Afford Anything - Tribute to Dr. Daniel Kahneman, Who Won a Nobel in Economics Even Though He Never Took an Econ Class

Episode Date: April 6, 2024

#497: Princeton Professor Daniel Kahneman never took an economics class. But he won the 2002 Nobel Prize in economics, thanks to his advancements in understanding the psychology of money. In today’s episode, we pay homage to the late Dr. Kahneman, who passed away on March 27 at age 90. We also discuss the jobs report, inflation data, the booming stock market, the next Bitcoin halving, Capital One’s acquisition of Discover, and the National Association of Realtors settlement. Enjoy! For more information, visit the show notes at https://affordanything.com/episode497 Learn more about your ad choices. Visit podcastchoices.com/adchoices

Today we pay homage to Daniel Kahneman, who pioneered the field of behavioral economics. We also take a look at last month's jobs report, inflation data, we discuss Capital One's acquisition of Discover, and the National Association of Realtors settlement, which has potentially game-changing implications when it comes to how we buy and sell homes. Welcome to the first Friday bonus episode of the Afford Anything podcast. This is the show that understands you can afford. anything, but not everything. Every choice that you make carries a trade-off. And that applies to your money, your time, your focus, your energy, your attention. It applies to the allocation of all limited resources. So what matters most and how do you make decisions accordingly? Those are the

two questions that this podcast exists to explore. My name is Paula Pan. I'm the host of the show. On the first Friday of every month, we host a bonus episode in which we cover a monthly economic update. So welcome to the April 24, first Friday bonus episode. We begin with a tribute to Professor Daniel Conneman, who passed away on March 27 at the age of 90. Professor Daniel Connman won a Nobel Prize in Economic Science in 2002 and is widely credited with pioneering the field of behavioral economics, the psychology of how we spend our money, which is very much what

this podcast is dedicated to exploring. Now, traditional economics assumes that humans are rational. Traditional economics is anchored in the assumption that humans make rational choices. And in the times in which we act irrationally, we do so only because the stakes are low. When the stakes are high enough, people act in their rational self-interest. that is the premise on which the traditional field of economics is anchored. Professor Connemon, who did much of his work at Princeton, was trained not in economics but in psychology,

and over the span of his career, his central ideas advanced what in the 1970s was a brand new field called behavioral economics, which is essentially that then-diagram intersection between psychology and economics, he helped advance the idea that humans are filled with mental biases, heuristics, rational fallacies. You know, we are imbued with both cognitive biases and flawed mental models that lead us to act irrationally. So, for example, there's a cognitive bias known as loss aversion in which we feel the pain of loss more than we feel the joy of gain. So if you were to lose $1,000 in the stock market, that would hurt more emotionally than

failing to seize the opportunity to win $1,000 in a raffle ticket competition. And so loss aversion explains why people can sometimes be self-defeating in their behaviors. For example, if you check your stock portfolio too often, you may panic and sell because you feel the pain of the decline more than you feel the joy of the potential gain that you might make in the long term if you were to hold for the long term. His insights into this intersection between psychology and economics were so significant and so profound that he won, as I mentioned earlier, in 2002, he won the Nobel Prize in economics despite the fact that he never took a single economics course. Now, he became, at least in certain circles, a household name nine years later, in 2011 when he published a book. a book called Thinking Fast and Slow, which became a massive New York Times bestseller. And it was a crossover bestseller, both on the business lists as well as on the science lists. Again, highlighting the interdisciplinary nature of his insights.

The last book that he authored prior to his death is called Noise, and it examines how human judgment, even amongst specialists, can vary wildly. and while sometimes this happens in predictable ways, so for example, you may have two specialists in a given domain who simply have different frameworks for how they approach their subject matter expertise. There are also, in addition to that, instances of what he defines as noise,

which is this unwanted variability. So for example, a specialist might make better decisions in the morning than they do in the afternoon because in the morning they're fresh and they have clearer thinking, whereas in the afternoon, after lunch, there's a little bit of a post-lunch slump. For a longer discussion on that particular topic, please listen to our podcast episode with an author named Daniel Pink, who wrote a book called When, The Scientific Secrets to Perfect Timing.

