Richard Thaler with Malcolm Gladwell on Misbehaving

hello everyone thank you for coming I am as many of you know secretary gates is next door and if any of you are here thinking this is the gates event you're in for an upgrade I think dick just said it we're gonna have gonna talk about war no no and you've said it back there that it was almost certainly the case that we will have more laughs because there we know there are at zero and yeah so I've been here to hear the first half hour and so far they're at zero but you know it might they might get to the funny part yes uh pretty soon I am you and I have met before do you remember what the first time that was at a hotel bar in Rochester yes the only time I've ever talked someone in a hotel bar in Rochester was you and then we also had a and this what was what came to mind when I was thinking about deceiving we had a conversation with him mutual friend of ours named Manny one Manny about um about analysis and Manny is very much in favor of psychoanalysis as am I and you were very resistant to it let's I skipped or kept achill which you're allowed to be when you're at the University of Chicago that great temple of rationality but you're here at the 92nd Street Y where it's safe to say everyone not just in this room but also in a twenty five block radius high of this place is in analysis so I wanted this evening I would like to encourage you to talk about your feelings that would that's how no I don't actually I'm not your gonna make you lie down on stage but as we talked about I ask you questions I would like very much for you to talk about the emotional implications of those questions I'm never out I'm now trying to remember the thought process that got me to ask you to do this and I know there was something but but I'm blocking on it it's okay go on well I want to start with um this book you've written it's lovely marvelous book you've written is the history of an insurgency right yeah so you just like those like next time yeah right so could you start by simply as simply as you can describe the nature of the insurgency well um economics as a discipline at least since about 1950 has been a discipline that studies I would say fictional creatures with a appropriate Latin term I don't know whether it's a genus or what but Homo economicus and I call them icons and these creatures have perfect self-control perfect calculating ability rational expectations and no emotions I don't know any of those people certainly there are none here these people are all you know nuts and so I had the idea in while I was in graduate school you know when I was learning these theories my reaction was really and but I didn't really know what to do about it and la I wasn't by any means the first person to point out that economic models were getting less and less realistic there were many people who made that point that was brushed away by Milton Friedman with a the famous two-word dismissal as if so yeah of course people aren't really that smart and blah blah blah blah blah but we don't care as long as they behave as if they were optimizing and we should judge a theory based on its predictions not as assumptions so and I think he wrote that in early 1953 and that kind of stood mm-hmm and then herb Simon another Chicago renegade came along and had the idea of bounded rationality but I think it's safe to say economists pretty much ignored Simon and and he got bored with arguing with them and when often did other things like artificial intelligence and then I made my biggest discovery in science which was I discovered these two psychologists one whom the same here uh Danny Kahneman and Amos Tversky and they had an idea that made my career possible and the idea was systematic bias and so you know take one of Danny's examples people are using the availability heuristic so they're judging frequency by ease of recall that's usually pretty good but sometimes it will lead mistake so people think there are more homicides and suicides because homicides get more press well notice they're not as if optimizing anymore and I met of one of Dani students at a conference and he told me about his advisors work and I went back and pretty much read all of it in one sitting and said oh maybe I could do something with this this was in what year 1976 to talk a little bit let's talk about since I wanted to talk about your feelings yes give some emotional dimension to that was it a kind of AHA was it a slow realization with something in common was it a well so I would say there was a slow realization for several years leading up to this point when I met fish-off who's the guy the student of Danny's was a famous paper about hindsight bias yeah right so but reading their papers was an aha moment I immediately realized this idea systemic bias was the thing that I had been missing so you know I tell the story in the book I had a list of funny behavior I had friends over for dinner when I was a graduate student and served a bowl of cashews and cocktails while dinner was cooking we started devouring the cashews and at some point I took the bowl and hid it in the kitchen eating a few more as I went to the kitchen and I came back and we were economics graduate students so we all started analyzing that and you don't there's a you know there's a rule of thumb I think we mentioned a nudge that a dinner party is ruined if more than half the guests come from the Economics Department