There's a story I tell about a dinner

party and I bring out a bowl of cashew

nuts. People started eat nibbling as

they do. And at some point I realized

their appetite was in danger. And so I

grabbed the bowl of cashew nuts and went

and hid them in the kitchen. People

thanked me. So you removed choice. And

then because this is a group of

economists, somebody mentions that well

we're actually not allowed to be happy

about that because more options is

always better and we used to have the

option to eaten us and now we don't.

Well, you can imagine the principle is

interesting that sometimes

we prefer

not to have options. I'm excited to dive

in and I thought Nick we would let you

take the reigns because you had this

idea of starting from first principles

or at least fundamentals and I think

that is a great place to start because

maybe the things we think we understand

we don't understand or the things we

think we've defined for ourselves we

haven't defined. when I got to college

at a liberal arts college and didn't

know what I was going to study but I

knew I enjoyed business quote unquote or

might work in business of some sort

you're left with the study of economics

there like you're not getting an

undergrad MBA or something so you get to

economics class and it's not that at all

you know it's a bunch of models it's a

bunch of all that so I thought what we

would start which is first principles

what is the study of economics

and we're going to the best source in

the world on that. But it's really basic

yet I think fundamentally misunderstood.

>> I think that's actually a great place to

start and especially

it's not really possible to talk about

what behavioral economics is without

understanding what economics is.

Economics is really two things. It's

people interacting in markets and then

what are those people doing?

And what happened is

sometime right after World War II,

economists started getting interested in

making their models more rigorous and

more mathematical.

And

the easiest model to write down of what

somebody is doing

is to write down a model in which

they're doing it perfectly. So if you

open up any economics textbook,

you'll see the three letters max

and that's short for maximize.

And all models start with that. So, we

assume that when Nick goes to the

grocery store, what he chooses is the

best things he could choose.

And that's a simplifying assumption.

It's simplifying for the economist

because that's the easiest model to

write down.

>> And so, what are they modeling though?

Like even more fundamentally,

>> what they're modeling is whatever you

do. So, what route do you take to drive

from home to the golf course? The best

route. Which home do you choose to buy?

The best one. What mortgage do you

choose? The best one.

>> Yes.

>> Look, economists are jealous of physics.

>> And they're jealous of physicists. Many

economists started out in school as a

math major or physics major or

engineering major and then decided, oh,

this is too hard, but they kind of

admire that.

So, they want a model that's as accurate

as the model you use to send up a

rocket.

And the the problem is that that problem

is solvable. How much stuff do you need

to get a rocket to go up there? That's a

solvable problem. Figuring out what

people do. If you open a book, an

economics textbook, you actually don't

see the word people,

>> right?

>> You see the word the agents. Economics

starts with Adam Smith, 1776.

And it's that way about until 1950. Now,

we have an equation that says exactly

what a smart person is going to do. And

so the agents in these models are

getting smarter and smarter because the

norm is my model is better than your

model if my agents are smarter than your

agents.

>> And so what does it mean to be rational

within those models?

>> Well, it means to solve the problem the

way an economist would. And I don't mean

that economists think that they're the

smartest, though they may. But if it's

an economic problem,

like how to adjust your thermostat so

you're comfortable and spend the least

money, right? That's a little practical

economic problem. And an economist and

an engineer might solve it. And knowing

you, Nick, you you could easily get

absorbed with figuring out how to really

do it, but most people can't figure out

how to use that easy using thermostat in

their house, much less solve it

themselves. So people will take

shortcuts

and

you know my joke is instead of writing

down max suppose we wrote down meh

because what people are doing isn't

really max right it's you know I'll do

something where I come in on that part

of the story is okay if people are not

capable or interested in solving

and they're doing something else, taking

some shortcut

then then what? So that's principle

number one. Principle number two is

economists again for simplicity

have assumed that people are selfish.

Most of us care more about ourselves

than anybody else. Maybe our family,

some family members, you know, but we

give money to charity. You know, NPR

collects money.

>> Churches collect money, right?

>> We might care about fairness.

>> We might care about fairness, right? I'm

sure we're going to have a discussion

about fairness. And we might care about

being treated fairly.

And so that was left out of the model

again

because it seemed like a simplifying

assumption to just start out.

>> Yeah. You're making the rocket equation

and you don't really care about the

astronauts at this point,

>> right? You just got to get the rocket.

>> You got to get the rocket up. I'll

mention a third thing, which is these

agents don't have any self-control

problems. So, they eat just the right

amount. They exercise just the right

amount. We wouldn't need these new fat

drugs because people would already

>> be optimizing for the health. it would

be perfectly fit and you wouldn't have

sold half as many books, Tim,

if people were those agents and you know

even the other kinds of things you're

interested in implicitly in this idea

that the agents are maximizing means

they don't need any advice.

>> They're doing it right. They're getting

the labor leisure tradeoff right.

They don't need any help in getting

along with their spouse because they're

they're

>> maximized I've optimized my marriage.

>> And in fact, our wives would be happy to

testify that we are a wonderful job.

>> We're both perfect. Really, we couldn't

be better husbands. I've been looking

forward to this conversation that I've

always sort of furrowed my brow at the

agents all as rational and selfish

because I just don't see that behavior

if you look at your neighbor or your

friend or someone else. So my question

though is not so much to dive into that.

We could and the the story of your

friend who got hay fever Richard when he

mowed his lawn is a pretty funny one

from New York Times. Maybe we'll bring

that up. But suffice to say, people

self-sabotage. They care about fairness.

There all these things that seem to

invalidate getting the rocket to the

moon or that approach to economics. And

I'm wondering, were they just

force-fitting precision to something in

order to defend it as more rigorous and

it was a waste of time? Or was it more

like Newtonian physics versus quantum

mechanics where it's like, well, you can

actually use Newtonian physics for a lot

of good things. Is there anything

productive that came of these incorrect

assumptions about all agents being

rational and selfish as a bedrock

assumption?

>> I would say sure. Supply and demand

still works. All economics starts with

supply and demand. If you raise the

price, you're going to sell less almost

always. When you write down these more

formal models and make more precise

predictions

then the question is are you adding

predictive power through that and I

think what happened is as this norm

we're starting in the 50s and I would

say

rationality peaked in the '9s maybe

where this norm that a model with

really, really, really smart people is

the best possible model. Eventually,

people start to realize, well, maybe

there's some drawbacks to that. But you

can argue, and of course, I've spent my

career arguing about how wrong this is.

You know, the great Chicago economist

Milton Freriedman

had this defense. He would say, "Look,

I just want a model that people are

behaving as if they were maximizing."

So he would say, "It doesn't matter if

they literally know how to do it if

their behavior is close enough." And so

the real debate over my career has been

about that question. Well, let's go back

to the start then I think of sort of

your origin story and thus the origin

story of behavioral economics itself

because at some point psychologists

start getting involved and they start

looking at these models and they start

saying

yeah but people don't really act this

way and so this could be great in a

laboratory or on a piece of paper in a

spreadsheet

but it might not work in the real world

and there's real consequences to those

things. So let's go back to when you

were a young academic and started coming

across those ideas.