You can find that episode on our website. Go to Afford Anything.com. Search for Daniel Pink. that particular episode is a deep dive into how time of day has a massive impact on performance. In fact, ever since I recorded that interview, I do not make elective doctor's appointments in the afternoon. Again, go to that episode for a very thorough explanation as to why. It was episode 353, episode 353. In any event, coming back to Daniel Connaman, his impact.

on the field of behavioral economics cannot be overstated. And the Afford Anything podcast as a show that widely covers behavioral economics would be remiss to not dedicate this time in memory of his work. Moving to other recent news, the jobs report in March exceeded the new employment data from the past two months. The U.S. added 303,000 new jobs in the month of March on a season. reasonably adjusted basis. This makes for the 39th straight month of job growth, 39th straight month. The unemployment rate, which was already at a historic low, fell even further, from 3.9% in February, down to 3.8% in March. All of this is to say that job growth, which was already strong, has in March got stronger, and unemployment, which was already low, in March, got lower.

Now, of the 303,000 new jobs that were added in March, the bulk of those came from the private sector, which represented 232,000 of those new jobs. Construction had a big role to play in that. The construction industry added double the amount of jobs as it typically does in a given month. So the construction industry added 39,000 new jobs in March. Now, there are some people who worry that job growth is too much of a good thing. So there is a school of thought that believes that if you have too many new jobs, too much wage growth, this becomes inflationary. But a look at inflation data paints a very optimistic picture. Now, we don't yet have the March CPI data numbers.

The March CPI data is going to be released on April 10th. at 8.30 a.m. Eastern. So you'll have to wait until April 10th to get that information. But what we know right now, as of the first Friday of April, Friday, April 5th, is that in February, the CPI, the Consumer Price Index for all items rose by 0.4% seasonally adjusted and 3.2% over the last 12 months not seasonally adjusted. What that means is that while inflation is still above the Fed's target of 2%, it is decidedly lower than it has been in recent memory. This is strong news that inflation is largely under control. Now, according to the Bureau of Labor Statistics, the biggest increases that we're seeing in prices

or that we did see in prices in the month of February came from shelter and gasoline. Those two indexes combined contributed to more than 60% of the monthly. increase within the consumer price index rise. Groceries, which is known as the Food at Home Index, stayed flat, and dining out, known as the food away from home index, rose only by 0.1%. Again, this is data related to the CPI for all urban consumers, otherwise known as the CPI-U. Now, there's quite a lot of optimism among investors because the S&P 500 climbed to record highs on 22 separate days during the first three months of the year. And so not only are jobs plentiful, but also the stock market, anyone who

has a stock portfolio, is seeing big increases in their equities allocations. Now, it is true that inflation is baked into this rise. So there's a distinct. between real returns after inflation versus total returns, which include an inflationary increase. However, the market's gains have outpaced inflation. In other words, stock values are reaching highs in the context of real returns, meaning real dollars after inflation. So, the synopsis of the economic data right now in terms of jobs, in terms of the stock market, in terms of inflation, is that there is significant reason to be bullish, to be positive. Speaking of bullish, let's talk about Bitcoin, because it has reached new highs, it has broken

its previous record, its pandemic era record, it shattered that ceiling and moved past it, And although it has come back down off of its peak, it still remains, as of the time of this recording, which is Friday, April 5th. It's currently around 67,700, which is close to hovering around its historic high watermark. Now, one major event that is likely going to happen in the month of April is the next Bitcoin halving event. We've discussed this on previous episodes. I'm not going to go too far into that. I'm not going to go into that in today's episode. But if you would like a deep dive into what a Bitcoin having event is and why it is significant, please go to Afford Anything.com slash episode 325. Episode 325. This is our explainer episode on Bitcoin. This episode covers everything ranging from, how Bitcoin was created, how its mind, why having is such a significant event, and other related topics, including the basics about blockchain technology. So again, afford anything.com slash episode 325 if you'd like an explainer on that. What I'll say for the sake of today's episode, the first Friday episode, is simply that the major new story that I am watching in the month of April is

