Latest / Masters in Business / Special Edition: Nobel Prize Winner Richard Thaler Live from the Economic Club of New York

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Special Edition: Nobel Prize Winner Richard Thaler Live from the Economic Club of New York · Masters in Business

0:02
Speaker 1: Bloomberg Audio Studios, Podcasts, radio news. This is Masters in
0:11
Speaker 1: Business with Barry Ritholts on Bloomberg Radio.
0:16
Speaker 2: Hey, it's a bonus Masters in Business Live. One of
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Speaker 2: my favorite economists, Richard Taylor and his colleague at the
0:26
Speaker 2: Booth School of Business, Alex Emos, We're going to give
0:30
Speaker 2: a presentation at the New York Economic Club. And they said, Hey,
0:35
Speaker 2: why don't we make this a live conversation and literally said, hey,
0:40
Speaker 2: how do you feel about being our intolocutor And any
0:46
Speaker 2: opportunity I have to spend time with Taylor, I jump
0:49
Speaker 2: at So sure, let's do that. And so a few
0:53
Speaker 2: weeks ago I sat down with Professor Richard Thaylor and
0:57
Speaker 2: Professor Alex Emos, both of the Booth School of Business
1:02
Speaker 2: at the University of Chicago, live at the New York
1:05
Speaker 2: Economic Club, talking about their new version of the book,
1:11
Speaker 2: The Winner's Curse. It was about thirty forty minutes of conversation.
1:15
Speaker 2: We had some questions from the audience. It was fabulous.
1:19
Speaker 2: In fact, it was so good. We're going to have
1:21
Speaker 2: them back in the studio for a full Masters in Business,
1:26
Speaker 2: which is now already recorded. It won't be out for
1:30
Speaker 2: a couple of weeks, but in the meantime, to give
1:33
Speaker 2: you a taste of what that full interview is like,
1:36
Speaker 2: here is our live Masters in Business conversation at the
1:41
Speaker 2: New York Economic Club. I'm kind of fascinated by not
1:49
Speaker 2: only this book, but Richard's entire history, and a lot
1:55
Speaker 2: of what I know about him really came to the
2:00
Speaker 2: public eye through the Anomalies columns that began so long ago.
2:06
Speaker 2: Tell us a little bit about the genesis of what
2:10
Speaker 2: the Anomalies columns were and how that led to this book.
2:15
Speaker 3: Sure, so, about nineteen eighty six, somebody at the American
2:23
Speaker 3: Economics Association decided it would be a good idea to
2:26
Speaker 3: start a new journal in which the articles would be
2:31
Speaker 3: accessible to at least all economists and grad students and
2:37
Speaker 3: even undergrads, because articles have become more and more specialized.
2:43
Speaker 3: So that was the idea. I had a friend. I
2:47
Speaker 3: have a friend named hal Varian who has been the
2:52
Speaker 3: chief economist at Google. He was a mere professor at
2:56
Speaker 3: the time and on the advisory board of this journal,
3:00
Speaker 3: and they were planning some pieces that would appear in
3:03
Speaker 3: every issue, which is once a quarter, and Hall and
3:07
Speaker 3: I cooked up the idea of having a feature on anomalies.
3:13
Speaker 3: So what's an anomaly in economics? An anomaly is something
3:19
Speaker 3: that cannot easily be explained using the standard assumptions that
3:26
Speaker 3: people are really smart, unemotional, selfish, no self control problems,
3:36
Speaker 3: basically not like anybody you know. And so as a
3:43
Speaker 3: result of that, there were lots of anomalies. And I
3:46
Speaker 3: did this for almost four years. When it looked like
3:54
Speaker 3: a pile of them looked like a book, I stapled
3:57
Speaker 3: them together and that was the original version of The
4:01
Speaker 3: Winner's Curse, published in nineteen ninety two.
4:06
Speaker 2: So the book comes out in ninety two. I was curious,
4:09
Speaker 2: how was it received by traditional economists. You're challenging core
4:16
Speaker 2: thesis that they deeply believe in, and did the lay
4:20
Speaker 2: public take any interest in us?
4:22
Speaker 3: So, you know, I'm very good friends with Steve Levitt
4:26
Speaker 3: and Stephen Dubner. They basically invented a best selling economics book.
4:34
Speaker 3: Before Freakonomics, there was no such a thing. So this
4:37
Speaker 3: is pre pre freeconomics. It was read, but the profession
4:45
Speaker 3: had read the articles in the journal, and the book
4:51
Speaker 3: was an attempt to reach out. But you know, I've
4:56
Speaker 3: often said that, you know, I'm a professional heretic and troublemaker,
5:02
Speaker 3: and I say, I didn't change anybody's mind over the
5:07
Speaker 3: course of my career, and after realizing that, I decided
5:13
Speaker 3: instead to have a strategy of corrupting the youth. And Alex, so, yeah,
5:24
Speaker 3: I'll let Alex tell his version of the story. But
5:29
Speaker 3: you know, the book sold better than expected and was around.
5:35
Speaker 3: It was still in print, but for various boring reasons,
5:43
Speaker 3: it was going to go out of print, and the
5:45
Speaker 3: publisher asked me if I wanted to freshen it up,
5:50
Speaker 3: and that turned into a well we first talked about
5:55
Speaker 3: that five years ago, so you can see how long
5:58
Speaker 3: it took. But that's that's the story of the book.
6:04
Speaker 2: So, Alex, how did you get corrupted by doctor Thaylor?
6:09
Speaker 4: I didn't need much much pushing, so I was.
6:12
Speaker 5: I was a neuroscience undergrad major, so I was already
6:16
Speaker 5: kind of interested in, you know, how human minds actually worked.
6:20
Speaker 5: I took a bunch of abnormal psychology and things like that,
6:23
Speaker 5: but science like STEM classes were really really hard, and
6:27
Speaker 5: so I took economics as kind of a way to
6:28
Speaker 5: boost my GPA. So and I thought it was fun
6:34
Speaker 5: that the algebra was interesting, and but I didn't, you know,
6:38
Speaker 5: I didn't think of much of it. And then at
6:41
Speaker 5: some point I was like, I was moving and I
6:43
Speaker 5: was a planing of medical school. By the way, I
6:44
Speaker 5: was pre med, good immigrant kid, and I was I
6:49
Speaker 5: was driving cross country and I was listening to the
6:52
Speaker 5: radio and Richard was on the radio.
6:55
Speaker 4: This was two thousand and eight. I had no idea
6:57
Speaker 4: who Richard was. I didn't know what nudge was.
6:59
Speaker 5: He was on on NPR talking about NUDGE and it
7:02
Speaker 5: was about about this field called behavioral economics that I've
7:05
Speaker 5: never heard about before. And I was like, wait, I
7:07
Speaker 5: could take this and combine it with that, and that's amazing.
7:12
Speaker 5: I got to Los Angeles, went online, applied to em
7:15
Speaker 5: PhD programs right away, didn't end up going to medical school,
7:19
Speaker 5: and I ended up going to UC San Diego for
7:21
Speaker 5: my PhD.
7:23
Speaker 4: And lo and behold, Richard was not on the roster.
7:26
Speaker 5: But he spent his winters in San Diego in the
7:29
Speaker 5: office next to me.
7:32
Speaker 4: And you know, I would come out at first sight.
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Speaker 5: You corrupted me just way earlier, and so I was,
7:43
Speaker 5: you know, we started chatting.
7:44
Speaker 4: Then I got a job at Carnegie Mellon.
7:46
Speaker 5: Afterwards, we kept in touch and then I got a
7:49
Speaker 5: job offered at University of Chicago, and I think like
7:52
Speaker 5: I got there in July twenty twenty.
7:54
Speaker 4: I think within like a few months, you gave me.