>> Yeah, I guess this is like in grad

school. So, there's a story I tell about

a dinner party with some other economics

graduate students and there's some roast

in the oven. It smells great and there's

some adult beverages and I bring out a

bowl of cashew nuts and people start

nibbling as they do. And at some point I

realized that their appetite was in

danger. And so I grabbed the bowl of

cashew nuts and went and hid them in the

kitchen.

And then I came back into the living

room and people thanked me. Oh, thank

God you got rid of those nuts. We were

going to eat them.

>> Yeah. So you removed choice.

>> Yeah, I removed choice. And then because

this is a group of economists,

they start analyzing it. There's a rule

of thumb. You don't want too many

economists at any dinner party. And this

is a good example of it. Somebody

mentions that, well, we're actually not

allowed to be happy about that because

more options is always better. And we

used to have the option to eaten us and

now we don't. Well, you can imagine. So,

but the principle the discussion wasn't

that interesting but the principle is

interesting that sometimes

we prefer

not to have

options and so I started with this list

of stuff like that

and then the work comes into all right

well how can you go beyond a story

so yeah that's an amusing story, but so

what?

>> You want to change the framework of

economic theory without throwing out the

rigor, but now you're introducing

something super messy, which is humans

and psychology and irrationality and all

of those things. So, how do you do that

without getting rid of the rigor? Yeah,

just to make sure I'm tracking it seems

like so you've created this list of

sacred cows that you would put on trial,

but the question was how to do it

quantitatively or in some way like Nick

said rigorously without just leaving it

as an anecdote.

>> Well, there are two parts to it. One is

can you show that people are really

doing that?

>> And then second, can you create rigorous

models

that describe that behavior? Mhm.

>> And I think we might as well stick to

the demonstration part. So we can go

from that the cashew story and say,

well, what does that have to do with the

real world? And we can talk about

retirement saving as a first principle.

Americans don't save

unless the money is taken from their

paycheck and put into a retirement plan.

Now,

economic theory would say it doesn't

matter. People are going to save the

right amount. There have been two Nobel

prizes for theories that basically say

people save the right amount. So, they

they take their income and they decide,

okay, I'd like this consumption path

over my lifetime, and now how much do I

have to save to get that? And and then I

keep reoptimizing.

marker goes up, I can save a little

less.

>> I mean, that seems so obviously wrong.

So, were you frustrated at this point?

Like, I read some of your old papers in

preparation for this, and I saw these

little backhanded little mentions that

were kind of snide. I mean, it's funny

reading 40-year-old academic papers and

reading the snark in them, right? I

mean, there's actual snark in Young

Thaylor long before any of this.

>> It never escaped.

>> It never escaped. So, you know, tell me

a little bit about that because it seems

to me like in hindsight, you know, the

first time we met, we played golf

together after like a Twitter exchange.

And I remember thinking to myself as you

were saying this, I would go like, yeah,

well, obviously. And then you'd look at

me like, "No, no, no. You don't

understand. For 150 years, that wasn't

obvious." And so within the context of

this academic world, why was any of

applying what seems to be pretty logical

stuff, why was it resisted so much? Why

is that system built like that?

>> I can tell you while I was living

through that, the emperor has no clothes

was a recurring thought. Why am I seeing

that and no one else does?

And the no one else was just economists.

I remember giving a talk in the

psychology department at Cornell where I

was teaching and I was talking about

this theory of how people save and the

audience just starts laughing.

>> Yeah, that's what I did

>> and I was like pretty easy laughing and

one of my economist friends was there

and he had to assure them that I wasn't

making this up and that this wasn't a

caricature

of economic theory. No, there are

economists one floor up from here who

actually believe this is the way people

behave.

>> But they didn't even think of it as an

abstraction in the model. They actually

thought like, hey, this is how humans go

through life

>> or as if. Remember those magic?

>> Yes.

>> They don't have to know how to do a

present value, but they're acting as if

they knew.

>> That's right. That has a bit of a like

maxing works in mysterious ways type of

ruring to it.

>> Yeah.

>> Is that defensible as an argument the as

if or is that just kind of a a wiggle?

Look, it was the winning argument

when I started on this. And in fact, in

my first paper, which was published in

1980, my first behavioral economics

paper, it ends with a long response to

Milton Freriedman's as if. And he talks

about a billiard's player. It's an

expert billiards player, I should point

out, that he talks about. He says he may

not know physics or trigonometry

but he acts as if he did.

>> Is it really inferring that like the

like law of large numbers or crowd

intelligence or whatever you want to

call it where you go like well it

doesn't matter what the individual does

as an aggregate.

>> Okay so

>> when we look at a model it will average

out that the smart people and the idiots

all get to the midline which is the

model.

>> There are two things here. One is when

he talked about this expert billiards

player, I pointed out in this article,

you know, we actually study regular

people, not experts. So, you're a pretty

good golfer. I'm a mediocre golfer.

Neither of us play like Tiger Woods,

right? So, even though you're a pretty

good golfer, we wouldn't want to predict

the way you're going to hit a shot by

saying, "What would Tiger do?"

>> Thousand%. Yeah,

>> that was my first point about the

billiards player is let's just go to a

bar and try to predict what this guy is

going to do. Is the model going to be

the one that is optimizing or is it the

model of the regular guy at a bar?

>> Right?

>> And if we're studying investors,

they're not Warren Buffett.

You know, they're pretty far from Warren

Buffett. The second thing is and it's

sort of another version of the same

thing which is if we're trying to

describe behavior

whose behavior is it? So you know

there's a lot of discussion

in say monetary policy about

expectations.

So the the Fed will say we have to

change interest rates because we're

worried that if prices go up, people

will expect them to go up further. I'm

always asking my friends who are in that

field, whose expectations are they

talking about? If it's the, you know,

guy walking down Michigan Avenue, they

have no expectations about inflation.

They may have impressions of what's

going on now, like, oh, meat's high now.

>> Eggs,

>> eggs are high, right? Gasoline, right?

>> You know, I have an electric car. Even

I'm aware of the price of gas because

it's posted in those big signs that you

walk by, right? So, we know kind of the

level. Do we have real forecasts about

the future? No. Going back a little bit

now, how did you then go about designing

thought experiments, actual lab

experiments, experiments out in the

public

to take these erratic, if you will, or

nonoptimal

behaviors

and go back to the models that you

questioned and improve them, alter them,

change them. If you could give a couple

examples because I think they're kind of

fun, too. Let's talk about loss

aversion. Here's the first survey I ever

my my thesis which was a very

traditional bit of economics although on

a kind of exotic topic. It was on the

value of saving lives. So if we make a

highway safer and we save 10 lives a

year, how much should we be willing to

pay for that? And I decided it might be

interesting to ask people a question. So

I ask people suppose by attending this

lecture today you've been exposed to a

one in a thousand risk of dying. You

have this disease and there's one in a

thousand chance you're going to die a

quick and painless death next week. But

I have a cure here that I can sell. How

much would you pay for it? That was one

question. Another question was over at

the med school who were studying that

same disease.