so so this is living proof of that so we remove the bowl of cashew nuts and pretty soon somebody had a napkin and a decision tree and could prove it's pretty Elementary proof that we had just made ourselves worse off because we removed an option that we kind of liked which was eating nut he didn't cashew nuts we used to have that option now we didn't but we were happy that's not allowed that was probably my very first act of misbehaving at least in yeah in the technical sense why was it why is it and was it pretty was it an odd thing I'm assuming it was an odd thing for an economist to read in a psychological literature oh yeah that's why I claimed to have discovered them I mean for economists I did discover them and I had never been to that part of the library remember there were libraries yes that's right so you know Google Scholar didn't exist so you went to the library and this was on a different floor at the risk of sounding very naive why why is it an odd thing for an economist to read psychology I mean look at the truth is it's an odd thing for an economist even to read economics that's more than twenty years old I do a poll of my graduate students I asked them how many of you have ever read anything by John Maynard Keynes zero and I make the joke it's on the forbidden reading list at the University of Chicago but I don't think that would be any different at Harvard or MIT mmm-hmm people if it's more than 20 years old you know it's passe and so people barely I mean the first year of graduate school they learn a lot of math and statistics and tools and then they tend to start getting specialized even within economics so somebody's a labor economist doesn't read papers in macro so psychology you might as well be reading anthropology or or you know Sanskrit what was so as this as this insurgency gets started what's the kind of react it's not it right now it's an insurgency in my mind yeah I mean that's not much of it in so you talked me into seventies yeah yeah yeah I'm just curious to go forward a little bit um what is the kind of reaction you get from your colleagues as you start to pursue these ideas worried looks well my thesis adviser Sherwin Rosen a delightful man I remember the first time we met Danny Danny Kahneman sitting in the front row if he wondering what I'm putting it and um the first time he met Danny told me afterwards so i met your friend condiment delightful man complete but really a delightful man and so Sherwin was a Chicago trained economist who went back to Chicago after this little bit in Rochester he spent and he you know I told him about some of this stuff and he just told me to get back to work doing serious things and I mean that he he like Amos he died early and he never thought really that anything I was doing was worthwhile what is it about you that led you to be a subversive in this way have you thought about that uh you know I don't think I mean somebody asked me recently why I became an academic and it's clear I'm not really suited to most lots of work that require you to do what somebody asks you to do I mean misbehaving refers not just to the people in economic models but to the author of this book and even actually to the way I wrote the book I mean this isn't a proper way to write a book it's not a it's not an autobiography it's not a textbook it's not and it's at least in parts funny so everybody told me you can't no no this is this is not a proper book mm-hmm but I didn't know any other way to write this book so that's why I wrote it but are you are you curious as to where this spirit really are intent on psychoanalyzing me well i friend i don't know how many people is our point disappointed this is gonna lead somewhere but I just hope so I'm uske there's probably an analyst in the room budget is probably 10 or 15 and yeah right you know is there a doctor in the house means something very different in this part of town but no I'm just curious about when you reflect on this so you diverged from your profession yeah I quite radically did something that your own thesis adviser told you was nuts yeah sorted with people who economists don't consorted I could go on yeah yeah star do you account for this you know uh that I mean I you know I don't have that vivid memories of my childhood but they're well-behaved is not a term that I remember anyone applying to me we would I mean you we were delinquent no no but uh look my father was an actuary yeah you know a very precise man and he was until I would say until I was 50 he was disappointed in how things turned out for me because I hadn't become an actuary like him so is this is the question actually that our mutual friend Manny asked me to ask you yeah is your pursuit of behavioral science a form of rebellion against your father ha ha I mean if no no this is a serious question here because here we have who is not the embodiment that kind of is formalin bother you good at asking question we've just talked about that you know that the profession the discipline to which you belong had this kind of love affair with this formalized abstract notion of being well doesn't the actuary have the same love of oh yeah look I I did this for this one of this reasons I didn't become an actuary is the nine exams are just ridiculously hard and I tried one of them when I was in high school the first ones a calculus exam and oh that was the hardest calculus exam I had ever seen and you know they