what's going to happen when the next Bitcoin having event takes place. No one knows precisely what day it will happen, but we know that it is close. It is widely expected to take place sometime this month, sometime in the month of April. When it does take place, the supply of Bitcoin, the new supply that comes on to the market gets cut in half. and historically this has correlated with increases in the price of Bitcoin. But past performance is not necessarily indicative of future results, which is why I'm popping the popcorn, sitting back in the recliner and eagerly waiting and watching to see what will happen. The rough expected date, and this is very, very rough, is ballpark somewhere around April 20. But again, no one knows precisely when it's going to happen.

Having occurs once every 210,000 blocks of Bitcoin are mined. And so there isn't a specific date, calendar date set, but rather once sufficient blocks of Bitcoin have been mined, that is when the having will take place. So the guess around what date it will happen is reflective of the rate at which blocks of Bitcoin are being mined. Again, for a deep dive into this, go to afford anything.com slash episode 325. But the key takeaway for right now is to keep a close eye on this event that is widely expected to happen sometime this month and possibly even within the next two weeks. Next week, we're going to feature an interview with a Harvard professor who is an expert in blockchain technology, Web3, and specifically NF3.

NFTs, non-fundable tokens, and that will be a compliment to episode 325, which was our Bitcoin episode. And through a professor at Harvard Business School, we will explain what an NFT is and why it matters. Tune in next week for that episode. Make sure that you are following this podcast in Apple Podcasts and Spotify. Fifth Third Bank's commercial payments are fast and efficient. but they're not just fast and efficient.

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It's about not being just one thing, but many things for our customers. Big bank muscle, tech hustle. That's your commercial payments, a fifth-third better. The holidays are right around the corner, and if you're hosting, you're going to need to get prepared. Maybe you need bedding, sheets, linens. Maybe you need servware and cookware. And of course, holiday decor, all the stuff to make your home a great place to host during the holidays, you can get up to 70% off during Wayfair's Black Friday sale. Wayfair has Can't Miss Black Friday

deals all month long. I use Wayfair to get lots of storage type of items for my home, so I got tons of shelving that's in the entryway, in the bathroom, very space saving. I have a daybed from them that's multi-purpose. You can use it as a couch, but you can sleep on it as a bed. It's got shelving. It's got drawers underneath for storage. But you can get whatever it is you want, no matter your style, no matter your budget. Wayfair has something for everyone. Plus, they have a loyalty program, 5% back on every item across Wayfair's family of brands. Free shipping, members-only sales, and more terms apply. Don't miss out on early Black Friday deals.

Head to Wayfair.com now to shop Wayfair's Black Friday deals for up to 70% off. That's W-A-Y-F-A-I-R.com. Sale ends December 7th. Let's turn our attention to Capital One's acquisition of Discover. This announcement actually took place in late February, and what we saw over this past month. In the month of March, we saw a lot of analysis of the implications of this, because this is an historic merger. Capital One announced that it is going to acquire Discover in a transaction that is worth $35.3 billion. Now, Discover is the fourth biggest payment processing network in the U.S. after Visa, MasterCard, and American Express. And I want to, before we go any further, I want to draw a distinction. between a payment processor versus a card issuer. In the world of credit cards and debit cards, a card issuer is an entity like Capital One, J.P. Morgan Chase, Bank of America, Barclays, U.S. Bank, Wells Fargo, these financial institutions, banks, credit unions, these are card issuers.

