design thinks about. But
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  Speaker 3: that a standard ECON class like the ones I teach
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  Speaker 3: to my undergrads or MBA students or executives would not
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  Speaker 3: necessarily cover.
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  Speaker 2: So other than the students in your warton class, how
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  Speaker 2: can individuals become more aware of all of these hidden
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  Speaker 2: market mechanisms and use them to their best advantage?
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  Speaker 3: Yeah, so the first step is recognizing that these things
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  Speaker 3: are markets. You want access to something, it's scarce, there
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  Speaker 3: is a limited amount that can be allocated, and you're
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  Speaker 3: competing with lots of other people who want them. Examples
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  Speaker 3: might make it more concrete because we're, you know, thinking
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  Speaker 3: about things that people participate in every day.
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  Speaker 4: These markets.
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  Speaker 3: So you want to get a reservation at a hot restaurant,
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  Speaker 3: you want to get a ticket to a live event.
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  Speaker 3: You want to get a product that is hard to
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  Speaker 3: come by, either you know, a clothing special clothing drop
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  Speaker 3: or this summer it was La Boo boos, the ugly
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  Speaker 3: cute stuffy dolls, but you could think of beanie babies
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  Speaker 3: or cabbage patch dolls if you're as.
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  Speaker 4: Old as me.
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  Speaker 3: And in these cases there is a price that you pay,
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  Speaker 3: but there's also some other ordeal that you may have
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  Speaker 3: to go through to get access to those scarce resources.
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  Speaker 3: Same thing with benefits or services provided by the government.
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  Speaker 3: You want to get your kid into public elementary school,
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  Speaker 3: you want to get a library book, you want to
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  Speaker 3: get a life saving organ transplant. These are environments where
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  Speaker 3: you have to understand, okay, what is the rule that
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  Speaker 3: is doing the allocation, and then how can you use
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  Speaker 3: your knowledge of that rule to figure out the right strategy.
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  Speaker 2: Your daughter trying to get into her favorite after school
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  Speaker 2: program really resonated because it was such a little niche thing.
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  Speaker 2: It's just one of those everyday life frictions. You don't
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  Speaker 2: really think of those as markets that have been designed,
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  Speaker 2: but you do a really nice job explaining any allocation
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  Speaker 2: of scarce resources is a market decision.
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  Speaker 3: Exactly, and that one is one of the banes of
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  Speaker 3: my existence. I have to it's a first come, first
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  Speaker 3: serve race, which is what I call the experience that
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  Speaker 3: folks have on a regular basis of there is a
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  Speaker 3: scarce resource, it is being made available at a point
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  Speaker 3: in time, and whoever clicks first gets it, whoever calls
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  Speaker 3: in first in different market structures, is the one who
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  Speaker 3: can claim that scarce resource. After school programs at my
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  Speaker 3: daughter's elementary school, this is what the kids are doing
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  Speaker 3: between two thirty when school lets out, and five thirty
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  Speaker 3: when working parents can pick them up. There are some
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  Speaker 3: very popular classes for the kids to do during those hours,
• 13:25
  Speaker 3: but there are a lot of kids who want to
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  Speaker 3: participate in them, and so every semester they will say okay.
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  Speaker 3: On June twelfth at ten am. We're going to release
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  Speaker 3: all of the fall semester courses, and whoever clicks to
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  Speaker 3: claim the spots in those classes first will get them,
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  Speaker 3: and everybody else will be disappointed.
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  Speaker 4: And it is a.
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  Speaker 3: First come for Serve race. And I like the race
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  Speaker 3: analogy because I don't do a ton of cardio and
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  Speaker 3: this is where my heart race is faster that you know,
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  Speaker 3: this is fight or flight, because I know I'm competing
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  Speaker 3: with all these other parents who want to get their
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  Speaker 3: kids into these classes. And if my daughter gets what
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  Speaker 3: she wants, mornings are wonderful, and if she doesn't, it's
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  Speaker 3: you know, I don't want to go to school today.
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  Speaker 2: There's some you seem to have an advantage because there
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  Speaker 2: are some fascinating strategies here. Hey, maybe you don't start
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  Speaker 2: with the Monday classes. Maybe you do Tuesday, Wednesday, Thursday,
• 14:19
  Speaker 2: because they're going to fill up while everybody's racing to
• 14:21
  Speaker 2: get Monday. And if you're disappointed in a Monday, but
• 14:24
  Speaker 2: you've locked in the three ones for the rest of
• 14:27
  Speaker 2: the week, there's an advantage. Thinking about how the rest
• 14:31
  Speaker 2: of the participants are playing the game.
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  Speaker 4: This is exactly right.
• 14:34
  Speaker 2: So the ball game theory.
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  Speaker 3: It's all game theory, and I wrote a book about
• 14:38
  Speaker 3: game theory. I didn't use the term game theory because
• 14:40
  Speaker 3: I didn't want to scare people off. But it's thinking
• 14:43
  Speaker 3: about what it is that you want and then what
• 14:45
  Speaker 3: it is that other folks might be going for and
• 14:48
  Speaker 3: developing the right strategy for that. Now, first come for
• 14:52
  Speaker 3: serve races. There's a bunch of strategy that is kind of,
• 14:56
  Speaker 3: you know, maybe obvious when you think about it. Of Okay,
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  Speaker 3: you have to know that it's a race. You have
• 15:02
  Speaker 3: to know that this is a situation where you need
• 15:05
  Speaker 3: to be available to click.
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  Speaker 4: As fast as you can at that time.
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  Speaker 3: Right when I get the email and it says June
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  Speaker 3: twelfth at ten am is when registration opens. Even if
• 15:16
  Speaker 3: I've never participated in the registration for these after school classes,
• 15:21
  Speaker 3: the ten am tips me off that something is going
• 15:23
  Speaker 3: on at my son's school where the classes are not
• 15:26
  Speaker 3: as demanded. There is no ten ams. I mean, there
• 15:31
  Speaker 3: might be a time when the registration begins, but nobody
• 15:33
  Speaker 3: really cares about it because you can go whenever you
• 15:36
  Speaker 3: want that day or later in the week, and there's
• 15:37
  Speaker 3: plenty of options available. But this market, the ten am
• 15:43
  Speaker 3: tells you all right, by ten oh one or ten
• 15:45
  Speaker 3: o two, the good stuff might be taken.
• 15:46
  Speaker 2: Did your wife ever get to the French laundry in Napa?
• 15:50
  Speaker 3: This was a first time, first of race that I
• 15:53
  Speaker 3: talk about in the book. It's for milestone birthdays only
• 15:56
  Speaker 3: because it's so expensive. So in the book I talk
• 15:59
  Speaker 3: about how we did not get it for her fortieth birthday,
• 16:02
  Speaker 3: so she will try again when she's fifty.
• 16:04
  Speaker 2: I was reading that and using your strategy imediately thought, oh,
• 16:09
  Speaker 2: you're flying out just for a weekend. Four o'clock is
• 16:13
  Speaker 2: essentially seven o'clock in New York. Why not do four
• 16:17
  Speaker 2: or four to thirty and bang, they're good to go.
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  Speaker 3: This is exactly so the strategy to play there is
• 16:24
  Speaker 3: to think about what I call settling for silver versus
• 16:27
  Speaker 3: going for gold. So the settling for silver strategy is,
• 16:31
  Speaker 3: you know that seven o'clock or seven thirty is the
• 16:34
  Speaker 3: most desirable time to eat, at least you know for
• 16:36
  Speaker 3: regular people not in retirement communities. That's the ideal time.
• 16:40
  Speaker 3: If you're going to go on a Saturday, that is
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  Speaker 3: what most people are going to be aiming for. When
• 16:46
  Speaker 3: I went for her fortieth birthday to try to register.
• 16:48
  Speaker 3: I knew it was a race. I knew when the
• 16:50
  Speaker 3: starting gun was going off, I was there, My heart
• 16:52
  Speaker 3: was beating fast, and I went first for the seven
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  Speaker 3: thirty reservation page reloads.
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  Speaker 4: I don't get it, and I see that.
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  Speaker 3: Four to thirty still available, so I click for four thirty,
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  Speaker 3: thinking it's better than nothing, and the page reloads and
• 17:06
  Speaker 3: that is also gone.
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  Speaker 4: So struck out there.
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  Speaker 3: That's why we're waiting a decade to your point, if
• 17:12
  Speaker 3: I had I was doing it as a surprise for
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  Speaker 3: my wife, if I had planned and talked to her
• 17:16
  Speaker 3: about it in advance, we might have recognized four four
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  Speaker 3: thirty is just is.
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  Speaker 2: Nearly as good youer an East Coast, it's.
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  Speaker 3: Nearly as good as seven thirty. And that's the kind
• 17:26
  Speaker 3: of situation where you want to settle for silver, where
• 17:30
  Speaker 3: you want to go for something where there's less competition. Again,
• 17:34
  Speaker 3: the game theory coming in, fewer people are going to
• 17:37
  Speaker 3: be going for four four thirty. That is something that
• 17:40
  Speaker 3: you actually have a much better shot at if you
• 17:42
  Speaker 3: go for it first. You have to act as if
• 17:45
  Speaker 3: that is what you wanted all along, right, because when
• 17:48
  Speaker 3: the page reloads the first time, four thirty is still available,
• 17:52
  Speaker 3: Meaning if instead of going for seven thirty, I gone
• 17:54
  Speaker 3: for four to thirty initially as if it was my
• 17:56
  Speaker 3: first choice, she would have been able to cross French laundry,
• 18:00
  Speaker 3: the bucket list.
• 18:00
  Speaker 5: There you go.
• 18:01
  Speaker 2: Aside from the east coast West coast difference post pandemic,
• 18:06
  Speaker 2: My wife likes to point out that you use apps
• 18:10
  Speaker 2: like Open Table RESI, and she says six thirty is
• 18:13
  Speaker 2: the new seven thirty because everybody wants to get home
• 18:16
  Speaker 2: and stream whatever they're streaming. It's so different than it
• 18:19
  Speaker 2: was in the twenty tens. And I'm like, am I
• 18:21
  Speaker 2: just getting old? Are we going to start going to
• 18:23
  Speaker 2: the early bird specials? She's like, no, no one wants
• 18:26
  Speaker 2: to have dinner at ten, nine, ten o'clock at night.
• 18:28
  Speaker 4: I believe that.
• 18:29
  Speaker 3: And at the French laundry the meals take forever. So
• 18:31
  Speaker 3: getting out of there, you know, early.
• 18:32
  Speaker 2: For thirty gets you out at nine, ten and five, right,
• 18:35
  Speaker 2: Absolutely fascinating. Coming up, we continue our conversation with Judd Kessler,
• 18:40
  Speaker 2: Howard Mark's professor at the Wharton School at University of Pennsylvania,
• 18:44
  Speaker 2: discussing his new book, Lucky by Design, The Hidden Economics.
• 18:49
  Speaker 2: You need to get more of what you want. I'm
• 18:52
  Speaker 2: Barry Ridhelts. You're listening to Masters in Business.
• 18:55
  Speaker 5: On Bloomberg Radio.