get harder from there so you know uh but yeah I think I guess you could say I mean it's not that I was angry at my father though I mean I yeah I think yeah I'm just not well behaved that's all it's not nothing more to it than that dude are you saying this line of inquiry about sort of the psychological roots of your subversion doesn't interest you I would say that I would be disappointed if it were the only topic we discussed tonight okay can I just before we move on eventually can I point out the irony of this you see where I'm going oh here you are critiquing your profession for its lack of interest in the psychological dimension of human beings and as you as we examine your own career you're showing a distinct lack of interest in the psychological dimension of your own approach to economics um are you guilty of the very thing you've been denouncing officers clearly not your can you know as many lay people do oh no that's not I don't take as a criticism I don't know I mean a well educated lay person but you are confusing cognitive and social psychology experimental psychology with clinical psychology and you know experimental psychologists are not interested in these kinds of questions now come on what we'll fight this out of drinks no we can but no I do think though it's interesting though to me that that the how difficult this it goes to the sort of a central point I think in a lot of your work which is that how difficult it is for us to incorporate these two sort of modes of understanding human behavior right that I don't mean this is a crystal at all but even you who has done more than almost anyone else to try and expand the horizons of your profession as difficult to expand the horizons of your profession well yeah it's hard it's hard and look there are even the so to take to give a attempt a serious answer at this question there are the ways in which we've been able to behavioural eyes economics are extremely limited and I mean I sometimes call it Kahneman diversity economics we our friend George Lowenstein has done some work on emotions but most of the human repertoire is left out and it's because what we all were able to do so far we I never set out to create a new discipline so I don't think there should be a new department of behavioral economics or or some new word B and the standard economic models are are indispensable for what we do because we use them as a benchmark so you know I I'm a critic of my friend gene farm as efficient market hypothesis but none of my research would have been possible without him as a straw man and we don't have straw man models of things like emotions it we have no models and so it it's hard to for an economist to make me that that would be a very big leap yeah and there's nobody in sight but you know hopefully there's some grad students somewhere with deviant thoughts who thinks like you that I've left most of the interesting stuff for someone else to do and hopefully that student will have started therapy at 11 and by the time he reaches graduate school we'll be able to take your take this on can I point out parenthetically as a layperson how hilarious it is that to fight to discover that the economists let you call what you do behavioral economics in other words if you're doing behavioral economics what are they doing well I mean herb Simon has a wonderful quote a definition of behavioral Eakin likes where he and he may learn a new word here he says that the phrase seems to be a pleonasm which is a redundant phrase and and he says it it is so because you might ask what other kind of economics could there be yeah and then he answers the question the answer lies in the assumptions of economics so it's behavioral economics I mean it may be it should be called human economics because it's the study of humans in markets and so far there's only been unicorn economics ok one thing that's always puzzled me is about the nature of the resistance to the kind of work that you and those around you were doing is what again a naive question why would economists be threatened by that why wouldn't they what you're doing is you're expanding the horizons of their own discipline and to put it very kind of crudely bringing in lots of cool stuff why would the objects - bringing in lots of cool stuff so I think there were there are two reasons one there's a story I tell in the book about a guy who went to a talk an early talk I gave and at the NBER National Bureau of Economic Research and he said you know if you're right what am I supposed to do I know how to solve optimization problems and I didn't have a very good answer for him so that's one answer another answer I think the most vehement objectors to this the objections were based on politics and they were based on politics because these people had a very strong lazy fair Milton Friedman Chicago school kind of view and the logic is people are optimizers therefore they choose what's best for them therefore they don't need any help therefore anything that the government did would make things worse QED now for the first 25 years that I was doing research I religiously avoided doing anything remotely political or Paula even policy oriented because I knew that that was the fear and this Merton Miller who was a colleague of mine for a while and as you know was not a fan I think that was his fear was if you show that markets are not perfectly efficient then somebody in Washington is going to want