Discussion Section: Understanding Incentives, Part 2, featuring Steven Levitt

[Music] I want to ask you about two things one first off what is it that economists have to bring to the world and now I'm not talking about congressional testimony I'm saying I'm gonna talk to people in the lay public and I'm gonna say you think like an economist what is that that you can teach people about thinking like an economist that they could yes what has been your experience what has been shocking to me is how little economics pervades almost every other aspect of life take for instance businesses so I've worked a lot with businesses with with really big successful businesses with the people the top of those businesses and they just plain almost to a one do not think like economists and so what does it mean to think like okay so I think there's some ink I really think of economics is being applied common-sense that's like 80% of economics so there's a set of things that aren't obvious in economics but there's just there's a really big the most important thing the economics are so obvious okay I mentioned one already which is incentives right that that if you if you change a rule and people care about that rule they're gonna change their behavior in response to I mean nothing could be more obvious everybody understands that at some level and yet how many times either in policy or you know in a business do you see people just ignore that I mean I think one of the one of the best examples of that is from our colleague John lists work about the Endangered Species Act so part of the Endangered Species Act says that there has to be I think it's a one-year window for discussion and review once a species is like being mentioned as being endangered so what is John find when he goes and looks at the data not surprisingly people who are thinking about building they build like maniacs in that year before because there's no restriction on what you can do you know that in the future like not a to build and still they destroy the habitat at the highest rate of all time in that one year window okay so in indeed the Endangered Species Act has been very effective at endangering species because it gives builders exactly the wrong incentives to build immediately even faster than would otherwise okay it's totally obvious to an economist once once you think about it that that's got to be a problem I mean you think good health care all of the cases where when we don't take into account the incentives of the different players so that's one thing about thinking like an economist okay the other thing is just you got to think but also part of it is it's important to get that evidence out there too because what I find a lot of times is you'll say well Jesus isn't that an obvious implicit all nobody'll think of that that that won't really happen that's that's blackboard thinking that's you know people don't really behave that way and what you're saying is lo and behold they actually really do behave time and time again you find that people respond and you know I I can't tell you the number of cases I've come across like that and people point to data that says they don't respond yeah and often it's that they don't look at the data where the response actually is going to occur and you do see people respond so I think part of the message has to be hey this is what economics tells us and by the way this really does work yeah this is this is how the world works yeah one of the things I've learned so I know you want to talk later about what he cannot least to learn in the world yes but one thing I have learned from the world that I think economic could benefit a lot from is the power of storytelling I think in economics like if you use the word storytelling people's like but you know that's not power scientists you know we we don't use stories what I have learned is that a simple story like so what I just told about the Endangered Species Act that's just a story right but people respond to that regularly people I can talk about incentives all day long I put it up an equations on the board but that kind of story works and I'll tell you another story about incentives which really changed the way I think about incentives because as you said often times people say well maybe some person is going to take advantage of some loophole but it's it really gonna happen but when I was trying to potty trained my three-year-old daughter my wife had completely failed she had been potty trained but then she had completely reverted and I my clerk this is a simple economic problem it's all about incentives okay I knew what my daughter liked she liked M&Ms okay and so I just said to her hey I'm sweet Amanda every time you go on the potty I'm gonna give you a menem's okay and literally she said really and I said yeah okay I'll go to the potty right now she literally walked over to the potty went to the bathroom I gave her some minimums and I'm like let the economists solve the problem so for the next two or three days it was perfect not one accident she would announce she had go to the bathroom I deliver her M&Ms everything was great yeah on day three she said he can all have to go to the bathroom I said okay I follow to the bathroom she dribbled out like two drops okay and so I gave her the M&Ms and then not like 30 seconds later said we'll have to go to the bathroom okay she goes she dribbles up two drops 30 seconds later she says I have to go to bathroom it was a classic example of I had given her an incentive scheme and she had managed a three-year-old in three days had managed to understand my incentive scheme and to game it in such a way that it's such a bladder control now that she could cut off the flow in order to double triple quadruple the him.how Nova of M&Ms she was gonna get and to me that was really interesting because here I was like a world-class economist and within three days I got outsmarted by a three-year-old and what I thought was a pretty good incentive scheme and I and I always keep that in the back of my mind like if my three-year-old can beat me in three days how in the world you know can can the government that's trying to put out incredibly complex regulations about oil drilling not expect that an army of lawyers and and high paid consultants aren't gonna undo and find the loopholes everywhere so I think I my basic rule is in a world in which people care about something you can be absolutely certain that they will get that that through the force of like the market and and other things they will get the best for themselves and so it's really I mean it really drives one of my guiding forces and thinking about policy or incentives in general is that the more complex the situation the more complex the world the simpler the policy has to be because um complex policies and complex world leave yourself open to tough to gaming in ways you can't even imagine where it's these simple rules you can start to think about the ways in which they'll be gamed I think the other side of it is I don't think we should question so much whether you get what you pay for but you better be careful about what you're paying for it the problem with incentives isn't that they don't work it's actually work too well and often people respond to incentives not in the way you hope they will but in the way that most effectively takes advantage yeah I remember this when I used to I used to coach youth sports and you design these little games to play in practice and the thing is they had an objective which wasn't really to win the game you were hoping the game would induce them to practice a skill that would ultimately help them and you had to keep changing the game because they would always figure out a way that they could do very well in the game but it no longer correspond to what you were trying to accomplish and and you know they were a little worse than your three-year-old maybe they took more than three times to learn but you found that those games would degenerate because they would Mac they would it wasn't that they didn't respond to incentives they were really good at responding to incentives I was just not as good at designing incentives that got what I wanted it's amazing how effective when people care about something how they figure out you know through accident through experimentation whatever how to optimize I mean it's one of the basic I mean I think one of the basic principles of economics going back to idea of what he can Amin spring roll is the idea that people optimize and they that they that they change your behavior to figure out how to get what they want [Music]

Channel: Becker Friedman Institute at UChicago - BFI

Views: 1,186

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Id: XlcxruMnF3k

Length: 8min 49sec (529 seconds)

Published: Thu May 31 2018