7:56
Speaker 5: A call and say, hey, my publisher is asking I
7:59
Speaker 5: should freshen up the book, maybe to give it a
8:02
Speaker 5: new preface, but I want to do something a little
8:05
Speaker 5: bit more ambitious than that, and you know, we can
8:08
Speaker 5: play around with it, add some new things. It'll take
8:11
Speaker 5: about six months, easy, easy work.
8:13
Speaker 4: We get to hang out, and.
8:15
Speaker 5: I jumped at the opportunity, and then we kept talking
8:19
Speaker 5: and then it grew and grew and grew, and that
8:21
Speaker 5: book is about two thirds new content at this point.
8:24
Speaker 5: So it took five years of writing and going back
8:27
Speaker 5: and forth. And you know, there's been thirty years of
8:29
Speaker 5: research since nineteen ninety two, and so that's kind of
8:33
Speaker 5: the book. The original winner's courses in there a little
8:37
Speaker 5: bit rewritten and freshened up, but the thirty years of
8:40
Speaker 5: research are now in there too. So every single anomalies
8:44
Speaker 5: column there were new anomalies that were added to it that.
8:47
Speaker 4: Richard had written afterwards.
8:48
Speaker 5: But also every single chapter comes with an update basically
8:52
Speaker 5: reviewing everything that's happened in the last thirty years of behaviorly.
8:55
Speaker 2: So I'm going to circle back to the book in
8:57
Speaker 2: a moment. But for people who are UNFLI familiar with
9:00
Speaker 2: Alex this wasn't just a random kid next door. He
9:06
Speaker 2: wrote what could be one of the most cited finance
9:09
Speaker 2: papers of recent years, called I'm going to get this wrong,
9:14
Speaker 2: Selling fast and Buying Slow?
9:15
Speaker 3: Is that right?
9:17
Speaker 2: Selling fast and Buying Slow? It's a chapter in my
9:19
Speaker 2: book I've written about it, and you describe how professional
9:24
Speaker 2: fund managers are really really good buyers of stocks. What
9:28
Speaker 2: turns out they're terrible sellers of stock. Nobody had discussed
9:32
Speaker 2: this in this sort of detail, and that's one of
9:35
Speaker 2: the reasons that paper has become so highly regarded. But
9:39
Speaker 2: I just wanted the audience to be aware of who
9:43
Speaker 2: you were. Tell us what it was like working on
9:48
Speaker 2: the book with Richard.
9:50
Speaker 4: It was just a lot of fun.
9:51
Speaker 5: I mean, we would get on the phone and you know,
9:54
Speaker 5: why don't we talk about this topic.
9:58
Speaker 4: A lot of the research?
10:00
Speaker 5: You know, I kind of wrote, I took lead on
10:02
Speaker 5: the updates and we kind of went back and forth
10:04
Speaker 5: on them, and then it was you know, just a
10:08
Speaker 5: lot of a lot of conversations over the phone during
10:10
Speaker 5: COVID it was a lot of zoom. Then it moved
10:13
Speaker 5: on to you know, we were colleagues at the University
10:15
Speaker 5: of Chicago coffees, just kind of going back and forth
10:19
Speaker 5: on what should be included, what push, what where. A
10:23
Speaker 5: lot of it was about framing of where the field
10:25
Speaker 5: has come and where what we kind of found out.
10:30
Speaker 5: I don't think this was obvious when we first started
10:32
Speaker 5: the book, is that where the field has come is
10:34
Speaker 5: really gone from these lab experiments that were in the
10:36
Speaker 5: original columns in the Winner's Curse, where it was college students,
10:40
Speaker 5: low stakes, maybe not even any stakes at all. And
10:43
Speaker 5: the pushback from the economics profession was, look, we don't
10:46
Speaker 5: really care about students, We care about market participants.
10:49
Speaker 4: The updates are all about Look.
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Speaker 5: All of these anomalies, as you mentioned, replicate in some
10:54
Speaker 5: of the most sophisticated economic participants out there, such as
10:57
Speaker 5: institutional investors in the case of my paper.
11:00
Speaker 2: So there are some ideas in the book down in
11:04
Speaker 2: effect status quo biased Winners Curse that were or today
11:09
Speaker 2: are everyday vocabulary, but back then people really know about it.
11:16
Speaker 2: The whole book has aged fairly well. What do you
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Speaker 2: think about those original ideas, Richard, and how they present
11:24
Speaker 2: in the modern world.
11:26
Speaker 3: Well, I mean, the one of the one of the
11:31
Speaker 3: motivations for writing the book is the so called replication crisis.
11:37
Speaker 3: It's not really a crisis, but there's there has been
11:43
Speaker 3: several papers and several fields where the original experiments cannot
11:49
Speaker 3: be reproduced, and some of those papers are, let's say,
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Speaker 3: adjacent to behavioral economics, and I was worried that some
12:02
Speaker 3: of that bad aroma would rub off on us. And
12:10
Speaker 3: I think the reason why things replicate so well is
12:18
Speaker 3: when I was choosing what topics to write about, I
12:22
Speaker 3: was picking big stuff. I wasn't picking some little minor thing.
12:27
Speaker 3: I was picking something with a very big effect size
12:32
Speaker 3: and topics. There had already been several papers. So you know,
12:40
Speaker 3: it's not when we started this that we realized there
12:46
Speaker 3: really wouldn't be any problems. But we were pleasantly surprised
12:51
Speaker 3: not to find any anything in the attic, so.
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Speaker 2: To speak, nothing aged poorly. No, not really what has
13:03
Speaker 2: persisted or if anything, have become more widely accepted today.
13:08
Speaker 2: That was a pleasant surprise. Amongst the chapters in the book.
13:15
Speaker 5: WHOA the endowment effect now so you know, back then
13:20
Speaker 5: Bick in the ninety two book, it was about mugs
13:22
Speaker 5: and pens. So the endowment effect is this phenomenon where
13:25
Speaker 5: you know, buyers and sellers are in a market. The
13:29
Speaker 5: idea is that if you assign a good to a
13:31
Speaker 5: buyer seller. There's a theorem in economics that underlies Basically,
13:35
Speaker 5: it's one of the fundamental theorems in economics called the
13:38
Speaker 5: coast theorem. Basically, it means that it doesn't matter who's
13:40
Speaker 5: assigned property rights, there's going to be transactions where people
13:44
Speaker 5: the person who wants it the most or values are
13:46
Speaker 5: the most, that's going to end up with it. And
13:48
Speaker 5: what Richard showed in a paper with Jack Netch and
13:52
Speaker 5: Danny Kahneman is that basically, you know half, Let's say Barry,
13:57
Speaker 5: you are sitting in a classroom. I'm sitting in a
13:59
Speaker 5: class the professor gives me a mug and doesn't give
14:02
Speaker 5: you a mug. You have some money in your pocket,
14:03
Speaker 5: and he's asking what is the lowest amount that you
14:06
Speaker 5: would be willing to sell the mug? And he's asking you,
14:09
Speaker 5: is how what's the most you'd be willing to pay
14:11
Speaker 5: for the mug? Because it doesn't matter we were randomly assigned,
14:15
Speaker 5: we should have basically the same average valuation, but it
14:17
Speaker 5: turns out just because I own the mug, I start
14:20
Speaker 5: valuating it more. This is called the endowment effect, and
14:23
Speaker 5: what Richard and Danny and Jack showed is that it's
14:26
Speaker 5: about two and a half times more. So there's like
14:29
Speaker 5: a breakdown in the market because of this endowment effect.
14:32
Speaker 5: So what have we found? What has been documented thus far?
14:37
Speaker 5: There's a paper in the American Economic Review, the top
14:40
Speaker 5: journal in the profession, showing that there's an endowment effect
14:42
Speaker 5: for houses, and you can actually estimate exactly the amount
14:46
Speaker 5: of loss aversion that people have which drives them to post.
