Good Life Project - The Surprising Science of Match-Making

Episode Date: June 16, 2015

Want a job at Google, a gorgeous hideaway on Airbnb, a spot on the Stanford faculty, a romantic partner or even a kidney?Good news, bad news. You have a say, but so do they.It's all part of a phenomenon called "matching markets."Markets are what make businesses possible. But not all markets operate on the exchange of cash for goods. In fact, some of the most important markets go so far as to outlaw cash. In other markets, like romance, many societies just find cash morally repugnant. And, no matter how much you may want something, there's another person who'll have a say in whether you get it.When you understand these often complex and hidden markets, the nuanced rules and games that get played, you end up in a better place to both get what you need from them and give more effectively to those you seek to serve.That's what we're talking about in this week's conversation with Nobel Prize-winning economist, Stanford professor and author of the fascinating new book, Who Gets What - and Why: The New Economics of Matchmaking and Market Design, Al Roth.This discussion pulls back the curtain on why we are willing to do so much, for one thing, person or opportunity and yet so little for another and how that is redefining our options, how they are presented, and how much control we really have over any of it. Hosted on Acast. See acast.com/privacy for more information.

ideas of what's fair and what isn't these aren't things that are fixed forever they're things that can change but how they change is a little bit of a mystery and the fact that they can change doesn't mean that they aren't enormously powerful at any given moment there's this really interesting thing that happens when you're trying to find the right person, the right job, the right college to get into. You may have a really good idea of what lights you up. You may feel like there's a total connection, but it's not entirely up to you. There's got to be this magical meshing where you light up and they light up, and together you both say yes. This is a phenomenon called matching markets.

And in today's conversation, we're sitting down with Al Roth, Nobel Prize winning economist and professor who's been studying these markets. And we dive into some really fascinating, sometimes what would seem like irrational parts of these markets, how they exist around us all day long and control so many of the decisions that we make, and what we can learn about the way that these markets interact, and how we can get the most out of our interactions with them. I'm Jonathan Fields. This is Good Life Project.

Mayday, mayday. We've been compromised. The pilot's a hitman. I knew you were going to be fun. January 24th. Tell me how to fly this thing. Mark Wahlberg. You know what the difference between me and you is?

You're going to die. Don't shoot him, we need him. Y'all need a pilot. Flight risk. If you're looking for flexible workouts, Peloton's got you covered. Summer runs or playoff season meditations, whatever your vibe, Peloton has thousands of classes built to push you.

We know how life goes. New father, new routines, new locations. What matters is that you have something there to adapt with you, whether you need a challenge or rest. And Peloton has everything you need, whenever you need it. Find your push. Find your power. Peloton. Visit Peloton at onepeloton.ca. The Apple Watch Series 10 is here. It has the biggest display ever. It's also the thinnest Apple Watch ever, making it even more comfortable on your wrist, whether you're running, swimming,

or sleeping. And it's the fastest charging Apple Watch, whether you're running, swimming, or sleeping. And it's the fastest-charging Apple Watch, getting you 8 hours of charge in just 15 minutes. The Apple Watch Series X. Available for the first time in glossy jet black aluminum. Compared to previous generations, iPhone XS or later required, charge time and actual results will vary. So where to begin with you? Let's dive in. One of the fascinations when I was reading through your book and sort of exploring your work is that you spend a lot of time researching this thing called matching markets or matched markets, and which I had no exposure to before this, or at least in name.

But of course, every day I have exposure. And it seems like the fundamental question is really, as we go about our lives and we sort of exchange value, there are all these scenarios where you pay cash. But then there are all these much softer scenarios where there's no cash that changes hands. So if you could just sort of describe the idea of what is a matched market? What is that all about? Well, let's start with what isn't a matching market. I think many people, when they think of markets, think of commodity markets. When you buy 5,000 bushels of number two hard red winter wheat on the Chicago Board of Trade, you don't care who you're buying it from. They don't care who they're selling it to because it's a commodity.

You know exactly what you're getting. But when you offer someone a job, you care who it is you're offering a job. And so one of the differences between a commodity market and a labor market is that in a labor market, you can't just choose what you want. You also have to be chosen. You can't just decide to go work for Google. They have to hire you. And they can't just decide who should work for Google. They have to compete with Facebook. So you care who you hire. They care who they hire. You care who you work for. But you don't care who you buy 100 shares of stock from on the New York Stock Exchange. So a commodity market is anonymous. It's arm's length.