We'd like to know how much you would

have to pay you to expose yourself to a

one in a thousand chance of getting that

disease. And there's no cure here. Now,

economic theory says the answers to

those two questions have to be the same.

So the amount I'm willing to pay to get

rid of it or the amount of I'm have to

be paid to do it should be approximately

the same. They're nowhere near the same.

So people would say, "Oh, I'd pay $1,000

to get that cure. I wouldn't do that

experiment for a million dollars." Now

they're lying because they drive they

>> Yeah. They do all sorts of things. Yes.

But they wouldn't choose to be in that

experiment for a million. So, okay. So,

that's buying and selling prices are

wildly different. Now, how do we get

that down to something more real? You

asked about an experiment. There's a a

famous experiment I did with my friend

and mentor Danny Conorman and our friend

Jack Kitch. And the way it works is is

very simple. We go into a classroom

and we did some of these at Cornell. We

would go and put a Cornell coffee mug of

the sort you can get at any campus

bookstore. We put it on every other

desk.

And then we say, "All right, if you have

a mug, we ask you each of the following

prices are you willing to sell?

Start at $10 and go down. And if you

don't have a mug, you get the same form

and say, "At each of the following

prices, are you willing to buy?"

And now the mugs are assigned at random.

People have had this mug for 30 seconds.

It's not their grandma's mug. It's been

in their possession for 30 seconds. And

what do you find? Well, the people who

have a mug demand twice as much to give

it up than the ones who don't have a mug

are willing to pay to get it. Why is

that, do you think?

>> Well, if I've got it, I don't want to

give it up.

>> That's it.

>> But I wouldn't pay much to get it,

>> right? The variance between retaining

something and acquiring it,

>> right,

>> are really wide. Like, what are the

consequences of that?

>> Well, it means there's much less trading

and much less change than we would

expect because we hold on to the stuff

that we have because we don't like

giving it up. But when there's a big

fire like they had in LA last year,

people are going to have to decide, all

right, now they don't have the option of

moving into the old house. What are they

going to do? The interesting thing about

these is that the way that we met is

that I was running experiments of loss

aversion with a restaurant. So I had the

these restaurants, I had people making

reservations, and if they had absolutely

not a single penny in, they didn't care

about anything. But you could take the

richest person in the world and once

they had $5 in for their reservation as

a deposit, it took the no-show rate from

14% to under 3%. And I wrote about that

and published it and these economists

from Northwestern

published an article saying that I was

an idiot and I should just run an

auction. And I replied to them

suggesting that maybe there's a little

bit of human behavior and and psychology

involved in this. and I think that I've

got it right and I have hundreds of

thousands of of examples as to why this

is working for my business. And Thaylor

read this and tweeted at me, but at the

time I didn't know who he was. And so

finally people said, "Hey, you know,

you've got one of the best economics

professors in the world who who really

wants to talk to you about this." And so

I was just doing it out of intuition and

experimentation,

but they're the same sorts of

experiments in a practical way that you

were abstracting into these traditional

models.

>> Conorman and I wrote another paper where

we tried to find out what people think

is fair.

>> Yeah, fairness is a really interesting

concept. You know, the Northwestern

economists that were dumping on Nick

thought that what he really should do is

just auction off the tables at 7:30 on

Saturday night for whatever price he

could get

>> because I'd be maximizing my utility.

>> Well, no. You'd be maximizing your

profit,

>> right?

>> And there is some rich guy who will pay

$2,000, especially then.

>> You know, you go back and said, "Yeah,

but they might not come back." The

questions that we asked in this paper

were scenarios like there's one there's

a hardware store that's been selling

snow shovels for $20 and there's a

blizzard and they raise the price to

$30. Is that fair?

And people say no. You know, but there's

one exception. You know, there's a group

that say absolutely yes, and that's

business school students.

So, I teach a class in decision-m

and each week I show them, look, here's

the data from some experiment. You think

these people are idiots, but look, you

do it the same. So, they may be idiots,

but so are you.

>> What's the example? But any of them, any

of these other experiment except this

one on fairness, the business school

students are different from the idiots

because they think of course you should

raise the price of snow shovels after a

blizzard. We learned that in micro.

>> Yeah. Well, that's the Uber surge

pricing. Tim, you know something about

that.

>> Yeah, surge pricing. I know it well.

>> Surge pricing. I thought at the time

that there's nothing wrong with search

pricing, but you have to put a limit on

it. And the example I gave, I tried to

convince the owner of Uber of this. I

said, suppose Uber existed on 9/11 and

you had Ubers charge $5,000 to drive

people back to Greenwich. How many days

would Uber still be in business? Right.

minutes. You can't do that.

>> You can't do that. And that's the

fairness principle.

>> That's right.

>> That proves the rule that we are

psychological. Everyone is a

psychological creature when it comes to

markets and interaction.

>> It might be the guys that are in that

Uber for five grand. But even they are

going to be a little pissed.

>> Yeah.

>> Yeah.

>> The thing is at the time when they would

have these surges like of 10x

They were not making any money off of

that. It would be fleeting. So, they'd

make a little bit of money just like if

Nick had sold one dinner reservation for

10 grand. Yeah, he'd make 10 grand, but

he'd have thousands of people writing

articles, thousand%. So Uber was making

a little bit of money and pissing off

millions of people and that was dumb in

a business where they had to fight city

by city to get permission to take people

to the airport. Mhm.

>> And so I think the important lesson is

that if you're doing business in the

real world and you have customers and

employees that are people, not agents,

then you have to do things a bit

differently. That's like the one

sentence summary of behavioral

economics. Richard, could you for people

listening and for me give an example or

two of how you take the research and

then apply it in the real world? You

mentioned effectively forced savings

earlier. Maybe that's a domain we could

explore.

>> When my father worked, he was an

actuary. He worked at a big insurance

company. He had the pension that was

prevalent at that time, defined benefit

pension plan, the oldfashioned kind

where how much you got in your pension

just depended on how long you worked and

what your final salary was. No

decisions.

And we gradually started shifting over

to the new 401k type that's called

defined contribution. Meaning you put

money in and invested and then you get

what you have at the end. Now,

when I started working in this area, one

problem we noticed was

lots of people weren't joining this

savings plan even though their employer

was matching contributions dollar for

dollar up to say 6% of their salary.

That's like the stupidest thing you

could ever do, right? You're making

$100,000. They'll say, "I'm going to

give you $6,000 as long as you put

>> save 6,000."

>> Yeah. In a tax deferred.

>> So, an economist would say, "Well,

>> 100% of people do.

>> Everybody will do it." And what we

noticed is in a lot of companies, only

half of new workers would sign up within

the first year.

So, how can we fix that? Well, remember

we talked about status quo bias. So,

here's a simple way. The way it worked

at that time was in order to join you

have to fill out a form and choose some

investments and then sign. And this was

a piece of paper at the time. Said, "How

about if we just change the form and say

there's this plan we're going to put you

in unless you fill out a form saying you

don't want it." Again, economic theory

says that won't make any difference.

Everybody's going to join. And certainly

just filling out a piece of paper,

>> it's not enough friction to change

things, right? I mean, we're giving you

$6,000, right?