• 19:08
  Speaker 2: I'm Barry Dults. You're listening to Masters in Business on
• 19:11
  Speaker 2: Bloomberg Radio. My extra special guest this week is judde Kessler.
• 19:14
  Speaker 2: He is the Howard Marx Professor at the Wharton School
• 19:18
  Speaker 2: at the University of Pennsylvania. So I want to talk
• 19:22
  Speaker 2: about Lucky by Design. The book is really interesting. I'm
• 19:26
  Speaker 2: intrigued by how much of what we think of as
• 19:31
  Speaker 2: luck is really just the way allocation mechanisms have been
• 19:36
  Speaker 2: either well designed or poorly designed. Lotteries, waitlists, queues, scoring rules, algorithms,
• 19:43
  Speaker 2: norms explain this concept that luck by design may really
• 19:50
  Speaker 2: be based on some hidden economic rules.
• 19:52
  Speaker 3: Yeah, so the way the markets operate, there's a set
• 19:57
  Speaker 3: of rules that decides who gets what. So we talked
• 19:59
  Speaker 3: about first come for serve races, but as you point out,
• 20:02
  Speaker 3: there's first come for serve waiting lists. There's lines, there
• 20:06
  Speaker 3: are lottery systems where you're putting your name in the
• 20:10
  Speaker 3: hat and we're pulling people out. And then they're centralized
• 20:13
  Speaker 3: clearing houses where you might rank your preferences over things
• 20:17
  Speaker 3: you want. And then there's some priorities or rules in
• 20:19
  Speaker 3: the background. And I have this sense that people look
• 20:24
  Speaker 3: at these systems and they don't have a framework for
• 20:26
  Speaker 3: thinking about them, and so when they participate in these markets,
• 20:30
  Speaker 3: they don't really realize they're doing so, and then the
• 20:33
  Speaker 3: outcomes seem like they're based on chance, or they try
• 20:39
  Speaker 3: to understand them and they struggle and they feel overwhelmed
• 20:43
  Speaker 3: and stressed out, and then play a strategy that might
• 20:46
  Speaker 3: not be right for them, and then they look around
• 20:48
  Speaker 3: and they think, oh, man, that person got what they
• 20:50
  Speaker 3: wanted I didn't.
• 20:52
  Speaker 4: They must have been lucky.
• 20:53
  Speaker 3: Because if you don't understand the system, then it all
• 20:56
  Speaker 3: seems like it's happening by chance. But by understanding the
• 21:01
  Speaker 3: rules that are applying in each market, you then can recognize, Okay,
• 21:05
  Speaker 3: this is a situation where it's a first come, first
• 21:08
  Speaker 3: serve waiting list. So I have to put my name
• 21:12
  Speaker 3: down early. Then I have to think about the strategy
• 21:14
  Speaker 3: I'm going to play when it's my turn. Do I
• 21:16
  Speaker 3: take what's offered to me? Do I keep waiting? And
• 21:19
  Speaker 3: you have a develop a framework for that. Even in
• 21:23
  Speaker 3: lottery allocations, which we often think of as being the
• 21:26
  Speaker 3: ones that are based entirely on chance. If you understand
• 21:30
  Speaker 3: the rules, you can develop strategies that help you do better.
• 21:34
  Speaker 3: So you want to go see a theater production, and
• 21:38
  Speaker 3: there's going to be a ticket lottery. You can go.
• 21:41
  Speaker 3: You can enter your name for two tickets. But maybe
• 21:44
  Speaker 3: you can bring your friend that you're going to go
• 21:46
  Speaker 3: see the show with or your partner, and you both enter.
• 21:48
  Speaker 3: Now you have twice as many chances. Maybe you get
• 21:50
  Speaker 3: a bunch of friends who work nearby to enter, maybe
• 21:54
  Speaker 3: it's online. They enter for you. If they lose, they lose,
• 21:57
  Speaker 3: but if they win, they come down to the theater,
• 21:59
  Speaker 3: pick up the tickets, give them to you. All of
• 22:01
  Speaker 3: a sudden, Now you've dramatically increased your chances of winning.
• 22:04
  Speaker 3: These are technically allowed. Often by the rules. Sometimes you
• 22:09
  Speaker 3: can enter a lottery in years you intend to lose,
• 22:12
  Speaker 3: because the system rewards you in subsequent years for prior losses.
• 22:18
  Speaker 3: It's trying to be fair over time, and so the
• 22:20
  Speaker 3: rules are if you have lost nine years in a row,
• 22:23
  Speaker 3: then in your tenth year, you'll get ten entries or
• 22:26
  Speaker 3: one hundred entries or a thousand entries relative to someone
• 22:29
  Speaker 3: who's entering for the first time. Or maybe you win
• 22:32
  Speaker 3: the lottery in a year you don't want to win,
• 22:34
  Speaker 3: and you defer what you get for a year, and
• 22:36
  Speaker 3: now you basically get to enter this year in the
• 22:39
  Speaker 3: hopes of deferring for next year, and if you lose
• 22:41
  Speaker 3: this year, you get to enter next year for the
• 22:43
  Speaker 3: chance of getting whatever it is next year.
• 22:46
  Speaker 2: So you've gone to school at Harvard and Cambridge, you
• 22:49
  Speaker 2: teach at University of Pennsylvania. When we look at college admissions,
• 22:55
  Speaker 2: that seems to be like a mess of everything, some
• 23:00
  Speaker 2: some skill, some checking the boxes, a little bit of lottery,
• 23:05
  Speaker 2: a little bit of early admission, first come, first serve.
• 23:09
  Speaker 2: What do you think of that entire college admission process?
• 23:12
  Speaker 2: What's driving that design?
• 23:14
  Speaker 3: Yeah, so that is what I call a choose me market.
• 23:17
  Speaker 3: It's a two sided market where it's as you point out,
• 23:20
  Speaker 3: it's not as simple as any one rule. It's not
• 23:22
  Speaker 3: like whoever applies first to the school gets it or
• 23:24
  Speaker 3: they're going to totally pick people by lottery.
• 23:28
  Speaker 4: They have a strategic decision as an institution.
• 23:32
  Speaker 3: Maybe I should say we as an employee of one
• 23:34
  Speaker 3: of these institutions. But the features of a choose me market,
• 23:39
  Speaker 3: of a two sided market are that there are market
• 23:42
  Speaker 3: participants on both sides. So for college admissions, there's applicants
• 23:46
  Speaker 3: who are trying to get into the colleges, and then
• 23:48
  Speaker 3: there are colleges that are deciding who am I going
• 23:50
  Speaker 3: to admit. We're trying to make a class of smart, motivated,
• 23:57
  Speaker 3: well rounded or very pointy people who are gonna make
• 24:00
  Speaker 3: the class, you know, a rich, fun environment, and the
• 24:06
  Speaker 3: dynamics are about you know, are we both succeeding and
• 24:09
  Speaker 3: getting what we want? So I think the thing that
• 24:12
  Speaker 3: people think of is okay, is the candidates strong enough?
• 24:15
  Speaker 3: Do they have good enough grades, good enough SAT scores,
• 24:18
  Speaker 3: good enough extracurriculars. But something that we think less about
• 24:22
  Speaker 3: as an applicants say, because it requires thinking about the
• 24:25
  Speaker 3: other side of the market, is you know, how do
• 24:28
  Speaker 3: the universities or colleges feel about the applicants. Well, one
• 24:32
  Speaker 3: of the things that they value is high yield. We
• 24:37
  Speaker 3: want the people who we admit to enroll in our school.
• 24:42
  Speaker 3: We want them to matriculate. When I was applying to college,
• 24:46
  Speaker 3: that yield, the fraction of folks you admit who come
• 24:49
  Speaker 3: was in the US News and World Report rankings of
• 24:52
  Speaker 3: best colleges and universities. It's not anymore, but it's still
• 24:56
  Speaker 3: a matter of pride and reputation, because it's hard to
• 24:58
  Speaker 3: say you're one of the best schools in the CUNT
• 25:00
  Speaker 3: if you know half or two thirds of the people
• 25:02
  Speaker 3: you admit choose to go somewhere else. And so when
• 25:05
  Speaker 3: you mentioned early admissions, early decision or early action, that
• 25:10
  Speaker 3: is where this kind of yield question comes into play.
• 25:13
  Speaker 3: So the way that it works with early decision is
• 25:16
  Speaker 3: when you apply, say to pen where my employer early decision.
• 25:21
  Speaker 3: If you do that, you are committing to come if
• 25:23
  Speaker 3: we admit you. So that's great for our yield because
• 25:28
  Speaker 3: now you know you're guaranteed to come. And lots of
• 25:32
  Speaker 3: schools do this they have an early admission deadline. There's
• 25:37
  Speaker 3: also early action where you're not committing, but you can
• 25:39
  Speaker 3: only apply to one school early action, and so it
• 25:41
  Speaker 3: has similar properties where you're kind of giving up applying
• 25:43
  Speaker 3: elsewhere early. And the kind of deal is that emission
• 25:49
  Speaker 3: standards appear to be a little lighter, and so researchers
• 25:53
  Speaker 3: have estimated it's kind of worth about one hundred SAT
• 25:56
  Speaker 3: points if you apply early. It's kind of we're going
• 25:58
  Speaker 3: to where we like idea that you want to come.
• 26:00
  Speaker 3: We like that you're going to help us with our yield,
• 26:03
  Speaker 3: and so you know we're going to kind of be
• 26:06
  Speaker 3: more open to having you enter. Now I just say,
• 26:09
  Speaker 3: I don't work in the ad missions committee, so this
• 26:11
  Speaker 3: is right. This is as an outsider doing, you know,
• 26:13
  Speaker 3: looking at the research about it. But all of a sudden,
• 26:16
  Speaker 3: then it becomes a strategic decision as you as an applicant,
• 26:20
  Speaker 3: So you have one shot in the early decision game
• 26:25
  Speaker 3: where do you want to apply? We talked a little
• 26:28
  Speaker 3: bit about going for gold or settling for silver. Do
• 26:31
  Speaker 3: you go for the thing you really want, the seven
• 26:32
  Speaker 3: to thirty reservation at the hot restaurant, or do you
• 26:35
  Speaker 3: go for something there where there's less competition, like a
• 26:37
  Speaker 3: four to thirty and the early decision game, that strategy
• 26:42
  Speaker 3: that's settling for silver strategy might be a smart play
• 26:45
  Speaker 3: because if the place you really want to enroll, that
• 26:49
  Speaker 3: gold medal option for you is too far out of
• 26:52
  Speaker 3: reach that even if you apply early, you're you're not
• 26:56
  Speaker 3: going to hit that admission cutoff. Then you're essentially wasting
• 26:59
  Speaker 3: that application in that school, and you should be applying
• 27:03
  Speaker 3: instead to a place where if you applied early, you
• 27:06
  Speaker 3: would actually get in. But if you didn't apply early,
• 27:08
  Speaker 3: you wouldn't someplace where you're kind of.
• 27:10
  Speaker 4: More on the market.
• 27:10
  Speaker 2: That's a very narrow little slice. You have to figure
• 27:13
  Speaker 2: out exactly what your odds are.
