Latest / Merryn Talks Money / You Are Unhappy Because You Aren't Taking Enough Risk

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You Are Unhappy Because You Aren't Taking Enough Risk · Merryn Talks Money

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Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
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Speaker 2: Welcome to Merton Talk to Money, the podcast amos people
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Speaker 2: who know the markets explain the markets. I'm joined Stevick,
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Speaker 2: senior reporter of the Bloomberg News and the author of
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Speaker 2: the Money Distilled newsletter. I'm filling in for Merton this
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Speaker 2: week is she's still in Holdy, So this week I'm
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Speaker 2: speaking with Alison Schrager, who's a Bloomberg opinion columnist and
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Speaker 2: senior fellow at the Manhattan Institute. Alison wrote a book
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Speaker 2: called and Economist Walks into a Broadle and Other Unexpected
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Speaker 2: Places to Understand Risk, and now she's get a new
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Speaker 2: book coming out which is called Worth the Risk, The
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Speaker 2: Seven myths that keep us from taking the chances we
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Speaker 2: need to take. I wanted to speak to Alison because
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Speaker 2: I'm a fan of her columns. She kind of covers
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Speaker 2: similar things to me and the she's trying about personal
1:00
Speaker 2: finance and investment, but she's writing about it from the
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Speaker 2: US perspective. And one of the things I've find fascinating
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Speaker 2: is there's actually a massive overlap despite the fact that
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Speaker 2: we tend to think of the UK is having very
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Speaker 2: different issues to the US. So This is one reason
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Speaker 2: I wanted to get her on, and so in today's show,
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Speaker 2: we talk about her new book. We talk about her
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Speaker 2: view that it's actually a lack of risk taking that's
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Speaker 2: leading to the anger that we see in societies, and
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Speaker 2: that's manifesting itself by frustration over inequality, etc. And actually
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Speaker 2: what we need to do is be taking more risks.
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Speaker 2: We talk about which country's got the best pension system,
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Speaker 2: and we also talk about the US housing market and
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Speaker 2: the different views on whether a house is an asset
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Speaker 2: you should be putting all your money into it, or
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Speaker 2: whether the stock market is actually a better place for
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Speaker 2: your money. Alison, Welcome to Merton Talks Money.
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Speaker 1: Thanks so much for having me, is said, I'm a
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Speaker 1: longtime fan, so.
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Speaker 2: Well see here. I've been looking forward to interviewing you
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Speaker 2: for a while, so thanks very much for making the
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Speaker 2: time now. I only just found out that your new
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Speaker 2: book is coming out, and so i'n't have the chance
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Speaker 2: to read it, but I did read the introduction they
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Speaker 2: very kindly sent to me, and it really sounds fascinating,
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Speaker 2: and it also sounds that it may explain some of
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Speaker 2: the dissatisfaction that's been widespread across well, basically across the
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Speaker 2: world since the two thousand and eight crisis. Can you
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Speaker 2: just talk us through your thesis. What's the book about.
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Speaker 1: Well, it's all about our changing relationship with risk, which
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Speaker 1: happens over time. But I sort of make I guess
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Speaker 1: it was a counterintuitive argument. Is that people keep saying
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Speaker 1: that the reason where we're so unhappy is that we
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Speaker 1: face all these sort of massive risks we can't control,
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Speaker 1: and I think it's actually the opposite, is that we've
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Speaker 1: taken great pains to remove risk from our life, and
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Speaker 1: that also sort of removes upside in the chance for
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Speaker 1: possibility and sort of is a big part of our motivation.
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Speaker 1: And I think that's honestly, what's keeping us down is
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Speaker 1: the sort of lack of possibility, lack of upside and
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Speaker 1: the ability and a lack of ability to take the
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Speaker 1: risks that are meaningful or important to us.
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Speaker 2: As it basically there's the risk of not taking enough risk.
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Speaker 1: Yeah, I guess they say you make zero shots you
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Speaker 1: don't take And you know, there are obviously good reasons
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Speaker 1: to remove risks from people's lives, like our social safety net.
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Speaker 1: It's a great example of that. But the thing is,
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Speaker 1: if you take away risk entirely. You also take again
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Speaker 1: the possibility of upside, of earning more, of feeling like
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Speaker 1: you tested yourself, which is also super important to well
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Speaker 1: being and also very important to moving the economy forward.
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Speaker 1: I think we're seeing this a lot in Europe. People
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Speaker 1: like keep saying, well, we need to remove all these
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Speaker 1: regulations or we need to integrate better, and you know,
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Speaker 1: but the regulations are there for a reason. I mean,
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Speaker 1: their feature, not a bug, and that particularly Continental Europe
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Speaker 1: is much less comfortable with risk. They've made They've built
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Speaker 1: a very large welfare state, they have a lot of
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Speaker 1: restrictions on firing people. This is all to reduce risk,
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Speaker 1: but the downside of that is that you're going to
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Speaker 1: have less growth. I'm an efficient market tonymists, so I
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Speaker 1: tend to think that you know, no risk, no reward.
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Speaker 1: So the same is true not only in financial markets,
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Speaker 1: but also economic growth in general. So if you construct
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Speaker 1: an economy where it's really hard to experience any downside risk,
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Speaker 1: you also are going to get up with less growth
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Speaker 1: and less upside risk.
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Speaker 2: It's really interesting because you talk about Europe is more
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Speaker 2: risk averse, and I think that's perfectly that's very reasonable
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Speaker 2: why do we have this level of anger? Because you
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Speaker 2: recently wrote a piece about asking what Americans are better off?
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Speaker 2: But they're they're very angry, kind of like talking about
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Speaker 2: people feeling frustrated. Where do you think that this is
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Speaker 2: coming from? This sense that everyone feels somewhat hard done by?
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Speaker 1: Well, again, I think part of it is they don't
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Speaker 1: have that possibility of upside. They don't have that possibility
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Speaker 1: of advancing like they used to, particularly when we're in
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Speaker 1: a big economic transition which introduces uncertainty into our lives
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Speaker 1: and you know, not being able to fully participate in that,
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Speaker 1: but just sort of feeling like you deal with the stagnation.