>> But the first company that did that,

>> new employees now joined 90% instead of

50%. I wrote a book called Nudge, and

that's an example of a nudge.

>> I am fascinated by nudges. And tell me

if I'm defining this correctly, but some

feature of the environment that improves

decisions but doesn't force anyone to do

anything. Is that a fair Yes.

>> I think I'm trying to quote correctly,

so hopefully it's accurate. I'm pretty

sure I wrote those words.

>> Yeah, I think you did. One of the

examples that I've heard you

discuss, I think this started in the

Netherlands, but it is the fly etched or

otherwise put inside of urinals to

reduce spillage because a lot of guys

are on autopilot. Turns out they like to

aim at things.

>> I love that. That's what you of

everything that you read, that's what

you chose to pick.

>> Well, I picked it because at least most

guys listening have seen this. Yes, a

thousand%.

>> And my question is,

is there a certain halflife to the

effectiveness of nudges? Because I

remember the first time I saw one of

these, I was like, I'm definitely going

to get that fly. I remember it. And then

after a while, I was like, okay, I

realize this is just painted on enamel

or etched into the enamel. It's no

longer that interesting. And not to

extrapolate from myself to everyone, but

I'm wondering if you need to refresh

nudges as you might refresh many other

things that maybe Nick has experimented

with in the realm of business. How do

you think about the durability of these

types of nudges?

>> There's a good example of a nudge of

that sort here in Chicago. When Nick and

I drive back home, we're going to go on

Lakeshore Drive and there's a bendy part

And it's beautiful, beautiful road. And

a lot of people wipe out around these

bends. You really can't go more than

about 30. And it's a sixlane road. So

people think they can go fast. So what

somebody did around the time we wrote

that book, a little before, is they

painted lines on the road

that get closer and closer together.

That gives the illusion that you're

speeding up.

>> That's clever. And so you're just

instinctively tap the brake and then

don't wipe out your car. That's good.

Right now those lines, they keep

repainting them.

>> No one pays attention anymore.

>> Well, I don't know.

>> I don't know either.

>> I don't know. I think the fly in the

urinal probably

won't have any effect in the toilet you

use at your place of work where you know

you see it several times a day or

whatever.

>> But for the pension thing if we only

have to get you to sign up once that's

enough.

>> Yeah. So yes, attention it may be that

we have to do something different to get

your attention this time, but there's a

rule which is if you want people to do

something, make it easy. That's a rule

that's always true. The more complicated

you make things, the less people are

going to do it. I think that's pretty

much automatic in terms of

capturing attention.

That's what the business of advertising

is constantly trying to do.

And you know, clickbait on ads on social

media. Social media itself is in the

business of that,

>> right? Keep it simple is a formula that

always works and

getting your attention always works. But

it won't be the same thing that will

keep getting your attention.

>> So this turned into a whole field from

relatively simple concepts like that

called choice architecture.

>> And you've done consulting with various

companies, the NFL, all sorts of people.

I don't even know which ones I'm allowed

to talk about or not, so I have to be

careful. But

>> tell us a little bit about like when

does that become a bad thing? Can you

turn the nudge or can someone that's

malicious turn the nudge into something

that takes advantage of the lack of

self-control in these models?

>> Yeah. Sure. We always say we didn't

invent nudging. Adam and Eve, right?

>> Yeah. Yeah.

>> Then the serpent, right? There was, you

know, the apple. So, human nature has

been there all along. Husters have

existed forever. Charles Ponzi didn't

read our book, didn't read any of my

papers, neither did Bernie Maidoff. When

we wrote Nudge, it was saying, "Look,

here are some basic principles of human

behavior.

Can we use those to help people make

better decisions?" So practically

speaking, how do you then go into one of

the businesses that you've consulted for

and come up with through your framework

what they have overlooked?

>> Well, you want people to do more of

that. Why are you making it hard for

them to do it? I mean, right, that's the

answer. But where I was going with that

was the same principles can be used to

harm people. So if you go into a casino,

the whole casino has been designed to

get people to bet as much as possible

and to bet on things that

>> have the worst possible outcomes,

>> right?

>> Yeah.

>> And now we have online gambling and we

have places like Robin Hood that have

made investing

feel a lot like casino gambling.

>> Yeah. They gified it. Yeah, they're

making it easy, right? They've made it

easy to bet. It used to be you had to go

find a bookie. Now you open your phone

and you can bet on the game that you're

watching. And that's very tempting. So

the the principles of understanding the

customer and then designing the product

can be used for good or evil. I take no

responsibility

for somebody optimizing

an online gambling app to make it as

attractive as possible for people to

lose all their money. Don't blame me.

That's what's going to happen in a

competitive market with consumers who

are humans.

>> Richard, question for you. How long have

you been teaching your or how long did

you teach? It sounded like it was

current day. the decision-m class

>> 40 years.

>> Okay. You've had time to work on your

material.

>> Yeah, I should be better at it, right?

>> Well, I mean, I wasn't going to go that

far. I was going to ask you, what seems

to be the stickiest of what students

repeat back to you from that class as

concepts, frameworks, stories, could be

anything at all. And I suppose the

precursor question is what are they

hoping to gain from the class in the

first place? What's the promise of the

class? But I'd be I'd be curious to know

what sticks.

>> First thing I will say is nobody thinks

they need a class in decision-m

because they're great at decision-m. Why

would they need a class in that? Do I

need a class in breathing? Although

you're going to tell me actually you

don't know how to breathe, right? And

yeah,

>> I've got a frictionless ecourse for you

with lots of inapp purchases. I do hear

from people who took a class from me at

Cornell 40 years ago, which is very

gratifying. I'm glad that they even

remember that they had such a class.

What do they remember? They remember

stories. That is the only thing people

remember. They do not remember a

formula. They don't remember some

abstract concept. They remember a story

or they remember a demonstration.

Take the concept of the winner's curse.

>> This is an obvious move on my part since

I have a new book that's called the

winner's curse. But let's talk about the

winner's curse because it's a great

example. The way you do this in a class

is you bring in a jar of coins and you

say, "I'm going to auction this off."

You get the money in the jar.

>> You mean like the high bidder gets

>> high bidder, right? High bidder gets the

money. So, there's $75 worth of coins in

there and the high bidder gets 75 bucks

and they pay me

>> something. That's what we're getting to,

>> right?

>> Yeah.

>> Do they know that it contains 75 or it's

an unknown?

>> It's like a jelly bean estimation or

something. Exactly.

>> Yeah, I got it.

>> You can use jelly beans or whatever

paper clips.

>> So, what what do you find in that? You

always make money on this.

>> The creator of the jar makes money.

>> Yeah. The professor always makes money.

Yeah.

>> Because you have this jar. or it's worth

$75. There will be somebody that'll beat

a h 100red or 150

>> and they win.

>> And they they're the winner.

>> They win. Yes.

>> That experience, you can tell people

this abstract concept of something

called the winner's curse. They won't

even remember what it means cuz it's got

a weird name. It doesn't have anything

to do with cursing or witches. But they

remember, oh yeah, that that guy who bid

a lot too much

>> bid too much. Now this concept was not

discovered by psychologists. It was

discovered by

>> engineers at Arco, an oil company. There

were bidding for leases

in what I'm going to insist on

continuing to call the Gulf of Mexico.