• 27:15
  Speaker 3: Yeah, which you can do with research, with talking to
• 27:17
  Speaker 3: other people, you know, seeing you know, how does your
• 27:20
  Speaker 3: SAT score compare to the ones that are published on
• 27:22
  Speaker 3: the website. You know, the people who went to your
• 27:25
  Speaker 3: high school in prior years who succeeded in getting in.
• 27:28
  Speaker 3: What were their grades like, what were their extracurriculars like?
• 27:31
  Speaker 3: So you know when these when it matters for you,
• 27:33
  Speaker 3: the research that you do to figure out how to
• 27:36
  Speaker 3: succeed in these markets will inform what strategy you should play.
• 27:41
  Speaker 2: Huh, really interesting. Let's talk about the three e's. You
• 27:45
  Speaker 2: discuss what's equitable, efficient, and easy when people are designing
• 27:50
  Speaker 2: various types of market mechanisms. Give us a little overview
• 27:54
  Speaker 2: of that core framing device.
• 27:56
  Speaker 4: Yeah.
• 27:56
  Speaker 3: So the three e's are about how well a market operates,
• 28:01
  Speaker 3: So you mentioned them, efficiency, ease, and equity. Equity is
• 28:06
  Speaker 3: about fairness. It's about are we treating the market participants
• 28:11
  Speaker 3: equally if that's our goal, right, if we want everybody
• 28:13
  Speaker 3: to have an equal chance at getting the scarce resource
• 28:16
  Speaker 3: is our allocation mechanism, are our market rules allowing us
• 28:21
  Speaker 3: to do that. Efficiency is about making sure that we're
• 28:24
  Speaker 3: not wasting any scarce resources and whether the scarce resources
• 28:29
  Speaker 3: that we're giving out are being put to their best
• 28:31
  Speaker 3: possible use. So if there's someone who really wants something,
• 28:34
  Speaker 3: are we recognizing that and saying, oh, actually, as a society,
• 28:37
  Speaker 3: we're better off if we give that scarce resource to
• 28:40
  Speaker 3: that person. And then ease is the one that think
• 28:44
  Speaker 3: standard econ doesn't think that much about. And the reason
• 28:48
  Speaker 3: is that prices are easy to work with. You might
• 28:53
  Speaker 3: not love that you have to pay a lot of
• 28:54
  Speaker 3: money to buy something, but the actual process of buying
• 28:57
  Speaker 3: something in a market where price doing all the work
• 29:01
  Speaker 3: is trivial. You go to the website, you click a
• 29:03
  Speaker 3: button and you know the thing is shipped to you,
• 29:05
  Speaker 3: or you walk into a store you pay a price,
• 29:07
  Speaker 3: or you know, go online and execute some trade or
• 29:11
  Speaker 3: call your broker and do it.
• 29:12
  Speaker 4: It's very straightforward to work with prices.
• 29:15
  Speaker 2: So let's let's talk a little bit about one of
• 29:17
  Speaker 2: the most fascinating market mechanisms that's out there, which is
• 29:22
  Speaker 2: live performance tickets. You use the example of Taylor Swift,
• 29:26
  Speaker 2: who could have charged a whole lot more for her tour,
• 29:29
  Speaker 2: which still made billions of dollars, But lots of other
• 29:32
  Speaker 2: artists charge less than the market bears. Why do these
• 29:39
  Speaker 2: artists not go for you know, revenue maximizing. What's the
• 29:43
  Speaker 2: downside of that?
• 29:44
  Speaker 3: Yeah, So I when I think about sellers designing, should
• 29:48
  Speaker 3: I set a price below the market clearing price? The
• 29:51
  Speaker 3: price that I would teach in my econ class is
• 29:54
  Speaker 3: going to be the best for them.
• 29:55
  Speaker 2: Here's the price, here's the demand. Where that intersects is
• 29:58
  Speaker 2: the profit maximize? But they don't do that.
• 30:01
  Speaker 3: So before we get to Taylor Swift, let's think about
• 30:03
  Speaker 3: the restaurant that is letting there be a line around
• 30:06
  Speaker 3: the block, or the fad product that is making it
• 30:10
  Speaker 3: hard to get access to their you know, to what
• 30:13
  Speaker 3: they're selling. In those cases, I think one of the
• 30:16
  Speaker 3: reasons is to bolster future demand. I see a line
• 30:20
  Speaker 3: around the block for a restaurant I walk by. I
• 30:22
  Speaker 3: might have never heard of the restaurant before, but I
• 30:24
  Speaker 3: look and I think, oh man, that restaurant must be
• 30:26
  Speaker 3: really good.
• 30:27
  Speaker 4: Look at that line.
• 30:29
  Speaker 3: That might mean that I get turned into a future customer,
• 30:34
  Speaker 3: or at least somebody who's interested in going when the
• 30:36
  Speaker 3: line might be a little shorter.
• 30:37
  Speaker 2: Lots of buzz, lots of pr just by the virtue
• 30:41
  Speaker 2: that it looks like more people want a limited scarce restart.
• 30:45
  Speaker 3: Correct, and that we see that, you know, throughout with
• 30:48
  Speaker 3: lots of fad products or with you know, scarcity driving
• 30:51
  Speaker 3: interest in demand. Now, I don't think Taylor Swift has
• 30:54
  Speaker 3: to do that. I think we all know who she is.
• 30:56
  Speaker 3: Her fans are famously loyal, and she, you know, doesn't
• 31:01
  Speaker 3: have to worry so much about getting more people to
• 31:04
  Speaker 3: be interested in her as an artist, so she might
• 31:07
  Speaker 3: have other considerations. She might think more about the equity
• 31:11
  Speaker 3: and the efficiency of the allocation of her scarce resource.
• 31:15
  Speaker 3: And you know, one reason she might not charge very
• 31:19
  Speaker 3: high prices, which might be you know, hundreds of dollars
• 31:22
  Speaker 3: for the cheapest ticket and thousands for the kind of
• 31:25
  Speaker 3: closer to the stage seats, is that she's a billionaire.
• 31:29
  Speaker 4: Her swifties.
• 31:31
  Speaker 3: I'm sure she has billionaire fans because she's such a
• 31:33
  Speaker 3: great artist, But most of her fans, a few thousand
• 31:36
  Speaker 3: dollars is going to be a big chunk of their
• 31:39
  Speaker 3: income for that month or more, and so it might
• 31:43
  Speaker 3: not be a great look if she's charging what would
• 31:45
  Speaker 3: be market clearing prices. So for the Eras tour, she
• 31:48
  Speaker 3: charges forty nine dollars for the cheapest seats. The average
• 31:51
  Speaker 3: ticket price was just above two hundred and so at
• 31:55
  Speaker 3: those prices, you know there's going to be massive access demand.
• 32:00
  Speaker 3: She might think that that's more fair that that might be,
• 32:02
  Speaker 3: you know, not just because it will make her look bad,
• 32:04
  Speaker 3: but also she might want her fans to be able
• 32:07
  Speaker 3: to come and only have to pay forty nine or
• 32:11
  Speaker 3: ninety nine or one hundred and ninety nine dollars. It
• 32:14
  Speaker 3: might also be that those folks really really want to go.
• 32:17
  Speaker 3: So you think about efficiency, there's no guarantee that the
• 32:20
  Speaker 3: person who can pay the most actually values going to
• 32:24
  Speaker 3: the concert the most. If her biggest fans have less
• 32:28
  Speaker 3: income than you know, the fans who can pay more,
• 32:33
  Speaker 3: they're going to get pushed out. Whenever the market is
• 32:38
  Speaker 3: relying exclusively on price, you.
• 32:39
  Speaker 2: End up with a series of rentiers and middlemen that
• 32:44
  Speaker 2: arguably contribute nothing positive to society and just exact a cost.
• 32:49
  Speaker 2: In the book, I don't remember was it the UK
• 32:52
  Speaker 2: or Europe EU that they banned places like stub hub
• 32:56
  Speaker 2: and those sort of ticket middlemen.
• 32:59
  Speaker 4: Yeah.
• 32:59
  Speaker 3: So this is one of the super interesting things about
• 33:03
  Speaker 3: these hidden markets is that whenever you are giving folks
• 33:08
  Speaker 3: access to a scarce resource at a below market price
• 33:11
  Speaker 3: and there is the opportunity to resell it, you will
• 33:15
  Speaker 3: get middleman. You will get speculators or brokers who come
• 33:20
  Speaker 3: in exclusively to try to extract surplus from the fact
• 33:25
  Speaker 3: that the market is letting the price kind of be low.
• 33:29
  Speaker 4: Initially.
• 33:31
  Speaker 3: Now there are economists who say, oh, that's how it's
• 33:33
  Speaker 3: supposed to work, We're supposed to get to market clearing prices.
• 33:35
  Speaker 4: But that's not what I.
• 33:38
  Speaker 3: Argue, because the seller has decided that she, in this case,
• 33:42
  Speaker 3: wants to keep the price low. She wants people, regular
• 33:46
  Speaker 3: people to be able to buy for forty nine ninety
• 33:48
  Speaker 3: nine hundred nine ninety dollars. So the middleman becomes a
• 33:53
  Speaker 3: problem that the market has to address. One way to
• 33:56
  Speaker 3: do that is ban resale. But then you get situations
• 34:00
  Speaker 3: where this was the London Olympics, where there were seats
• 34:05
  Speaker 3: that were empty to see some of the events, when
• 34:08
  Speaker 3: there are people standing outside the stadium who would desperately
• 34:12
  Speaker 3: want to get in, but because there's no way for
• 34:14
  Speaker 3: the tickets to be redistributed. Know, you end up with
• 34:17
  Speaker 3: empty seats, which is clearly inefficient.
• 34:19
  Speaker 2: Well, you could redistribute them at a ten percent markup
• 34:22
  Speaker 2: or something like that. So there's only once you can't
• 34:26
  Speaker 2: just go ten ten ten.
• 34:27
  Speaker 3: So this is the question is you know, how do
• 34:29
  Speaker 3: we innovate in this market? So in the book, I
• 34:31
  Speaker 3: have some ideas about how to do it. I think
• 34:33
  Speaker 3: one key problem with how a lot of live event
• 34:36
  Speaker 3: tickets are being allocated is that they're relying on first come,
• 34:39
  Speaker 3: first serve. First come, first serve races is the way
• 34:44
  Speaker 3: that we do it on the internet now, and that
• 34:47
  Speaker 3: allows the ticket brokers to program bots that will race
• 34:52
  Speaker 3: faster than any human can, and that is going to
• 34:57
  Speaker 3: mean that the folks who are building the bots with
• 35:00
  Speaker 3: the intention of getting a bunch of tickets and reselling
• 35:03
  Speaker 3: them are going to be at an advantage and be
• 35:06
  Speaker 3: able to extract surplus. The FTC sued Ticketmaster a few
• 35:11
  Speaker 3: months ago about this issue, basically letting their b bots
• 35:16
  Speaker 3: on the platform that extract.
• 35:18
  Speaker 2: Loading their own bots that then resell at higher price.
