Freakonomics Radio - EXTRA: People Aren’t Dumb. The World Is Hard. (Update)

Episode Date: July 15, 2024

You wouldn’t think you could win a Nobel Prize for showing that humans tend to make irrational decisions. But that’s what Richard Thaler has done. In an interview from 2018, the founder of behavioral economics describes his unlikely route to success; his reputation for being lazy; and his efforts to fix the world — one nudge at a time. SOURCES:Richard Thaler, professor of behavioral science and economics at the University of Chicago. RESOURCES:“Behavioral Economics,” by Richard Thaler (The Past, Present, and Future of Economics: A Celebration of the 125-Year Anniversary of the JPE and of Chicago Economics, December 2017).Misbehaving: The Making of Behavioral Economics, by Richard Thaler (2015).Nudge: Improving Decisions About Health, Wealth, and Happiness, by Richard Thaler and Cass Sunstein (2008). EXTRAS:"Farewell to a Generational Talent," by Freakonomics Radio (2024)."Why Is Richard Thaler Such a ****ing Optimist?" by People I (Mostly) Admire (2021)."All You Need Is Nudge," by Freakonomics Radio (2021)."How to Launch a Behavior-Change Revolution," by Freakonomics Radio (2017).“How To Win A Nobel Prize," by Freakonomics Radio (2015).The Big Short, film by Adam McKay (2015).

Hey there, it's Stephen Dubner, and this is a bonus episode of Freakonomics Radio. On this week's regular episode, we traveled to Chicago to celebrate the legacy of Danny Kahneman, the Nobel Prize-winning psychologist who recently died at age 90. Kahneman and his research partner, Amos Tversky, produced a body of work that reshaped not just psychology, but economics as well. But they were working from the outside. On the inside were a few economists who admired their work and took it even further into the realm of policymaking. You remember the Greek myth of Prometheus?

He stole fire from the gods and gave it to humans. The economist Richard Thaler may be the Prometheus of economics. He took Kahneman and Tversky pecked out his liver every day for eternity, Thaler was rewarded with a Nobel Prize of his own. We spoke with him back in 2018, not long after he won the prize for his, quote, contributions to behavioral economics. I thought this conversation was well worth revisiting now, and I hope you'll agree.

So let's begin. If you would, say your name and title. I'm Richard Thaler. I'm a professor at the Booth School of Business at the University of Chicago. I see, technically, you're called the Charles R. Walgreen Distinguished Service Professor of Behavioral Sciences, blah, blah, blah. Is that accurate? The Walgreen? Yeah, yeah, yeah. That's accurate. But I didn't want to take up the whole podcast.

I understand. With my title. I was curious, however. I guess it's an endowed chair or something. Yeah, is that what that is? Yeah. In fact, it's a chair that has only been held by three people, all of whom have won a certain prize. Interesting. More important, though, I want to note,

as it's bestowed by the Walgreen family, does the position come with a discount at Walgreen's drugstores? There is no discount that I've been informed of. That said, you and I guess the other two holders of said chair, you are about a million plus dollars richer since you were last on the show, because I understand that you went out and won a Nobel Prize and that they give you some money with that. Now that you mentioned that, you know, I won that prize in spite of your best efforts to prevent it. I don't... You know, I think the show owes me an apology, like, on the air. This is like sore winterdom we're seeing.

You win the Nobel Prize, having been on our show previously, talking about potentially winning the Nobel Prize, and yet somehow you're sour about our theoretically negative influence when in fact the outcome was positive? What kind of logic is that? Well, no, but it's not the interview with me. It was the interview with Per Stromberg where you outed me. I'm sure you guys can find the tape. Yeah, we found the tape.

So I'm actually not allowed to talk so much about what happens. The episode was called How to Win a Nobel Prize. Per Stromberg is on the committee that awards the economics prize. As he pointed out, he couldn't say too much about the secret process, but he said his committee was very reliant on the reports they commissioned on potential winners. Our goal is to keep on scanning the field of economic sciences, broadly speaking. And to keep this up to date, we continuously send out these reports, basically scanning the field. So these are super helpful, and they're sent to really top people in these fields who put a lot of work into these reports. So this is probably our most important input in

a sense. And those reports remain confidential for 50 years, correct? Exactly. So Richard Thaler tells me that he was asked many years ago to write a report. He was commissioned to write a report on the work of Daniel Kahneman and Amos Tversky, who... You described me revealing I had written a long report on my friends Kahneman and Tversky back in the 1980s, and you told Pair I had told you that, and I think his words were, oh, he shouldn't have done that. I'm not sure he was allowed to say that, but fine.