By contrast, a payment processor is Visa MasterCard Discover. Now, Amex, American Express, is a unique case because Amex is both a card issuer and a payment processor, and that's highly unusual. Amex is the rare bird exception to the rules. But in general, when it comes to Visa, MasterCard, Discover, these three entities are strictly payment processors. They are not card issuers. And so Visa, MasterCard, and Discover all must work with a card issuer in order to co-create. the credit card that sits in your wallet. And in fact, there's also a third entity that gets involved. That's when a credit card or a debit card is co-branded. So you'll see this when you get a retail

credit card like a Home Depot credit card or a Sephora credit card or an airline co-branded credit card like an American Airlines or United Airlines co-branded credit card. And so co-branded credit cards are issued by a financial institution, right? The credit card is issued by a bank or a credit union. It is co-branded with a company like Home Depot or Sephora. And then payment processing happens through Visa, MasterCard Discover. It happens through a payment processor. There are as many as three major entities that come together

within the final product of that credit card that is sitting in your wallet. There's the card issuer, the payment processor, and sometimes but not always, a co-branded partner. Now, currently Capital One, which is a card issuer, it currently relies on the Visa and MasterCard networks for its payment processing, but it's going to move all of its debit cards and some of its credit cards to the Discover payment processing network. work, it's going to start making that move. It plans to start doing so in the second quarter of

next year, second quarter of 2025. And according to Richard Fairbank, the CEO of Capital One, the company plans to move more than 25 million Capital One card holders over to the Discover Payment Processing Network by 2027. So what does that mean for you? Well, the good news is, it could make the payment processing space more competitive because Visa and MasterCard right now dominate the space. They have a much bigger position than Discover does. And so that increased competition having Discover play a much bigger role in the payment processing space might mean that consumers may get benefits such as better rewards. And while that's possible, there are other counterbalancing forces. So for example, Visa and MasterCard both spend a lot of money on fraud

protection. Credit card payment processing is largely the business of fraud protection. And any hits that these companies have to take may or may not impact the budget that they have in that domain. In addition to that, there are other counterbalancing forces such as the Credit Card Competition Act, which is a proposed piece of legislation, which, if passed, could reduce rewards. So there are many forces at play in a very delicate ecosystem that comprises the credit card that sits in your wallet. But what we do know, what we can say, you know, much of what I've just said for the last couple of minutes is speculation on how Capital One's acquisition of Discover might affect you. What we know, what is outside of the realm of speculation, is that if you are a customer of Discover, you will gain access to physical bank locations because right now, Discover, technically they have one. Discover has exactly one brick and mortar location in the entire nation. Capital One, by contrast, has 259 branches. And they also have 55 something that they refer to as the Capital One Cafe.

So Capital One has a much bigger brick and mortar footprint, which Discover customers will be able to access. So if you are a Discover customer, there's that. Also, customers of both Capital One and Discover will be able to both access a much wider network of ATMs. Capital One currently has 80,000 ATMs. Discover has more than 60,000 ATMs once the merger takes place. Customers of both Capital One and discover will see the number of ATMs that are available to them either almost double in the case of a Capital One customer or more than double in the case of an existing Discover customer. So increased ATM access is a shared benefit that Capital One customers, existing Capital One customers and existing Discover customers will certainly be able to get.

I say certainly, I'm going to put an asterisk, the deal still has to pass through antitrust scrutiny. So there is a chance that antitrust regulators might blow up the deal. But if the merger does go through, then Capital One would become the largest card issuer in the country based on outstanding credit card loan size. So right now the largest card issuer in the country is J.P. Morgan Chase. If this deal does go through, Capital One would beat them out. Now, the last thing, we turn our attention to the National Association of Realtors Settlement. This made some waves. This was early March news from about a month ago.

I should probably be doing these updates more often than once a month because if something happens at the beginning of the month, then, you know, as it did with the NAR settlement, that took place at the beginning of March. Now this first Friday episode is the beginning of April, you know, in the future. Actually, I'd like to hear from you. Would you like to hear these economic updates more than once a month? If you're subscribed to the show notes, just to hit reply on any of the show notes emails and let us know. Would you like to start hearing these more than once a month?