• 35:20
  Speaker 3: Well, this is part of the problem, which is the
• 35:23
  Speaker 3: secondary market platforms, the ones that are facilitating the trades
• 35:27
  Speaker 3: between the brokers or regular people who buy tickets, but
• 35:31
  Speaker 3: then you can't go and have to resell them. Those
• 35:34
  Speaker 3: platforms are benefiting from the sales. They get hefty fees.
• 35:39
  Speaker 3: I bought tickets recently, and my calculation was that Ticketmaster,
• 35:43
  Speaker 3: where I was reselling them, I was buying them and
• 35:45
  Speaker 3: then I had friends who canceled how to resell them,
• 35:48
  Speaker 3: was getting thirty percent of the transaction.
• 35:51
  Speaker 2: Probably you would think the artists would be the one
• 35:54
  Speaker 2: that should garner those gains. I've heard I love the
• 36:00
  Speaker 2: Russian crypto is a solution in search of a problem.
• 36:04
  Speaker 2: One would imagine that if the tickets and I'm not
• 36:07
  Speaker 2: a you know, bitcoin bro, but if you could sell
• 36:11
  Speaker 2: tickets on the blockchain, and there's a smart contract built
• 36:13
  Speaker 2: into that that the artist gets half of the resale price,
• 36:17
  Speaker 2: it changes dynamics there a lot.
• 36:19
  Speaker 4: So you could do that.
• 36:20
  Speaker 3: But of course, if the artists wanted more, they could
• 36:23
  Speaker 3: just raise the prices. Right, they don't need they don't
• 36:25
  Speaker 3: need the resale market to extract that surplus. Right the
• 36:29
  Speaker 3: what I describe in the book, it doesn't You don't
• 36:31
  Speaker 3: need to go all the way to the blockchain for it.
• 36:34
  Speaker 3: You do need names on tickets, meaning really yeah, because.
• 36:38
  Speaker 2: Right, so it's ticket and ID not just as.
• 36:41
  Speaker 3: But yeah, and it seems complicated because then it's like, oh,
• 36:43
  Speaker 3: I'm going to the it's like going to the airport.
• 36:44
  Speaker 3: I don't want to go to a concert to be
• 36:46
  Speaker 3: like going to an airport. Although last concert I went
• 36:48
  Speaker 3: to had to go through security anyway detector.
• 36:50
  Speaker 2: Of Madison Square Garden for a Knix game.
• 36:52
  Speaker 3: So exactly. But but no, your phone can identify who
• 36:55
  Speaker 3: you are. If I tap my tickets through my phone, right,
• 36:58
  Speaker 3: it can validate who I am. Facial recognition is getting
• 37:00
  Speaker 3: very good, and so you know, there's clear the service
• 37:05
  Speaker 3: you use at the airport, if that's something you've subscribed to,
• 37:08
  Speaker 3: they have similar style products that get.
• 37:11
  Speaker 4: Used at venues.
• 37:13
  Speaker 3: Major League Baseball has had a version of this that
• 37:16
  Speaker 3: they rolled out at some point. And so validating that
• 37:20
  Speaker 3: you are named on the ticket is easy to do
• 37:23
  Speaker 3: or getting easier.
• 37:25
  Speaker 4: If you don't have.
• 37:26
  Speaker 3: That, then you could put some cap on resale, but
• 37:31
  Speaker 3: then you know, it doesn't. Nothing stops anybody if they
• 37:34
  Speaker 3: have a physical ticket from doing what used to happen,
• 37:38
  Speaker 3: which is standing you know, outside the venue and selling
• 37:40
  Speaker 3: them or or selling them on some third party platform
• 37:43
  Speaker 3: that's not tracking how much more the ticket is you know,
• 37:47
  Speaker 3: being paid for right if it's in cash, there's no
• 37:50
  Speaker 3: way to validate that it's only ten percent.
• 37:52
  Speaker 4: And then the other thing you have to do, and
• 37:53
  Speaker 4: this is trickier.
• 37:55
  Speaker 3: It is a different type of change is get away
• 37:59
  Speaker 3: from first comfort because even if you have names on tickets,
• 38:02
  Speaker 3: but you're doing a first comfort serve race, the folks
• 38:06
  Speaker 3: who program the fastest bots are still going to be
• 38:08
  Speaker 3: able to extract surplus.
• 38:10
  Speaker 2: So could someone like Taylor Swift with an army of Swifties. Hey,
• 38:15
  Speaker 2: sign up here and it's two tickets per name, and
• 38:18
  Speaker 2: you have to be in their system for that long.
• 38:21
  Speaker 2: And so at least what is Madison Square Garden twenty
• 38:24
  Speaker 2: five thousand people? At least the first ten thousand tickets
• 38:28
  Speaker 2: are going to go to local people who are her
• 38:30
  Speaker 2: fan base.
• 38:31
  Speaker 3: So for the aristour that we started talking about, they
• 38:34
  Speaker 3: did something similar where they did a verified fan process.
• 38:40
  Speaker 3: We had a validate who you were, and then folks
• 38:42
  Speaker 3: came to the website if they were lucky enough to
• 38:47
  Speaker 3: after being verified, to win a lot. So they're still
• 38:49
  Speaker 3: a lottery, still a lottery. But then then fair lottery
• 38:53
  Speaker 3: among people that they thought were real folks rather than brokers,
• 38:58
  Speaker 3: and then you had to wait in a virtual queue
• 39:01
  Speaker 3: and wait for some people hours. So what ended up
• 39:04
  Speaker 3: happening was they claimed there were a lot of bot
• 39:06
  Speaker 3: attacks trying people that didn't have the verified fan code
• 39:11
  Speaker 3: that they needed to buy. The tickets were coming and
• 39:13
  Speaker 3: the systems ground to a halt and they crash and
• 39:15
  Speaker 3: people were waiting for hours, and so all of a
• 39:17
  Speaker 3: sudden you had to first come for a serve line
• 39:19
  Speaker 3: built into the system that was supposed to be a lottery,
• 39:23
  Speaker 3: where now you're going through an ordeal. We talked about,
• 39:25
  Speaker 3: you know, is the market easy. It's not easy. If
• 39:27
  Speaker 3: you have to wait online in front of your computer
• 39:30
  Speaker 3: for hours, it's almost as painful as having to wait
• 39:33
  Speaker 3: outside the box office, which we used to do for hours.
• 39:36
  Speaker 3: And so, you know, I think the solution is to
• 39:39
  Speaker 3: actually lean more on the lottery and basically say, look,
• 39:43
  Speaker 3: at some point, we're just going to have you put
• 39:46
  Speaker 3: your name in, say what your preferences are, what shows
• 39:48
  Speaker 3: you want to see her perform at, which sections you'd
• 39:51
  Speaker 3: be willing to buy tickets for, and you're going to
• 39:53
  Speaker 3: enter yourself in and we will tell you whether you won,
• 39:56
  Speaker 3: but you don't have to be there and pick the
• 39:57
  Speaker 3: specific seats.
• 39:59
  Speaker 4: Right.
• 39:59
  Speaker 3: You can say I want, I prefer to be in
• 40:00
  Speaker 3: the center, and I'm willing to pay more whatever. But
• 40:03
  Speaker 3: that would make the participation in the market way easier.
• 40:07
  Speaker 3: You could run, you know, whole tours or sections of
• 40:09
  Speaker 3: tours at once. You could reward folks who are more flexible.
• 40:13
  Speaker 3: If I'm willing to see Taylor Swift perform at any
• 40:16
  Speaker 3: venue you know on the East Coast, and I'll go
• 40:19
  Speaker 3: to any show and sit in any section, i am
• 40:21
  Speaker 3: revealing myself to be a very big swiftye that.
• 40:25
  Speaker 2: There is more a broker that wants to flip the ticket.
• 40:27
  Speaker 3: Well, but if the names are on it, then I'm
• 40:29
  Speaker 3: stuck if I have to return it. If I can't go,
• 40:31
  Speaker 3: I have to return it to the you know, to
• 40:33
  Speaker 3: Swift and she can give it to somebody on the waitlist,
• 40:36
  Speaker 3: but on the randomized waitlist, right like, you could design
• 40:38
  Speaker 3: the system to basically cut out the brokers altogether.
• 40:42
  Speaker 2: So the craziest thing about the brokers in the US,
• 40:46
  Speaker 2: I heard stories from several people who said, rather than
• 40:50
  Speaker 2: pay the markup in the US, it was cheaper to
• 40:53
  Speaker 2: secure tickets in Paris or London, fly over there, stay
• 40:58
  Speaker 2: in a hotel for a few days, go to the
• 41:00
  Speaker 2: show and go home. That was less expensive than paying
• 41:03
  Speaker 2: full boat to any of the seat geeks. Stub hub
• 41:07
  Speaker 2: middlemen that you know they charge with the market, will back.
• 41:10
  Speaker 3: They charge with the market, will bear. They don't add
• 41:12
  Speaker 3: anything to the production. And yeah it could be you know,
• 41:14
  Speaker 3: and you get a vacation out of it. You go
• 41:16
  Speaker 3: to Paris to see the show.
• 41:17
  Speaker 2: Coming up, we continue our conversation with Judd Kessler, professor
• 41:21
  Speaker 2: at the Wharton School, discussing Lucky by Design The Hidden
• 41:25
  Speaker 2: Economics You Need to Get More of what you Want.
• 41:28
  Speaker 2: I'm Barry Ridults. You're listening to Masters in Business on
• 41:31
  Speaker 2: Bloomberg Radio. I'm Burry Redults. You're listening to Masters in
• 41:48
  Speaker 2: Business on Bloomberg Radio. My extra special guest this week
• 41:51
  Speaker 2: is Professor Judd Kessler. He teaches behavioral economics and market
• 41:56
  Speaker 2: design at the Wharton School at University of Pennsylvania. His
• 42:00
  Speaker 2: new book, Lucky by Design, The Hidden Economics You Need
• 42:03
  Speaker 2: to Get More of what you Want is out now.
• 42:06
  Speaker 2: So let's talk a little bit about some things that
• 42:09
  Speaker 2: are lucky by Design. One of the things that slightly
• 42:15
  Speaker 2: before my time but certainly resonated was what took place
• 42:21
  Speaker 2: during Vietnam with the draft lottery. Some of the data
• 42:25
  Speaker 2: was pretty shocking. At the time African Americans made up
• 42:29
  Speaker 2: eleven percent of the population, they were twenty two percent
• 42:33
  Speaker 2: of the people that were drafted and twenty two percent
• 42:37
  Speaker 2: of the casualties, two x the representative population. Why did
• 42:43
  Speaker 2: that go down that way?
• 42:44
  Speaker 3: Yeah, So the situation that arises when you have these
• 42:48
  Speaker 3: hidden markets is whoever's in charge of the market gets
• 42:51
  Speaker 3: to pick the rules, and they might not be equitable
• 42:56
  Speaker 3: or efficient or easy. And the Vietnam draft, before the lottery,
• 43:02
  Speaker 3: which was introduced to kind of correct some of these issues,
• 43:07
  Speaker 3: had a bunch of loopholes in them. In the system,
• 43:09
  Speaker 3: so you could get a deferment for various reasons. You
• 43:12
  Speaker 3: could have some of your friends or family members, lobby
• 43:16
  Speaker 3: folks on the local draft boards that were going to
• 43:19
  Speaker 3: decide which men of that age were going to be
• 43:22
  Speaker 3: sent to be.