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Speaker 1: And I think the stagnation is largely a big part
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Speaker 1: of the anger. I mean, it's also I think the
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Speaker 1: anger in the if you look at almost every metric,
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Speaker 1: you know, you know, liberalism worked. I mean, we are
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Speaker 1: more prosperous, and that is true across the income distribution,
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Speaker 1: even if the income distribution widened. But the question is
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Speaker 1: why do people feel like the economy is broken and
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Speaker 1: that it's not working for them when it actually delivered
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Speaker 1: what it said it would and the goal has always
5:28
Speaker 1: been increasing prosperity and I think if you look at
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Speaker 1: different income groups, you have different answers. You know, particularly
5:35
Speaker 1: lower middle income people are really being hammered by inflation.
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Speaker 1: So when they say I am more soft than I was,
5:40
Speaker 1: say five seven years ago, they're not wrong. So I
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Speaker 1: argue in my book, this is a population's particularly been
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Speaker 1: cut out of meaningful risk taking. You know, we're putting
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Speaker 1: more and more like they need to be protected, and
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Speaker 1: they do. There's certainly said a case for a welfare state,
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Speaker 1: but they also we've also like shut out upside for them,
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Speaker 1: which you know is obviously you know, keeps them poor.
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Speaker 1: And then you have the upper middle class, which is
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Speaker 1: doing well but also is more locked in a genuine
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Speaker 1: zero sum game with super rich people. And I think
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Speaker 1: to them, they feel like the economy isn't working for
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Speaker 1: them because they did say everything right as we say.
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Speaker 1: You know, they went to the right schools, they studied
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Speaker 1: something that sounded fancy, they moved to the cities, and
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Speaker 1: it didn't work. You know, things have worked out for
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Speaker 1: them by any sort of economic metric, but they still
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Speaker 1: feel like they should be somewhere different. Or they see
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Speaker 1: people who they went to school with who are getting
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Speaker 1: ahead faster than they are. Part of that is that
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Speaker 1: they're looking for these positional goods lots of private schools,
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Speaker 1: sort of desirable housing in big cities that is in
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Speaker 1: finite supply. But also I think they've also been sold
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Speaker 1: something wrong, which is if anyone who says I did
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Speaker 1: everything right, I should have gotten something kind of is
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Speaker 1: giving the game away of like, well, if you do
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Speaker 1: everything right, you also didn't take any risks. You didn't
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Speaker 1: take meaningful risks, you didn't check in and say, well,
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Speaker 1: what's meaningful to me in terms of moving my life
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Speaker 1: or both economically, socially whatever, And if you just sort
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Speaker 1: of follow the rule book, you're not going to sort of,
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Speaker 1: I think, ultimately get that satisfaction.
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Speaker 2: Yeah, that's really interesting because obviously people highlight inequality as
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Speaker 2: a driver of this frustration. But where you mentioned incomeing,
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Speaker 2: equality in the US had expanded, and that's the incoming
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Speaker 2: equality here is actually gone down. You know, they kind
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Speaker 2: of they're certainly on the wage side and the earl
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Speaker 2: inside there's been massive compression between the lowest percent on
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Speaker 2: the highest percentile. So it's really interesting. So what you're
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Speaker 2: basically saying is nothing to do with that. It's mostly
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Speaker 2: about the people particularly further down not being able to
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Speaker 2: kind of take the risks and not being able to
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Speaker 2: or not necessarily not being able to do it, but
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Speaker 2: but not participating presumably in the stock market. Is that
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Speaker 2: what you're talking about, Well, they're different things.
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Speaker 1: I think in America there is this sort of winding
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Speaker 1: inequality and this of anyway, it's not true feeling that
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Speaker 1: the economy is your sum. But people are getting richer
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Speaker 1: in America, so as opposed to the UK and Europe,
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Speaker 1: there is much more stagnation. And I try to explain
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Speaker 1: to people in America if you think like a widening
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Speaker 1: inequality but a growing economy is bad, wait till you
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Speaker 1: have the alternative, which is the compression, which is the stagnation.
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Speaker 1: People are a lot more unhappy when that happens. But
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Speaker 1: the thing is in both cases you do have this
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Speaker 1: sort of more people being shut out of risk, you know,
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Speaker 1: particularly you know in your very high tax rates, which
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Speaker 1: take away upside. That's another reason why sort of wealth
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Speaker 1: tends to be in your much more generational. What you
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Speaker 1: do is you see this persistence of their wealthiest family
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Speaker 1: being the same generation after generation, and that is largely
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Speaker 1: because you have such high income taxes, such high consumption taxes,
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Speaker 1: which makes it much harder to accumulate a fortune. And
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Speaker 1: they said, get all that upside, and it sort of
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Speaker 1: again becomes perversely more unequal because the families that have
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Speaker 1: generational wealth are the ones that stay wealthy.
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Speaker 2: Yeah, it's difficult. Does a campaign. He had Gardy Stevenson,
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Speaker 2: who I don't know, you me or me not have heard.
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Speaker 1: Once, did a debate with him like six years ago.
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Speaker 1: And that's what I tail was more I completely, but
9:10
Speaker 1: it was like during COVID when like everyone in their
9:12
Speaker 1: grandmother was doing like a lot of online content and
9:14
Speaker 1: I had no idea who he was, and some British
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Speaker 1: person had me do this debate with him, and I
9:20
Speaker 1: honestly like barely remember. I remember looking at him in advance.
9:23
Speaker 1: I'm like, God, reckon, this is gonna be difficult. But
9:25
Speaker 1: it actually found it quite pleasant. And I do think
9:27
Speaker 1: we found some areas of commonality, if I recall, and
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Speaker 1: I found him quite nice.
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Speaker 2: And going back to your book, so the supaid, there's
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Speaker 2: the seven myths that keep us from taking the chances
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Speaker 2: we need to take. Ously I'm not going to ask
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Speaker 2: you to go through them all, because you know people
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Speaker 2: need to read the book. But is there one of
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Speaker 2: these myths that stands out to you as being particularly counterintuitive.
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Speaker 1: Well, one of them is that I hear a lot,
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Speaker 1: which is you can't take risks until you're ready or
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Speaker 1: in a secure place. And you know, first of all,
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Speaker 1: I mean, first of all, most people don't have that luxury.