Oh, okay, well, that's his problem, not mine. This show owes me an apology for trying to block my slim chances and drive them to zero. Well, let me ask you just to entertain the counterfactual. Maybe it made that Nobel committee think, oh, that Thaler, he's his own man. He identifies what he thinks are important ideas, and he feels it's important to disseminate them, even at personal risk to himself. And because... You know, well, it would be a line you could have used. You know, I was holding off on the lawsuit until it was clear I hadn't won. But I think you're safe now, Steve. So we can move beyond this.

And move beyond this, we shall. Today on Freakonomics Radio, the unlikely rise of Nobel laureate Richard Thaler. Suppose they did all the stats on Thaler. No one would have drafted him. His big Hollywood moment, also unlikely. Well, here's Dr. Richard Thaler, father of behavioral economics, and Selena Gomez to explain. The rather humble purview of behavioral economics. It's the sort of thing that your mother might say, really, you make a living doing that?

And if behavioral economics were a bumper sticker, what would it say? So we don't think people are dumb. We think the world is hard. This is Freakonomics Radio, the podcast that explores the hidden side of everything, with your host, Stephen Dubner. Years ago, Richard Thaler became enthralled with a new line of research about decision-making by the psychologists Amos Tversky and Danny Kahneman. Thaler went on to collaborate with them, thereby helping to create the field now known as behavioral economics. To mainstream economists, Thaler's research was often an irritant. He insisted that the elegant models they used to describe human economic activity were in fact grotesquely inelegant because they failed to factor in how real humans actually think and decide and behave. Over time, however, Thaler's work came to be tolerated, if not outright accepted. Along the way, he wrote a few books, including Misbehaving, The Making of Behavioral Economics, and Nudge,

Improving Decisions About Health, Wealth, and Happiness. Today, governments around the world are running so-called nudge units, hoping to harness the simple power of Thaler's ideas in the pursuit of better outcomes in health, education, personal finance, and crime reduction. Many other institutions and firms are practicing what Thaler has been preaching, often to quite substantial success. If Kahneman and Tversky were the architects of this behavior revolution, Richard Thaler was the man who turned their sketches into something we could actually inhabit. I have a lot of questions for you today, and we also solicited listener and reader questions. So we'll toss them in as we go. Here's one from Jose Albino Sanchez. He writes, he's an economics major who graduated from Notre Dame in 2016, so congratulations.

He wants to know, how did you, Richard Thaler, use your behavioral economics research to not run away with the one million plus prize money of the Nobel Prize and go buy a Ferrari? And I should say, that's assuming you didn't do that. But I, like Jose, am curious how you use your behavioral knowledge to spend or not spend yet your money. Well, you know, like every Nobel winner, I think, is asked this question, what are you going to do with the money? And they asked me this at 4.45 in the morning. The routine is you get this call at 4 a.m. Chicago time,

and once they've convinced you this is not a prank, they say, okay, get ready. There's a press conference in 45 minutes. And I hopped in the shower and then I'm on a press conference and the first question is, what are you going to do with the money? And all I could think of was,

well, to an economist, this is like a silly question, an impossible question. To most economists, perhaps. Well, certainly to a non-behavior an economist, this is like a silly question, an impossible question. To most economists, perhaps. Well, certainly to a non-behavioral economist, it's a silly question. Because the answer would be it just goes into the pool with the other money. It's no different than any other. Is that why? Right.