• 43:23
  Speaker 2: So if you were politically connected, you had a better shot.
• 43:25
  Speaker 3: Politically connected, wealthier, wider. Those were the things that let folks.
• 43:30
  Speaker 2: So you could have a medical disability, you could be
• 43:34
  Speaker 2: in college or grad school you.
• 43:36
  Speaker 4: Could go to the National Guard, so you would be
• 43:38
  Speaker 4: kind of stay.
• 43:38
  Speaker 2: Staty, and not everybody gets gets admitted to the National Guard.
• 43:42
  Speaker 3: Correct, So having a kind of way to circumvent what
• 43:46
  Speaker 3: would have been the task of going overseas. The loopholes
• 43:51
  Speaker 3: were kind of played by a few, and a bunch
• 43:54
  Speaker 3: of folks did not either have the means or have
• 43:57
  Speaker 3: the connections or kind of know that this was a
• 44:00
  Speaker 3: way out.
• 44:01
  Speaker 2: Did the lottery, And I learned a lot more than
• 44:05
  Speaker 2: I knew about it in the book. So they just
• 44:08
  Speaker 2: randomly picked birth dates, your month and day of birth,
• 44:12
  Speaker 2: and that was the order in which people were drafted.
• 44:14
  Speaker 2: How did that impact how things? Yeah, so they see
• 44:18
  Speaker 2: they did have the desired effects.
• 44:19
  Speaker 3: Well, I mean it had the desired effect. There were
• 44:21
  Speaker 3: still loopholes that you could use to get out of service,
• 44:23
  Speaker 3: but it had the desired effect of three hundred and
• 44:26
  Speaker 3: sixty six possible birth dates, including February twenty ninth, because
• 44:30
  Speaker 3: you didn't want to leave those folks out. You know,
• 44:32
  Speaker 3: they got pulled in order, they randomly when at a time,
• 44:35
  Speaker 3: and then the way the lottery worked was they were
• 44:38
  Speaker 3: just called down the number. So folks who were old
• 44:40
  Speaker 3: enough to remember this. At my father's generation, this was
• 44:43
  Speaker 3: a big deal and you know you wanted to have
• 44:46
  Speaker 3: a later you have your birth date picked later, so
• 44:49
  Speaker 3: you were less likely to be called now again, still loopholes.
• 44:53
  Speaker 3: But folks looking back history, you know, at history, say
• 44:57
  Speaker 3: this helped facilitate the anti war movement and that eventually
• 45:00
  Speaker 3: got the US out of Southeast Asia. Because when you
• 45:04
  Speaker 3: have well educated, wealthier kind of folks who have a
• 45:07
  Speaker 3: little bit more socioeconomic status, a little more power in society,
• 45:13
  Speaker 3: when their sons started getting called up and you know
• 45:17
  Speaker 3: this was a fair system and so it was harder
• 45:19
  Speaker 3: to get out. Then you saw a bunch more kind
• 45:23
  Speaker 3: of influential folks saying, no, no, this is not a war
• 45:26
  Speaker 3: we want to be in for the long term.
• 45:27
  Speaker 4: Huh.
• 45:28
  Speaker 2: Really really interesting. Let's talk about the area that you
• 45:31
  Speaker 2: spent so much of your career on, which is organ donation,
• 45:36
  Speaker 2: and what those rules look like. To start, I have
• 45:41
  Speaker 2: to ask about the numbers. There are one hundred thousand
• 45:45
  Speaker 2: Americans on an organ waiting list, organ transplant waiting list.
• 45:51
  Speaker 2: I was shocked to read of that one hundred thousand,
• 45:54
  Speaker 2: ninety percent or waiting for a kidney.
• 45:56
  Speaker 5: That's amazing.
• 45:57
  Speaker 3: Yeah, I mean, so the reason for that is that
• 46:01
  Speaker 3: there is dialysis.
• 46:02
  Speaker 5: For kidney fails, which can keep you alive.
• 46:04
  Speaker 3: For five or more years. I mean, you want to
• 46:08
  Speaker 3: get a kidney as soon as possible. Dialysis is time intensive,
• 46:11
  Speaker 3: it's painful, it's expensive, although the cost is borne by
• 46:15
  Speaker 3: Medicare primarily after a certain number of months that your insurance,
• 46:20
  Speaker 3: your private insurance covers it and then it gets handed
• 46:22
  Speaker 3: off to Medicare. So there's a lot of costs that
• 46:25
  Speaker 3: go into it. But of course, if you don't have
• 46:27
  Speaker 3: a kidney that you can get as a recipient, if
• 46:31
  Speaker 3: there isn't a donor kidney available, this is your only option.
• 46:34
  Speaker 3: But this is why the waiting list for kidneys is
• 46:37
  Speaker 3: so long, because folks can kind of wait for an
• 46:40
  Speaker 3: extended period of time. Think about another organ, like a liver,
• 46:43
  Speaker 3: there is no dialysis, so at some point, if your
• 46:45
  Speaker 3: liver function gets bad enough, you either need a transplant
• 46:49
  Speaker 3: or that's it. So this is why the kidney list,
• 46:54
  Speaker 3: you know, goes on for so long. But it's also
• 46:57
  Speaker 3: a major financial burden in addition to all the emotional
• 47:02
  Speaker 3: and physical burden that the folks, the patients in their
• 47:05
  Speaker 3: families face That estimate suggests that it's basically one percent
• 47:10
  Speaker 3: of the federal budget is spent on end stage renal disease,
• 47:15
  Speaker 3: on on folks who have kidney failure because Medicare is
• 47:19
  Speaker 3: covering it. You know, medicare big chunk of the federal budget,
• 47:23
  Speaker 3: and this in particular, this line item is very expensive.
• 47:26
  Speaker 2: And the crazy thing about this another data point that
• 47:30
  Speaker 2: shot me is sometimes an imperfect match shows up and
• 47:35
  Speaker 2: you have the option of you know, rolling it over
• 47:37
  Speaker 2: and saying I'll wait for the next one. Twenty percent
• 47:40
  Speaker 2: of the donated kidneys are just thrown away.
• 47:43
  Speaker 3: This is the nature of these first come, first serve
• 47:47
  Speaker 3: waiting lists. So you know, there's when an organ becomes available,
• 47:50
  Speaker 3: there's a list that's generated. It's based on how close
• 47:54
  Speaker 3: you are to the transplant center, on the medical match
• 47:57
  Speaker 3: between the organ donor and the recipient. So there's a
• 48:00
  Speaker 3: bunch of considerations that come in, including how long you've
• 48:02
  Speaker 3: been waiting. So if you've been waiting many years on dialysis,
• 48:06
  Speaker 3: you're going to be closer to the top of the list.
• 48:08
  Speaker 3: So an organ becomes available and you, as the patient,
• 48:12
  Speaker 3: with the help of your doctor, have to decide is
• 48:15
  Speaker 3: this going to be an organ I take or not.
• 48:18
  Speaker 3: Some of the information about whether it's a good match
• 48:20
  Speaker 3: for you we only can learn after the organ has
• 48:24
  Speaker 3: been removed from the donor who's you know, passed away.
• 48:28
  Speaker 3: And so now we have testing that's getting done on
• 48:32
  Speaker 3: the organ and there's.
• 48:33
  Speaker 4: Only so much time.
• 48:35
  Speaker 3: Yeah you so you know, we have this testing getting
• 48:37
  Speaker 3: done and folks are getting are learning all right, this
• 48:40
  Speaker 3: it could be this organ that you take, or we
• 48:42
  Speaker 3: can keep waiting and if you're at the top of
• 48:44
  Speaker 3: the list, maybe you get offered a bunch of organs.
• 48:47
  Speaker 3: And so you know, it is hard to get through
• 48:51
  Speaker 3: the whole list of you know, you know, ninety thousand
• 48:54
  Speaker 3: folks waiting for the organ, and so you know, if
• 48:56
  Speaker 3: the organ's not great and we can't identify somebody who
• 48:59
  Speaker 3: might take it, a way to suscort it.
• 49:01
  Speaker 2: As kind of fascinated by the example you describe with
• 49:05
  Speaker 2: what they do in Israel that if you check I'm
• 49:09
  Speaker 2: willing to be an organ donor three years prior, you're
• 49:14
  Speaker 2: higher on the recipient list. The theory being, hey, if
• 49:18
  Speaker 2: everybody understands this is that many more organs available for transplant.
• 49:23
  Speaker 2: How has that tested out in real life? And are
• 49:26
  Speaker 2: any states here putting them into work.
• 49:30
  Speaker 3: This was the research that got me into market design.
• 49:34
  Speaker 3: In particular, I was working with al we started thinking
• 49:37
  Speaker 3: about organs. It has this nice feature of being a
• 49:40
  Speaker 3: public good. If I agreed a register as an organ donor,
• 49:44
  Speaker 3: hopefully I won't be in this situation, but my organs
• 49:47
  Speaker 3: are available for transplant if I die in a way
• 49:50
  Speaker 3: that makes them available. When folks agreed a register, they
• 49:55
  Speaker 3: are making this scarce resource the organ They're making it
• 50:00
  Speaker 3: be less scarce. There are more organs available in expectation
• 50:04
  Speaker 3: if folks are registered. So a bunch of countries, including Israel,
• 50:08
  Speaker 3: but also Chile, China and Singapore have built into their
• 50:13
  Speaker 3: allocation rules an incentive to get people to provide this resource,
• 50:18
  Speaker 3: to make it less scarce. And as you said, they
• 50:21
  Speaker 3: in Israel it's three years. But you can think about
• 50:24
  Speaker 3: doing it different ways. Where if you're eighteen years old
• 50:27
  Speaker 3: and you're going to the DMV and it's the first
• 50:29
  Speaker 3: time you've ever been asked do you want to be
• 50:31
  Speaker 3: an organ donor? You are rewarded if you say yes,
• 50:37
  Speaker 3: insofar as you know fifty years later, if you end
• 50:40
  Speaker 3: up needing a kidney, you're going to get priority over
• 50:42
  Speaker 3: someone that's kind of in the same situation as you,
• 50:45
  Speaker 3: but when they were eighteen, said no, no, no, I don't
• 50:47
  Speaker 3: want to help out other people. And so we saw
• 50:50
  Speaker 3: when we did our research that this incentive of being
• 50:53
  Speaker 3: given the option to be a donor so that you
• 50:56
  Speaker 3: can have priority later on induced a lot more people
• 51:00
  Speaker 3: to say they wanted to donate in a game that
• 51:03
  Speaker 3: was modeled on that decision. We looked at Israel and
• 51:06
  Speaker 3: we saw when Israel implemented it, our estimates suggests about
• 51:10
  Speaker 3: one hundred thousand more people. And Israel's a small country,
• 51:12
  Speaker 3: so it's a lot. Yeah, it's a lot signed up
• 51:15
  Speaker 3: in the run up, you know, kind of before they
• 51:19
  Speaker 3: announced it, and they were letting people sign up, and
• 51:22
  Speaker 3: it was the date when if you signed up before,
• 51:24
  Speaker 3: you'd immediately have priority. Otherwise you'd have to wait the
• 51:27
  Speaker 3: three years to avoid I mean the three years, by
• 51:29
  Speaker 3: the way, is to avoid a loophole where I get
• 51:32
  Speaker 3: sick and need a kidney and I go sign a
• 51:33
  Speaker 3: donor card and then I have priority that would totally
• 51:36
  Speaker 3: underline purpose, which we have research showing that you know
• 51:39
  Speaker 3: that it would in fact undermine it. So yeah, so
• 51:41
  Speaker 3: then they they implemented it, and it seems to work.