14:50
Speaker 5: If they own the house, they post the house at
14:53
Speaker 5: a higher price. And the number the actual quantitative number
14:57
Speaker 5: in housing markets. This is the crazy part about it
15:01
Speaker 5: matches the number that Richard documented in the lab. So
15:05
Speaker 5: there's a there's there's obviously a lot of back and
15:08
Speaker 5: forth between different experimental is, different different experiments and stuff
15:13
Speaker 5: like that, but even most of the quantitative magnitudes have
15:16
Speaker 5: been great.
15:17
Speaker 2: It's robust. Let's talk about something that economic theory says
15:22
Speaker 2: shouldn't happen. Ultimatums and cooperations let's talk about the ultimatum game.
15:27
Speaker 2: Tell us a little bit about that.
15:29
Speaker 3: Okay, sure, So the ultimatum game is pretty simple. Let's
15:34
Speaker 3: say I give Barry one hundred dollars and I tell
15:38
Speaker 3: him that he's got to share it with Alex. He
15:42
Speaker 3: can make Alex an offer for some amount of the hundred.
15:47
Speaker 3: You can give all.
15:48
Speaker 2: Hundred unlikely, I'll take it.
15:53
Speaker 3: Alex gets to say yes or no, So it's an ultimatum.
15:59
Speaker 3: And if he says yes, deal he says no, they
16:03
Speaker 3: both get nothing. Now that game was invented, It didn't
16:09
Speaker 3: really surprise us. It was invented because we kind of
16:15
Speaker 3: knew what was going to happen, which was so. But
16:20
Speaker 3: before that, let's say, what does economic theory say and
16:25
Speaker 3: what does game theory say? Game theory says people are
16:29
Speaker 3: selfish and Alex, if you offer him a dollar, don't
16:35
Speaker 3: insult him with a quarter or a penny. But if
16:38
Speaker 3: you offer him a dollar dollars or something, and he
16:42
Speaker 3: knows the dollars worth more than zero, so he'll take it.
16:47
Speaker 3: And you know that he knows that, and so you
16:52
Speaker 3: offer him a dollar and he takes it. No, no
16:56
Speaker 3: real world person has ever done that.
17:00
Speaker 2: Meaning in the lab experiments, what's the number under twenty dollars.
17:05
Speaker 3: Under yeah, offers less than twenty percent of whatever the
17:08
Speaker 3: pie is are more likely are likely to be rejected.
17:13
Speaker 3: Allfers tend to be fifty to fifty. The profit maximizing
17:18
Speaker 3: offer is forty percent. So there are a whole We
17:24
Speaker 3: have two chapters that are about games sort of like this.
17:29
Speaker 3: The big lesson is that in the world, you're dealing
17:33
Speaker 3: with people, and if you make insulting offers, they may
17:38
Speaker 3: get rejected. And if you want cooperation, you have to
17:45
Speaker 3: be cooperative. Let me tell you a story that's related
17:50
Speaker 3: to this. Years ago, my wife and I were in
17:54
Speaker 3: Thailand and we needed to take a cab twenty minute
18:00
Speaker 3: ride like three blocks here, but it was ten miles
18:04
Speaker 3: and changed my so and everything is negotiated there. So
18:11
Speaker 3: I'm negotiating with this cab driver and after wild negotiations,
18:17
Speaker 3: we agree on some fare out four dollars and we
18:21
Speaker 3: get to the restaurant and then there was a question
18:27
Speaker 3: of how are we going to get back? And the
18:32
Speaker 3: cab driver said, would you like me to take you back?
18:34
Speaker 3: And notice there's a mutual risk of defection. He could
18:41
Speaker 3: not be there when we get done with dinner, or
18:44
Speaker 3: we could get done early and go back with somebody else.
18:48
Speaker 3: He proposed a contract that no economist would ever recommend.
18:55
Speaker 3: The contract was, he said, don't pay me anything perfect.
19:01
Speaker 3: So when dinner's over, of course we went to look
19:04
Speaker 3: for this cab driver. We're not going to stiff the
19:06
Speaker 3: cab driver. And in fact he dropped us somewhere else
19:10
Speaker 3: for some other same thing. Now, what's the lesson there?
19:18
Speaker 3: He knew that by being trusting he would engender trust,
19:28
Speaker 3: and that's like a big important lesson both in business
19:35
Speaker 3: and in life and in politics.
19:39
Speaker 2: Coming up, we continue our live conversation with doctor Richard
19:44
Speaker 2: Taylor and doctor Alex Emos, both of the Booth School
19:48
Speaker 2: of Business at the University of Chicago, discussing the newest
19:53
Speaker 2: edition of their book, The Winner's Curse. I'm Barry Ridults.
20:07
Speaker 2: You're listening to Bloomberg's Masters in Business. Let's continue our
20:11
Speaker 2: live conversation with Richard Taylor and Alex Amos discussing the
20:17
Speaker 2: new edition of the book The Winner's Curse. So let's
20:22
Speaker 2: talk about some other things within the book. The title
20:26
Speaker 2: The Winner's Curse is really a fascinating story and leads
20:31
Speaker 2: so many places. Let's start off talking about oil leases.
20:35
Speaker 2: Tell us about the winner's curse.
20:38
Speaker 3: You want to go, you want me to go, you
20:41
Speaker 3: can do it. So this is the only chapter in
20:48
Speaker 3: the book that the research original research was not done
20:53
Speaker 3: by psychologists or economists.
20:55
Speaker 4: The lord one price.
20:57
Speaker 3: Oh, you're not calling financial economists as aonymous. Oh, and
21:02
Speaker 3: that gets back to booth. You're going to be in
21:05
Speaker 3: a lot.
21:05
Speaker 4: I'm in a different part of the building.
21:09
Speaker 3: So finance is just a branch of economics, it's not
21:13
Speaker 3: its own field. So we're both dabblers in finance. So
21:23
Speaker 3: the research on this was done by engineers at Atlantic
21:28
Speaker 3: Ridgefield ARCO. And here's what they found. They were bidding
21:32
Speaker 3: for oil leases in what I still call the Gulf
21:36
Speaker 3: of Mexico. And what they found was that for the
21:44
Speaker 3: leases they won, there was less oil than they expected.
21:51
Speaker 3: And they're thinking, we have great geologists, how can we
21:55
Speaker 3: be wrong? What's going on? And then they got an insight.
22:02
Speaker 3: The essence of the insight is that when you're in
22:08
Speaker 3: an auction, the ones you win are not a random
22:13
Speaker 3: sample of your bids. The auctions you win are when
22:18
Speaker 3: you bid high. Right now, that sounds like a pretty
22:23
Speaker 3: obvious point, but it's not because if there are a
22:27
Speaker 3: lot of bidders. Let's suppose that the version of this
22:32
Speaker 3: that we would run in classrooms is we'd have a
22:35
Speaker 3: jar of coins, and we'd have people bid for the
22:40
Speaker 3: amount of money in the jar, not the coins. And
22:44
Speaker 3: what happens the average bid is, let's say the jar's
22:48
Speaker 3: worth a hundred dollars, the average bid is much less
22:52
Speaker 3: because people are risk averse, but the winning bid is
22:56
Speaker 3: always more than a hundred, because it's the most optimistic
23:00
Speaker 3: person or the person with the first eyesight or whatever.
23:05
Speaker 3: So this insight by the engineers applies everywhere, and contractors
23:18
Speaker 3: have either learned this or go out of business right
23:22
Speaker 3: because when they're bidding on a job, it low bid wins,
23:28
Speaker 3: and if you forget the roof or the hvac, you're
23:33
Speaker 3: going to go massively over. And so one of the
23:37
Speaker 3: interesting follow up experiments was to take a bunch of
23:41
Speaker 3: contractors and put them into one of these experiments and
23:46
Speaker 3: see what would happen. And the experimenters were a little
23:50
Speaker 3: worried that the contractors were going to take them to
23:53
Speaker 3: the cleaners, but they didn't. The reason is the contractors
23:57
Speaker 3: never understood the math of this. Instead, they had a
24:01
Speaker 3: fudge so they would figure out what they thought they
24:06
Speaker 3: could build it for and then add twenty five and
24:10
Speaker 3: that covers the stuff they forget. But they didn't have
24:14
Speaker 3: that rule for bidding for jars, and so they were
24:18
Speaker 3: no better than the undergrads in The Winner's Curse.