The proceeds of that money, half of which will end up in the U.S. Treasury, are sitting in some account at Vanguard. And if I go out for a fancy dinner, there's no way for me to label that Nobel money, though that might be a fun thing to do. I've thought that maybe the hedonically optimal way to spend the money would be to get a special credit card, the Nobel credit card. A Nobel card. Yeah, nice. And then when I decide to buy a ridiculously expensive set of golf clubs,

hoping that that will turn me into a competent golfer, then I just whip out the Nobel. That might be a good idea. Now, I'm curious, you do believe, and in fact helped identify the notion that we think of as mental accounting, which I know that the smart people tell you, you shouldn't do that. You shouldn't set aside money for vacation or for a certain project because money is fungible. That's one of the beauties of money. And yet, as you discovered, many people do it. And you also argued it's not such a bad idea, or at least since so many people do it, we should figure out how to deal with it. But is there a kind of a cookie jar on the counter where you've got the half a million that you can dip into whenever you want to do something fun? Yeah, yeah, yeah. That would be a really good idea.

What's your address, by the way? Especially if we announce it on the radio. But why'd you stick it in Vanguard, where it just becomes like, you know, more dollars mixed in with the others? Well, you know, I haven't, I've been busy, Steve. So, yeah, maybe you're getting me to think about labeling it. And of course, maybe we should figure out what percentage, maybe all, should go to some cause. That would make me feel good too. If there were a cause, can you tell us just kind of the general outlines of the cause? Would it be a kind of poverty alleviation? You know, I greatly admire

Doctors Without Borders, and they are one of the causes that we support, but I haven't really figured out what my personal cause is. Now, let me ask you this. Your wife, France, you've been married quite a while. I don't know how much credit you give her for being part of the familial team that produced this Nobel Prize. If you were to divide the prize, how do you think about divvying that up? Oh, first you try to prevent me from winning the Nobel Prize. Now you try to break up my marriage, Steve. You know, I used to think of you as a friend. And so I would say that France should get 120% of the after-tax money. Good answer. And you should get minus 20%. And I think that

would be a great solution. Early in your academic career, and I hope you don't mind me saying this, it didn't appear as if you were destined for huge distinction in your field. I think that's fair. Yeah. The undergraduate and graduate schools you went to aren't quite elite. Your place in the economic firmament was hardly guaranteed. So what happened? How'd that guy get to here? You know, I think I, so you're right. I don't think I was, well, I certainly wasn't a great student. And I don't think I was a great economist in the way economists are usually judged, in the sense that I wasn't a great mathematician

and my econometrics skills were not superb. So suppose there was an economics combine, like the NFL combine, and they did all the stats on Thaler. No one would have drafted him. And so what I really ended up having to do to survive, and this sounds premeditated, and of course it wasn't, was to figure out a kind of way of doing economics that would be something I was good at. And had I not done that, I might well have not gotten tenure and gone off and, you know, maybe I would be competing with you in book writing. You've summed up behavioral economics as a collection of, quote,

supposedly irrelevant factors that when it comes to how people actually live their lives are in fact not irrelevant. Can you give an example? Sure. You know, one of the first things that I noticed back when I was a graduate student puzzling through the behavior I saw was that people don't follow the economist's advice to ignore sunk costs. You know, if you paid for some expensive, rich dessert and after one bite, you were already full and your waistline doesn't really need it, but you remember how much you paid for it and so you think you need to eat it, following all kinds of mother's bad advice to finish what's on your plate, then you are failing to follow the economist's advice of ignoring that money because eating it doesn't get the money back. And so sunk costs are something that economists predict will have no effect on

behavior. And there are a class of these supposedly irrelevant factors. In fact, it's almost the only set of things about which economists have precise predictions. So, you know, consider supply and demand. If the price goes up, people will demand less. Well, how much less? Oh, sorry, The theory doesn't specify that. All it says is less. Whereas here, sunk costs will matter precisely zero. So says the theory, at least. Says the theory, right. In reality, you're saying they matter a great deal. Right. That's why I call them supposedly irrelevant factors. You know, another example is default options. Which box is ticked on a form? That, again, according to economic theory, the cost of clicking the other box is infinitesimal. Yet we know that making enrollment in a retirement plan the default option increases enrollment rates to over 90%.

And so, again, economists would predict confidently that that would have a zero effect and it has a massive effect. In an earlier episode of this podcast called How to Launch a Behavior Change Revolution, we heard Danny Kahneman, who won his own Nobel Prize in 2002, describe the history of behavioral economics. He pointed out something that distinguished Richard Thaler from many other economists. Richard, he hates my saying the next two things I'll say about him. I mean, one of them, I think he would tolerate. I think he's a genius. That's one he accepts. I think he's lazy.