And if you are not subscribed to the show notes, go to afford anything.com slash show notes. And you'll get the show notes and just hit reply to any one of these and let us know. Do you want to start hearing these more than monthly so that, you know, I don't want to inundate you with too much economic news because there's enormous value in evergreen time-tested material. But at the same time, the world is changing and it's nice to keep up with it. So again, if you're subscribed to the show notes, just hit reply to any one of the emails that we've sent and tell us what you think. We turn our attention to the final story that we're going to cover today. And that is that the National Association of Realtors, which was embroiled in a major lawsuit, reached a settlement.

which requires the association to pay $418 million over the span of four years. So what is included in this settlement and what implications does it have for you if you are either buying or selling a home? Well, the biggest thing is that NAR, the National Association of Realtors, has agreed, to implement a new rule that prohibits offers of compensation on the MLS. And, okay, this is a bunch of jargon. Here's why this matters. First of all, the MLS is the multiple listing service. Only licensed real estate agents and brokers can access the MLS.

Historically, historically, agents could make compensation offers on the MLS. So, for example, a listing agent could make an offer to split their commission with a buyer's agent, and that offer historically could happen on the MLS. And that was one of the points that was really at play in the lawsuit. So in the NAR lawsuit, the plaintiffs alleged that even though technically real estate commissions were always negotiable, technically they were always negotiable. But in the lawsuit, the plaintiffs allege that in practice, they really weren't. Because in practice, the fact that these deals would happen on the MLS meant that home buyers and sellers were sort of shut out of that conversation.

Now, I am a former licensed real estate agent. I had a license in the state of Georgia. that license has lapsed, it is expired. But when I went through agent training, the training was very clear that technically the commission was negotiable. But it was always one of those technicalities where in practice, the commission split, at least in the state of Georgia, was widely understood to be 3.2% on one side and 2.8% on the other side. And what that meant was that the seller was on the hook for paying a 6% commission to the listing agent, which would then get split between the listing agent and the buyer's agent. By virtue of moving compensation offers off of the MLS, there is now greater room for sellers to negotiate, which technically they always could, and offers of compensation to the agents. and to the brokers, can continue to be an option that consumers pursue off of the MLS.

The thing is, sellers can offer buyer concessions on the MLS. So a seller could say, hey, I'm offering a concession. Seller covers closing costs, right? The seller can, on the MLS, they can state that they are going to cover the buyer's closing costs. That is still allowed. It's simply the compensation portion of it that is prohibited according to the terms of the settlement. Now, there's another big change that has come out of the settlement, and that is the requirement of written agreements between buyers and buyers' agents. If you're a buyer and you want to hire an agent to represent you, and technically what you're doing is you're hiring the broker and then the agent,

that you work with is an agent who represents the broker. So if you're a buyer, technically, you hire the broker to represent you. The new change that is made is that you now must have in writing, number one, exactly what that broker is going to do. And number two, exactly what they're going to charge for each service. Now, previously, there was sort of a version of that in place. So there's this thing called the buyer agency agreement, which is sometimes referred to as an exclusivity agreement. But for the purposes of this recording, I'm going to use the term buyer's agency agreement, but just know that agency agreement versus exclusivity agreement, these are interchangeable terms, typically. A buyer's agency agreement is a written contract that creates a working relationship between the home buyer and the agent that that buyer works with.

It is separate from the agreement that the seller signs with their agent. That is a listing agreement. Now, a buyer's agency agreement specifies a duration of exclusivity. So, for example, 90 days, such that the agent is entitled to receive a commission for any home purchased during that duration, regardless of whether or not the agent showed the buyer that home. So, for example, if you as a home buyer are walking your dog one Saturday morning and you wander into an open house or your colleague at work mentions that they're thinking about selling their home. And the two of you make a direct deal as individuals, one-to-one, if you're going to one, if you're going to you, if you are still bound by the terms of the buyer's agency agreement, you still have to pay your agent a commission. There is a termination clause within the agreement, but there are very strict

conditions around it. So previously, this structure called a buyer's agency agreement was in place, but it was not necessarily required. Now, according to the terms of the settlement agreement, there must, in every transaction involving MLS participants, there must be a written agreement between buyers and the broker and agents representing those buyers. Now, in practice, what does this mean? There are a lot of armchair theories about what type of ramifications this will have, with some people saying this is going to reshape the field of home buying and selling as we know it, and others saying that the impact will actually be minimal and technical.