to do something and whatever that was he wouldn't like and now it wasn't our agenda and you know even if you fast forward to say to nudge the book I wrote with Cass Sunstein in 2008 I mean you know that was hardly a radical book I mean we said what things can you do to improve people's outcomes without restricting their choices we called it libertarian paternalism knowing that it might piss off some people who think of themselves as libertarians but but we did mean choice preserving and you know that that's about as unravel as one can possibly be and yet it did infuriate some on the right who think that we're meddlers so I think I think that the most certainly the most vehement objectors tended to have very strong free-market views it isn't just objections don't just come from within the your profession though they come my my favorite parts of the book my favorite chapter the book has a football van is your chapter about football talk about the best chapter in the book because it's really fascinating because you realize that you're dealing with something that's it's this isn't just a faculty fight it's a it's a problem that lots and lots of smart people have with making sense of the world so can't tell me about your findings so let's start with the decayed mass the paper you did with Cade Massey about the draft give us a just a little uh okay so the actually to even make this segue cleaner that there was an article about me in the University of Chicago alumni magazine and it's a very Chicago thing to do the writing an article about me so they interview Gary Becker who's the late Gary Becker Ede died last year a very nice very nice gentleman and they asked him what he thought of behavioral economics and he said and this is almost a verbatim quote it doesn't matter if ninety percent of the people can't calculate probabilities the ten percent who can will be in the jobs where that matters so to me that was like a challenge okay let's see if that's true so football teams are owned by billionaires in fact they have a spare billion right you one of the reasons neither of us own a football team is we don't have a spare billion so they have a spare billion to buy a football team they have payrolls of over a hundred million a year just for their players you would think this is high enough stakes all right this is big business so Kate and I Kate was a student of mine we thought okay let's study that and there's a there was so we won't get too deep into football which Malcolm and I are easily capable of doing though it'd be a welcome diversion from psyctherapy vital to safer and safer ground yeah thank you from then Troy to Roger Goodell so so as I'm sure almost everyone but my wife knows the each year the teams have a draft of players and the worst team picks first and so forth and there's seven rounds and the interesting thing about that is there's a market for picks so you can trade the first pick for say half a dozen second-round picks not all at once but that's what the market says now that implies that the first pick is five times more valuable than an early pick in the second round that seemed like a lot especially given that the first picks get paid a lot a lot more than the guys in the second round so they would have to be really really better and so we did a big analysis that you have to buy the book to get or download the paper for free but it's full of equations you really don't want to go there and what we found is that if you compute the surplus a player provides to his team meaning how good is performance is how much it would cost to get a player that good - how much you have to pay him and really since there's a salary cap in football the only way you can win is to get players that perform better than what you're paying them that's the only way to win and so what we found is these second-round picks are actually more valuable than that first pick oh but you could get five of those for that pick it's the biggest anomaly I've ever found and now the interesting thing is you know we Kate and I have now we're on our third team that we've done some work for the first one we fired them it was the Washington Redskins it was early in Dan Snyder's tenure as owner and I met him and he said hole we didn't want to know about this and he introduced me he said I'm gonna send my people to see you and they flew out to Chicago I met with Kate and me and we told them what our findings were and we basically have two pieces of advice trade down and lend picks this year for picks next year because they have this interesting rule of thumb if you get if you give up a third-round pick this year you get a second-round pick next year so it's a one round interest rate if you compute the real interest rate it's a hundred and thirty seven percent per year so these guys did not get to be billionaires borrowing at 137 percent per year but that's the rule of thumb they use so anyway we taught his guys stands guys what to do and then we watched the draft eagerly that year and they traded up and borrowed pick neck this year for one next year so okay but has it so has stolen yeah ever done the pure sailor Cassie no I mean so the Patriots are not surprisingly as good at this as anybody that one problem is that the smart teams don't get the overvalued picks and there's no way to put it in finance jargon there's no way to short the first pick so you and I know that Tampa Bay should have traded the