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Speaker 1: Second of all, like often you know, the best risk
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Speaker 1: takers are taking it sort of when they're down. And
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Speaker 1: this idea that you have to like, have the job,
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Speaker 1: you have to be married, you have to have all
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Speaker 1: these things in place before you take risks only ensures
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Speaker 1: you'll never get those things because it sort of keeps
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Speaker 1: you from getting ahead. And I also mentioned they say
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Speaker 1: in the field of motivation, like what gets us out
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Speaker 1: of bed in the morning, this resolution of uncertainty is
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Speaker 1: one of the biggest sources of motivation. So if you're
10:27
Speaker 1: just like I have to play by the rules, I
10:28
Speaker 1: have to do everything right, and then I can maybe
10:31
Speaker 1: start thinking about what's my dream? You know, how do
10:34
Speaker 1: I take risks in a meaningful way, You're just never
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Speaker 1: going to get there.
10:37
Speaker 2: Yeah, And I suppose also if you can take more
10:39
Speaker 2: risks when you get less to lose as well, which
10:42
Speaker 2: is I think something that people often forget. But still
10:46
Speaker 2: moving on to the retirement pensions, you've described yourself as
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Speaker 2: a retirement economist. That is that an official thing.
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Speaker 1: No, it's not. I say it because you know, if
10:59
Speaker 1: you're in a economists, there's no other way to describe.
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Speaker 1: I mean, there's like maybe fifteen other retirement economists who
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Speaker 1: I identify that way. It's a made up field, to
11:07
Speaker 1: be fair, but I think it's accurate because in economics,
11:10
Speaker 1: you know, you could be a macroeconomist, microeconomist, financial economist,
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Speaker 1: but if you're a retirement economist, you kind of are
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Speaker 1: a lot of things. It's a macro question, it's a
11:18
Speaker 1: micro question, it's a finance question, it's a behavioral question,
11:22
Speaker 1: it's a labor question. So you kind of have to
11:24
Speaker 1: take things from all different fields. So I don't think, like,
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Speaker 1: technically I'm a macro financial economist, because that would be
11:31
Speaker 1: my training. But I don't feel like that really is accurate.
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Speaker 2: I suppose it does boil, don't they? And you've mentioned
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Speaker 2: this yourself. It is the hardest problem in finance, certainly
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Speaker 2: in personal finance, is managing your money so that you
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Speaker 2: have enough so that it doesn't run out before you die,
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Speaker 2: or that you don't have so much that you've wasted
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Speaker 2: the early years of your life accumulating, only you know,
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Speaker 2: find that you die before you've had the chance to
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Speaker 2: enjoy it. But in those terms, what are the kind
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Speaker 2: of the biggest mistakes that you see people making when
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Speaker 2: they're thinking about the retirement and how to go about it.
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Speaker 1: I think it's that they're thinking in terms of wealth
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Speaker 1: then income. And I don't blame people for that. I
12:10
Speaker 1: blame the retirement industry. It happened like maybe like fifteen
12:15
Speaker 1: years before in America then the UK, is that we
12:18
Speaker 1: moved from these like traditional pensions to individual accounts like
12:22
Speaker 1: a forur own K.
12:22
Speaker 2: And this is so the traditional pensions where the defined
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Speaker 2: benefit once yes, where you get a set income, and
12:28
Speaker 2: it was not in the in the US. I take
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Speaker 2: it that was provided by the employer as well. Yes, yeah,
12:34
Speaker 2: why did that die out in the US.
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Speaker 1: It's really expensive?
12:38
Speaker 2: Yeah, yeah, it's okay, it's the same as why it
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Speaker 2: died out here, okay.
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Speaker 1: Yeah. And it's not just like the income, the amount
12:45
Speaker 1: of contributions you have to put aside. It's a huge
12:47
Speaker 1: Like you're just talking about all the risk around outliving
12:50
Speaker 1: your assets, about managing asset risk. These are very expensive
12:54
Speaker 1: risks to manage, and it just became untenable, particularly as
12:57
Speaker 1: people were living longer, for employers to put this on secularly,
13:00
Speaker 1: as they were looking to grow and hire and make
13:02
Speaker 1: the economy more dynamic. So it's not bad that we
13:05
Speaker 1: moved to this new system because it means coverage increased
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Speaker 1: a lot. You have like a lot more people with
13:10
Speaker 1: retirement accounts and retirement assets. But you know, I call
13:14
Speaker 1: it like the original sin of retirement of that you know,
13:17
Speaker 1: certainly in America, the four one K was meant to
13:20
Speaker 1: supplement the defined benefit plans, So we tend to sort
13:23
Speaker 1: of cast it as wealth, like you're supposed to accumulate
13:25
Speaker 1: a certain amount of money before you retire. But that
13:28
Speaker 1: sort of sets people up for failure because like, what
13:31
Speaker 1: do you do with this pile of money on day
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Speaker 1: one of retirement? Like you said, it's the hardest problem.
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Speaker 1: Bill Sharp has said that a lot of Nobel Prize
13:38
Speaker 1: winning financial economists. I mean, we minimize personal finance as
13:42
Speaker 1: being easy because everyone does it, but that doesn't mean
13:45
Speaker 1: it is. It's actually, I think much harder and a
13:47
Speaker 1: lot of various complex financial problems people are solving all
13:50
Speaker 1: the time. Of so how do you this slipping that
13:54
Speaker 1: switched to thinking about this pile of money and turning
13:56
Speaker 1: it into income. First of all, it doesn't really make
13:58
Speaker 1: sense because income is valid you differently than wealth. So
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Speaker 1: you can't just slip this switch, at least not without
14:04
Speaker 1: exposing yourself to potentially big risks. And it also just
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Speaker 1: I think mentally really sets people up to not know
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Speaker 1: how to spend their money, or to feel inhibited from
14:14
Speaker 1: spending their money because they've spent their whole lives building
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Speaker 1: up this nest egg. Like even my parents are in
14:19
Speaker 1: their seventies refuse to spend any of their retirement savings.
14:22
Speaker 1: And I'm like, you know, you worked hard, you know
14:24
Speaker 1: they're both working still, but I'm like, you could maybe
14:26
Speaker 1: work less and spend some of this money. This is
14:28
Speaker 1: what you should do, this is what you've worked so
14:31
Speaker 1: hard for. And they look at me like I'm crazy.
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Speaker 2: I mean, I think that's a really good, good point.