And what they discovered was the leases

that they won had less oil

than the engineers and geologists had

told them would be there.

And they said, "Gee, that's weird

because we thought we had great

geologists

and what's the problem?" And the the

problem they figured out, which very

subtle, which is that the auctions you

win are not a random sample of the

auctions you bid in. They're the ones

where you're the highest bidder. And if

you're the highest bidder, there's a

good chance that

>> you bid too much.

>> You bid too much. That leads to an

interesting conundrum or you know like

it's almost like war games where the

only way to win the game is not to play

if you're Arco which means you should

just go out of business.

>> Well, so

>> you know so how do you win that if you

are in that market where you have to bid

on these things?

>> That's a great question. So all right

it's 1970 or something whenever they

published that paper. they get this

finding. What should they do?

And right, one would be to go into some

other line of business. Another would be

to bid less, but then they're not going

to win very many auctions.

They came up with a pretty clever

solution.

>> Was it collusion?

>> No,

>> cuz that wouldn't work. But I bet it's

something like that.

>> Major League Baseball.

>> Major League Baseball does that.

>> That was their solution

>> and they were outed on that. No, their

solution was to write a paper. Think

about it, you know?

>> So, they made everyone aware of it,

>> right? So, instead of going to all the

other team owners and say, "Hey guys,

when Catfish Hunter becomes a free

agent, don't bid."

You know, that's illegal. But publishing

a paper saying people are bidding too

much and the more bidders there are, the

less you should bid. That's perfectly

legal and useful.

Now, it turns out that there's a funny

story about this, which is the version

of this book, The Winner's Curse, that I

published in 1992.

The editor who bought that went to

Princeton University Press. And then

when Nudge came along, there was an

auction for the rights to bid it. And

did he pay too much?

>> No, he didn't bid. And I said, Peter,

how come you didn't bid on this book? I

think it's going to sell. He said, "No,

I read The Winner's Curse." I knew

>> I can't bid on your book.

>> Yeah. Right. And no, don't bid in

auctions. So, I said, "Well, you know,

maybe this one should have been an

exception. I haven't forgotten your

question." I don't know whether people

will learn that theoretical lesson, but

they'll remember the jar of coins and

they'll remember stories. You know, I

had two psychologist mentors, Amos

Diverski and Danny Conorman. now both

dead. But Amos sadly died at 59.

At his funeral, his son read a little

note that Amos had given him that said

something like, "I'm not going to get

this exactly right, but he had cancer

and had a few months where he knew he

was dying and was spending time talking

to his family about it." and he wrote a

note saying that he thinks the time

they've been spending talking has been

useful and that he thinks people learn

through stories.

And I've put that little note in my

first class ever since then. And I say

to people, look, people will tell you

don't take this class. All he does is

tell stories.

And I said, that's true. And talk about

sports. That's also true. But here's

this line from Amos, smartest man on

earth. That's the way you learn. You're

going to learn through the stories. We

show people that they're overconfident

and

>> in their decision- making.

>> Yeah. Or or in judgments. I mean, you

can you ask people what's the length of

the Amazon River and give 90% confidence

limits. meaning give a high and low

estimate so that you're 90% sure that

the correct answer lies somewhere. Yeah.

>> And the right answer will be within it

not 90% but like 60%.

>> Yeah. I would not wager on that. I have

no idea.

>> Yeah. So you know you have no idea but

still the limits are are too narrow. By

the way, the same is true for CFO CFOs

of Fortune 500 companies. I have two

friends at Duke who do a survey twice a

year of CFOs and they're asked what's

going to be the return on the S&P 500

over the next year and they are asked

for a high and low estimate and the

correct answer comes out between those I

think they asked for 80% limits and it's

like

>> yeah no

>> a third of the time I mean now it's true

that that's an impossible task meaning

nobody can predict the market but you

should know that you can't predict the

market. So a correct answer for 80% is

well it's going to be

somewhere between up 20% and down 10.

That's a reasonable forecast.

>> Yes.

>> But instead they say up 10 minus two%.

Yeah, there were there was a whole

decade where the average downside

scenario was zero.

>> Well, it's a recency bias, right? Like

whatever happened the last couple years,

people tend to extrapolate into the

future.

>> Well, they were doing that right up

until the financial crisis.

>> Yes.

>> Right.

>> Yeah. Yes. Yeah.

>> So, they were most overconfident

before the [ __ ] hit the fan. Exactly.

Right.

>> So, that was Kakona saying the [ __ ] hit

the fan. Not

>> I'm allowed to swear on this podcast.

>> Oh. Oh, okay. That's good. Oh yeah, you

can swear. Yeah, you can feel free to

fire away.

>> You're fine.

>> So, the winner's curse sounds like a

abstract concept, but Nick knows I wrote

a a paper about the NFL draft

that applies exactly that concept. Teams

really think it's valuable to have the

first pick or one of the top 10 picks.

And then you just cited the Chicago

Bears and their quarterback picks and

that's all you needed to do.

>> Yeah. I mean, and you know, I think the

Bears traded up twice to pick

quarterbacks at least.

>> This is always It's not just the Bears,

though.

>> It's not just the Bears. No, it's not.

This is available.

We live in Chicago, right? But they're

not the only team that does this. and my

co-author and I of that paper and and

somebody else have been again updating

that and nothing's changed.

>> But then people actually then hire you

to tell them this because for some

reason they can't believe it.

>> Yeah. But then the problem is that

there's an owner. Let me ask you,

Richard, about the the hiring just for a

second because the example with Arco

involved writing a paper that draws

attention to the fact that if you bid

the most, you're likely going to be

overpaying, which is a very interesting

strategium. I'm wondering in the case of

say an NFL team, what is it that they

can do? How can they change their

behavior or bidding behavior based on

you describing the winner's curse and

sort of all the connective tissue around

it? If they have a top pick, they can

trade down.

>> If you have the first pick, you can

trade it for the seventh and eighth

picks or five, count them, five second

round picks. And those five players will

cost you about the same

>> in dollars in contracts. Yeah.

>> Right. And if you look, I mean, any

sports fan can rattle off the number of

very high picks, quarterbacks, and

others that have been complete busts.

Here's the one statistic from that paper

that I think is most compelling.

take the players at any one position,

let's say running backs, and rank them

in the order in which they were picked.

So, we have the first down to whatever.

Now, we ask, what's the chance the

higher one picked is better than the

next one. My co-author Kade and I used

to we called this the better than the

next guy stat.

>> It's like a tennis ladder,

>> right? If teams are perfect at

predicting, it'll be 100%.

>> Yeah.

>> Right. If we rank it tallest to

shortest, that'll be 100%. Right?

>> If they're flipping coins,

>> it's 50%.

>> Sure.

>> It was 53%.

>> All that work, all of the prediction,

all of the people, all the scouting, all

the combine, pretty much coin flip.