• 51:44
  Speaker 2: Have any places in the US adopted this.
• 51:46
  Speaker 3: No, so it would have to be this is not
• 51:48
  Speaker 3: a state by state thing. That Oregon allocation systems are national,
• 51:52
  Speaker 3: and so you would need the country as a whole
• 51:55
  Speaker 3: the to have a change in the allocation rules. So
• 51:59
  Speaker 3: I have been advocating for that since we did that
• 52:02
  Speaker 3: research over a decade ago, but you know, we have
• 52:05
  Speaker 3: not yet had movement on that, although I remain perennially
• 52:08
  Speaker 3: optimistic because it's been you know, many years, and the
• 52:12
  Speaker 3: problem isn't getting better. So basically, anything we can do
• 52:15
  Speaker 3: to make this scarce resource less scarce is valuable.
• 52:18
  Speaker 2: I'm recalling Richard Thaylor's book Nudge. I think he co
• 52:23
  Speaker 2: wrote that with Cas Sunstein, And there was questions about
• 52:26
  Speaker 2: opt out and opt in. In other words, if everybody
• 52:30
  Speaker 2: by default is an organ donor, but you have to
• 52:33
  Speaker 2: opt out. The reasons people don't want to do that
• 52:36
  Speaker 2: religious reasons and other But is that a potential?
• 52:40
  Speaker 4: So that was.
• 52:43
  Speaker 3: That was like a great hope of behavioral economics, was
• 52:45
  Speaker 3: that these kinds of nudges in choice arrket. Yeah, so
• 52:49
  Speaker 3: this is a case. There are many places where it works. Well,
• 52:52
  Speaker 3: this is a case where it doesn't. And the reason
• 52:54
  Speaker 3: it doesn't is that, you know, if you are say
• 52:57
  Speaker 3: it's an opt out system, so I should pause and
• 53:00
  Speaker 3: say we don't. We can't do that in the US
• 53:01
  Speaker 3: without a major law change because oregons fall under the
• 53:05
  Speaker 3: Gift Act, So you know, you have to actually make
• 53:08
  Speaker 3: an affirmative statement that you want. You know, you could
• 53:11
  Speaker 3: make it salvage law. So if you're not using it,
• 53:13
  Speaker 3: we can take it, right, But that's people might not
• 53:15
  Speaker 3: want to do that. But but in the in the
• 53:17
  Speaker 3: countries that use these opt out systems, the next of
• 53:21
  Speaker 3: kin are still consulted, right, so you know, what the
• 53:25
  Speaker 3: next of kin are told is that the person did
• 53:27
  Speaker 3: not opt out and the defaults basically to the next
• 53:30
  Speaker 3: of kin to decide. And so what the research shows
• 53:33
  Speaker 3: is that there just isn't a delta between the countries
• 53:36
  Speaker 3: that use opt in and the countries that use opt out.
• 53:38
  Speaker 2: Because it always goes to that affirmative decision.
• 53:42
  Speaker 3: Yeah, and when when you know I've opted in, I
• 53:44
  Speaker 3: mean I might be special because I talk about it
• 53:46
  Speaker 3: a lot, right, But but if you've opted in, then
• 53:49
  Speaker 3: the next of kin see that and they know that
• 53:51
  Speaker 3: it was your wish right, you did, you said at
• 53:53
  Speaker 3: some point, yes, I want to register. They know that
• 53:56
  Speaker 3: that you want to do that, and so if you
• 53:58
  Speaker 3: pass away, they know that they should donate your organs,
• 54:01
  Speaker 3: so they're not going to stand in the way. It is,
• 54:04
  Speaker 3: you know, a binding agreement to be an organ donor.
• 54:06
  Speaker 3: But of course if the next of kin don't want it, right,
• 54:11
  Speaker 3: they're the only ones who are left around to sue
• 54:13
  Speaker 3: the doctors. Right so so so, but it ends up
• 54:16
  Speaker 3: being the case if you register. You know, the vast
• 54:19
  Speaker 3: majority of folks who register have their organs recovered.
• 54:22
  Speaker 2: I found a lot of the book had really surprising
• 54:26
  Speaker 2: themes and data doing your research. What's the thing that
• 54:30
  Speaker 2: surprised you most about market design? What sort of things
• 54:34
  Speaker 2: did you go, huh that that doesn't make any sense.
• 54:38
  Speaker 3: So at the end of the book I talk about
• 54:39
  Speaker 3: you know, how you are a market designer. We've talked
• 54:42
  Speaker 3: about you as a market participant. We've talked about others
• 54:44
  Speaker 3: as market designers. But hidden market is one where there's
• 54:48
  Speaker 3: a scarce resource that needs to get allocated without prices
• 54:52
  Speaker 3: being what determines who gets what. And if you think
• 54:56
  Speaker 3: about it that way, you are a market designer for
• 54:58
  Speaker 3: things like your time and attention, which lots of people want.
• 55:01
  Speaker 3: They want to have you respond to their emails. They
• 55:03
  Speaker 3: want to get on your calendar, and you have to
• 55:04
  Speaker 3: decide who you serve and who you don't. That's the preface.
• 55:08
  Speaker 3: The thing that I learned was a set of market
• 55:11
  Speaker 3: rules that I thought made no sense, which was how
• 55:14
  Speaker 3: we used to allocate water from the Colorado River. So
• 55:18
  Speaker 3: for many years the rule was first in time, first
• 55:22
  Speaker 3: and right, which meant that the first folks to tap
• 55:27
  Speaker 3: the river to take water out to divert for their
• 55:29
  Speaker 3: own purposes kind of always got their allotment. So that
• 55:33
  Speaker 3: was California in nineteen oh one, where they diverted water
• 55:36
  Speaker 3: from the river to turn a desert into farmland. And
• 55:41
  Speaker 3: then decades later, when there was a drought and there
• 55:46
  Speaker 3: was less water coming down the Colorado, the California got
• 55:50
  Speaker 3: to keep the exact same allotment, and folks who tapped
• 55:53
  Speaker 3: the river later, like the city of Phoenix, Arizona, which
• 55:56
  Speaker 3: in nineteen oh one was ten or fifteen thousand people
• 55:59
  Speaker 3: but it's now a million and a half, they had
• 56:01
  Speaker 3: to cut back, even though for them it was drinking
• 56:03
  Speaker 3: water and for California it was you know, to grow
• 56:05
  Speaker 3: alfalfa to feed to livestock. So I looked at that
• 56:09
  Speaker 3: and I thought, oh man, what a terrible It's not efficient,
• 56:12
  Speaker 3: it's not equitable. The race that determined who got what
• 56:16
  Speaker 3: was run, you know, a century ago. And so you know,
• 56:20
  Speaker 3: I'm thinking of feeling like, oh man, isn't it great
• 56:22
  Speaker 3: that we don't use these kinds of systems anymore? And
• 56:25
  Speaker 3: then I looked at my calendar and I saw my
• 56:28
  Speaker 3: recurring meetings on there, and I thought, that's first and
• 56:31
  Speaker 3: time first, and right I'm doing what they were doing
• 56:33
  Speaker 3: with the Colorado river a meeting that I put on
• 56:35
  Speaker 3: my calendar, you know, two years ago that takes Thursday
• 56:38
  Speaker 3: at eleven am. Every week Thursday at eleven am. Is
• 56:42
  Speaker 3: being allocated to you know, this this project, even if
• 56:45
  Speaker 3: it's not the most efficient or equitable use of my time.
• 56:50
  Speaker 3: And I realized, like, oh man, you know, there's some
• 56:52
  Speaker 3: stuff that's sacrosanct, like my teaching, but a lot of
• 56:55
  Speaker 3: these recurring meetings, it's not adhering to the efficiency and
• 56:59
  Speaker 3: equity standards that I would want for my allocations.
• 57:03
  Speaker 2: Huh. Having read the book, I keep coming across things.
• 57:07
  Speaker 2: As I was reading it. I was thinking about different things.
• 57:10
  Speaker 2: And then either yesterday or this morning, I saw a
• 57:13
  Speaker 2: Wall Street Journal piece the new mayor elect in New
• 57:17
  Speaker 2: York once the freeze prices not just on apartments but
• 57:21
  Speaker 2: at Yankee Stadium on hot dogs and beer. And there's
• 57:24
  Speaker 2: a couple of interesting issues that, hey, are people going
• 57:28
  Speaker 2: to get too drunk? But some other stadiums have done
• 57:31
  Speaker 2: this and it's worked out really well. When we look
• 57:35
  Speaker 2: at price controls, how do you think about rent control
• 57:38
  Speaker 2: for apartments or capping the price of hot dogs? Costco
• 57:44
  Speaker 2: very famously has the dollar fifty hot dog for them
• 57:47
  Speaker 2: thirty six years. How do you think about those different
• 57:50
  Speaker 2: price mechanisms really as a form of branding or marketing.
• 57:55
  Speaker 3: Yeah, I mean I love the Costco hot dog, so
• 57:58
  Speaker 3: I can see the branding of marketing, you know, benefit
• 58:00
  Speaker 3: it's there. I have thought a bunch about this because
• 58:04
  Speaker 3: that has the potential to create hidden markets or exacerbate
• 58:08
  Speaker 3: hidden markets that are already there. So I recently wrote
• 58:10
  Speaker 3: a piece about affordable housing lotteries. So this is in
• 58:14
  Speaker 3: New York City and a bunch of major cities around
• 58:18
  Speaker 3: the world. Do this where a new development will be
• 58:22
  Speaker 3: built and you'll have thirty percent of the units that
• 58:27
  Speaker 3: are built are going to be designated affordable, meaning folks
• 58:30
  Speaker 3: are only expected to spend thirty percent.
• 58:32
  Speaker 4: Of their income on housing.
• 58:35
  Speaker 3: But there are so many people who are finding rents
• 58:39
  Speaker 3: hard to bear in New York City and these other
• 58:41
  Speaker 3: big cities that the lotteries get flooded. So in a
• 58:46
  Speaker 3: last full year, there were about six million applicants for
• 58:51
  Speaker 3: about ten thousand units. So each lottery entry has a
• 58:54
  Speaker 3: one and six hundred chance of winning, and so as
• 58:59
  Speaker 3: a result, folks are kind of constantly applying to these
• 59:02
  Speaker 3: lotteries because that's the only way that you're gonna have
• 59:04
  Speaker 3: a chance of getting something, is if you're applying to
• 59:06
  Speaker 3: every possible lottery. But then there's all these inefficiencies that
• 59:10
  Speaker 3: can crop up. Maybe I win a lottery, I get
• 59:12
  Speaker 3: really lucky, but it's it's not in my desirable, desired neighborhood.