24:23
Speaker 2: How is this held up since what does the latest
24:26
Speaker 2: data on the Winter Scurse look like?
24:29
Speaker 5: Well, the Winter Skurs will as we discuss in the update,
24:32
Speaker 5: that it's held up quite well as far as you know,
24:36
Speaker 5: the experiment replicates. First of all, you know, you run
24:40
Speaker 5: it in Harvard, you go into econ one to one
24:42
Speaker 5: at Harvard, you auction off of jar coins. They're going
24:45
Speaker 5: to be overbidding for the for the coins it's just
24:49
Speaker 5: and then you know it's hold up, held up with
24:51
Speaker 5: the NFL teams where you're you're basically bidding for free
24:55
Speaker 5: agents and things like that.
24:56
Speaker 4: So it shows up in the data and the big file.
25:00
Speaker 5: Follow up to The Winner's Curse has been the idea
25:02
Speaker 5: the kind of abstracting from the phenomenon of the Winter's
25:06
Speaker 5: Curse but thinking about like what leads to the Winter's
25:09
Speaker 5: Curse in the first place, psychologically and psychologically, what leads
25:13
Speaker 5: to the Winter's curse is you not taking into account
25:15
Speaker 5: that you're bidding against other people. You're not just kind
25:18
Speaker 5: of bidding alone. Oh I think this is worth this much.
25:21
Speaker 5: That's how much I'm going to pay, shading down a
25:23
Speaker 5: little bit. It's the fact that if I'm bidding with
25:26
Speaker 5: a lot of people, if I end up winning, that's
25:29
Speaker 5: real bad news for me because everybody else is just
25:32
Speaker 5: as smart as me, and they're bidding a great they
25:35
Speaker 5: with the similar information. And if I'm the one who's winning,
25:39
Speaker 5: I'm making a mistake. So you kind of have to
25:41
Speaker 5: bid down. And so the other follow up experiments have
25:44
Speaker 5: basically explored where this sort of phenomenon shows up in
25:50
Speaker 5: other places. So, for example, one setting is you know,
25:55
Speaker 5: kind of thinking about there's the guessing game to be
26:00
Speaker 5: beauty contest game, which is meant to model from from
26:03
Speaker 5: Caines exactly, so the follow up to the idea behind
26:06
Speaker 5: the winner score. So Kines had the model for the
26:09
Speaker 5: stock market where he said, the stock market is a
26:12
Speaker 5: beauty contest in the sense that it's not that the
26:14
Speaker 5: fundamental value of a stock would determine its price, it's
26:17
Speaker 5: what everybody else thinks the fundamental value is it's all
26:21
Speaker 5: about the belief.
26:22
Speaker 4: So there was this.
26:23
Speaker 5: The reason it's called the beauty contest is the newspapers
26:25
Speaker 5: used to run these contests where you had a whole
26:28
Speaker 5: page of faces, and the winner of the contest was
26:32
Speaker 5: the one who chose the face that everybody else chose
26:35
Speaker 5: as well. And so he said, the stock markets just
26:38
Speaker 5: like that. And so you run the beauty contest by
26:40
Speaker 5: saying something like, all right, what is guess the number
26:44
Speaker 5: between one and one hundred? The room guesses, everybody submits
26:48
Speaker 5: a guess, and the winner is the one who guesses
26:51
Speaker 5: two thirds of the average. Now again this game, think
26:55
Speaker 5: about it for a second. This game has an e
26:58
Speaker 5: economic solution. Then what's the solution we can we can
27:02
Speaker 5: do right now?
27:03
Speaker 3: It's the New York Economics Club. Somebody should know the equilibrium.
27:07
Speaker 5: Anybody have a guess for the Nash equilibrium?
27:12
Speaker 4: Yeah, should be Yeah, it should be one.
27:16
Speaker 3: It should be one, would be zero or one.
27:17
Speaker 5: If if the lowest number is one is one, it's one.
27:20
Speaker 5: And the reason is the following. Let's say I think
27:23
Speaker 5: i'm I'm I'm playing against a bunch of you know,
27:25
Speaker 5: random people. They don't know what they're doing. They're guessing randomly.
27:28
Speaker 5: If everybody guesses randomly, the average is going to be fifty.
27:31
Speaker 5: So I should do two thirds of that, right, But
27:34
Speaker 5: then I think, all right, if it's two thirds of that,
27:35
Speaker 5: I guess that. Wait, well, they're probably going to think
27:39
Speaker 5: the same thing, and so they're going to guess two
27:41
Speaker 5: thirds of fifty, so I should do two thirds of that.
27:44
Speaker 4: But then I think, wait, no, hold on, hold on,
27:47
Speaker 4: I'm going to do.
27:48
Speaker 5: Two thirds of that, and two thirds two thirds, two
27:51
Speaker 5: thirds I get to one, right, So that's the Nash
27:53
Speaker 5: equilibrium solution.
27:55
Speaker 4: Would you win guessing one?
28:00
Speaker 5: No, you would not win guessing one because other people
28:04
Speaker 5: are not guessing one. So the way that when you
28:08
Speaker 5: run this experiment, essentially what you see is the majority
28:12
Speaker 5: of people guess something like fifty times two thirds times
28:17
Speaker 5: two thirds, so they'd make it to level two and
28:20
Speaker 5: then they stop.
28:23
Speaker 3: I played this game once in the Financial Times with
28:27
Speaker 3: two business class tickets from London to the US as
28:31
Speaker 3: a prize, and the winning guess was thirteen. So there
28:37
Speaker 3: were lots of zero ones and they didn't win. There
28:44
Speaker 3: were a bunch of ninety nine.
28:46
Speaker 2: And one hundred they didn't understand the game.
28:48
Speaker 3: No, they were jerks trying to skew the numbers. Yeah,
28:54
Speaker 3: and they were all from Oxford and they were trying
28:59
Speaker 3: to pull it all. They weren't disguising they all had
29:05
Speaker 3: the same dorm address. But but but it was one
29:10
Speaker 3: guest per person. So my tas and I were the
29:16
Speaker 3: judges and we had thirteen hundred entrance. But yeah, so again,
29:21
Speaker 3: this is the sort of thing that we can do
29:24
Speaker 3: in class. If you do it with NBA students, you're
29:28
Speaker 3: going to get a number in the teams when.
29:31
Speaker 4: Thirteen eight something like that.
29:33
Speaker 5: The more so kind of oh I've taken economics, they'll
29:36
Speaker 5: go like eight, Oh, I haven't taken economics.
29:39
Speaker 4: Thirteen sixteen.
29:41
Speaker 5: So it's it's always above one, and it just mattered.
29:44
Speaker 5: You can see these spikes in the data. That's the
29:46
Speaker 5: craziest part about it.
29:47
Speaker 3: So, you know, I've written a paper with one of
29:50
Speaker 3: my former students showing that the NFL draft is subject to.
29:55
Speaker 2: This literally where I wanted to take this inside world.
29:58
Speaker 3: You know, esp is one one of my one of
30:01
Speaker 3: my skills. Arry, So, uh, well, you probably are all
30:06
Speaker 3: familiar with the NFL draft that the end of the season,
30:09
Speaker 3: the worst team gets the first pick of the eligible players.