14:37
Speaker 2: And I don't think people talking off about the psychological
14:41
Speaker 2: difficulties of actually spending your money like we do certainly
14:46
Speaker 2: in business and the pestal finance journalism business. The thing
14:51
Speaker 2: we worry about mostly is making sure that people have
14:54
Speaker 2: enough or that they're saving. And the pensions industry over
14:57
Speaker 2: here is always saying you should be saving the x
14:59
Speaker 2: amount of your every single month from the day you're born, basically,
15:03
Speaker 2: but this challenge of decumulation, how do you get over
15:08
Speaker 2: so just thinking about it as an income, but also
15:12
Speaker 2: how do you get over the huddle of saying, Okay,
15:15
Speaker 2: that's that's me. I'm going to step back gradually. If
15:20
Speaker 2: you get any thoughts or any strategies for thinking about that,
15:23
Speaker 2: say the retirement puzzle.
15:26
Speaker 1: Yeah, well, I mean it works pretty well in Chile
15:28
Speaker 1: because it's conditioned from day one that this is income
15:32
Speaker 1: and you're going to neudize this or are you going
15:34
Speaker 1: to take these phase withdrawals from the government. So I
15:37
Speaker 1: mean when people had to find benefit pensions, they weren't looking.
15:40
Speaker 1: You know. I think a lot of people don't realize, like,
15:41
Speaker 1: if you may get like whatever, thirty, forty, even sixty
15:44
Speaker 1: percent of your salary every year until you die, that's
15:47
Speaker 1: worth millions of dollars. But people don't think, oh, this
15:51
Speaker 1: asset is worth millions of dollars. They're thinking, I get
15:53
Speaker 1: sixty percent of my salary every year. So you have
15:56
Speaker 1: to condition people to think that way from day one,
15:58
Speaker 1: and Chili does that pretty well well. You know. In
16:01
Speaker 1: some ways I look at the UK as a disappointment
16:03
Speaker 1: because you used to require people to anutize part of
16:07
Speaker 1: your retirement in savings, but it was so unpopular they
16:10
Speaker 1: had to get rid of it. Now, that might be
16:13
Speaker 1: because interest rates were so low then annuities were super expensive,
16:16
Speaker 1: or it could have just been poor marketing, but.
16:19
Speaker 2: I think it was a sense that there was poor
16:21
Speaker 2: value and I think the thing it would be fair
16:23
Speaker 2: to say the annuities market was not as competitive as
16:28
Speaker 2: it should have been.
16:31
Speaker 1: Why do you think that is?
16:32
Speaker 2: What was I think at the time. I mean, because
16:34
Speaker 2: this all changed in two thousand and six. At first,
16:38
Speaker 2: thing it was two thousand and six, and then it
16:39
Speaker 2: became steadily easier to not innuitize as well, because at
16:43
Speaker 2: first it was you were allowed to not inutize as
16:45
Speaker 2: long as you're a certain amount of money, and then
16:49
Speaker 2: that was basically completely done away where I think it
16:51
Speaker 2: was about ten years ago under George Osborne. And you're right,
16:54
Speaker 2: during the Osborne you know, it was because interest rates
16:56
Speaker 2: were extremely low and so annuities looked like poor value.
17:01
Speaker 2: But I think before that it was basically just because
17:04
Speaker 2: the financial industry was much less competitive, fees were much higher,
17:12
Speaker 2: you know, there was a general it was, and also
17:14
Speaker 2: it was still quite hard to kind of comparison shop.
17:17
Speaker 2: I think that would be different now, and maybe you're right,
17:20
Speaker 2: maybe if we did still have compulsory and utization, the
17:24
Speaker 2: nuities market would be much better and better run. So
17:27
Speaker 2: that's an interesting one.
17:28
Speaker 1: Because you used to have that website that could comparison shop.
17:31
Speaker 1: It was around like twenty ten ish. I love that
17:34
Speaker 1: website because I'm just a nerd for a newity prices.
17:38
Speaker 1: But I guess it just didn't take off, maybe because
17:40
Speaker 1: you couldn't click through and buy in a new idea
17:41
Speaker 1: or to go back. Maybe it wasn't accurate, do you
17:43
Speaker 1: know what.
17:43
Speaker 2: The other reason was that a lot of people were
17:45
Speaker 2: tied to a provider, or they thought they were tied
17:48
Speaker 2: to a provider. It's basically it was basically just the
17:50
Speaker 2: usual sort of like financial industry comms thing where because
17:55
Speaker 2: partly because consumers were unsophisticated, if you like, they would
17:59
Speaker 2: just say do they get a letter from the pension
18:01
Speaker 2: provider saying this is the annuity we can offer you,
18:05
Speaker 2: and they would just tick the box and say, oh fine,
18:07
Speaker 2: and it would turn out that they'd got something that
18:09
Speaker 2: you know, was basically maybe could even be as much
18:11
Speaker 2: as a percentage point less than they would have got elsewhere.
18:15
Speaker 2: And then obviously there was a kind of bit of
18:17
Speaker 2: a campaign, certainly from writers like us, saying, look, make
18:20
Speaker 2: sure you shop her own, because if you're in l health,
18:23
Speaker 2: or even if you're in good health, you don't have
18:26
Speaker 2: to buy your annuity from your provider. Although it was
18:29
Speaker 2: basically a lack of knowledge and a lack of sophistication,
18:32
Speaker 2: and you're I think that could be overcome, especially now,
18:36
Speaker 2: I think consumers are a lot more savvy about financial
18:39
Speaker 2: products in general and kind of shopping around. So actually, yeah,
18:43
Speaker 2: maybe it would be different now.
18:45
Speaker 1: Yeah, and it's with the higher rates and also just
18:47
Speaker 1: more people retire. I mean, even like ten to fifteen
18:51
Speaker 1: years ago, you know, defind contribution plans were still relatively
18:54
Speaker 1: new here, let alone the UK, so people didn't have
18:58
Speaker 1: the same significant assets like I just saw Torston slock
19:03
Speaker 1: daily whatever. It was always wonderful showing that one of
19:09
Speaker 1: the big drivers for private credit is that the newty
19:12
Speaker 1: market is growing so fast, which was exciting news for me.
19:16
Speaker 1: So it could be as well now that we have boomers,
19:19
Speaker 1: you know, uh four one k's really took off, say
19:22
Speaker 1: late eighties, early nineties in America, a little later in
19:24
Speaker 1: the UK. So you have the first generation retiring significant
19:28
Speaker 1: assets in this who are also facing a higher rate environment.