I've made him famous for being lazy. You've been accused or really praised by your collaborator and mentor and friend Danny Kahneman as being extremely lazy. And furthermore, he argues that laziness has, in fact, been a big part of your success. What's he mean by that? And should we all try to be a little bit lazier? Well, you know, I don't know whether I can recommend laziness.

And, you know, Danny insists in great earnestness that this was intended as a compliment. Although he described it as my best feature. And I object to that. You know, I concede some laziness, but that being my best feature? Really, Danny? You know? So I think what he means is that, well, at least I'm going to interpret it this way, that I have little patience for working on things that aren't, at least to me,

both interesting and somewhat important. And so compared to many economists or academics, I haven't written a super large number of papers, and I don't follow the habit of writing 20 versions of the same paper or on the same topic because I get bored, and the fourth paper on some topic is not nearly as interesting as the first one. So Danny claims that it's my laziness that forces me to work on things that are important rather than unimportant. And that's his story anyway. And the mechanism of that benefit is what? Because you're lazy, you just don't want to waste time on things that aren't going to be potentially important and or interesting?

Yeah, that's the idea. So I hate to inject our personal history in this, but it does bring up a memory is I remember coming to visit you in Chicago. I think it was the first time we met, and it was probably 15, 16 years ago. And I had really fallen hard for this whole behavioral idea, Kahneman-Tversky and Thaler, and I like the economics. I especially like the psychology. And I came to you and I said, Herr Professor Thaler, I, a young and ambitious journalist at The New York Times, would be most interested in writing a book that incorporates your research and incorporates your own view of the world. And I'd love to include you in it as some kind of collaborator, subject, so on. And if I recall correctly, I'm just curious to know what your recollection is. You basically said,

that sounds like a lot of work and I got other stuff going on. So I'll buy you lunch, but then scram. That was my recollection. And I've always been disappointed that we never worked on a book together. I'm curious if that squares with your recollection. Yeah, it really is too bad for you because when you got done with me, you said, I'm going over to the economics department to talk to this young guy, Levitt. And then I think you abandoned the idea of writing a book with me because sumo wrestlers are more important than mental accounting. But my recollection of this story was that I thought maybe I had a book in me. And eventually I did. Obviously you did. You had two more and maybe more beyond. So, you know, this is the tallest midget theory, but, you know, by economist

standards, I write well. And so, yeah, I thought that maybe I should write a book and that it should probably be in my voice. And it worked out well for all three of us. I do agree you write well, not even for an economist. You're a good writer, but in economics, it especially stands out. I read a piece of yours recently that I would recommend to everybody. It's was published in, I believe, JPE, Journal of Political Economy. And it was an essay about the history of behavioral economics. And this was so interesting to me. You write that it nearly got fully underway at the University of Chicago about 100 years ago, but didn't catch on. Can you talk a little bit about that?

Yeah. So the background is the University of Chicago House Journal, the Journal of Political Economy, one of the top five journals in the world. They were celebrating their 125th anniversary, and they asked a bunch of Chicago faculty members to write short essays on their field and how it's been represented in the journal. And for behavioral economics, there were pretty slim pickings. But there was this article written exactly 100 years ago in 1918 by a guy called John Maurice Clark. He was the son of a more famous guy, John Bates Clark, for whom an award is named. And he writes something like that the economist can try to invent his own psychology, but it will be bad psychology. And if they want to stick to economics, they should borrow their psychology from psychologists. Clark, you write, ends up leaving Chicago for Columbia. And you

write, it seems fair to say that the subsequent editors of the JPE did not take up his call to arms, which was essentially to integrate psychology and economics. Why did it take so long, do you think? Well, you know, I don't know really what was going on in 1918. But it is the case that economics was behavioral. You know, Adam Smith was a behavioral economist, for sure. And Keynes was a behavioral economist. The single best chapter on behavioral finance was written by John Maynard Keynes in The General Theory, which was written in 1936. So I think until World War II, there wasn't something called behavioral economics, but economics was kind of behavioral. And then what happened is there was