But a labor market is like marriage. And it doesn't mean there's no money involved. They, of course, pay you a wage. But that isn't the only thing that determines who gets which job. One of the examples I like to give is that I teach at Stanford University, which is a fancy university. And we don't choose our freshman class by raising the tuition until just enough kids want to come, right? So we don't set the price at which supply equals demand. Instead, there's an application process, an admissions process.

There's a lot of things that go on in matching markets other than prices. And as you suggested, in some matching markets, we don't allow prices to work at all. Like who gets into New York City high schools? My colleagues and I have helped design parts of that procedure. Who gets a kidney? Things like that. So we have laws against paying money for kidneys, but it's still a matching market. So let's dive into that a bit. You lead the book, actually, with the whole conversation about the kidney, which then ends up getting threaded through in various ways. But that is a market that, you know, thank God I've never had exposure to. But let's set that up a little bit because I think it's really fascinating.

You know, you've got some, according to what you share, I believe it's about a hundred thousand people every year who are waiting for a kidney. Well, there are a hundred thousand people waiting right now. Okay. On the list. So take me through this whole, you know, what happens in the world of people who are in need of a kidney, how it normally works and then, um, or I guess how it was working and then how there's been this pretty astonishing shift in the way that the matching works. Well, there aren't enough kidneys for all the people who need kidney transplants. That's why there are so many people waiting. And it's not a market in which prices are set so that supply equals demand.

It's against the law to pay for a kidney. A kidney transplant is expensive, but you can't pay for the kidney. So kidneys come from dead donors, and they also come from living donors. You have two kidneys, and if you're as healthy as I hope you are, then if someone you loved was dying of kidney failure, you could save their life by giving them a kidney. So last year in the United States, we had about 11,000 transplants from deceased donors, and we had about 11,000 transplants from deceased donors, and we had about 7,000 transplants from living donors. And to be a living donor, you have to be pretty healthy.

But sometimes you're healthy enough to give someone a kidney, but you can't give a kidney to the person you love because kidneys have to be matched. The person you love might have a different blood type from you in a way that makes it incompatible. Or more often, the person you love may have some antibodies to some of your proteins. And that would mean that their immune system was ready to attack your kidney if it showed up. So you might be healthy enough to give a kidney, but you can't give. You're incompatible with the person you love. And I might be in the same situation. And that opens up the possibility of exchange. It might be that your kidney is compatible with the person I love, and my kidney

is compatible with the person you love. So if we arrived at the hospital at the same time, we could do an exchange in which I would give a kidney to your patient and you would give a kidney to my patient and they would both get compatible kidneys. So that's become a standard form of transplantation in the United States and it's spreading around the world. And it's something that my economist colleagues and I were able to help our surgical colleagues to organize in a cashless matching market, a big data set of all the incompatible patient donor payers and who can be matched to whom. Right. And you also dealt with something that made sense to me, which is, but I hadn't thought about it until you laid it out, which is, I guess, originally,

when you were starting to think or when sort of the medical industry was starting to figure out, okay, this might be possible, there's a trust issue. So originally this was being done where the surgeries had to be, you know, like side-by-side, you know, ORs, and the surgeries had to be simultaneous, you know. One, you know, the chief calls the next thing and says, are they on anesthesia, you know, is the first cut made? Because there's a trust.

You know, like you don't necessarily trust that when you're done, the next person is going to honor their commitment. So there's a trust issue. There's also just a feasibility issue. Sometimes when you put someone under anesthesia, they have a terrible reaction and the operation can't proceed. So to make sure that these simple exchanges went through the way they were designed, we did exactly as you said. The surgeons would anesthetize the donors and the patients and make the initial incisions. And when they could see that the operation could go through, they would go through simultaneously. And often these were at different hospitals. The donor would travel to where the patient was.

So they would check by telephone. I remember being in the OR and the doctors got on their cell phones and they said, we're ready here in Cincinnati. Are you ready in Toledo? No. Which, you know, on the one hand is great that we have the technology and the ability to do that now, but it's also pretty limiting. So what happened that allowed for that to move from simultaneous procedure to sequential? Well, the reason we do these simple exchanges

simultaneously, the reason we did them and still do them simultaneously is it would really harm some patient donor payer if they gave a kidney on day one and then failed to get a kidney on day two. And it would harm them in two ways. One, they would have had a surgery that didn't help them. And the other is they'd no longer have a kidney with which to enter into kidney exchange. But a lot of our transplants are facilitated these days by non-directed donors, by donors who don't have a particular patient in mind. And there aren't too many of those, but they really, I'll tell you, they really facilitate a lot of transplants because they allow chains to be formed in which each patient-donor pair will get a kidney before they have to give one. And so if the chain breaks, no one is hurt in this extreme way of having lost a kidney without having gotten one. So when you have a non-directed donor, you can start off and have the non-directed donor give to a patient in some incompatible patient-donor pair. And then the donor in that pair go on to pass it forward to another patient and so forth.