19:31
Speaker 1: So maybe that's also spurring demand.
19:33
Speaker 2: That's interesting. So they are now utizing by choice basically
19:38
Speaker 2: of increasingly, Yeah, it's here, Yeah, it's when it's compulsory,
19:44
Speaker 2: it's does that sense that you're getting ripped off in
19:47
Speaker 2: some way? And I think a lot of people also that.
19:50
Speaker 2: You know, there's always an example of someone who innuitized
19:52
Speaker 2: and then they died the next day, and you know,
19:55
Speaker 2: their whole pension pot is gone or recently perceived as that.
19:58
Speaker 2: So I think that was the least the annuities kind
20:01
Speaker 2: of got a bad name over here to an extent.
20:04
Speaker 2: I think you can still do draw down, which is
20:07
Speaker 2: the same sort of thing, but you're rate that does
20:10
Speaker 2: I get your point about who that doesn't push people
20:13
Speaker 2: to think about it as an income so much as
20:15
Speaker 2: a pot that they are taking stuff out of.
20:18
Speaker 1: Yeah, in Chile, you can do a phrase draw down,
20:21
Speaker 1: but you see that you get more money from annuitizing,
20:24
Speaker 1: and there's the lump sum options are just so much less.
20:28
Speaker 1: And you know, there's great, you know, sort of consumer
20:32
Speaker 1: education around annuities as well, so people start sort of
20:35
Speaker 1: looking into annudies even in their fifties and sort of
20:37
Speaker 1: comparison shopping, maybe locking in early for good prices. And
20:41
Speaker 1: it's just people. I mean, there's a lot of problems
20:44
Speaker 1: and pushbacks certainly with the Chilean pension system, but the
20:47
Speaker 1: accumulation I think they have the best solution compared to anyone.
20:50
Speaker 2: Absolutely interesting. Okay, so we should be looking to Chili
20:53
Speaker 2: for a pension solution. That sounds good. Sometimes getting to
21:06
Speaker 2: ask you about was this kind of goes back to
21:09
Speaker 2: what we were talking about before. Something people get frustrated
21:12
Speaker 2: about and that we constantly talk about in the UK
21:14
Speaker 2: is the lack of risk appetite on the part of
21:17
Speaker 2: the private investors, or the perceived lack and how nobody
21:21
Speaker 2: owns individual equities and by comparison the US kind of
21:26
Speaker 2: like lots of people owned stocks, you know, you're kind
21:29
Speaker 2: of average investor owned stocks. Is that evidence a more
21:35
Speaker 2: risk taking mentality? Do you think or does that just
21:37
Speaker 2: because us kind of save us understand the market better.
21:42
Speaker 1: Well, I don't know, if you're buying individual stocks if
21:44
Speaker 1: you understand the market better, you know. I was a
21:50
Speaker 1: disciple of Bubmerton, of you know, black Sholes, and he
21:53
Speaker 1: used to always say that people should be forbidden from
21:56
Speaker 1: buying individual stocks. He's like, he's like buying a spark
21:58
Speaker 1: club from a car. If it's not part of a
22:00
Speaker 1: larger riskport for risk strategy, it's useless. So I don't know.
22:05
Speaker 1: I mean, it's sort of another counterintuitive thing about my
22:08
Speaker 1: book is arguing we're not taking enough risk when we
22:10
Speaker 1: also see young people in America certainly taking like enormous risks,
22:15
Speaker 1: like strange risks, like getting really into sports, gambling, day trading,
22:19
Speaker 1: all these sorts of things, and you know, sort of
22:21
Speaker 1: these more sort of zero sum risks that have a
22:24
Speaker 1: very low probability of paying off. Although I think that's
22:26
Speaker 1: a symptom of lack of productive risk taking in their life.
22:29
Speaker 2: Yeah, yeah, the financial nihilism thing.
22:33
Speaker 1: Yeah exactly. So, I mean what you do see in Europe,
22:37
Speaker 1: less the UK, but certainly like in Germany, it is
22:41
Speaker 1: just sort of a discomfort with any set of downside risk.
22:44
Speaker 1: I once try to set up a defined contribution plan
22:47
Speaker 1: in Germany and just they insisted that to being ninety
22:49
Speaker 1: percent in German bunds because they're just like, well, if
22:52
Speaker 1: it's in the stock market, it could go down. And
22:54
Speaker 1: it's like, well, yeah, I mean that's why you get more.
22:57
Speaker 1: Most of the time, they're nuts. I mean yeah, you know.
23:02
Speaker 1: And honestly, if you look at these dB plans in Germany,
23:04
Speaker 1: they're still mostly in buns. They like their buns. Well,
23:10
Speaker 1: you know, there's nothing wrong with being risk averse, particularly
23:14
Speaker 1: if it's a cultural choice. The problem is that I
23:18
Speaker 1: think where people go wrong with it is that they
23:21
Speaker 1: think they're going to get something for nothing. They think
23:23
Speaker 1: they can take low risk and still get more. And
23:27
Speaker 1: it's an amazing thing to me, this cognitive dissonance, because like, honestly,
23:31
Speaker 1: like really successful, knowledgeable people in finance also make this mistake.
23:36
Speaker 1: It's like why people went with Bernie Madoff. They're like, yes,
23:38
Speaker 1: you can get seven percent or more every single every
23:42
Speaker 1: single year in them and never and will never underperform.
23:46
Speaker 1: It's like no, like that is a sign that you're
23:48
Speaker 1: being defrauded. Like if someone says they can beat the
23:51
Speaker 1: market and that you will never lose money like that's
23:54
Speaker 1: a sign you're being defrauded. There is no excess return
23:57
Speaker 1: without taking risk, so I think we've all liked to
24:01
Speaker 1: believe that's not true. Or again, if we play it safe,
24:04
Speaker 1: we're going to get more.
24:06
Speaker 2: So.
24:08
Speaker 1: The fact is that you can live a low risk life,
24:10
Speaker 1: but you need a lot more money to do it.
24:12
Speaker 1: And I think this is what Europe is certainly having
24:15
Speaker 1: to come to terms with, is we want this very
24:17
Speaker 1: so of low risk economy where everything's protected and we
24:19
Speaker 1: don't invest in equity, or at least individuals don't. Yet
24:22
Speaker 1: we also want to be able to pay for all
24:25
Speaker 1: this stuff, and I think the math just doesn't work.