a mathematical revolution that took place right after World War II. And it was led by people like Paul Samuelson and Kenneth Arrow. And Samuelson in particular, he was a University of Chicago undergraduate and then went off to graduate school and his thesis was called Foundations of Economic Analysis. So all he did was redo all of economics properly. And so starting with that, economists got busy writing down Greek letters and formalizing economics. And it turns out the easiest way to do that is to describe behavior as some kind of optimization problem. Because if you've taken a high school calculus class, then you know how to solve for the maximum. You take the first derivative and set it equal to zero, and you're done. So it was the bounded rationality of economists, ironically, that led them to make everything rational. It's interesting because a lot of the hallmark anomalies, I guess, identified in recent decades

by people like you and Kahneman- Tversky. We talk about loss aversion and mental accounting and the endowment effect and all the cognitive biases, recency bias and status quo bias and the availability bias. You know, it strikes me that none of them actually even seem remotely new. I mean, can't you find most of them in Shakespeare? Can't you find them in, you know, Roman and Greek and earlier philosophy? Don't you find them in the Bible and other ancient texts? So, if what you're describing now is a kind of mid-century modern renaissance of a sort of more holistic thinking about economics that was there from Adam Smith onward until World War II, I guess the real question is, is that really worth a Nobel Prize to have rediscovered this rich, rich, rich tradition

of people say they want to do one thing but often do another? Yeah, I think it's the sort of thing that your mother might say, really, you make a living doing that? Much less a Nobel Prize. So, I mean, I guess it's fair to say that just pointing out that people aren't all that smart would not get you a Nobel Prize. You had to do something with it. And that turned out to be more work than I liked. But yeah, there was a long debate. And by no means have I convinced everyone. Well, you were once asked about the degree to which, quote, mainstream economists have embraced behavioral economics. And you said, I don't think I've changed anyone's mind in 40 years. You basically don't change minds,

given that I've turned to the strategy of corrupting the youth. And indeed, there are a lot of young economists really interested in behavioral stuff. Is that really true? Did you really change no minds? And if so, or even if not, I guess, what have you learned about the human capacity to change a mind? I mean, we don't want to just write off anyone over the age of 25, do we, as incapable of entertaining new thoughts? Well, it's hard. So I think Richard Posner, the great judge, I think he's changed his mind a bit.

But I think it is hard to change people's minds. But economists in graduate school now, they don't have a big sunk cost in the traditional methods. There was an economist once early in my career who said to me, you know, if you're right, what am I supposed to do? What I know how to do is solve optimization problems. And I said, you know, really, I don't know. I'm sure you'll think of something. It's interesting, though, because if you look at the world writ large, political systems and healthcare institutions and so on, isn't that exactly the same core problem that we're facing,

which is people come along with what could be really useful solutions, but institutions being what they are, the people with the power to change have often the least incentive to change. Isn't that a huge issue in the lack of progress? Well, I get what you're saying, which is if I'm at the top of the heap, why do I need to change? But on the other hand, it's often the CEO that is the most reluctant to change. And that guy, and he's unfortunately still usually a guy, potentially has a lot to gain from changing. I mean, if you think of companies that have come and gone, like Kodak, which invented the digital put tens of thousands of mom and pop video stores out of business, only to be put out of business by Netflix.

Coming up after the break, wait a minute, the Nobel Prize in Economics isn't a, quote, real Nobel Prize, is it? You know, it's a pretty good substitute. What the award ceremony feels like if you're the one getting the award? I will say that I found the whole thing to be pretty emotional, partly because of where I came from intellectually. And what's Thaler got to say about past and future economic meltdowns? You know, we seem to learn one lesson and then are not able to extrapolate it to the next one. I don't know what the next bubble will be or whether we're already in one. In December of 2017, Richard Thaler went to Stockholm for a multitude of Nobel festivities. At the Nobel Prize banquet, one winner from each prize has to give a toast.

It gives you a glimpse of the grandeur. It is a great honor to present the winner of the Swedish Riksbank Prize in Economic Science to Alfred Nobel's memory, Richard Thaler. So my toast began by saying that my fellow winners had discovered things like gravitational waves and circadian rhythms, and I discovered the existence of humans in the economy.