• 59:16
  Speaker 3: It was still a good lottery to enter. It is
• 59:18
  Speaker 3: better to get affordable housing than not. Maybe you win
• 59:21
  Speaker 3: in the neighborhood that I want, there's no way, but
• 59:24
  Speaker 3: there's no way for us to switch, right, It's kind
• 59:26
  Speaker 3: of like golden handcuffs. If you forgetting an affordable place,
• 59:29
  Speaker 3: and you know the same thing with freezing rent, where
• 59:32
  Speaker 3: you know, the folks who are in rent controlled or
• 59:35
  Speaker 3: rent stabilized apartment that you know are going to be
• 59:38
  Speaker 3: able to kind of keep paying that low rate. You know,
• 59:42
  Speaker 3: that's great for them, but that doesn't solve the bigger problem.
• 59:45
  Speaker 4: Right.
• 59:45
  Speaker 3: It's it's affordability for the lucky few, but not for
• 59:50
  Speaker 3: other folks who are moving to the city for the
• 59:51
  Speaker 3: first time and want to make a life here. And
• 59:54
  Speaker 3: so you know, I can see why folks are eager
• 59:58
  Speaker 3: to do that, but it's hard to think about how
• 1:00:02
  Speaker 3: to solve that problem without broader changes, right.
• 1:00:06
  Speaker 2: It doesn't move the needle on the broader underlying problem.
• 1:00:11
  Speaker 2: It just for that handful. It kind of raises the
• 1:00:14
  Speaker 2: issue of nimbiism and just not building well. Since the
• 1:00:19
  Speaker 2: Great Financial Crisis, we've wildly underbuilt single family homes. Affordable
• 1:00:25
  Speaker 2: housing go down the list. The focus has been on
• 1:00:28
  Speaker 2: luxury properties because hey, there's the most amount of economic
• 1:00:31
  Speaker 2: benefit for the builders to put their time and energy.
• 1:00:35
  Speaker 3: But this is definitely, you know, a supply and demand problem.
• 1:00:38
  Speaker 3: If you want to bring costs down, you have to
• 1:00:40
  Speaker 3: increase supply. And you know, as an economist, we are
• 1:00:43
  Speaker 3: trained to kind of think one step further. So I'd
• 1:00:47
  Speaker 3: have to read the specific policy about the you know,
• 1:00:50
  Speaker 3: Yankee Stadium concessions, right, but my first instinct would be, Oh,
• 1:00:54
  Speaker 3: if you cap the price of concessions, the logical next
• 1:00:57
  Speaker 3: step is that the ticket price goes up a little bit.
• 1:00:59
  Speaker 4: Right.
• 1:01:00
  Speaker 3: It's like, now, all of a sudden, it's cheaper to
• 1:01:02
  Speaker 3: go to you know, to have the full night out
• 1:01:04
  Speaker 3: at the you know, city Field or at Yankee Stadium.
• 1:01:07
  Speaker 3: And so, you know, is there also going to be
• 1:01:09
  Speaker 3: a price control on the ticket or or not? And
• 1:01:12
  Speaker 3: then are we actually getting the gains that we want
• 1:01:15
  Speaker 3: or you know, are we are we getting nice sound bites.
• 1:01:18
  Speaker 2: The thing about constructing your own market design is kind
• 1:01:23
  Speaker 2: of interesting. I have a friend Dave, who comes to
• 1:01:26
  Speaker 2: New York a couple of times a quarter, works in finance,
• 1:01:30
  Speaker 2: comes down from the Berkshires, and since he's one person
• 1:01:34
  Speaker 2: and doesn't care which Broadway show he goes to, his
• 1:01:40
  Speaker 2: market design hack is he waits to depending on the day,
• 1:01:43
  Speaker 2: five minutes to seven or five minutes to eight, the
• 1:01:46
  Speaker 2: price's plummet. Yes, they're about to expire worthless. Oh, Hamilton
• 1:01:50
  Speaker 2: for half price, let's go wicked half price and he's
• 1:01:54
  Speaker 2: seen half the stuff on Broadway at shockingly reasonable prices.
• 1:01:59
  Speaker 2: So as I was reading this, I thought about that,
• 1:02:02
  Speaker 2: and then I just had an experience up in Newport
• 1:02:05
  Speaker 2: my first time visiting. You wrote about this in the book,
• 1:02:09
  Speaker 2: about the restaurant reservations in the waiting list. So we
• 1:02:12
  Speaker 2: stayed at this hotel and there's a super hot restaurant
• 1:02:15
  Speaker 2: there which I didn't even know about. We made other
• 1:02:18
  Speaker 2: reservations for the weekend, and we stop in and there's
• 1:02:23
  Speaker 2: a line of people at five o'clock waiting to sit
• 1:02:28
  Speaker 2: at the bar. I said, we're on the waiting list.
• 1:02:31
  Speaker 2: He's like, well, we have like one hundred seats and
• 1:02:33
  Speaker 2: the waiting list is about four hundred long. Oh forget it.
• 1:02:37
  Speaker 2: And I said something to the matre d and he said,
• 1:02:40
  Speaker 2: why don't you come down later and see what the
• 1:02:42
  Speaker 2: line looks like. It usually moves pretty and it was
• 1:02:45
  Speaker 2: beautiful out you could see it at the bar. It
• 1:02:46
  Speaker 2: was outdoors, so it was like we had a seven
• 1:02:50
  Speaker 2: o'clock reservation. The goal the goal, and we walked and
• 1:02:55
  Speaker 2: we were going to walk to the restaurant. So we
• 1:02:56
  Speaker 2: come down like six thirty, no line the bar. So
• 1:03:01
  Speaker 2: I said, hey, you're not seeing people at the bar.
• 1:03:03
  Speaker 2: You no, there's no line, get over there. And it
• 1:03:06
  Speaker 2: was just simply being nice in the matri d and
• 1:03:08
  Speaker 2: asking a question was was that behavioral?
• 1:03:11
  Speaker 4: Heck?
• 1:03:12
  Speaker 3: This is, you know, learning about the market and the
• 1:03:15
  Speaker 3: market rules and getting inside information about when when is
• 1:03:19
  Speaker 3: there less demand? What is the optimal strategy in this environment?
• 1:03:23
  Speaker 3: It requires often doing a little bit of research, but
• 1:03:27
  Speaker 3: it's not unattainable. We all have the ability to think
• 1:03:31
  Speaker 3: about the market rules, think about who will know the
• 1:03:33
  Speaker 3: matre d. You know, if you're polite to him or her,
• 1:03:38
  Speaker 3: they might want you to come and give you the
• 1:03:40
  Speaker 3: inside tips. But you know, you have to kind of
• 1:03:44
  Speaker 3: have to either do your own research or have folks
• 1:03:47
  Speaker 3: advise you that you trust. And yeah, you can. You
• 1:03:51
  Speaker 3: can often succeed in markets where other people fall.
• 1:03:55
  Speaker 2: So I only have you for another ten minutes, So
• 1:03:57
  Speaker 2: let me jump to my favorite questions school my guests,
• 1:04:01
  Speaker 2: starting with tell us about your mentors who helped shape
• 1:04:04
  Speaker 2: your career.
• 1:04:05
  Speaker 3: Yeah, so the main one, I mean already mentioned him,
• 1:04:08
  Speaker 3: so you can see how big an influence is. Alvin Roth.
• 1:04:11
  Speaker 3: So he took me in as an undergrad mentee. I
• 1:04:14
  Speaker 3: had this story in the book and then it got
• 1:04:16
  Speaker 3: cut for space. So I put it in the acknowledgments
• 1:04:18
  Speaker 3: because it was such a formative experience for me where
• 1:04:22
  Speaker 3: I was taking his PhD class as a senior in
• 1:04:26
  Speaker 3: undergrad and so I was kind of a little bit
• 1:04:28
  Speaker 3: out of place already, and I wanted to write a
• 1:04:32
  Speaker 3: senior thesis the thing that kicked me off to this
• 1:04:34
  Speaker 3: career and you know, put me at this table talking
• 1:04:36
  Speaker 3: to you. Now, I had procrastinated asking him to be
• 1:04:40
  Speaker 3: my advisor because I was a little intimidated, I felt
• 1:04:42
  Speaker 3: attle out of place, and you know, I came up
• 1:04:45
  Speaker 3: to him on the day the form was due and
• 1:04:47
  Speaker 3: I said, I want to write a senior thesis. I
• 1:04:49
  Speaker 3: would really like for you to advise it. You know,
• 1:04:52
  Speaker 3: the form is due today, but you know, and this
• 1:04:54
  Speaker 3: is the commitment. He was like, all right, why don't
• 1:04:55
  Speaker 3: I sign the form and we'll see how it goes.
• 1:04:58
  Speaker 3: And he signed the form and you know, the his history,
• 1:05:01
  Speaker 3: but it was both the idea that you know, I
• 1:05:04
  Speaker 3: could be involved in learning new things that people didn't
• 1:05:07
  Speaker 3: know before and do it with somebody who was willing
• 1:05:11
  Speaker 3: to mentor me.
• 1:05:12
  Speaker 4: That was a real, real big impact.
• 1:05:14
  Speaker 2: Yeah, I can imagine what are some of your favorite books?
• 1:05:16
  Speaker 2: What are you reading right now?
• 1:05:18
  Speaker 3: So there, this is a pop Econ book, my book
• 1:05:21
  Speaker 3: Lucky by Design. It's in the spirit of another pop
• 1:05:25
  Speaker 3: Econ book about market design which Al wrote, which is
• 1:05:28
  Speaker 3: called Who Gets What and Why? And so for a
• 1:05:30
  Speaker 3: while I didn't want to write another, you know, pop
• 1:05:33
  Speaker 3: market design bookcase I didn't want to step on his
• 1:05:34
  Speaker 3: toes as a.
• 1:05:35
  Speaker 2: Great title who Gets What and Why?
• 1:05:38
  Speaker 3: Yeah, And there's a little in the text of my
• 1:05:40
  Speaker 3: book and kind of I drop that every so often,
• 1:05:42
  Speaker 3: the kind of question, that wording of that question. So
• 1:05:46
  Speaker 3: that was an idea for me, This idea that you
• 1:05:49
  Speaker 3: can communicate these market design concepts to regular folks. I
• 1:05:52
  Speaker 3: recommend my book, but also that book for folks who
• 1:05:54
  Speaker 3: are interested in this. My colleague, whose office is next
• 1:05:59
  Speaker 3: to mine, had a book that came out a few
• 1:06:00
  Speaker 3: weeks before mine.
• 1:06:02
  Speaker 4: It's called Having It All.