>> Yeah, it's pretty much coin flips. That

means more picks are better. So Tim's

podcast is really about taking, you

know, as he always says at the beginning

of everyone, the high performers and the

people who see things differently and

trying to take the nuggets to that

people can apply to their lives. Mh.

>> And so I know that like some of what

you've studied and done,

you've looked at people's habits like we

were saying at the very beginning where

everyone makes perfect decisions

and of course that's not the case and

that's really what the whole podcast is

about. How to change those bad habits

into positive habits. And so what kind

of frictions can we create in our lives

where we can improve our

decision-making? We can be more like

that ideal agent that actually cares

about our economic utility without, you

know, going nuts and sitting in a room

with spreadsheets. But how do you take

these things that you've studied in

human nature for 40 years and apply them

like to my life normally?

>> Let's go back to the cashews. This is

stuff everybody knows. Your mother told

you. If you're trying to quit smoking,

you don't have cigarettes around. If you

are drinking too much,

>> lock the wine celler.

>> Yeah. Lock the wine celler. Make it

harder to do the stuff you want to do

less of and make it easier to do the

stuff you want to do more of.

>> Yeah. I mean, that seems obvious.

>> Well, not so much for economists.

>> Basically, everything I've done

has seemed obvious after the fact.

selling

reservations at a restaurant instead of,

as you used to say, having five people

you pay to say no on the phone. That

seems like an obvious thing to do. It

does, but I will say that

since I have sold the company, we'll

talk about the law of one price, right?

This penge, if it's identical, should

cost the same kind of all over the

place. And that's where arbitrage

opportunities come from and all of that.

And classical economics would say, well,

those get scrubbed out like because of

perfect information and all of that. But

as it turns out, you have to then

convince business owners that, hey, this

is not a controversial idea and you can

indeed charge a deposit and change the

economics of your business. And I spent

over a decade doing that. And it was

very difficult actually. And no matter

how easy we made that choice

architecture for them as business

owners, their psychology was that well

this is a controversial topic. And then

since I've left the company, what I've

watched is that one of the big

competitors is now simply going to other

restaurants, some of the premier

restaurants, and they're saying, "Well,

we'll give you $10,000 to leave talk

upfront cash. I would go. Why would they

want to give me free money? There is no

such thing as a free lunch, but it works

remarkably well. And that sort of thing

is also an interesting psychological

problem.

>> You know this better than anybody, but

people are good at something

like being a chef. Many restaurants are

run or owned by the chef.

And being a good chef doesn't make you a

good business person.

And the same is true of

being a coach.

You don't get to be the coach of a team

just by being smart. You almost always

have to have played that sport.

And that doesn't make you a good

decision maker. You know, it's

interesting the field of behavioral

economics and the field of sports

analytics.

You can think of think of Michael

Lewis's book Moneyball. It's the same

field. Why do I say that? Well, again,

people optimize, right? So, economists

would say, well, teams are all going to

do the strategy that maximizes their

chance of winning. Let's take

basketball. There was an innovation 40

years ago, the three-point shot. Before

that, all shots are worth two points.

Now, you have a shot that's 50% better.

Now, every team had somebody who could

make 40% of their three-point shots,

and teams average about half of their

two-point shots. Now, Nick, see if you

can keep up with the math here.

>> Yeah.

>> 40% of three

>> expected value

>> is greater than 50% of two.

>> Yeah. How long did it take them to

figure that out?

>> Basically 40 years.

>> That's right.

>> Steph Curry.

>> Steph Curry. Yeah. Well, right now I'm

going to say the words Michael Jordan.

Give me your image

that comes to mind and I can tell you

what it is. It's Michael

taking some last second shot

somewhere mid-range with two guys

hanging on him. Now that even if you're

Michael Jordan, that's a low percentage

shot. Steve Kerr, who's now the coach of

the Warriors, was on the team with

Jordan,

for an entire year, his three-point

shooting percentage was 50%.

>> Was that true? Really?

>> Yes.

>> I had no idea.

>> And how many shots a game do you think

he got?

>> Like one and a half or something.

>> Yeah. Right. Yeah. Right.

>> Right. So if you have a look at a plot

of threepoint attempts over time, it's

been going up but very slowly.

>> Yeah.

>> And so I'm friends with Daryl my who's

the general manager of the 76ers. I

always tease him that he got to be rich

and famous because he was the first guy

to calculate that point4* 3 was greater

than.5* 2. He's actually a really smart

guy. But that's kind of true.

>> And then that happens everywhere around

us.

>> Yes, there are examples of that. And

again, you know, when I came from

Cornell to Chicago, I came and gave a

job talk. It's called an interview and

you present a paper. and they were

taking me to lunch and we walk out the

door and there's literally a $20 bill

lying on the and people think I'm making

up the story because it's sort of an

apocryphal economic story that

economists look at that it can't be real

because otherwise somebody would have

already picked it up. I picked it up. So

economists really they think there

aren't these $20 bills on the street and

there kind of are.

>> There are. But then what I was going to

say is where do you put that? So I want

to just touch on a little bit my

favorite concept of yours of all because

it comes up in my household and in my

businesses like once a week and that is

mental accounting.

>> Oh yeah.

>> And if you could just go over because I

think this one might be the most

applicable to every single person that I

know because people are incredibly

irrational about this. Explain what that

is. In economic theory, there's money

and it has no labels.

There's just you have wealth W and then

you figure out and it doesn't matter

where it is or how you got it or that's

it.

>> Now, humans think about money as sort of

coming in categories. And let's suppose

you take out a pair of jeans you haven't

worn in a long time and you find there

are $300 bills in there. You don't know

exactly when you left them there. Oh,

that feels like a windfall.

>> Jackpot, right?

>> I can go have a nice meal.

>> So again, the the standard theory is

money has no labels. Now, here's a

policy version of this question. In the

financial crisis, the Obama White House

had to there was going to be some tax

refund to stimulate the economy. And the

question was, should we give it in a

lump

or should we spread it out? Now, the

economists will say, does it matter?

It's W. That's it. Right.

>> Yeah,

>> it matters. I'm not saying I know

exactly what the right answer is. It's

kind of a complicated question,

>> but the point is is that people take

sort of money and how they acquired it

matters to them,

>> right?

>> Like if I win $100 off you at golf, I

might go like, "Well, I'll buy a bottle

of wine with that." But really, it's

just part of my cumulative wealth. And I

should have just done that anyway

because I had another $100. But that

comes true like we're selling our house

right now. And

>> that money, I'm pretty sure you ought to

just give that to me. So, my house is

going to get sold. And so, there's this

concept now that, well, that's the money

for the next house, right?

>> Or the condo we're buying in Chicago as

we downsize. Somehow the budget is tied

from one house to the other even though

it's completely irrelevant. Like, the

money is going to come in from the house

sale. And I can use any pool of it's

just in the big swimming pool. It

doesn't matter which drop you take.

Right.

>> Right. And in our companies, I think

businesses do a terrible job of that.

People get budgets. You know, they own

that budget and they look at tax savings

that the company might get as completely

different than earnings that they might

get and they spend it differently and

they think about it differently. And

boards I've been on are like,

>> yeah,

>> are talking about all this. And what we

all said in our businesses, we tried to,

Steve Bernaki, I'll give you a shout

out. Every dollar spends the same.