30:14
Speaker 3: What you may not know is there's a chart that
30:20
Speaker 3: the Dallas Cowboys first created, one of the one of
30:25
Speaker 3: the owners that plots what somebody thought was the should
30:30
Speaker 3: be the prices to trade picks. So, for example, you
30:35
Speaker 3: can trade the first pick for the seventh and eighth picks,
30:38
Speaker 3: or for half a dozen second round picks. And what
30:43
Speaker 3: we show in that paper is the early picks are
30:46
Speaker 3: massively overvalued.
30:48
Speaker 2: And where where does the value show up? Round twound?
30:52
Speaker 3: Yeah, round two. Now, even bigger anomaly is you can
30:57
Speaker 3: trade this year's pick for next year. And the rule
31:03
Speaker 3: of thumb is if you trade a second round pick
31:08
Speaker 3: this year, you get a first round pick next year.
31:11
Speaker 3: So you move up one round per year. And we
31:16
Speaker 3: calculated that's a discount rate of one hundred and thirty
31:19
Speaker 3: seven percent.
31:20
Speaker 2: Really, why such a big discount, right?
31:23
Speaker 3: Because owners want to win. Now, we have one former
31:28
Speaker 3: franchise owner in the room, and I'm pretty sure he
31:32
Speaker 3: didn't get his money by borrowing at one hundred and
31:36
Speaker 3: thirty seven percent. But and NFL teams are even more
31:42
Speaker 3: expensive than NBA teams, But that it's still they still
31:48
Speaker 3: have that rule. And we're in the process of replicating
31:54
Speaker 3: that study, and it's.
31:56
Speaker 2: All exactly So this conversation reminds me of the discussion
32:03
Speaker 2: that took place after Michael Lewis's Moneyball. So everyone's familiar
32:09
Speaker 2: with the book about the Oakland A's and how they
32:13
Speaker 2: brought a essentially behavioral economic approach to selecting players. What
32:20
Speaker 2: happened after that book came out.
32:23
Speaker 3: Well, it's interesting. I mean, one thing happened is I
32:27
Speaker 3: got in touch with Michael Lewis, and we didn't know
32:31
Speaker 3: each other at the time, but through his publisher or something,
32:36
Speaker 3: I said, if you ever in Chicago, let me know
32:38
Speaker 3: I'm there next week. And we've become very good friends
32:43
Speaker 3: and have come to realize that sports analytics and behavioral
32:47
Speaker 3: economics are the same field. It's trying why, well, what
32:54
Speaker 3: was Billy Bean, who also lives in our northern California.
33:00
Speaker 3: What was Billy trying to do? He was trying to
33:02
Speaker 3: buy a team more cheaply than others by And it's
33:10
Speaker 3: just like being a portfolio manager, you're trying to buy
33:13
Speaker 3: undervalued stocks. He was trying to buy undervalued players. Michael
33:18
Speaker 3: got so interested in this he ended up writing the
33:22
Speaker 3: book The Undoing Project which is a great book. It's
33:26
Speaker 3: about my mentors, Danny Kahneman and named mister Vsky. He
33:31
Speaker 3: did stick an irrelevant chapter in the beginning about Darryl Moury.
33:35
Speaker 2: But anyway, the line I was looking to pull from
33:42
Speaker 2: you is not for nothing, Michael. But what you're writing
33:46
Speaker 2: about these two Israeli psychologists have been writing about and
33:51
Speaker 2: experimenting with for years. Moneyball directly led to your relationship
33:57
Speaker 2: with him and that becoming a book as well.
33:59
Speaker 3: Yeah, yeah, And I mean it's about the biases from
34:04
Speaker 3: psychology and it's also about markets, right, So the difference
34:08
Speaker 3: between behavioral economics and psychology is markets. So a psychologist
34:15
Speaker 3: would be interested in the fact that teams are overconfident
34:22
Speaker 3: in their ability to tell good players from bad. That's
34:26
Speaker 3: pure psychology. The fact that it gets reflected in the
34:31
Speaker 3: market for picks, that's economics.
34:34
Speaker 2: So let me push back a little bit on this
34:37
Speaker 2: and The Winner's Curse in that all the topics that
34:42
Speaker 2: you write about in The Winner's Curse oil leases where
34:46
Speaker 2: we don't know what the future oil production will be,
34:49
Speaker 2: first round draft picks where we don't know how that
34:51
Speaker 2: player is going to perform, and in the market's either
34:54
Speaker 2: picking stocks, or picking fund managers to pick stocks, or
34:59
Speaker 2: picking somebody to pick the fund managers in a fund
35:01
Speaker 2: of fund to pick stocks. They all seem to deal with, Hey,
35:05
Speaker 2: we really are unaware of how this is going to
35:09
Speaker 2: play out, and we're making decisions under uncertainty. All of
35:14
Speaker 2: this comes back to economin and Suvarski.
35:19
Speaker 3: Well, I'm not gonna I'm not going to disagree with that.
35:24
Speaker 3: I mean, look, I became a behavioral economist when I
35:28
Speaker 3: discovered them. I claim that was my big discovery, was
35:34
Speaker 3: discovering these two psychologists who were over in Israel that
35:38
Speaker 3: economists hadn't heard of. And I went and spent a
35:43
Speaker 3: year at Stanford where when I got winned that they
35:45
Speaker 3: were going to be there and basically stalked them.
35:51
Speaker 5: Well, a lot of the phenomenon they go away when
35:54
Speaker 5: there's not a lot of uncertainty. The winner's course needs uncertainty. Right,
35:58
Speaker 5: If we know what the value of the plot is,
36:00
Speaker 5: there's no winner's curse. It doesn't matter how many people
36:02
Speaker 5: are bidding.
36:03
Speaker 4: If we know.
36:03
Speaker 5: So, there's a famous anchoring effect, right, So if I
36:07
Speaker 5: the anchoring effect is essentially you know, you ask a
36:10
Speaker 5: question like how many countries are in Africa before but
36:12
Speaker 5: before I do it, I spin a big wheel, right.
36:14
Speaker 4: The wheel has nothing to do with the question.
36:16
Speaker 5: And the wheel gets to like seventeen or eight or whatever,
36:20
Speaker 5: and it turns out wherever that number gets to affects
36:24
Speaker 5: how what number of people gets about the number of
36:26
Speaker 5: countries in Africa. But if people know the number of countries,
36:28
Speaker 5: they're not going to be affected by the wheel. Right,
36:31
Speaker 5: So all of this has to do Almost every single
36:33
Speaker 5: behavioral economic phenomenon has is bred and.
36:37
Speaker 4: Fed through uncertainty.
36:39
Speaker 5: And I think the way that people react to that
36:42
Speaker 5: uncertainty and shape their preferences and beliefs, that's where all
36:45
Speaker 5: the biases seep in in the first place. When I'm
36:48
Speaker 5: certain when experts know what they're doing, when they're you know,
36:53
Speaker 5: they know the value of the plot, they know what
36:55
Speaker 5: you know, the whether the stock is going to go
36:57
Speaker 5: up or down, there's not a lot of biases to.
36:59
Speaker 3: Talk, you know. One aspect of this that surprised me
37:08
Speaker 3: is in the sports world, teams have learned but really slowly.
37:15
Speaker 3: I mean it's like shockingly slowly. When the three point
37:22
Speaker 3: shot was introduced in basketball, Darryl Moorey, I always tease him.
37:27
Speaker 3: He's the general manager of the Philadelphia seventy six ers.
37:31
Speaker 3: I always tease him that he was the first guy
37:33
Speaker 3: who figured out that three is one point five times two,
37:37
Speaker 3: So you should take three point shots because they have
37:41
Speaker 3: a higher expected value. Every team has somebody who can
37:44
Speaker 3: make forty of their three point shots, and they make
37:48
Speaker 3: about half their two point shots. But if you look,
37:52
Speaker 3: Larry Bird was really good at making three point shots,
37:54
Speaker 3: and he took two or three a game. Steph takes twenty.
37:59
Speaker 3: He's a little better than Larry Bird. But now if
38:03
Speaker 3: you look at that trend, it's really shallow, and it's
38:10
Speaker 3: the same as football. Teams have learned to punt.