• 1:06:03
  Speaker 3: So my colleague is Caren Low, and I'm really enjoying
• 1:06:07
  Speaker 3: that book. I mean, I've heard about everything that was
• 1:06:09
  Speaker 3: in it, you know, along along the way. But she
• 1:06:13
  Speaker 3: writes about the time that women and their partners spend
• 1:06:19
  Speaker 3: in doing household production and how society has progressed over
• 1:06:24
  Speaker 3: decades where women have entered the workforce, but the norms
• 1:06:29
  Speaker 3: at home about how time is.
• 1:06:32
  Speaker 4: You know, household chores are split.
• 1:06:34
  Speaker 3: It has not changed, so women end up really yeah,
• 1:06:38
  Speaker 3: the data in that book is quite shocking. I mean,
• 1:06:41
  Speaker 3: I'd been hearing about it as she was doing the research.
• 1:06:44
  Speaker 3: But you know, women, even in households where they earn
• 1:06:49
  Speaker 3: more than their male partners, will still be doing more
• 1:06:54
  Speaker 3: labor all of that stuff at home, so that you know,
• 1:06:58
  Speaker 3: in my book, I talk a little bit about how
• 1:06:59
  Speaker 3: my wife and I manage our household responsibilities using the
• 1:07:05
  Speaker 3: concepts of market design to kind of avoid some of
• 1:07:08
  Speaker 3: these systematic problems that that on average couples display.
• 1:07:13
  Speaker 2: Huh really, you know I love to cook, but I
• 1:07:15
  Speaker 2: tend to make a giant mess. And my wife is
• 1:07:18
  Speaker 2: convinced that it's a purposeful strategy, so she could and
• 1:07:22
  Speaker 2: it's I'm like, honey, we're married thirty years, you know me?
• 1:07:26
  Speaker 2: Is this how I rolled? You know?
• 1:07:27
  Speaker 3: You gotta yeah, sometimes this is just my technique. But
• 1:07:31
  Speaker 3: one of the things that I talk about in the
• 1:07:33
  Speaker 3: book and must.
• 1:07:34
  Speaker 2: You pour from so high?
• 1:07:35
  Speaker 4: It's olive oil.
• 1:07:37
  Speaker 2: It doesn't need that high.
• 1:07:39
  Speaker 4: You got to get that aired and it's it's part
• 1:07:42
  Speaker 4: of the fun. But no.
• 1:07:44
  Speaker 3: One of the strategies is having one person be in
• 1:07:48
  Speaker 3: charge of the whole task from conception to execution. So
• 1:07:53
  Speaker 3: that means if you are cooking, you're also cleaning. Would
• 1:07:56
  Speaker 3: be part of that, right, because then the incentives are aligned.
• 1:07:59
  Speaker 3: When when you don't do that, the person who cooks
• 1:08:02
  Speaker 3: can leave a giant mass the other person cleans. That
• 1:08:04
  Speaker 3: seems fair, but the decisions, the resentment comes in and
• 1:08:09
  Speaker 3: why are you making such a big mess? And so
• 1:08:10
  Speaker 3: it turns out it, you know, might be more efficient
• 1:08:12
  Speaker 3: and equitable if one person does that whole task and
• 1:08:15
  Speaker 3: somebody else does a whole other time. Right, you cook
• 1:08:17
  Speaker 3: and I'll do the laundry and clean the floors. And
• 1:08:20
  Speaker 3: that's the you know, the split that might be fair.
• 1:08:23
  Speaker 2: You know, I'm usually out the door early, or if
• 1:08:25
  Speaker 2: I'm home, I'm at the desk writing, so she takes
• 1:08:27
  Speaker 2: care of the dogs and during the weekend I try
• 1:08:31
  Speaker 2: and give her a break and feed and walk the
• 1:08:34
  Speaker 2: dogs early. We've never discussed it. It just kind of
• 1:08:38
  Speaker 2: worked out that way.
• 1:08:39
  Speaker 4: That sometimes that's how it happens.
• 1:08:41
  Speaker 3: But you know, for those who are not finding it
• 1:08:43
  Speaker 3: that easy, talking it out and kind of splitting the
• 1:08:46
  Speaker 3: tasks is an effective strategy.
• 1:08:49
  Speaker 2: Tell us what's keeping you entertained these days? What are
• 1:08:51
  Speaker 2: you watching or listening to? Either podcasts or Amazon Prime, Netflix, whatever.
• 1:08:57
  Speaker 3: So I am a major fan of The Simpsons. Yeah,
• 1:09:02
  Speaker 3: I have always loved it.
• 1:09:03
  Speaker 2: What are we up to season forty something?
• 1:09:05
  Speaker 3: It's crazy almost Yeah, And but what has been great
• 1:09:09
  Speaker 3: I found throughout my life, you know, rewatching old episodes
• 1:09:12
  Speaker 3: that I kind of get jokes that I didn't get before,
• 1:09:14
  Speaker 3: which makes sense right when I started watching.
• 1:09:16
  Speaker 2: It's one of those things that works for just both
• 1:09:18
  Speaker 2: kids and adults at the same time, exactly.
• 1:09:21
  Speaker 3: And so what has been phenomenal for me is exposing
• 1:09:24
  Speaker 3: my kids to it for the first time. And you know,
• 1:09:27
  Speaker 3: I'll say, so, I'll make some reference to something, and
• 1:09:29
  Speaker 3: my kids will be like, what are you talking about?
• 1:09:30
  Speaker 3: And then I'll pull up the YouTube clip I'll show
• 1:09:32
  Speaker 3: it to them, and then they'll be like, oh, can
• 1:09:33
  Speaker 3: you know can we watch that episode? So that has
• 1:09:36
  Speaker 3: been phenomenal.
• 1:09:37
  Speaker 2: Our final two questions, What sort of advice would you
• 1:09:39
  Speaker 2: give to a recent college grad interest in the career
• 1:09:43
  Speaker 2: in either market design or economics or academia.
• 1:09:49
  Speaker 3: Yeah, So, academia. There is a path forward for folks
• 1:09:53
  Speaker 3: who have just graduated college and are thinking about this,
• 1:09:57
  Speaker 3: and that is to get some experience doing research to
• 1:10:01
  Speaker 3: see if you like it. Because the market for tenure
• 1:10:06
  Speaker 3: track academic positions is getting tightened, we're feeling the political
• 1:10:11
  Speaker 3: wins as well as other things.
• 1:10:12
  Speaker 2: They've kind of demographically, there's slightly smaller admission classes and
• 1:10:17
  Speaker 2: I just read seventeen percent drop in international students. That's
• 1:10:20
  Speaker 2: a big number.
• 1:10:21
  Speaker 3: For a lot of the universities that have big PhD programs.
• 1:10:26
  Speaker 3: The budgets for things like the PhD program will depend
• 1:10:33
  Speaker 3: on their revenue streams, and foreign students coming for undergrad
• 1:10:37
  Speaker 3: or for master's degrees is a big revenue source for
• 1:10:40
  Speaker 3: a lot of institutions. So all of that is to
• 1:10:42
  Speaker 3: say that academia remains a great option for folks who
• 1:10:45
  Speaker 3: are interested in it, but it's getting harder and harder.
• 1:10:49
  Speaker 3: But if folks are interested getting and they have not
• 1:10:51
  Speaker 3: yet done it, they may have done it in undergrad
• 1:10:53
  Speaker 3: getting exposure to the research experience. There are predoctoral programs
• 1:10:57
  Speaker 3: for folks who work with academic researchers on their projects
• 1:11:03
  Speaker 3: and kind of get a sense of what is actually like,
• 1:11:05
  Speaker 3: there are master's programs that folks can participate in to
• 1:11:08
  Speaker 3: see what the coursework is like, So that is definitely
• 1:11:11
  Speaker 3: one way to go. There are kids who started earlier,
• 1:11:15
  Speaker 3: who started in college, but I was not one of them,
• 1:11:17
  Speaker 3: right I told the story about senior year kind of realizing, oh,
• 1:11:20
  Speaker 3: I want to do academia. So I hadn't done any
• 1:11:22
  Speaker 3: research assistant work until after I graduated, but is that
• 1:11:26
  Speaker 3: was the next step for me, was saying, Okay, I
• 1:11:28
  Speaker 3: want to see what this is like. So it is
• 1:11:30
  Speaker 3: a path to do, but you should only do it
• 1:11:32
  Speaker 3: if you really want to have a job that only
• 1:11:37
  Speaker 3: someone with a PhD can have, because there are a
• 1:11:39
  Speaker 3: lot of great jobs out there for folks interested in
• 1:11:41
  Speaker 3: these topics, but not in academia.
• 1:11:44
  Speaker 2: So final question, what do you know about the world
• 1:11:48
  Speaker 2: of market designs and economics or even academia that would
• 1:11:53
  Speaker 2: have been useful twenty plus years ago when you were
• 1:11:55
  Speaker 2: first getting started.
• 1:11:57
  Speaker 4: Yeah.
• 1:11:57
  Speaker 3: I think something I've recently developed in part researching for
• 1:12:02
  Speaker 3: the book is just how diverse the hidden markets are
• 1:12:06
  Speaker 3: that we participate in every day. As a young economist
• 1:12:11
  Speaker 3: being trained in how markets worked, I thought basically exclusively
• 1:12:17
  Speaker 3: about prices and the price mechanisms. That was how I
• 1:12:20
  Speaker 3: was taught that those were the markets I looked at.
• 1:12:23
  Speaker 3: And it's only recently that I've realized markets are much
• 1:12:26
  Speaker 3: broader than that, and thinking through the rules of those markets,
• 1:12:31
  Speaker 3: how we could design them better so that, you know,
• 1:12:34
  Speaker 3: they're more equitable and efficient and easy for participants. I
• 1:12:37
  Speaker 3: think there's a lot of gains for us to have
• 1:12:39
  Speaker 3: as a society, So I'm excited to be working on
• 1:12:41
  Speaker 3: it for the next twenty years. But if I if
• 1:12:43
  Speaker 3: I could go back twenty years and say, hey, maybe
• 1:12:45
  Speaker 3: focus on these markets a little bit more, because there's
• 1:12:48
  Speaker 3: a lot of low hanging fruit where we could be
• 1:12:51
  Speaker 3: making things better for everybody. You know, I wish I
• 1:12:55
  Speaker 3: knew that, and I want others to kind of look
• 1:12:57
  Speaker 3: at these markets and say, yeah, this could be better.
• 1:13:00
  Speaker 2: Fascinating. Professor really enjoyed the conversation we have been speaking with.
• 1:13:05
  Speaker 2: Judd Kessler, professor of behavioral economics and market design at
• 1:13:11
  Speaker 2: Wharton at the University of Pennsylvania and author of the
• 1:13:14
  Speaker 2: new book Lucky by Design, The Hidden Economics. You need
• 1:13:18
  Speaker 2: to get more of what you want. I would be
• 1:13:21
  Speaker 2: remiss if I failed to thank the crack team that
• 1:13:24
  Speaker 2: helps me put these conversations together each and every week.
• 1:13:29
  Speaker 2: Alexis Noriega is my video producer. Joan Russo is my
• 1:13:33
  Speaker 2: research assistant. Anna Luke is my producer. I'm Barry Rutolts.
• 1:13:39
  Speaker 2: You've been listening to Master's in Business on Bloomberg Radio.