24:28
Speaker 2: Again, I think this is fascinating, the the way that
24:32
Speaker 2: we are kind of cultural issuhoes sort of reflect each other,
24:35
Speaker 2: but just with this slightly shifted kind of perspective. Because
24:39
Speaker 2: a piece I thought it was really interesting you wrote
24:41
Speaker 2: recently was your piece about housing in the uns and
24:45
Speaker 2: this idea of house's no longer being this kind of
24:48
Speaker 2: pot of gold or the main financial aim. Get talk
24:51
Speaker 2: a bit about why you think that's changed and what's
24:55
Speaker 2: happened there.
24:56
Speaker 1: Well, you know, housing. You know, still you know it's
24:59
Speaker 1: not guarantee, because nothing is, certainly in America. And I
25:02
Speaker 1: think I compared the US stock market to Nantucket Island,
25:06
Speaker 1: which is this small, fancy island where like Eric Schmidt
25:08
Speaker 1: owns a compound and you know, it's limited housing stock,
25:12
Speaker 1: and so it is probably one of the hottest and
25:13
Speaker 1: most ridiculous housing markets in America. And that a five
25:16
Speaker 1: hundred thousand dollars house now costs four million dollars over
25:20
Speaker 1: thirty years. But what's stunning is it's like you still
25:24
Speaker 1: would have done much better if you just invested in
25:25
Speaker 1: the stock market. And I think that's less about the
25:29
Speaker 1: fact that housing doesn't pay off like it used to.
25:31
Speaker 1: It still pays off, probably more than it used to.
25:33
Speaker 1: It's just the stock market's crazy. I mean, it's just
25:36
Speaker 1: been crazy how much the stock market has gone up
25:39
Speaker 1: like that you could have invested, was it. I've said,
25:42
Speaker 1: five hundred thousand dollars in nineteen ninety five you out
25:44
Speaker 1: of eight point two million, and that's not including investing dividends.
25:47
Speaker 1: That's that's crazy. I'm not saying it's wrong. I'm just
25:52
Speaker 1: saying like it's it's it's stunning and.
25:55
Speaker 2: Do you think, Because what I do think is do
25:57
Speaker 2: you think that it's actually had in the effect or
25:59
Speaker 2: in people's behavior, because I think, like, again, going back
26:03
Speaker 2: to the UK, obviously, houses have been something that have
26:07
Speaker 2: been a kind of obsession, often seen as the main
26:11
Speaker 2: asset to own, but prices in the UK have now
26:14
Speaker 2: been stagnant for about ten years. If you look at
26:17
Speaker 2: it in real terms, and I think there's a thing,
26:20
Speaker 2: there's now starting to be a slight sense that well,
26:24
Speaker 2: maybe this isn't a sure thing, and maybe it isn't
26:27
Speaker 2: this kind of, you know, the one financial focus of
26:31
Speaker 2: our lives. But it's a very slow process and I
26:33
Speaker 2: wouldn't necessarily say that people are then thinking, well I
26:36
Speaker 2: should be sticking my money in stocks instead. But is
26:39
Speaker 2: this something you're kind of seeing from younger people in
26:42
Speaker 2: the US.
26:43
Speaker 1: We are part of it is the nihilism of houses
26:45
Speaker 1: are just so expensive and mortgage rates are higher than
26:47
Speaker 1: people are used to. I can't afford it anyway, doesnt agree?
26:49
Speaker 1: I've always thought home ownership is overrated. Again, it is
26:53
Speaker 1: a very sort of concentrated, highly leveraged bit in a
26:56
Speaker 1: single asset, especially if you're young. I don't understand the
26:59
Speaker 1: fit iszation people have here of owning a home whenn
27:02
Speaker 1: they're twenty five. I mean, I certainly didn't. You know,
27:04
Speaker 1: you want to be mobile, you want to be free.
27:06
Speaker 1: Your life's going to probably go through changes, you know.
27:09
Speaker 1: I don't understand why it's a dream young. But on
27:12
Speaker 1: the other hand, there is obviously something lost. I mean,
27:16
Speaker 1: I feel like I was going back and forth with
27:18
Speaker 1: my editor about this when we wrote the story of Well,
27:22
Speaker 1: you know before there was something innately human about this
27:26
Speaker 1: desire to own land, to own a piece of your country.
27:30
Speaker 1: And it's just more and more of our lives are
27:33
Speaker 1: becoming intangible. And if your wealth is in the stock market,
27:37
Speaker 1: I mean to me, that represents the best you know,
27:39
Speaker 1: companies in your country or in the world, and that's wonderful,
27:42
Speaker 1: but it is something intangible about it. You can't like
27:45
Speaker 1: renovate your stock like you can in a kitchen. You
27:48
Speaker 1: don't like look at your country and be like, I
27:50
Speaker 1: own a piece of this. It makes sense, it's a
27:53
Speaker 1: more better financial bet. I didn't own a I didn't
27:56
Speaker 1: own my I was in a homeowner intel I was
27:57
Speaker 1: in my forties. So I mean, you know, because I
28:00
Speaker 1: just always never understood why I would want that, and
28:03
Speaker 1: I saw financial markets as a better bet, and to
28:06
Speaker 1: be honest, they were. But now that I am a homeowner,
28:09
Speaker 1: I got to say, I do feel much more connected.
28:11
Speaker 1: I much feel much more at home, and there is
28:15
Speaker 1: something good about it. But I think people when they
28:17
Speaker 1: were sort of misled, saw, oh, I can have that connection,
28:21
Speaker 1: I can have that sort of physical ownership, and I'm
28:23
Speaker 1: going to make all that money. And you know you
28:25
Speaker 1: don't get that. I don't have any illusion God knows
28:28
Speaker 1: what the future of New York is that I'm going
28:30
Speaker 1: to make money off this home. But I do like one.
28:33
Speaker 1: I've locked in my house and costs, and I do
28:34
Speaker 1: like feeling that sense of community and ownership of my community.