They're all the same. So, I got to know

the CEO of an airline. I won't mention

which one. And I was trying to convince

them before CO that they should get rid

of change fees. I think I was also

lobbying for getting baggage fees. And

he told me, well, you know, there's a

guy

they have a billion dollars a year in

baggage fees.

>> Yeah.

>> There's a guy who owns that.

>> He ain't going away. Yes. of course

owns. What does that mean? It's not that

the money goes to him.

>> No,

>> he's the baggage guy.

>> Yeah. Yeah. Yeah. He's pricing out the

baggage.

>> No, it's it would be like if in your

restaurant Well, I'm sure there was a

beverage manager, but that money is the

same as the

>> same money as all the other. Yes.

>> So people the mental accounting concept

is don't do mental accounting basically,

right?

>> I mean, now it can be helpful. So,

putting money into

uh children's education account,

that can be smart and treating that as

offlimits.

>> Mhm.

>> Some people have trouble spending too

much. Most people have that problem.

Some have the opposite problem. And so

it's just like we were talking about you

want to hide the booze and put the

exercise equipment somewhere where it'll

be easy to use. It's the same with the

money. So you can have a fiction.

>> So there could be good fictions and bad

fiction.

>> Yes. Yes. And now you know part of

mental accounting probably the biggest

mental accounting thing is the so-called

sunk cost fallacy. And the idea is

if you paid for something, so we go out

to dinner and we've bought some dessert

and we realize, you know, God, we're

really full and neither of us need to

weigh more. We'll just say that, but you

know, we paid 30 bucks for that dessert,

so we got to eat it, right? That's dumb.

And again, every economist

teaches that. And this is this sort of

discussion I used to have in the old

days. I said, "Look, why do you have to

teach people the sunk cost fallacy

and then assume they already know it?"

>> Yeah.

>> You know, people would say, "What do you

mean? I can't waste that."

>> I mean, I fully admit your wine example.

I do.

>> I fully admit this. And every time I do

it, I think of the sun cost fallacy

because, you know, I've got this old

bottle of wine. It's now worth $500 or

$600. I would not pay $500 or $600 to

acquire it, but I will gladly drink it.

But I won't go buy a $500 bottle of

wine, right? And that's it in a

nutshell, right? And that's literally I

built the whole company off that. Like

the entire company of talk was built off

that one concept.

>> Wait, Nick, could you expand on that?

How is that built off of that?

>> Well, you know, the big friction in

>> and maybe you could explain it. I would

have mentioned it briefly in the intro,

but since it's come up a few times, the

reservation platform talk, maybe you

could just give a little bit of

background.

>> Well, he doesn't own anymore now, so you

know, he doesn't need to plug it.

>> No, no, no. I'm not I'm not trying to

plug it. That's how we met. I got into

the restaurant industry by accident in

some ways. And then when I got there, I

saw all these sort of irrational

behaviors, right? And one of them was

that people would make reservations for

restaurants and then simply not show up.

And it's a big number. It's like 12 14%

of the people just wouldn't show up. And

then even at a destination place like

Alineia that I used to own, you know,

six, seven, eight% of the people

wouldn't show up. And what I realized

very quickly was that if people had paid

for it, they would show up. And they

would show up at all costs. like the dog

could have died and like you know the

snowstorm is happening but they're going

to figure out a way to get there because

they have paid some amount of money

whether it's the whole or the half it

doesn't really matter and it's

fascinating because

if something more important lines up or

something has more economic utility to

you should in classical theory just go

well screw it like that's already done

I've already spent that $300 or whatever

it is.

>> Y

>> and now I have something that's more

important or more valuable.

>> But people cling to that thing very very

very very strongly.

>> I'll tell you a funny story. My daughter

lives in there was a guy a kid in the

neighborhood grew up to be a pitcher for

the Mets

and

he was pitching in some first round

playoff game and I noticed that and I

said, "I think I can get you tickets to

this game. Why don't you go? That'd be

fun." And she said, "Oh, that's great.

That's great." So I'd look online at one

of these ticket sites and tickets are

this was a first round. It wasn't that

expensive. So $300 $400. But then I

wasn't sure which ones she would want

and how to get them to her. So I say,

"Okay, I'll send you $1,000.

You pick which tickets you want and take

the rest to buy hot dogs." So she texts

me back.

>> Now she has a choice.

>> She texts me back and says, "Oh, this is

just like in your book. If you send me

$1,000, I'm not gonna spend it on

baseball tickets.

>> Right. Right.

>> Just last week, I learned my lesson.

We're David Burn fans in my family, and

David Burn had a show and where she was

playing. I sent her the tickets.

>> Yeah. Yeah. Yeah. Yeah.

>> And she had no joint. They were free.

>> Well, they're free. They're mentally

accounted for as zero.

>> Right. So, that that was the best gift

ever.

>> Yes.

>> I'd love to talk about cognitive biases

for a second. A few things have come up

already.

>> Sunk cost fallacy. I think maybe you

were referring to something that I might

put under the category of endowment

effect with maybe the mugs.

>> Yeah,

>> might be mixing that up. But my question

is what are good examples? I can think

of a few for myself actually as a

backstory. I bought books on cognitive

biases and the framing around the

reading for me was things to avoid,

right? These are things that I want to

avoid. These are yellow flags. But what

I realized, at least for myself, and

maybe I'm misapplying the term, but I

could basically do what Nick did to his

customers making reservations to myself.

For instance, I could prepay for

personal trainer or something like that

and it would make me more inclined to do

the thing that I say I want to do that's

good for me.

I know of actually wrote about the case

of two engineers. They worked at tech

companies. They made perfectly good

money, but they bet each other

effectively. It was a bet $1. So, it's

kind of like trading places, but if they

would show up at the gym at the same

time to do something like 15 minutes of

treadmill and if somebody didn't show

up, they had to pay the other person a

dollar. And these are two people who had

failed at every exercise regimen prior

to that. and they both ended up losing

50 plus pounds, even though they didn't

really know the nuances of exercise or

anything like that. So, I'm I'm curious

if any examples come to mind where you

can actually use cognitive biases to

your advantage.

>> I'm a big believer in that that you

know, a good way to get yourself to do

something is have a commitment,

>> pay for it,

>> and pay for it.

>> It's a monetary commit. It's pain. It's

a little bit of pain,

>> right? I have some young colleagues who

wrote a paper called paying not to go to

the gym. So yes, I do Pilates and if I

make an appointment with my trainer then

I go. There's a clever experiment by a

young colleague of mine called Katie

Milkman who's big in this behavior

change space and she has ran an

experiment

with getting people to go to the gym

where what she did was she gave them the

Hunger Games audio book and they could

only listen to it when they were on the

treadmill.

The idea is you pair something good with

something that you don't want to do.

>> Mhm.

>> So if you go then

>> you get to hear the next chapter.

>> You get to hear the next chapter.

>> Yeah.

>> And it's like if you're binging, imagine

to watch the next episode. First you

have to run around the block.