first pick this year instead of taking a quarterback with who's been arrested six times but you know we don't own a team with the worst record and the teams with the worst record don't hire us but it's still the case that very good teams can play the interest rate game they can and the Patriots do often play the game of trading a pick this year or a better one next year so let's but let's talk about why so it's not as if the world of sports like the world of business in general is a not full of educated people and be completely hostile to analytics this is what's supposed to be sweeping the world of sports right so what is it specifically about this and you've said that what you observed was not a trivial to face at all these are huge huge there are two to tell you how big this is if you did this right but we we think you would win one game a year more if if you also learned to go for it more often on fourth down another game and a half so just being smart we win at least two games a year on average it's only a 16-game season it's shocking now has their back word of all the American sports in terms of analytics David Romer wrote a famous paper about how you should go for it more and forth down in 1996 if you plot the frequency of going for it on fourth down since then flatline exactly zero learning in our thing they've kind of have learned so I think there's some geek at every team who's read our paper mostly you know think of the Jonah Hill character and the movie Moneyball yeah right so and and nobody pays attention to that guy and but they've heard some things that it's you know not smart to do what the Redskins did a few years ago which was trade away three first-round picks to move up for to get RG three but the teams with the first picks are still asking those prices so there's there's some loss aversion going on you know what it remembers exactly real estate markets after the price falls so in 2008 drive through a tract of these condos that were overpriced by a factor of two and what did you see for sale for sale for closed now in a standard economic model that's not supposed to happen there should be no more for sale signs in a slump than in a boom prices should just adjust until we cleared the market so but we know people are loss averse they don't want to sell their house for less than Bernie got for selling his house a year ago is us wasn't as nearly as good as mine anyway and why should I take two hundred thousand less than he got so that's what a Tampa Bay and was the team with the second pick anyway Tennessee they were getting offers for their picks but they were demanding prices and according to our analysis I mean a reporter once asked me what advice would you give to the team that had the first pick and I said have a sale announced the pick is on sale for 25% off and but nope no team has ever done that as far as I know how did does that does it leave you frustrated I mean do you feel like I blew back at your feelings but I uh yeah yeah what what is frustrated me um yeah I mean it leaves us frustrated but I don't think I don't think it's all that uncommon I've never been in any large organization that was run anywhere close to optimally mm-hmm I had a young economist come to my office a couple weeks ago and he had written a paper about oil and gas drilling and he had really good data and the results I mean he you know he was a recent Harvard ph.d good enough to get a assistant professor job at the University of Chicago you know this is a smart young kid and his analysis was showing that the companies like in North Dakota are leaving about half the money on the table how when you say I don't know I mean so in in the techniques they're using and you know I you know about the publishing world I will I won't ask you what you think of that world but I would say less than optimal would you agree with that so and certainly you know so I I think I'm not sure that football teams are that much worse I mean they're they're bad but you know it's not it's not not worse than so much worse than that a story in the book about an encounter you have with General Motors yeah well that was a long time ago it is a funny story but it so back this was like in the 1980s what rebates were still kind of new and but they were wearing off a little bit and somebody got the idea how about if we offer low interest rate loans to sell the cars in the summer the excess inventory that they so General Motors offered the then outrageously low interest rate of 2.9 percent and interest market rates were over 10 at that point and then I I know and and this worked unbelievably well people there were stories in the newspaper of people lying on the hood of cars saying this is mine so write a phenomenal success and I saw this little article in The Wall Street Journal saying actually you had a choice you could take the financing or the rebate if you take the rebate and financed at the market rate you actually save more money so they were offering this financing deal that was selling cars like crazy and it was worse than the the other deal they had on the table so I started to think about that well why might that be and then I had an idea which was based on simple psychophysics you know the rebate let's say six hundred dollars from a twenty thousand dollar car and but the financing was less than a third of the interest rate that's a deal six hundred off a car you know but one-third off the