28:38
Speaker 2: Well, it's impost to the point you do have to
28:40
Speaker 2: live somewhere, So that's true. Is a gap as well
28:44
Speaker 2: between I mean, I actually agree me and a lot
28:48
Speaker 2: of ways. I was never particularly attracted to home ownership
28:50
Speaker 2: when I was younger, but it is that thing once
28:54
Speaker 2: she particularly if you end up settling down and having
28:57
Speaker 2: her family. The tenure security, as much as anything else,
29:01
Speaker 2: is one of the kind of helpful things, and that
29:03
Speaker 2: you don't want to constantly move around but then that
29:06
Speaker 2: maybe actually talks to an element that the risk a
29:08
Speaker 2: version between here in the US, this idea that there
29:12
Speaker 2: is somewhere that you settle for a very prolonged period
29:15
Speaker 2: that I impossibly forever, whenever you're you know, when you're
29:18
Speaker 2: self teaser or whatever. So maybe it's just that, maybe
29:21
Speaker 2: it's just the kind of relative lack of labor mobility.
29:26
Speaker 1: It's part of it. I mean, Americans used to be
29:28
Speaker 1: very different in that they moved a lot. We really
29:32
Speaker 1: don't as much now. I think that's part of our
29:34
Speaker 1: changing risk relationship, because it's not like ownership has increased
29:37
Speaker 1: over the young, but people are still less likely to move.
29:40
Speaker 1: So in that way, we're definitely becoming a more parochial
29:44
Speaker 1: or in some ways as a more European. This is it,
29:47
Speaker 1: which in some ways as odd because it's not like
29:49
Speaker 1: people are tied to anything or sort of even evidence
29:52
Speaker 1: shows people aucting to move, even they can move somewhere
29:54
Speaker 1: where housing costs are cheaper. Yeah, it's like I think
29:58
Speaker 1: I think people are sort of more wanting to stay
30:01
Speaker 1: with what they know.
30:02
Speaker 2: I suppose it's the hassle factor as well, and so
30:04
Speaker 2: you don't want to Is that the theath of moving.
30:08
Speaker 2: That is interesting because I do wonder if maybe all
30:11
Speaker 2: of this is a contradance signal and maybe how residential
30:13
Speaker 2: housing will become attractive again. But you never know. As
30:18
Speaker 2: soon as you're you're here, and then you are an economists.
30:22
Speaker 2: The big topic of the day is AI and the
30:26
Speaker 2: impact on jobs. And your most recent piece was a
30:30
Speaker 2: piece about kids in the fourth grade, which I believe
30:33
Speaker 2: is like ten year olds stay and talking about how
30:37
Speaker 2: AI is going to take all the jobs, and so
30:40
Speaker 2: they're worried about it. I thought this sounds terrible. It is.
30:45
Speaker 1: I just met a fourth grade teacher and you know,
30:47
Speaker 1: when you're in fourth grade, you always have these like
30:48
Speaker 1: lofty ideas of what you're going to do. And she
30:50
Speaker 1: was like, she hears from her students all the time
30:53
Speaker 1: that they're really worried there won't be jobs. And you know,
30:56
Speaker 1: I understand why they said that, because they hear that
30:57
Speaker 1: all the time. We say this all the time, And
31:00
Speaker 1: it didn't occur to me until then that like your
31:02
Speaker 1: child and you're figuring out what you're going to do,
31:04
Speaker 1: and you know this is going to weigh on you.
31:06
Speaker 1: I mean they hear this too.
31:09
Speaker 2: I mean, what do you think of the THEI jobs issue,
31:13
Speaker 2: because I can't quite work out whether or not I
31:18
Speaker 2: think this is just a lot of hysteria and it's
31:21
Speaker 2: going to be like the Internet, where it just basically
31:24
Speaker 2: created new jobs and can opt under few industries, or
31:28
Speaker 2: if it is going to be more like the Industrial Revolution,
31:30
Speaker 2: where okay, it was fine in the end, but those
31:32
Speaker 2: about a century of misery for the group of people
31:35
Speaker 2: who were in that transition. So I'm curious to see
31:38
Speaker 2: you think which was should take.
31:40
Speaker 1: Well, we just don't know. I mean, I tend to be,
31:44
Speaker 1: as I mentioned, I did my undergrad in Scotland where
31:47
Speaker 1: a big part of your economics training is reading a
31:50
Speaker 1: lot of the history of the Industrial Revolution, which really
31:53
Speaker 1: for me was foundational as an economist of how I
31:55
Speaker 1: think about growth, how I think about transitions, how I
31:58
Speaker 1: think about technology. So I tend to be more of
32:01
Speaker 1: that school of you know, humans are good at finding
32:04
Speaker 1: jobs for themselves. I don't. I mean, again, no one
32:06
Speaker 1: knows for certain. I don't believe personally that we're going
32:10
Speaker 1: to have this sort of jobless future, although I am
32:13
Speaker 1: open that to the idea that as we did an
32:15
Speaker 1: industrial evolution, it might be a rocky transition. And some
32:18
Speaker 1: of that transition during the industrial evolution was because people
32:21
Speaker 1: were reluctant to embrace the change. You know, for like decades,
32:27
Speaker 1: factories hired women and children because these men who had
32:30
Speaker 1: been sort of displaced from being maybe a small scout
32:33
Speaker 1: artisan or a farm labor just didn't want to work
32:36
Speaker 1: in a factory. And I'm not like factories then were
32:39
Speaker 1: pleasant places, but it's not like their other jobs are
32:42
Speaker 1: that great either, but they just it was this concept
32:45
Speaker 1: that you had to go somewhere all day and like
32:48
Speaker 1: be told what to do by someone you weren't even
32:50
Speaker 1: related to, and not be able to leave when you want.
32:52
Speaker 1: It was just like awful, you know. I mean, we
32:55
Speaker 1: do what we all do it now, but at the
32:56
Speaker 1: time I felt, this is why I work from home,
32:59
Speaker 1: is so attracted to be, well, it's a more natural
33:00
Speaker 1: way to be. It's just like, that's crazy, I'm not going.
33:04
Speaker 2: To do that personal craft that we've gone back to.
33:07
Speaker 1: Yes, Yeah, so the transition was longer and more painful
33:12
Speaker 1: than it could have been, and I'm not minimizing it.