Then there were other events, including the Nobel Lecture. Professor Feiler, please, the stage is yours. Thanks to all the members of the committee, and thanks for that great introduction. So I've been interested in gravitational waves for a long time. Oh, no. In an earlier episode about the Nobel Prize and how to win one, we did speak with your colleague and our friend Steve Levitt, and he said...

The way I know it's Nobel season is that around Chicago, a lot of people tend to get haircuts in the few days leading up to the announcement of the prize. And so if I see all my colleagues with really short, well-maintained hair, I know that the prize must be somewhere right around the corner. So we have a question here from a listener named Aaron Wicks. He writes to say, Dear Professor Thaler, did you get a haircut in hopeful anticipation of receiving your Nobel Memorial Prize? No, I didn't. And I will also say that I've heard of economists and other scientists who set their alarm. And then did they practice sounding sleepy?

Like 345 so that they'll be alert, which I was the opposite of when the phone rang. And I'm a good enough amateur psychologist to know that this is a horrible idea, a really dreadful idea. So let's suppose my chances of winning were 1 in 20. Setting my alarm gives me a 95% chance of being awake to get the bad news. Whereas, you know, my strategy had always been to sleep soundly and then, you know, hear on NPR in the morning or now, you know, breaking news on your phone. Oh, isn't that nice that Jean Tirole, a fabulous fellow, won the Nobel Prize? And you can be happy about that. So, no, I didn't get a haircut and my alarm was not set. In the very near aftermath of having been informed

that you won the Nobel, you said this. And unlike Bob Dylan, I do plan to go to Stockholm. And you did go to Stockholm. Tell us about that experience. Well, it's a week-long marathon. The laureates are there for eight days of kind of constant interviews and dinners and talks and various things. And there's a hierarchy in the Stockholm Prizes. The Peace Prize is given by Norway and is done in Oslo. And the hierarchy is physics, chemistry, medicine, literature, economics. And so my line is that among sciences, the Swedes consider economics just after literature. And that's because, of course, the economics prize, as we know, and as I'm sure some of your listeners will call in and inform you idiots, it's not a real Nobel Prize.

Well, before you go on with your, so let's just get it straight. The Nobel Prize in economics is not what they call an original Nobel. It was established in 1968, and it's officially called the Central Bank of Sweden Prize in economic sciences in memory of Alfred Nobel. But as you point out, a small but vocal contingent always seeks to remind us of this fact whenever the economic prize is referred to as a Nobel Prize. What do you say to that small vocal contingent that says, well, it's not really a Nobel Prize? You know, it's a pretty good substitute. And I will say the Nobel Foundation

makes exactly no distinction. So you're all treated the same way. But because of this order, I spent a lot of time standing in lines and sitting next to Kazuo Ishiguro, the literature winner, who was charming and wonderful. But I will say that I found the whole thing to be pretty emotional, partly because of where I came from intellectually. So as we were saying, I'm not someone that you would have predicted would be a Nobel Prize winner. And when that finally happened, that was, yeah, it was an emotional experience. Are either of your parents still alive? No. They're very slow. They, the Nobel Committee, you're talking about? Yeah, the Nobel Committee. You know, they're working their way through the 1980s. So that means that people are typically in their late 60s and

early 70s when they win the Nobel Prize, which means there are very few parents that get to see their children win. Who do you think was most proud of you? Danny Kahneman. Well, he was happiest. He kept telling me, come on, win this before I die. And he's 84. So, you know, he's a friend. So I had to do it. You know, the bribes were finally well worth it. So let's move on to talking about how behavioral economics has been applied by various people in various intensities in many different places around the world. So you've said there are roughly 75 what are called nudge units named after you or Cass Sunstein's book N, about using behavioral economics in policy, essentially, policymaking. The latest number is 200. Goodness gracious.