financing so I told a friend of mine about that who had a consulting job at General Motors and he said Oh write that up so I wrote up a little one-page thing explaining what I just explained to you and I got a call from a guy at General Motors can I come talk to you so he comes and talks to me talk to him explain you know I said you don't have to come really see me really but I explained this thing to him and then they invited me to Detroit and I had the roger any experience of going to that that gigantic building with cars in every lobby and I said to them well who was in charge of figuring out why that deal worked last summer and the guy said I don't I don't know but I had eight appointments with vice presidents that day and one of them will know so at the end of the day turned out nobody had that job this cost something like 700 million dollars this promotion in nineteen eighty dollars hmm so I was pretty sure at that point I didn't want a consulting job for General Motors but they said would you write up your recommendations so I said sure so I basically recommended two things one they figure out why this worked and two they figure out what they're going to do next summer because it's likely other companies will copy this so about a month later I get a letter from General Motors saying we've decided against your proposal and so I called the guy up and I said I'm curious what why is it because I wasn't suggesting I do that so get somebody do that and they said oh well we decided we don't need to do that because we've decided we're going to manage our inventories better and we won't have any more sales at the end of the year server access which has never happened which has never happier well I'm reminded of there's a great passage in paper maybe that Albert Hirschman wrote in which he makes his observation that the this kind of shortsightedness foolishness whatever a rationale 'ti can be very useful so he made the point that you know when you look at major capital infrastructure projects every one governments always underestimate how they're going to cost how much they're going to cost and he says actually that's incredibly useful because if you were accurate in your estimation of how much they would cost you'd never do them right yeah I'm wondering whether when you look at this array of of misbehavior by human actors what are the uses what do we get out of what does the NFL owner get out of being nonsensical about the draft or what does General Motors get from not well you yeah I'm not sure they get anything I mean what is true Daniel is used to say that the way to become a general in the Israeli army was to be overconfident and lucky so you you do too foolish things and luck out and then you become a general and that's a good way also to become CEO it also helps if you're quite tall yes so it probably helps to be a general too but it certainly helps to be a CEO neither of us it's good yeah yeah we're not good-looking enough either so so I think overconfidence helps you become CEO but it's really bad to have an overconfident CEO there's a nice study that Oh overconfident CEOs pay more for acquisitions and they do worse and so I don't think that there's an upside I mean the the one upside could be we probably have more innovation because of overconfidence because most new businesses fail and some of the lucky ones succeed and you know some of those are Steve Jobs but of course Steve Jobs got fired but I'm wondering whether I'm not satisfied with that answer so uh damn I was never good student you know but let's let's go back to the NFL owners from over to think about that what do they get out of that what they get out of it is if they all behave in the same way they have it become that's the basis of their club that's one yeah the other thing is specific to the draft they preserve since they're also in they've preserved the kind of there's a theatricality to the draft right what you're suggesting is look the whole excitement and thrill that was associated with the number one pick is meaningless get rid of it what you really want is something no no no no no I'm okay I actually here's an even bigger puzzle about the draft yeah that we didn't write about which is virtually every picture be traded and so here's the reason let's let's suppose let's suppose that the best player and the draft is Jameis Winston mm-hmm now that whatever team values him most should acquire that pick at a rational price and that should happen for each pick it would be pure coincidence if the team that valued the best player happened to have the first pick so we should have 25 trades in the first round rather than three or four the reason why we don't have more is partly that the prices are wrong and people don't want to pay the wacky prices but if we had ripe prices we'd have way more trading mmm-hmm so no I I don't think it's any kind of inadvertent conspiracy you know I didn't mean it's just that I was trying to suggest that there are kind of are they I was really opposing as a question are there are kind of social and psychological goods that outweigh performance for people in so if you think the thing that's interesting about the NFL and CEOs and these groups we're talking about is that they are they evaluate themselves in their own performance not merely in the broad market terms how well is my company or my team doing but also in the fraternity of those like them so we would NFL owners know