38:15
Speaker 2: Less but still sill on fourth down.
38:18
Speaker 3: They should go for it on fourth down. They get
38:21
Speaker 3: it right now half the time they and the closer
38:27
Speaker 3: they get to if they get over the fifty yard line,
38:31
Speaker 3: they're more likely to get it right. But they're still terrible.
38:34
Speaker 3: So the learning is slow, and the reason is people
38:38
Speaker 3: don't like to look like fools.
38:40
Speaker 2: There was a Wall Street Journal article about I don't
38:43
Speaker 2: remember it was a high school or a college coach
38:46
Speaker 2: who always went for an on fourth down.
38:48
Speaker 3: Yeah, and I love that guy.
38:50
Speaker 2: Ten years ago.
38:51
Speaker 3: Right, yeah, twenty years ago. Probably he didn't have a kicker.
38:56
Speaker 3: He didn't have any Yeah, even he he didn't have
39:01
Speaker 3: a field goal kicker or a punter. Now it's this
39:05
Speaker 3: is obviously the case for high school because think about
39:11
Speaker 3: you gotta hike it back to some kid. He has
39:14
Speaker 3: to catch it, he has to put it down, and
39:17
Speaker 3: then the other kid has to kick it, and the
39:19
Speaker 3: weather's lousy. So he just had no kickers and he
39:26
Speaker 3: was winning the state championship in Arkansas, I mean, not
39:30
Speaker 3: some place with lousy football. So teams will get better.
39:36
Speaker 3: People do learn, But you know, people are always asking
39:40
Speaker 3: me what surprised me. What has surprised me is how
39:43
Speaker 3: slowly the learning has taken place in Look, how long
39:48
Speaker 3: did it take it's the World Series? How long did
39:51
Speaker 3: it take them to add a pitch clock? Baseball had
39:55
Speaker 3: become unwatchable. They add a pitchclock, It cuts half hour
39:59
Speaker 3: off the game. Well, you know that's not a genius.
40:02
Speaker 3: They had twenty four second clock in basketball for forty years,
40:07
Speaker 3: so they could have figured this out.
40:10
Speaker 4: But it's not just sports.
40:12
Speaker 5: I think, like the thing that economists push back with
40:15
Speaker 5: behavioral economics, it's oh, people just don't know, have opportunities
40:18
Speaker 5: to learn right in the endowment effect. If they trade enough,
40:22
Speaker 5: if people know what they're doing for long, even for
40:24
Speaker 5: a short period of time, they'll figure it out. These
40:26
Speaker 5: biases are going to go away. That's the whole Like, look,
40:29
Speaker 5: these are just confused subjects. They go to the market,
40:31
Speaker 5: they'll get some feedback, everything will be fine. But I
40:34
Speaker 5: think that's the biggest I think with Richard being surprised,
40:37
Speaker 5: I think not just in sports everywhere that these anomalies
40:40
Speaker 5: have held up, and the fact that these anomalies are
40:42
Speaker 5: holding up in very, very experienced people. So in the
40:46
Speaker 5: paper with traders, you know there, we find that they
40:49
Speaker 5: trade really well when they're buying, but on the selling
40:52
Speaker 5: they have to do a lot of selling. They sell
40:53
Speaker 5: all the time, they have to sell it order to buy.
40:56
Speaker 5: They sell all the time. Some of them have years,
40:59
Speaker 5: decades of experience, and they're doing worse than random and
41:02
Speaker 5: they're selling well.
41:03
Speaker 2: Explain that, because that was what was so brilliant about
41:05
Speaker 2: that paper. In order to figure out how well they sold,
41:11
Speaker 2: you guys came up with the solution of let's randomly
41:14
Speaker 2: sell anything else from that manager's holdings and compare it
41:18
Speaker 2: to what they actually sold, right, so what are the results?
41:21
Speaker 5: The results are, so we basically said, look, we want
41:24
Speaker 5: to give these guys a large benefit of the doubt.
41:27
Speaker 5: We don't know what their conditions are, so we're just
41:29
Speaker 5: going to compare them to a very very easy counterfactual.
41:33
Speaker 5: I don't know what they're facing. I'm just going to
41:35
Speaker 5: throw a dart in their portfolio and sell that instead.
41:38
Speaker 5: And they did worse than random. And basically what we
41:42
Speaker 5: found is that they were they didn't have they weren't
41:45
Speaker 5: spending a lot of time on the selling decisions.
41:48
Speaker 4: We interviewed them and we said, like, what are you
41:49
Speaker 4: guys doing. It's like, ah, selling is not really that important.
41:52
Speaker 4: It's not really an investment decision.
41:54
Speaker 5: And I'm like, you know, all right, I told my
41:59
Speaker 5: friends at the University Chicago finance department. They were very
42:01
Speaker 5: surprised that selling wasn't an investment decision, and so they
42:07
Speaker 5: were just not really paying attention to it. So they
42:09
Speaker 5: were just selling the things that were very very salient
42:11
Speaker 5: on their screens and the things that they were least
42:14
Speaker 5: attached to. So going back to the endowment effect, they
42:17
Speaker 5: were selling the things that they had recently bought, but
42:19
Speaker 5: if you're good at buying, that's not what you should
42:22
Speaker 5: be selling.
42:23
Speaker 4: You should be holding onto that for longer to get
42:26
Speaker 4: that alpha out.
42:27
Speaker 5: And we actually we have a graph in the paper
42:30
Speaker 5: called like the alpha decay graph and it was about
42:32
Speaker 5: nine months and they were selling it around six.
42:35
Speaker 3: You know, we all have blind spots. And you just
42:40
Speaker 3: wrote a book recently, you have a chapter on selling
42:44
Speaker 3: because of Alex. If I hadn't written that paper, you
42:48
Speaker 3: wouldn't have had a chapter on selling.
42:50
Speaker 2: I would have had a different chapter. It wouldn't have
42:52
Speaker 2: been as good.
42:53
Speaker 3: Or there are no articles about selling, basically very few,
42:58
Speaker 3: very few. So if you look at the Journal of
43:01
Speaker 3: Finance or one of the other top journals, there'll be
43:06
Speaker 3: one hundred articles of the form. Use the following three
43:11
Speaker 3: criteria a former portfolio, hold for one year, then sell.
43:16
Speaker 3: And these guys said, oh, maybe selling could be interesting
43:22
Speaker 3: and they could maybe double their alpha if they're selling
43:27
Speaker 3: decisions or as good as they're buying decisions.
43:30
Speaker 2: Coming up, we continue our live conversation with doctor Richard
43:35
Speaker 2: Taylor and doctor Alex Emos, both of the Booth School
43:38
Speaker 2: of Business at the University of Chicago, discussing the newest
43:43
Speaker 2: edition of their book The Winner's Curse. I'm Barry Ridults.
44:02
Speaker 2: You're listening to Bloomberg's Masters in Business. Let's continue our
44:06
Speaker 2: live conversation with Richard Taylor and Alex EMUs discussing the
44:12
Speaker 2: new edition of the book The Winner's Curse. Well, we
44:17
Speaker 2: talked about this last time we discussed this issue. The
44:21
Speaker 2: buys are very quantitative and rigorous. The cells are just squishy,
44:27
Speaker 2: and every emotional bias that comes in, Oh, this is
44:31
Speaker 2: starting to falter. It's not doing what I expected. Something
44:34
Speaker 2: else shiny comes along and catches their attention. They need
44:37
Speaker 2: to make room in the portfolio. You mentioned blind spots.
44:44
Speaker 2: Your friend Danny Koneman used to talk about. I used
44:47
Speaker 2: to ask him on occasion, how do you avoid all
44:50
Speaker 2: of these biases we all succumb to? And he's like,
44:54
Speaker 2: I'm subject to every one of them. We all have
44:56
Speaker 2: a bias, blind spot. There's no getting a way from it.