But because the pairs are getting kidneys before they're giving one, if the chain is broken, it's not tragic. And so you don't have to do them all strictly simultaneously. Sometimes there can be delays while you figure out how to extend the chain. And so the majority of living donor transplants done through kidney exchange nowadays are done through non-simultaneous chains. So, and when you use the phrase non-directed donor, which if we break that down, that's basically somebody who shows up and is acting purely altruistically?

Yes. So often these are people who know someone who had kidney disease who they weren't able to save. In the United States, about a third of the non-directed donors seem to come from faith-based organizations. There's one here in New York called Renewal. It's a religious Jewish organization. There are Christian organizations as well. There seem to be – I don't have good data on this, but there seem to be some representation of policemen and firemen because many of those are physically courageous and interested in helping people. kidney that they won't be able to get one. Because I remember talking to a policeman who said, I'm a policeman. If someone in my family needed a kidney, one of my buddies would give it. Yeah. And what blows me away about that also is that we're talking about somebody who's showing

up saying, I have no idea where this is going. But I'm just here. I know that somewhere, somebody out there, there are enough people waiting on the list that I'm going to be a match for somebody. I have no idea who they are. And, and I'm assuming the way it works, they, they may never know who it is, right? Or maybe not. That's true.

They might never know the, typically you give anonymously without knowing where it's going. Once the chain is complete, sometimes the chains are invited. They're asked, would you like to meet the other people? And so there have been some very touching photographs, sometimes with a lot of people in them when they have a reunion. Yeah, that's got to be amazing. I mean, if you have sort of like one non-directed donor, one person who shows up purely out of altruism that then triggers a sequence, like a dozen pairs or something like that, it's got to be extraordinary. Absolutely. The very first one of those was done by, was initiated, was organized by a surgeon named Mike Reese, who's the founder of a kidney exchange organization called the Alliance

for Paired Donation. And he held a reunion for them afterward. And it was actually in, I think, People magazine. And they showed the whole chain with little photos of the people there and it's quite something. It's really incredible. I want to talk about something, though, that we breezed past and you write about, but you write about sort of separately from the whole conversation about the fundamental way that

this whole thing works, which is, and you mentioned it briefly, it's the idea that you can't pay for a kidney, at least I guess from what you're saying in all but a single country in the world right now. Let's go into that a little bit because there will be people who will say, I got money. If somebody else is willing, why? And there's, you know, we're on equal ground. They're not being coerced. There's no, youced. There's great – I'll pay for all the medical care at the best hospitals, the best doctors in the world to make this happen as safely as possible. What's wrong with that?

That's a wonderful question and I don't know the answer to it. But what I can tell you is that it's presently against the law everywhere in the world except the Islamic Republic of Iran. That's the only place where there's an explicitly legal market. Now, there are plenty of illegal markets. And, of course, the trouble with illegal markets is they don't give gold-plated contracts. You have to deal with criminals. And so quite a few very bad things can happen in illegal black markets for kidneys. But in the United States, the 1984 National Organ Transplant Act says that no one can give valuable consideration for an organ

for transplantation. So incidentally, we needed an amendment to that act to make sure that kidney exchange was legal because to give a kidney for a kidney might look to you like valuable consideration. But Congress, by a claim, said kidney might look to you like valuable consideration. But Congress, by a claim, said that that is not what the act meant. So what the act means is you can't buy and sell organs. Now, there's lively debate on that as we speak. There was a recent issue of the American Journal of Transplantation, a surgical journal, that had three papers in it, one of which said, let's start to think about how to arrange compensation for donors, one of which said, let's think about how to conduct experiments

to inform the debate about whether compensation would be helpful. And the third said, it's fundamentally wrong to pay for kidneys, but it would be okay to compensate donors for their out-of-pocket expenses and maybe for their lost wages. There shouldn't be disincentives to give an organ, which there are now. If you wanted to give me a kidney, say, you'd probably have to fly to California where I live and you'd have to get a hotel room near the hospital for a couple of days before they admitted you to do the nephrectomy and maybe stay in that hotel for two or three days afterward while they did the post-operative checkups. So you could run up a bill of several thousand dollars.