I may be waiting the extent to which they derive their real satisfaction in life not from winning the most number of games but from being firmly a member of the fraternity of NFL owners yeah I so from the three owners I've gotten to know I would reject that hypothesis yeah they if anything they want to win too badly yeah and and and right now and I think that causes that plus overconfidence they may accept the truth of what you're saying but say I can I'm smart enough to be the exam you know they it's like we get to the point where they they understand it in cold state a week before the draft and then there's a player they're convinced is going to transform their team and and they're absolutely sure that every other team feels the same way and they just can't resist and they trade up three picks to get that guy and then it gets hurt before the season how is that line of research affected the way that you hire it's made me even less under-confident so look I know and and my colleagues should know that interviews are useless at forecasting virtually anything and but when we're hiring new assistant professors people have really strong opinions and and and they're completely wacky strong opinions they think that every paper this guy or this gal is going to write will be just like that one and I say you know do you remember your thesis it wasn't that great and it's nothing like what you're working on now why is it that you think this person should write earth-changing thesis and will never change but here's the number from the football paper I think is the most memorable and best takeaway for anybody who has to hire people if you take all the players at a given position and rank them in the order in which they were picked the chance the one picked earlier is better than the next one is 52% slightly better than coin flips now what does that tell us about paying a CEO 20 million dollars how confident i would argue that football teams have way more information in evaluating prospective players then companies have and hiring ceos especially ones from the outside because the you know the football teams they get to watch them into college for three years at least in football and then they bring them to the combine where they have all these tests no CEO you know imagine if we could have CEOs first we get to watch every decision they've made in the first 20 years of their career and then we bring them to intake in unpaid right and and you know what was his move when he had to fire that yeah you know that marketing director and then we bring them to Indianapolis and run them through a battery of tests for three days CEO combine yeah right so I mean it's I don't think it's even arguable that that task is easier than evaluating a manager and so the odds of being right are probably even worse but nip but think about this in the context of a graduate school does this suggest that let's talk about the University of Chicago grad economics department does this suggest that you should take in more students with a lower I have a be less selective at the point of entry well I think so this is another theme that I talked about in the book and related to some of the stuff that we've done in the UK in the nudge unit is every organization should be doing more experimenting and so you know gene fama and I disagree about many things about financial markets one thing one of many things we agree about is business schools should go back to taking some students right out of college when he and I started teaching that was common last night I had dinner with one of our alums who was a University of Chicago undergrad and did a five-year program we used to have and so he had an MBA at 22 he was a managing partner Goldman Sachs at 27 28 and was rich enough to basically quit and go to work for Mike Bloomberg in the beginning of the Bloomberg mayor administration for $1 a year there are dozens most of our most successful alumni were like that we take none like that you know what you want to know why Businessweek Businessweek about 20 years ago started raiding business goals one of the factors they use starting salary well 29 year olds earn a lot more than 22 year olds so no undergraduates get taken so gene and I for 20 years have been loved let's take 30 you know and I'm following a logically the idea of taking an undergraduate is how is that a reflection of what you've been talking about you mean you're willing to take a chance of yeah and do do something completely different now though the conventional wisdom is if you haven't had five years of work experience you're not ready to do an MBA well that wasn't true thirty years ago and I can tell you most of their work experience is bogus I mean it's like a contest who can write the best fiction about what they were doing I I did something in my class one year this is more misbehaving I had everybody in my class go look at the essays they wrote to get into business school and then I said and they you know they have them on their laptops and then I said okay to what extent would you say on a five-point scale from you know complete to the the honest truth where would it be and most people agreed to somewhere deep toward the now you know the this is admitting them themselves so you know you want anybody here want to go to business school I'll tell you the essay to write you know what what I've been doing I've been managing a startup company blah blah blah and