45:00
Speaker 2: Is there hope for us?
45:02
Speaker 3: Well, the only way you can learn anything is feedback,
45:06
Speaker 3: and most of us don't bother, so we don't get
45:12
Speaker 3: the feedback. And you know when when my friend Caide,
45:21
Speaker 3: my former student that I did the football paper with,
45:24
Speaker 3: we were hired for a while by one of the
45:28
Speaker 3: NFL teams, and we're they're showing us around their facility
45:35
Speaker 3: and we go and there's some room about the size
45:39
Speaker 3: of this, full of file cabinets, and we say, what's
45:43
Speaker 3: in there? Oh, old scouting reports. Our eyes are getting back,
45:49
Speaker 3: you know, like, well, have you ever studied those? No? Right,
45:56
Speaker 3: so you know that they have. They have probably twenty
46:02
Speaker 3: scouts going around watching games. They've built a two billion
46:09
Speaker 3: dollar taj Mahele Stadium. But do they invest a little
46:14
Speaker 3: research in improving the process of picking players? No, And
46:19
Speaker 3: I must say most firms are not that much better.
46:24
Speaker 3: Really well, firms still do interviews, interviews.
46:31
Speaker 2: Symphonies are doing blind auditions.
46:33
Speaker 3: Yeah, they but they still listen.
46:38
Speaker 2: Yes, so arguably.
46:41
Speaker 3: Interview look, and I think a great musician can here
46:48
Speaker 3: whether you're playing well or poorly, learning anything useful about
46:54
Speaker 3: how somebody is going to do on the job from
46:57
Speaker 3: the usual job. Interview is very.
47:01
Speaker 4: One of our postdocs.
47:02
Speaker 5: Actually, as a paper Brian Dreberian on So he worked
47:06
Speaker 5: with a company in the Philippines. They replaced all first
47:10
Speaker 5: round interviews with artificial intelligence, and retention ended up increasing. Basically,
47:16
Speaker 5: they were able to extract the signals that they needed
47:18
Speaker 5: to extract at that stage, and the humans were missing.
47:21
Speaker 2: So let's talk about this before we're going to open
47:24
Speaker 2: up this up for questions in a minute. But let's
47:26
Speaker 2: talk about that sort of choice architecture, and I just
47:31
Speaker 2: have to share some numbers with people as to how
47:35
Speaker 2: significant this could be. Richard's book Nudge described a variety
47:42
Speaker 2: of different ways to affect decision making. Perhaps the most
47:48
Speaker 2: significant was when you open a four oh one K,
47:51
Speaker 2: there's no obligation for you to participate in the company.
47:55
Speaker 2: When money goes into it, there's no obligation to put
47:57
Speaker 2: that money to work. Sure convinced the SEC and the
48:02
Speaker 2: government to change that so that the default is that
48:06
Speaker 2: you're assumed to participate and the money goes into some
48:11
Speaker 2: qualified fund, either a balance fund or a target date fund.
48:15
Speaker 2: And to just put some flesh on how significant that is,
48:19
Speaker 2: the US's four oh one K, not counting today's trading action,
48:24
Speaker 2: is four point seven trillion dollars. Historically, forty percent of
48:29
Speaker 2: that was defaulted to cash, which means there's two trillion
48:34
Speaker 2: dollars being invested today that otherwise would have been sitting
48:37
Speaker 2: around in cash for god knows how many years. So,
48:40
Speaker 2: given what we know about choice architecture, how should we
48:45
Speaker 2: be addressing choices and options, whether it's in hiring or
48:49
Speaker 2: putting money to work or bidding in auctions? How should
48:53
Speaker 2: what should we be doing well better?
48:55
Speaker 3: I mean there's so you know. Let on the retire
49:00
Speaker 3: and saving thing. We did three things. One was changed
49:05
Speaker 3: the default, and we had to get congressional approval for
49:11
Speaker 3: all of this because companies said, oh, if we enroll
49:16
Speaker 3: somebody without their permission, some lawyer is going to sue
49:20
Speaker 3: us as soon as the market goes down. So we
49:25
Speaker 3: were able to get a bill passed in two thousand
49:27
Speaker 3: and six that said it was okay to automatically enroll,
49:32
Speaker 3: it was okay to invest in something I could target
49:35
Speaker 3: day fund even though it could go down, and it
49:38
Speaker 3: was okay to slowly ramp up their contributions what I
49:44
Speaker 3: call save more tomorrow because we all have more self
49:47
Speaker 3: control next week. So that you know, those three ingredients
49:59
Speaker 3: were important. Maybe that for trillion is twice what it
50:05
Speaker 3: would have been without it. It's it's not easy to
50:10
Speaker 3: just say, you know, what, what can you do to
50:16
Speaker 3: solve obesity or some other problem. My mantra is make
50:28
Speaker 3: it easy. If you want people to do something, make
50:33
Speaker 3: it easy. I always say, what I would like is
50:38
Speaker 3: a world that's like GPS. I have a terrible sense
50:42
Speaker 3: of direction, and now I don't get lost hardly ever. Right,
50:49
Speaker 3: And notice the GPS doesn't tell you where to go.
50:53
Speaker 3: You had the wrong address coming tonight. So but but
50:57
Speaker 3: I plugged in the right address. You know, well I
51:02
Speaker 3: just had to walk down Fifth Avenue. But even I
51:04
Speaker 3: could do that. But right, So for complicated things like
51:11
Speaker 3: improving your diet or exercising more, or whatever problem you're
51:18
Speaker 3: trying to solve, you have to figure out what's preventing
51:24
Speaker 3: people from getting it right and then eliminate that. And
51:30
Speaker 3: you know, when when David Cameron was elected Prime Minister
51:35
Speaker 3: in the UK, he had get this. They have They
51:41
Speaker 3: don't have platforms, they have manifestos. And they had told
51:47
Speaker 3: me that they were going to put in their manifesto
51:51
Speaker 3: that if they got elected they were going to create
51:54
Speaker 3: a nudge unit. And I said, yeah, yeah, because I'm
51:58
Speaker 3: used to the US. So but they did it, and
52:02
Speaker 3: they called me up and said, hey, we're starting this thing.
52:05
Speaker 3: You better come over and figure out how to do this.
52:08
Speaker 3: And the main lesson I learned was we'd go to
52:14
Speaker 3: the branch. One of the things we did was we
52:19
Speaker 3: changed the way they dealt with people who owe money
52:23
Speaker 3: on their taxes. And what do you do, Well, we
52:27
Speaker 3: send a letter. What does the letter say? Oh, well,
52:30
Speaker 3: they showed us the letter. Oh I think we can
52:32
Speaker 3: improve the letter. So and we told them truthfully, ninety
52:37
Speaker 3: percent of people paid their taxes on time. That increased
52:41
Speaker 3: the speed, so brought in money very fast. Costs nothing, Right,
52:47
Speaker 3: they're sending a letter. It doesn't cost anymore to write
52:50
Speaker 3: a good letter. But you have to talk to the
52:57
Speaker 3: experts and understand what it is that's preventing them from
53:03
Speaker 3: doing the right thing, and then make it easy for
53:06
Speaker 3: them to do that.
53:07
Speaker 2: Remove the obstacles, make it easy. All right, So we
53:10
Speaker 2: have a few more minutes. Let's get some questions. Can
53:13
Speaker 2: I see some hands? Wait for the mic. Let's start
53:16
Speaker 2: right up front and work our way back.
53:20
Speaker 6: Thank you so much for super interesting discussion. I'm curious
53:24
Speaker 6: Robert Oman has a theory that says that reasonable people
53:29
Speaker 6: can't disagree, and I'm curious, like how you would relate
53:32
Speaker 6: that to the winner's person if you've ever had a
53:35
Speaker 6: discussion with.