That's a tripling in what span of time? Just a year or two? I don't know. And I'm not the one keeping track. But someone at the OECD has a map with 200. Some of these are in cities. Yeah, there's one in Chicago, for example. All right. But what would you say

to date has been the greatest kind of specific contribution of behavioral economics? In other words, the greatest instance in which the research and the ideas have been applied to policy in successful measures? I guess you'd have to say retirement saving plans because 401k plans and their ilk defined contribution plans have really been transformed because of behavioral economics research on two dimensions. One is changing the default, so what's called automatic enrollment. So you're in unless you actively take some step to opt out. That has gotten enrollment rates to be north of 90%. And then what my colleague Shloma Benartzi and I called Save More Tomorrow, which is a plan where you ask people if they want to increase their saving rates every year

until they hit some reasonable level. The generic version of that is now called automatic escalation. So what that means is you get a raise and you contribute a higher percentage, but because you're getting a raise, you still are bringing home a little bit more money and you don't feel the pain. Is that the idea? Right. And you commit yourself to this off in the future because we all have more self-control next month when we're going to start going to the gym every morning at six. You've written that the, I'll quote you to yourself, the subfield of economics in which the behavioral approaches had the greatest impact is finance. I'd love you to talk about that for a minute.

You know, one thing I've never understood about behavioral finance is, you know, once the notion of behavioral anomalies is widely accepted, and they seem to be now in finance and in investing, aren't they just subsequently priced out of the market? Well, that's an interesting question. And the answer is, to some extent, yes. But I've been involved with a money management firm called Fuller & Thaler that's been around for 25 years or so, and the things we do don't seem to work any less well than they did 20 years ago. I know Fuller and Thaler describes itself as having pioneered the application of behavioral finance to investment management, are your exact words. In what ways, just describe, in what ways is the firm's strategy actually behavioral? So we're explicitly thinking about what are a class of situations in which people are likely to make a mistake.

So it's like you go into some restaurant and somebody's leading you to your table and there's that one step down and they say, watch your step. And they say, watch your step because if they don't, you know, three people a night will fall down and they'll have lawsuits. So, you know, you can be a spectator watching that and say, oh, that guy's about to make a mistake. Now, you would have made that mistake too. So, what we try to do is find those steps that are not quite in sight that will throw a majority of market participants off. Let me ask you a related question. This is from Colm Ryan, who writes that he's an accountant in Dublin, Ireland, related to what we've been speaking about and with very high stakes,

I should say. So here's his question. Given that you could apply behavioral principles to help understand what led to the 2007 crash, do you see any similarities or indeed differences in what's going on in the film The Big Short, Selena Gomez helps you explain synthetic CDOs, collateralized debt obligations. Well, here's Dr. Richard Thaler, father of behavioral economics, and Selena Gomez to explain. Okay, so here's how a synthetic CDO works. Let's say I bet $10 million on a blackjack hand. $10 million because this hand is meant to represent a single mortgage bond. So first of all, was she a pretty good teacher? You understood CDOs better after that filming? Yeah. Let me just say that Selena, unlike me, was very good at memorizing lines. And I think it's fair to say that, I mean, she was a very charming young

woman. And I'm deeply grateful to her because being in that movie is the only thing that I've done that has impressed my granddaughters, who are big Selena Gomez fans. But I think it's fair to say Selena knew nothing about collateralized debt obligations, nor blackjack. So she's a great actress then, because the impression is that she knows quite a bit about both. Yeah, she's a much better actor than me. So a possibly funny story is that in the script, the first hand, she's dealt a 21, which of course in blackjack means you win.

And she was dealt 21 and didn't react. And so I had to take over as blackjack coach and director, both of which are uncredited in the movie, I might add, and say, Selena, when you get to L21, that means you win. And there's a shot in there where we're high-fiving. And that's because she had learned in subsequent takes that when she gets to L21, that she's supposed to be happy. Okay. So let's get back to Colm Ryan's question about the 2007 meltdown and now similarities, differences.

What do you see? Well, you know, I think – I don't think we will repeat that mistake. But that crisis followed pretty quickly after the tech crash in 2000, right? And it started like in 2006. So we're barely over the tech bubble and we get this real estate bubble. And, you know, we seem to learn one lesson and then are not able to extrapolate it to the next one. I don't know what the next bubble will be or whether we're already in one. I do think that we have done some things to make banks less fragile, especially big ones. But there are things like Bitcoin around. Of which you're not a fan, we should say.