And right now, there's no orderly way to pay you back, although it's legal to do so. So I think that one of the things that we may try to do in the near future is organize a way to make it straightforward for donors to recoup their costs. What are the reasons, though? What are the arguments that are offered against this? So the arguments are that even if you worked really hard to have a carefully regulated market, somehow it would work to the disadvantage of the poorest and most vulnerable members of society. So when you look at black markets, you can easily see how that could happen because indeed there

are sort of trafficked women from Eastern Europe or, you know, very, very poor people who then are cheated out of what they've been promised and don't get follow-up medical care. But of course, you can ask whether in the United States where we have pretty good rule of law, whether you could set it up so that those terrible things wouldn't happen. And that's a very good question. And so I've actually started to study, and I have a chapter in the book, I've actually started to study what I call repugnant transactions.

And those are, it turns out there are lots of them. Those are transactions that some people would like to do, some people would like to engage in, but other people think they shouldn't. Third parties who aren't apparently affected themselves. And there are lots of those. The one example that I like to give also, one without money right now, is same-sex marriage. Until 2004, when Massachusetts courts decided that Massachusetts citizens were being denied their equal rights by not having the opportunity to marry people of the same sex, it was not legal anywhere in the United States. And now we're just a decade later, and it looks like we're on the verge of having it legal everywhere. So this is something that was a repugnant transaction

in the sense that some people wanted to do it. They wanted to marry each other, and other people didn't want them to. It lasted for millennia. It's a biblical repugnance, and it ended faster than you could have imagined. So old repugnances can end. But on the other hand, we live in a country in the United States where we used to sell slaves. That was a legal transaction, which we now regard as highly repugnant. And you could even sell yourself into term limited slavery. The most common way that people bought passage across the Atlantic Ocean from England and Ireland was indentured

servitude. You'd sign a contract that basically said you'd be a slave for five years. Well, we don't do that anymore. So it's not that as we get all modern, old repugnances die off and everything becomes okay. Sometimes we discover things we used to do that we don't care for anymore. So I think that as social scientists, we economists need to understand a lot more what are the environments in which we allow transactions to take place when we like them and when we don't like them. Because of course, markets require lots of social support to function smoothly. Yeah, and the idea of repugnance based partly on morality, which can change partly in the genuine desire to protect those who may not be able to protect themselves.

And then partly probably just pure in politics on some level and in certain markets. And it would seem also this would be at play in, I mean, you were talking earlier about Stanford or about universities in general, university admissions, which is this form of matching market where, you know, you've got to pick the student, but the student has to pick you too. And but, you know, what happens if somebody shows up and says, well, you know, like tuition is $60,000 a year, but I'm perfectly willing to pay $500,000 a year. Pretty sure most people would consider that pretty morally repugnant. Well, when you go around universities, you find that a lot of the big buildings are named after people. So they're different ways, right?

Yeah, there was actually there was a case, this was a number of years back, um, in New York city where we are right now. Um, kids are often tracked in school from preschool. You know, the parents will pick certain preschools, which they perceive to be a feeder for the right elementary school in the middle and the high school, which then gets them into the Harvards and the Stanfords because, um, and, and there was a right elementary school in the middle and the high school, which then gets them into the Harvards and the Stanfords. And there was a big public thing in the city where somebody who's very high up in a very large company donated something like a million dollars to the larger institution where I believe it was a preschool. And somehow the kid ended up, you know, at three and a half years old being accepted into this preschool.

There are ways, I guess, to influence the system. But the bigger point is that we consider that offensive. Even though on a certain level, it's sort of supply and demand. We sometimes consider it offensive and sometimes we don't. You know, your story has two parts to it. One is someone is influencing – using money to influence an admissions decision that we might think of as being separate from monetary considerations. But it's also that someone perceives the admissions to Harvard as starting in preschool, starting very early. And there are markets, and I spent some time talking about them, in which there's a lot of unraveling, a lot of decisions get made very early. Among them are, say, the markets for new lawyers.