33:15
Speaker 1: I'd be really happy, unhappy if AI sort of wiped
33:18
Speaker 1: out economist jobs. I wouldn't be like, well, okay, I
33:20
Speaker 1: guess now I'll be a home healthcare worker. Like I'd
33:23
Speaker 1: be really upset too. I don't want to minimize how
33:25
Speaker 1: hard that is, but it also if people are unwilling
33:29
Speaker 1: to adapt, it certainly does prolong the change. But I
33:33
Speaker 1: do think we're going to end up somewhere better. I
33:36
Speaker 1: mean people are saying AI is different because it does
33:38
Speaker 1: things humans couldn't do. I mean, like a power loom.
33:41
Speaker 1: People thought the same thing of that, like the to
33:43
Speaker 1: them it was incomprehensible. Machine could do this thing that
33:46
Speaker 1: humans have been doing for thousands of years. So you know,
33:51
Speaker 1: I personally just find my own work with AI, like
33:54
Speaker 1: it's a helpful tool, but I don't see it doing
33:56
Speaker 1: what I can do. I think part of the confusion
33:58
Speaker 1: is the AI CEOs themselves aren't helping matters, And well,
34:06
Speaker 1: I think where they're I see where they're coming from,
34:08
Speaker 1: which is they're engineers, and so they observe a job
34:13
Speaker 1: and they see the output from that job, and they're like,
34:16
Speaker 1: a machine could do that job, therefore that job won't exist.
34:19
Speaker 1: But really, like anyone who's actually say, had a job
34:21
Speaker 1: and is a little like on the spectrumy engineer guy,
34:25
Speaker 1: understand there's all these parts of your job that are
34:28
Speaker 1: more than the sort of narrow output that can be observed.
34:32
Speaker 1: Like even if I write a column, like I guess a,
34:35
Speaker 1: I could write a column, but what makes a column
34:38
Speaker 1: interesting is the idea behind it, and the idea has
34:43
Speaker 1: to be novel, it has to be interesting. A I
34:47
Speaker 1: can only look at sort of existing data and sort
34:49
Speaker 1: of project something, it doesn't have that novelty. Or if
34:54
Speaker 1: I write a column and I talk about like something
34:56
Speaker 1: personal in my life, like it's not meaningful coming from that.
34:59
Speaker 1: There's also all the promotion. It's about connecting with people,
35:02
Speaker 1: it's about building community around that. And so it's like
35:05
Speaker 1: you could you could observe a column and say A,
35:07
Speaker 1: I could have written that, but they really couldn't have
35:09
Speaker 1: or it couldn't have really it probably could have done
35:11
Speaker 1: maybe thirty percent of my job, but not the whole job.
35:14
Speaker 1: And that's true of most jobs. If you think about
35:16
Speaker 1: how you actually spend your time or it makes you
35:19
Speaker 1: good at what you do, it isn't just the narrow output.
35:21
Speaker 1: It's a million other things. There's a European economist there's
35:25
Speaker 1: a book coming out called Messy Jobs. Which is like
35:27
Speaker 1: jobs are bundles of tasks and not all of them
35:30
Speaker 1: can be observed.
35:31
Speaker 2: Yeah, and there's a lot of friction within jobs that
35:34
Speaker 2: needs to be overcome, and I think they, as you say,
35:38
Speaker 2: the engineering model kind of tends to assume away the friction.
35:43
Speaker 2: There's not necessarily bad. Friction is just you know, getting
35:46
Speaker 2: for me to be walking to this place to get
35:48
Speaker 2: that and the old it is to that sort of stuff. Well,
35:50
Speaker 2: that makes a lot of sense.
35:52
Speaker 1: Yeah, or like HR, it's one big job that exists
35:56
Speaker 1: to create fiction in the workplace. But like you need HR,
35:59
Speaker 1: like I mean, I mean, I don't like watching those
36:02
Speaker 1: videos either, But like you know, it was my time
36:04
Speaker 1: and it's a friction in my life. But you know what,
36:05
Speaker 1: like enforcing workplace norms and codes of behavior are really important.
36:11
Speaker 1: It's a friction, but it's also a good friction.
36:13
Speaker 2: Yes, yes, I'm sure. Well let me think about that one.
36:19
Speaker 2: Oh that off the record. Well, look, thanks for much House.
36:23
Speaker 2: I really appreciate your time. There was a couple of
36:25
Speaker 2: final questions I wanted to put to you. One was
36:29
Speaker 2: if you had a magic wand and you could put
36:33
Speaker 2: in place one retirement policy or put a thought in
36:37
Speaker 2: the people's brains about this sort of thing. What would
36:42
Speaker 2: it be.
36:43
Speaker 1: From day one? People would be seeing their retirement and
36:45
Speaker 1: income and it would be very hard to see their wealth,
36:48
Speaker 1: their their asset balance.
36:50
Speaker 2: So basically go down the chili route.
36:52
Speaker 1: Yeah, that sounds good.
36:55
Speaker 2: Finally, what are you're eating just now and would you
36:57
Speaker 2: recommend it?
36:59
Speaker 1: I'm trying to get through a biography of Charles Degall.
37:02
Speaker 1: I was just in France and I was well regarded
37:05
Speaker 1: as story and insisted I read this book and have
37:07
Speaker 1: changed my life. And I haven't gotten through much of
37:10
Speaker 1: it yet, but it's my summer aspiration.
37:13
Speaker 2: Are you feeling any creeping changes yet?
37:16
Speaker 1: No? No, no, but I've only gotten through twenty pages.
37:21
Speaker 2: Well, thanks a little else, and really appreciate your time.
37:24
Speaker 2: It was lovely me lovely speak to you, and I'm
37:27
Speaker 2: sure we'll have you on again in the future.
37:28
Speaker 1: I'd love that. Thanks for having me bank.
37:35
Speaker 2: Thanks for listening to this week's Merden Talked Money. If
37:38
Speaker 2: you like a show, rate review and subscribe wherever you
37:40
Speaker 2: listen to podcasts, and keep sending questions or comments to
37:44
Speaker 2: Merton Money at Bloomberg dot net. You can also follow
37:47
Speaker 2: me on Twitter at join Underscore Stepek, where you can
37:51
Speaker 2: follow Merien at merin s w and. This episode was
37:55
Speaker 2: hosted by me Joint Stepic. It was produced by Summer
37:58
Speaker 2: Sadie and Moses and Dam. Sound designed by Black Naples
38:02
Speaker 2: and a very special thanks to Alison Schreeger