There are some people saying, hey, now there's going to be, a lot more negotiation happening between sellers and their agents. Some people say that, while others say, technically sellers could always negotiate, and many did. So there are very differing camps, schools of thought, when it comes to the magnitude of impact that this will have, as well as the scope of that impact. Among these various armchair theories, there are many arguments going on right now about if this will impact home prices and if so in which direction and buy how much. Some people hypothesize that lower fees will result in savings for home sellers, because home sellers typically shoulder that 6% haircut.

And so some people hypothesize that home sellers will walk away from the transaction with more money in their pocket. Others hypothesize that sellers will pass some of those savings onto the buyer. perhaps in the form of lower listing prices or in the form of more concessions. Yet others hypothesized that maybe it would draw more buyers into the market, increasing competition, which either creates a net neutral effect or creates higher home prices overall if enough new buyers come in to tip the scales. You can draw a dozen hypotheses that are directionally all over the map around the impact

if any, that this will have. My guess is that this will probably have either a net neutral effect or a very slight edge for the seller. Because if you're a seller and you save, you still do have to pay a commission, right? You're not going to save the entire 6%. So let's say you're a seller and you pay a 3% commission instead of a 6%. And then the buyer's job is to pay money to their agent. If you're a seller and you're saving 3%, it's unlikely. that you are going to give that up to the buyer. And if you do offer various concessions, such as covering closing costs, that's, in my view, going to largely be a result of broad market forces, the balance between buyers and sellers, the level of competition in your market at that point in time, right? If you're not getting very many offers, you're going to offer more concessions. But if you're listing your home and you get multiple offers on the day that you list, why would you bother offering concessions? So I think those, those, market forces, the supply and demand forces that govern home prices, that is going to determine

the amount of concessions that buyers receive, the amount of profits that sellers walk away with. I think a negotiation between sellers and their listing agents, will it have any effect? Sure. At most, I think it'll be a very, very slight edge for the seller. but the much bigger factors that determine home prices, housing affordability, the profits that sellers walk away with, the much bigger factors are rooted in the supply of housing because there is a serious shortage of housing in most parts of the nation, as well as obviously interest rates, as we have all experienced firsthand over the past year. And by the way, if interest rates drop later this year, later in 2024, I think it's likely that even more buyers are going to come into the market, which increases competition, which raises prices further. All of that said, the settlement agreement reached by the National Association of Realtors, caused big waves because it, at least on the surface, appears to upend the ways in which commissions are handled. but I am unconvinced that the actual monetary impact for the average individual home buyer and seller is going to be anything more than marginal.

So that is the monthly economic update for the month of April 2024. And this is the first Friday bonus episode of the Afford Anything podcast. Thank you for tuning in. If you enjoyed today's episode, please do three things. Number one, share this with a friend or a family member. That is the most important way to spread financial literacy. Number two, please subscribe to this show on Apple Podcasts, on Spotify, on your favorite podcast playing app, or apps, plural. Also, please subscribe to us on our YouTube channel, YouTube.com slash afford anything.

That is a major way that you can support this show. You can discuss this episode with other members of the community at afford anything.com slash community. subscribe to our show notes at afford anything.com slash show notes. And if you are subscriber, please hit reply to any one of our emails and let us know whether or not you want to hear more economic updates. If you want this more frequently than once a month. Thank you for tuning into the Afford Anything podcast. My name is Paula Pant. Next week, we have a Harvard Business School professor discussing NFTs. Make sure you tune in for that. And I will catch you in the next episode.