One of the fanciest jobs a graduate of a fancy law school can get is a clerkship with an appellate judge. Well, the people now people right now, the people who are getting clerkships, which are jobs that they will take after they finish three years of law school, after they graduate from law school, they're mostly getting those jobs early in their second year. So they're getting them two years in advance. And that's a process that doesn't promote the most excellent matching between students and judges. But it's part of the competition among judges for people who might become law review editors. And it's part of the competition among law students for judges who might be feeders into Supreme Court clerkships.

So it's quite a bit like what you describe about getting your kid into the right preschool so that she doesn't miss out on Harvard. Yeah, and you also bring up this concept of exploding offers as part of the process. Tell me a little – deconstruct what that is and how it works. So when – in this process, when a judge is looking for clerks, the way you go about it is you apply for the job and then you accept an interview date. And you pretty much, if you're a law student who's applying for an appellate clerkship, you pretty much have to be able to be in a position to say that you're prepared to accept the job if it's offered to you at the interview. That is, you won't be able to go on three interviews and collect three offers and consider them. Or you won't be able necessarily to go home and talk to your wife and say, what do you think about moving to Washington in two years? If you go on the

interview, you should have already talked to your wife and say, there's some chance that when I come home, we will be moving to Washington in two years. Yeah. And I remember you gave an example of somebody who I guess had met with a judge, got onto a plane. What were the details of that again? So he met with a judge in, let's say, Boston, and he got on a plane to, let's say, New York City. These interviews are conducted anonymously. And he turned off his phone when they closed the airplane door and said, turn off your phones. And when he landed 39 minutes later, he found three messages from the judge he had just interviewed on his phone. The first message offered him a job. The second message said he really had to answer soon. The judge couldn't leave the offer open very long. And the

third message said, sorry, he had to move on to his next candidate. The offer was no longer open. Which is kind of horrifying on a lot of levels, actually. If you're looking for flexible workouts, Peloton's got you covered. Summer runs or playoff season meditations, whatever your vibe, Peloton has thousands of classes built to push you. We know how life goes. New father, new routines, new locations. What matters is that you have something there to adapt with you, whether you need a challenge or rest. And Peloton has everything you need whenever you need it.

Find your push. Find your power. Peloton. Visit Peloton at onepeloton.ca. Mayday, mayday. We've been compromised. The pilot's a hitman. I knew you were going to be fun.

January 24th. Tell me how to fly this thing. Mark Wahlberg. You know what the difference between me and you is? You're gonna die. Don't shoot him! We need him! Y'all need a pilot. Flight Risk. The Apple Watch Series 10 is here. It has the biggest display ever.

It's also the thinnest Apple Watch ever, making it even more comfortable on your wrist, whether you're running, swimming, or sleeping. And it's your wrist, whether you're running, swimming, or sleeping. And it's the fastest charging Apple Watch, getting you eight hours of charge in just 15 minutes. The Apple Watch Series 10, available for the first time in glossy jet black aluminum. Compared to previous generations, iPhone XS or later required, charge time and actual results will vary. I'm a former lawyer, and I was very fortunate to have made Law Reviews. There was some personal resonance when I was reading how you write about that whole thing,

and I saw it happen to a lot of us around. You said there's this, but I think the fundamental thing that happens, I mean, that's a mechanism that exacerbates the problem. But the bigger issue is that, you know, we create scenarios where you're vying for a market and you keep going earlier and earlier and earlier and earlier and you get to a point where, you know, it's driven largely by fear of missing out, but you start to try and lock people who you perceive to have talent or ability in at such an early point that the chances of them actually arriving at the point where they then show up and end up working with you and having what you thought they would have, you know, there's, this is

a big disconnect there. Maybe they will, maybe they won't at that point. That's right. When you're hiring law clerks who have just completed one year of law school, as a judge, you're engaging in a competition that deprives you of a lot of valuable information that you could have if you were hiring them at the beginning of their third year of law school. Yeah. It was interesting. What do you make of this also? So part of what happens in the New York City school system too is that we have the gifted and talented program where I'm trying to remember. And there's some interesting research around that that I saw a couple of years back now that essentially showed that when the kid was retested in something like fourth or fifth grade, there was almost no correlation whatsoever to how they tested on like this gifted and talented exam

versus the type of student that they actually turned into. You know, I think the American system is actually much more forgiving in that respect than the European educational model. Yes. So for instance, in England, you have O-level and A-level exams. The O-level, ordinary level exams come quite early and they track you into different schools and different, very different pathways. But also, when you apply to college in Europe, typically you have to already decide what you want to major in, what department you're applying to. You don't apply to a university, you apply to a department. So in Europe, if you're planning to go to college, you sort of have to decide in high school what it is that you want to study. And along around the time you were a