Temptation bundling. That's what you

>> That's it. Yeah. It strikes me that a

lot of the experiments you've done

required finding groups of people and

then testing them methodically and then

putting rigor to some things that were

maybe a little amorphous and whatnot so

that the the academic community would

accept them as rigorous enough to be its

own, you know, department and ultimately

win a Nobel Prize.

And at the end of the day, that seems

like those tests and experiments are so

much easier now with social media, with

the internet, with the ability to engage

with huge populations of people. Is that

true? Has the field like sort of

utilized that? I know you've cited eBay

auctions in some of your papers. Yeah, I

think the big thing as you know I took

on a task a kind of a weird task of

taking a book I wrote in 1992

and taking on a young co-author and

going back and saying did we make all

that up or how does it hold up?

>> How does it hold up? It holds up and the

kind of encouraging thing is that we can

go from the lab and now to the field.

So, we were talking about mental

accounting. Here's a funny mental

accounting result. During the financial

crisis,

the price of gasoline fell

like by 50%.

So,

what do people do now? Remember, it's a

financial crisis, right? So, people are

tight for cash, but their gasoline

budget

is overflowing. They have a little

compartment in their head that's for

gas.

>> So let's say they spend a hundred bucks

a week at the gas tank

>> and

now it's 50 bucks. So what do they do?

Well,

>> time they start treating their car to

occasional tanks of high test.

>> Oh, really?

>> Now that's really stupid. Your Honda

Prius, it's not gonna do any better with

>> premium gas.

>> With premium gas, it's made to run on

regular. No matter what the gasoline

companies are telling you, the more

expensive gas isn't better for 90% of

cars. But what they found was when the

price went down, they would buy more

expensive gas. Now, you know, you and I

would say if we were going to do some

mental accounting with that, we say,

"All right, we could upgrade the wine."

>> Yes. I always say that.

>> That's always we would always do it

anyway. or they buy better olive oil,

you know, instead the store brand. And

the bigger picture is that's kind of one

of the lessons in this new book is all

the stuff that we found in thought

experiments and laboratories now because

of big data

you can find in the real world. And like

this paper, they had data from millions

of shoppers at a large box chain store.

And so they could show not only are they

upgrading the gas, which is stupid, but

they're not upgrading the orange juice

>> or purchasing in bulk to save money

during a crisis. Yeah.

>> Right. Right. You're right that it's

much easier to run experiments now. And

of course, companies are running these

experiments every minute. The largest

economics department in the world is now

at Amazon.

>> Mhm.

>> 100 PhDs in economics working at Amazon,

>> which could be good or bad for them.

>> Well, according to my

>> I was going to say it depends if they're

the right stripe, right?

>> Yeah. I think they're getting pretty

good economists. uh how many do you

think work and maybe the label of

economists is too confining here but in

terms of working with mass data sets in

the real world say a palunteer I don't

know if those numbers are public but I

would imagine they also have an entire

army of people who are working on this

stuff

>> and you know the mix of data scientist

and econ some of them got their training

in economics department so exactly what

their training is, but there are people

with the equivalent of PhDs in economics

or computer science working at all these

companies.

>> To rewind the clock quite a ways, you've

done a lot of amazing things in your

career. I was looking at an interview

with you on Nobelprize.org

and there's a line here I'd love for you

to explain. And my thesis adviser

famously said when interviewed about me

of my time in graduate school that quote

we did not expect much of him end quote.

So why is that the case? I was not the

best grad student in my class and I

wasn't in the best department. Actually

I wasn't a great student in any way but

I certainly knew

I was not the best grad student in my

class. Why is that?

>> I was good in math but not as good in

math as the people who go to get PhDs in

economics. Mhm.

>> And I was better at

noticing

the problems with economics

than

you can think about it as you could be

somebody who can draw

perfectly

or you can be somebody who thinks of a

different way of drawing.

>> Mhm. And I was more that guy. The only

way I managed to succeed, even get a job

as an economist

and get tenure, much less get a Nobel

Prize, which was certainly never

on my radar when I was a young person,

was to think of a different way of doing

economics.

and I more or less had to invent

behavioral economics

to have a career

>> otherwise I would have done something

else. I was reading in preparation for

this a bunch of his old source material

papers like I've read Nudge I read

misbehaving and all of these and I went

back to some of the source papers and I

was literally laughing out loud. I mean,

they were written 30, 40 years ago. And

some of these same problems and the same

human nature shows up again and again

and again. And I it's just a fascinating

thing that within this entire academic

discipline for hundreds of years, no one

said, well, the emperor doesn't have the

clothes on this. And I think that's what

you've done really, really well time and

again.

>> Thanks, Nick. I always say that

I never changed anybody's mind. What I

was saying was heresy. It was the

emperor has no clothes. I had been

thinking, look, see that mole on it on

his belly? You know, you can't see that.

You're talking about the three-piece

suit. But sarcasm doesn't really

convince people. So the strategy I

adopted at some point I mean I had to

write some papers but the strategy I

adopted to

broaden the field I always say instead

of changing people's minds I would

corrupt the youth.

One example of that is there's a

foundation in New York called the

Russell Sage Foundation

and they wanted to support behavioral

economics

when we were just getting started and

they gave us some money and they said

you can do whatever you want with it and

what we decided to do is start a 2 week

summer camp. That's not the official

name but everybody refers to it as the

summer camp. So it's two weeks. We got

30 grad students from around the world,

best students in the best departments

and we would teach them about behavioral

economics. There are graduates from that

graduates I mean attendees

>> alums

>> alums in the best economics departments

around the world. They're editing

journals now. the new chairman of the

Berkeley economics department was at one

of those and I think it's still the

truth that people my age they never got

convinced

and it's the 30 and 40 year olds

>> Mhm. The other thing I did was there was

a new journal called the journal of

economic perspectives and it tells you

something about economics that this

journal had to be created. Journal

articles had gotten so arcane and

technical that the papers were not

understandable

unless you were in the sub field.

you know a macroeconomics paper was not

understandable to a labor economist or a

finance professor. So they started this

journal and the idea was the articles

would be written in a way that would be

accessible to any economist or uh grad

student or even advanced undergrad. My

friend Halvarian who was the chief

economist at Google. He was an editor at

this journal and he and I were having

lunch one day and we got the idea they

were going to have some regular features

and the idea was I would write a column

in this journal on anomalies. So these

were pokes. There was one on the

endowment effect that we've talked about

that buying and selling prices are

different. There was one about the fact

that stocks that have gone down a lot do

better than ones that have gone up a

lot. So I started writing this when I

was about 40. And it it's kind of an old

man thing to do to

write stuff like that. And there was a

colleague of mine at Cornell who I

overheard telling somebody about this

journal. Well, I don't know whether

articles in that journal should count.

And I'm thinking,

>> what are they counting?

>> Yeah. What are they counting?

>> Right. Right. Right. Imaginary economist

points.

>> Right. Yes. You know, now there is

something you can count which is

citations. Citation is if somebody else

writes an article and cites your

article, those are counted. And actually

publications in this journal get a lot

of citations because people read them.

People can read them

>> because they're readable. Yes, they can

read them