53:35
Speaker 3: Him about that. Reasonable people can't disagree.
53:39
Speaker 2: He's never been online.
53:40
Speaker 3: I mean, you know, Alex and I are both extremely reasonable.
53:47
Speaker 3: We disagree, we disagree on all kinds of things.
53:49
Speaker 5: Well, his theorem is basically, if you have the same
53:52
Speaker 5: information set, you have to arrive in the same belief
53:56
Speaker 5: the same information you need, common knowledge, you need.
54:00
Speaker 2: You need com each other's rationality.
54:03
Speaker 3: You don't need the same confition.
54:05
Speaker 5: But and then you arrive at the exact same posterior belief.
54:10
Speaker 3: Right.
54:10
Speaker 5: But the problem is that people have confirmation bias in
54:14
Speaker 5: the real world, right, so they seek out information that
54:18
Speaker 5: confirms their beliefs. So they end up not only uh,
54:22
Speaker 5: they basically end up in completely different worlds thinking that
54:24
Speaker 5: they're rational and somebody else who's not agreeing with them
54:27
Speaker 5: is irrational. And that if you go back to Robert Auman,
54:33
Speaker 5: that breaks that that condition for being able to agree.
54:37
Speaker 5: So one of the things about the Internet age and
54:39
Speaker 5: digital the digital transformation is that look, if you read
54:43
Speaker 5: like the texts of what technologists we're writing, we're going
54:46
Speaker 5: to be in a utopia, millions of library of Alexandria's
54:49
Speaker 5: at our fingertip. Everybody will have all information at the
54:52
Speaker 5: same time. We should all agree, right, but we're not
54:57
Speaker 5: there yet, we have all the information, we are there yet.
55:00
Speaker 3: But what ended up happening agreeing?
55:03
Speaker 5: But it's because people are seeking information that confirms their
55:06
Speaker 5: priors and confirms the priors of the people that they're
55:09
Speaker 5: the and and because you can't think that your prior
55:13
Speaker 5: is wrong if you could, if you meet somebody with
55:15
Speaker 5: a different prior or a different belief, you assume that
55:18
Speaker 5: they are irrational. And then we're not going to agree.
55:21
Speaker 5: I'm going to hold out to my belief. You're going
55:22
Speaker 5: to hold onto your belief. And the more this kind
55:25
Speaker 5: of ramps up, the ability to anddogenously gather information and
55:29
Speaker 5: the feeding of that process from the information providers gets
55:34
Speaker 5: worse and worse.
55:36
Speaker 2: The fascinating part about the stock market is all the
55:40
Speaker 2: economic data is out there, all the market analysis is
55:43
Speaker 2: out there. Bulls and bears go out and they find
55:47
Speaker 2: what supports their view. They rarely seek disconfirming advice. And hey,
55:53
Speaker 2: trade is where there's a disagreement on value, button agreement
55:57
Speaker 2: on price, and it's all the same information people check
56:00
Speaker 2: pick And.
56:00
Speaker 3: Perhaps the biggest anomaly in financial markets is the volume
56:04
Speaker 3: of trade.
56:05
Speaker 4: That people are trading from place.
56:07
Speaker 3: That that's the counter example, how can we have a
56:10
Speaker 3: trillion shares traded if everybody agrees? Yeah, right, the mic right.
56:21
Speaker 2: So this is actually a related question.
56:24
Speaker 7: You've heard a paper in nineteen ninety seven on the
56:26
Speaker 7: equity premium puzzle. You finished it by saying, you have
56:29
Speaker 7: any issues with this, call me in twenty seventeen. So
56:32
Speaker 7: in twenty seventeen, two fourth years at the University of
56:35
Speaker 7: Chicago studied economics. Email do you try to call you
56:38
Speaker 7: on your bluff? You met with them, which me and
56:41
Speaker 7: my now husband do appreciate, and we both work in
56:46
Speaker 7: finance now and I am curious, especially you mentioned, like
56:49
Speaker 7: the volume of trading Democratization of trading Robin Hood Traders.
56:54
Speaker 7: As you're refreshing this book more broadly, how is technology
56:57
Speaker 7: changed or magnified some of the behavioral confects that you
57:00
Speaker 7: were writing about in nineteen ninety two.
57:04
Speaker 3: So, of course I vividly remember this. And there's a
57:10
Speaker 3: bridge over in here, Brooklyn, you know the So you're right,
57:16
Speaker 3: there was a chapter. It wasn't a chapter in the
57:20
Speaker 3: original book, but I did write a column on the
57:23
Speaker 3: equity premium puzzle and then a paper about it, and
57:26
Speaker 3: we talked about whether it included. Instead, we just have
57:31
Speaker 3: a couple pages saying the equity premium is within one
57:36
Speaker 3: percent of what it was when the first paper was published.
57:41
Speaker 3: It's going from seven down to six or something like that.
57:44
Speaker 3: So it didn't seem worth a chapter. But I'll let Alex,
57:50
Speaker 3: who's the now part talk about the technology.
57:56
Speaker 5: Yeah, So I think the democracy you mentioned the democratization
57:59
Speaker 5: of finance, and I think there was this hope that again,
58:02
Speaker 5: you know, people have access to basically there's no transaction fees,
58:07
Speaker 5: you log onto your phone, you have access to these
58:09
Speaker 5: equities and financial products that you didn't have access before.
58:13
Speaker 5: So now everyday people have you know, can can get
58:16
Speaker 5: a piece of the pie. They can get a piece
58:18
Speaker 5: of the real growth of the economy. So some of
58:20
Speaker 5: our colleagues wrote a paper at the University of Chicago recently.
58:23
Speaker 4: I think he came out.
58:24
Speaker 5: This year doing an audit of what people are trading
58:28
Speaker 5: on platforms like Robinhood. They're trading weekly options and they're
58:33
Speaker 5: losing billions of dollars. I think within the last two
58:37
Speaker 5: years they lost six billion dollars, right, and so, and
58:42
Speaker 5: why is that? Well, the same sort of biases that
58:45
Speaker 5: you have that you're documenting them lap that you document
58:48
Speaker 5: in the field, they're on steroids in digital spaces. Right.
58:51
Speaker 4: What is robinhood doing? Where is it making its money?
58:54
Speaker 5: Because the Robinhood does make money, it's making it on spreads, right,
58:59
Speaker 5: and the itis spreads are crazy instruments like options that
59:04
Speaker 5: generate these lottery like returns that we know human people
59:07
Speaker 5: are really attracted to. And so it's making money off
59:10
Speaker 5: of behavioral biases and people are losing a lot of
59:13
Speaker 5: money on it.
59:14
Speaker 2: So it's not even the weekly options, it's the single
59:17
Speaker 2: day options now have become the biggest volume.
59:20
Speaker 3: Right. And of course pure gambling sports gambling is even
59:27
Speaker 3: worse odds.
59:29
Speaker 2: Where you can bet on every play, not even the
59:32
Speaker 2: outcome of the well.
59:33
Speaker 3: And now they're learning that these bets on what a
59:37
Speaker 3: specific player does, they've got to get rid of those
59:41
Speaker 3: because there's just going to be too many scandals.
59:45
Speaker 2: That was my live conversation with Richard Taylor and Aleximus.
59:49
Speaker 2: Be sure and check out the full version of this
59:52
Speaker 2: coming sometime in the coming months. I would be remiss
59:55
Speaker 2: if I didn't thank the Cracked team that helps put
59:57
Speaker 2: these conversations together. A special thanks goes to the Economic
1:00:02
Speaker 2: Club of New York for hosting this event. My audio
1:00:06
Speaker 2: engineer is Justin Milner. Anna Luke is my producer. Sean
1:00:11
Speaker 2: Russo is my researcher. I'm Barry Renaults. You've been listening
1:00:15
Speaker 2: to a bonus live edition of Masters in Business on
1:00:20
Speaker 2: Bloomberg Radio.