sixth grader, you get just tracked into what kind of high schools you can go to. In the US, of course, you can apply to a university without having any idea what you want to study and declare a major at the end of your sophomore year. So the tracking process allows many more changes of mind and late bloomers and things like that in the US. But still, as you say, getting into good schools, getting into the right school for you is really important. And that's why school choice is such an important thing. Because in many American cities, when children are assigned to schools in their neighborhood alone, that means that children who live in poor neighborhoods are

condemned to go to poor schools, schools that might not serve them as well as better schools would. And I think that's the impetus behind school choice, allowing some movement of children around the city so that better schools get more children and poor schools get made smaller so that they can be fixed or maybe closed and replaced with other schools. And that's the kind of process we've been seeing in New York City. And the part that I've been a little bit associated with is the high school choice process.

Yeah. So talk me through that a bit also because it's really fascinating to see your lens on how you've been involved in helping to sort of restructure these matching markets of how certain kids in New York City and I think it was Boston public school system also get into the high schools. You know, in New York, I know that we have, you know, there are what would probably be considered a very large handful of specialized schools that are fantastic. Then there are a whole bunch of schools that are considered good and solid. And then probably some that, you know, are sort of more towards the bottom of the barrel too um and everybody is vying like

crazy to get into these um and it's such i mean it seems like such a complex dance i know you shared how um at one point maybe this wasn't high school i'm trying you can you know new york is high school i try to make that clear when i talk to New Yorkers because New York is complicated. But my colleagues and I are only responsible for the high school part. And the rest is, you know, talking to someone else. So talk us through this a little bit. Okay. Well, so years ago, I think, I don't remember what year, but early in Mayor Bloomberg's administration, I got a call from someone in the New York City Department of Education.

And they were trying to bring back some mayoral centralized control to the school system, which had been devolved into community boards and things like that. With the result that the existing admission system for high schools, the existing choice system was quite decentralized and it was having lots of problems. So the way it worked in those days, probably we're talking around 2003. I don't remember the exact dates. The way it worked in those days was kids would submit a rank ordered list of schools they wanted to go to. And that list was copied and sent to the high schools. And that was your application to the high school. And then as the high schools

made their decisions, the Department of Education sent out letters to some kids saying, you've been admitted to the following high schools, please make a choice and get back to us. And if there's some high school you're not admitted to that you want to be on the waiting list, choose that also and get back to us. And then when those decisions had been made, that freed up places in schools to make and the Department of Education could send out more letters, get more responses, send out more letters. Well, that's a cumbersome process, and they could only go through three rounds of those letters. And as a result, about 17,000 kids got multiple offers of high schools. But by the end of the three-letter process, about 30,000 kids hadn't gotten any offer of a high school and they had to be

administratively assigned to a school that they hadn't necessarily expressed any preference for. So the process was a mess. And it was a mess in a couple of ways. One of them was the one I just described, which is that it was congested. It was taking too long to get the answers back to get the kids into schools. The other is that, remember, your application was photocopied and sent to the schools. So they saw everything. So they saw everything. So they saw in particular whether you had listed them as your first choice or not. And many New York City high schools

adopted the policy that we will only admit kids who list us as their first choice. And so that means that you didn't really have a lot of choices if many of the schools you wanted to go to adopted the policy of only admitting kids who listed them first. So you had to be very careful about which school you listed as your first choice. Because if you listed as your first two choices, two schools that would only think of you if you listed them as your first, then you had just wasted your second choice. And of course, if you put down your, as your first choice, the school you really wanted to go to most, and then you didn't get in, that might mean that you had missed the chance to get into your true second choice and third choice. So maybe you would be smarter to say that your third choice was your first choice.

So you start to gain, like trying, you're thinking through how are they thinking, how I'm thinking, you're trying to like gain the system and not really saying what you really want. Right. And the principals, the school principals did that too because they were going to be these 30,000 kids just assigned. So they started withholding some places. And so nobody's actually saying what they really want or doing what they want.

And of course, it's very hard to give people what they want if they won't tell you what they want. So among the things we did, we now set up a, we helped New York City, we advised New York City on setting up a computerized clearinghouse that does a couple of things. And one of them is it makes it much safer to say what you really want. It also gets rid of that congestion, and it does it two ways. One is computers are fast and mail is slow. But to make the computers fast, you have to ask people to commit in advance that when they write down their first and second and third choice, if they get offers from their second and third choice, then they want their second choice.