what do I want to do well after I make my fortune I want to go to Africa and build schools and clean toilets and that'll get you in what it's worth 50 points on the GMAT but why isn't it why why why wouldn't the real rational responses that be we have a minimal level of qualification then we just take names out of a hat well I mean we know that if we used statistical model we would do better but we insist on interviewing students you know we've known that how long have we known that 60 years so what happens when you and Eugene fama make these suggestions at University of Chicago well everybody knows we're you know two old guys that don't know anything I come back to how that makes you feel he's older I mean it's you you're in this you're in this kind of marvelous conundrum which is that the continued existence of opposition to your ideas proves your point in other words if people started to agree with you nice one buck oh I knew you'd get something good here and when the world starts to agree with you then it's over for behavioral economics it's sort of yeah you know my father was an actuary I know the mortality tables I'm not worried we're we're running out of time but I did want to UM you please tell us something about your childhood come on what just a little you read a book no I say this because I think this is a truly magnificent book I feel like this has taught me more about what happened in the role of economics and making sense of people in the last thirty years and almost anything else I've read and I'm curious you know it's really funny so our mutual friend Michael Lewis is well he claims at least he's writing a review of this book and I talked to him on Saturday and he said I have three questions for you and the first one was what were you like as a kid so if you ever YouTube in like colluding you know so I you know I I was you know I played a lot of sports not particularly well and was like a B+ student do you think they had being a B+ student it was an important fact in forming your psychology no listen don't look at me like that this is an important point someone who has always been the the A+ student this the court feel are the obvious smartest kid in the room right golden boy is someone who is who is not powerfully motivated to disrupt the status quo right right right is rare going I see where you're going look no I think it's an obvious point that if I were if I had been really good at doing economics I wouldn't have had to do this you know all right I mean I sure when Rosen my advisor I quote him in the in in an article in The New York Times he told the reporter who asked about my career as a grad student quote we didn't expect much of him yeah and you it's always good to have you your adviser on your side and the first few pages of this book you quote one of your your dear friend Danny Kahneman as describing you is lazy yes which he insists is a compliment yeah well let him defend that which is another great insider to get into the mindset of behavioral economists that they would think of laziness is a qualification in our disqualification well he's a psychologist not in a cosmic I think we're running out of time we have a bunch of questions but um I don't know whether whether I suppose we have a few minutes let's pick one or two and then we'll oh this is a question that actually what is this not about psychotherapy right I don't know where we finish with that all right what is the single action we do that would drive the most social good I want to modify the question I'm and personalize it yeah if we if we made use our um you know czar American economic czar for the next four years uh what what would your agenda look like you could basically do whatever you please as long as it was you know not magical I mean I don't know whether I have anything profound I think it's been pure stupidity that we haven't been building roads bridges and so forth for the last seven years when we we could we can borrow at a negative interest rate and use otherwise idle resources I mean it's just mind boggling that we haven't done that and and you don't have to be a Keynesian to think that so whether or not this would stimulate the economy let's just suppose we do just cost-benefit analysis we have bridges that are all going to fall down all around the country we could be building them with construction crews that have nothing to do and borrowing at zero interest rate and we're going to have to do start doing it as soon as the economy picks up when it will cost a lot more so complete stupidity mmm-hmm anything else your mega use are I mean you you didn't yeah let's have another question yeah there's a question here for me whose footprint is on the sole of your gym shoe we'll leave that one for now yeah how can behavioural okay would end on this note because it's appropriately hubristic how can behavioral finance help us consistently beat the stock market oh yeah I this is the part of the question I love I emphasize consistently and beat I say I say have a true word Allah it can't it can't good well on that appropriately humble note thank you so much this was lovely

Channel: 92nd Street Y

Views: 79,226

Rating: 4.7577548 out of 5

Keywords: 92Y, 92nd Street Y, Misbehaving: The Making Of Behavioural Economics, Richard Thaler (Academic), Economics (Field Of Study), Malcolm Gladwell (Author)

Id: 4-dkZOz9nQw

Length: 65min 16sec (3916 seconds)

Published: Tue Jul 14 2015