Of which I'm not a fan, we should say. Of which I'm not a fan, no. You're not not a fan of blockchain itself, correct? But as a currency, not a fan. Is that about right? Correct. I mean, I don't know why anyone engaged in strictly legal activities would want to use a currency that is so volatile. It's just the opposite. You know, suppose you sell another book and the publisher offers you an advance in Bitcoin. Unless you were trying to cheat the IRS, you would say, no, tell me what it's going to be in dollars because I could end up getting half of what you're offering me. And that's not an attractive feature. So have you shorted Bitcoin?

No, because, you know, Warren Buffett says a lot of smart things, and one thing he says is, don't make investments in things you don't understand. And I have no clue. I mean, I don't think that the intrinsic value of Bitcoin is worth thousands of dollars, but I also think it's entirely possible that it will go up rather than down. So stay away is the best advice. Some people, including some economists, argue that behavioral economics is really just another way to suggest that individuals can't be trusted to make good decisions. And so institutions, particularly the state, should take more control. Indeed, your co-author on the book Nudge, the legal scholar Cass Sunstein, for several years ran

a White House unit called the Office of Information and Regulatory Affairs, which sounds about as Orwellian as you can. There are nudge units in dozens of federal governments around the world. You've described your work as libertarian paternalism and furthermore argued that that phrase is not an oxymoron. Why shouldn't we dismiss your work as a kind of new, softer form of statism? Well, I think, first of all, when we use this phrase libertarian paternalism, we're using libertarian as an adjective. And so we're trying to say we're going to design policies that don't force anyone to do anything. So the claim that we're trying to tell people what to do or force them to do things is just completely wrong.

We're also not trying to tell them to do what we think is smart. We're trying to help people do what they want to do. So, I like to use GPS as an analogy of what we're trying to do. So, I have a terrible sense of direction. And, you know, Google Maps is a lifesaver for me. Now, if I want to go visit you, I can plug in your address. And, you know, suppose I'm walking across the park and I see, oh, look, there's a softball game over there. I think I'll go watch that for a while. Google Maps doesn't scold me. You know, it will recompute a new route if I've gone a bit out of my way.

It doesn't suggest addresses to me. It just suggests a route. And if there's a traffic jam, it suggests maybe you should alter your route. So we don't think people are dumb. We think the world is hard. I mean, figuring out how much to save for retirement is a really hard cognitive problem that very few economists have solved for themselves. And it's not only cognitively hard, it involves delay of gratification, which people find hard. So it's just like navigating in a strange city is hard. So why not

try to help? When I first was working with the UK behavioral insight team, the first nudge unit, the phrase I kept saying in every meeting with some minister was, if you want to get people to do something, make it easy. Remove the barriers. That's what we're about. Let me go back to you and the Nobel. So what would you say have been the biggest changes in your life since winning the prize, both of the observable sort and unobservable? Well, I mean, I think I spend more time talking to people like you. My inbox, my email is completely out of control. And there are some downsides. You know, the university all of a sudden has a lot of things that they would like you to do.

Fundraisers. Of that ilk. So I was a pretty happy guy. You know, you've known me for years and we saw each other recently. Did I seem demonstrably happier? You looked a little taller and better looking, but otherwise, I think that was my perception. I think you were exactly the same, actually. No, that was just your jealousy. But look, I absolutely don't want to sound like- A sore winner. A sore winner or an ungrateful winner.

I'm saying that most of the people who win were already pretty successful people with pretty good lives. And there's what psychologists call a ceiling effect. So I had a pretty happy life. As you know, I have a nice wife and I have kids I love. And, you know, yes, this made me happy and it was very gratifying. But you have this image that you're going to be on cloud nine. And, you know, then there's life. You know, you still get flat tires, even if you have a Nobel Prize. You know, you still have leaks at home

that nobody seems to be able to fix. So, yeah, they need to fix that and say that if you get a Nobel Prize, nothing can leak in your house. I'll end with where I should have started. Congratulations. Thank you, Stephen. I, and I know everybody who listens to you,

is happy for you, proud of you, and most of all, we're pleased, in a selfish way, to keep learning from you because we learn a lot, and I thank you especially for that, and I look forward to the next time we speak. So do I. That again was Richard Thaler, the Nobel Prize winning economist from our 2018 episode called People Aren't Dumb, The World is Hard. Thanks to him for this conversation. And as always, thanks to you for listening.

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