That's what it means. So you don't have to say to them, you got an offer from your second and third choice, write us a letter and tell us which one you want. We know which one you want. You want your second choice. So that makes the early decision a little harder, but makes the process go much more smoothly. Yeah. And we can extrapolate this out into college admissions as well, to a certain extent. Now we're talking about a national scale. So, you know, many listeners aren't going to live in New York City, but this is probably going to be relevant to you or to your kids as you go through application process.

And there are similar issues when you're applying to colleges. There are indeed. So one of them we've already talked about a little is unraveling. If your kid is applying to a competitive American college or university, there's a good chance that they have some kind of early admissions or early decision program, which might only allow you to apply to one college early. So that's a little bit like an exploding offer. You have to say it's like going to a judge for an appellate clerkship. You have to be prepared. If I get an offer at that first interview, I will take it because otherwise I can't get the interview.

So that's what applying early decision is like. You have to say, I will come to your university if you admit me, and I'm not saying this, of course, to anyone else. It's also a congested process. Now it's become easier and easier to submit multiple applications through institutions like the Common App. And because it's become easier to submit multiple applications, the fact that you've applied to a college is less of a strong signal of interest than it used to be when you were handwriting your essays. I remember those days.

And it was costly to apply to a college in that sense. But because more people apply and they are perhaps less interested than they used to be, colleges have to admit more people because their yield is going down. And because colleges are admitting a smaller and smaller fraction of people, you maybe should apply to more colleges if you're applying to colleges. So it's like this vicious circle. So – and that's why colleges look for signals of all sorts. Early decision is a very strong signal, a very tough signal to ask for. But if you have a kid who's going to visit a college, he should certainly sign the guest book at the admissions office because not everyone visits. And the fact that a high school senior has visited a college is a strong

expression of interest. And because it's a matching market, colleges have to think not just who they like, but who also they have to think who likes them. And that's why sending signals is so important. And it's part of a sign of a matching market. It's you have to cut through the congestion because the college can't just choose the students at once.

It has to also be chosen and vice versa. Yeah. So I guess if, you know, note to parents and to kids who are looking, like really think about the signal that you're telegraphing and how you're doing it, you know, to a particular school. And I guess that's also probably partly why, even though there is this common app for so many, was it like 500 plus colleges and universities now use the Common App? Yeah, it's a big number. A lot of them still have unique essay requirements along with that. That's right.

And partly they may want to know what your favorite color is, but partly they may also want to make it a little more costly so that if you were just thinking, I could just check this one off too, you'll say, oh, no, I have to write an essay about what's my favorite color. I won't check it. Yeah. And then hopefully I'll somewhere in there, there'll be a prompt to say like, why us? On some level also. So you can again, telegraph and like signal that. Absolutely. And so if you're talking to a high school senior, when it says, why us? Showing the way you show real interest is by really knowing something about them, by showing that at least you've been on their website you understand what makes columbia different from

brown right you know what what has one has a great books program and one thinks you should craft your own uh courses uh my guess is that if you want to get into columbia you should it helps if you're aware that they have a great books program and that that's what you like yeah that if you want to get into Columbia, it helps if you're aware that they have a great books program and that that's what you like. And if you want to go to Brown, it helps that you should know that you can craft your own schedule there without any real requirements. Yeah. And again, I guess this telegraphs or this expands itself out into the job market. So we're talking about primary school, high school, college. And now, like you were saying before, if you're like if you're in technology or you've got, you know, a couple of great companies and it's not just a matter of they want you.

Like you've got to want them too. So when if you're interviewing with a Google, you know, like and a Facebook and three other tech companies, you know, they're part of your job. I'm guessing also is not just to impress them and show them how bright you are, but also to really go in beforehand. And although this gets more complex, right? Because in my mind, when you're interviewing for a job, let's say fresh out of college or even later in life, you know, it's part of what you're trying to do is you're interviewing them. You know, so you actually want to say, how's the culture? How are the people? You know, do I really, do I vibe with this place?

But part of what you're saying also is that it would probably behoove you to try and make that decision as quickly as humanly possible so that you can start to telegraph to whoever it is you really want to end up with as strongly and as quickly as possible, but that you're the one. Well, I think you're right. I speak in the book about two kinds of signals that you send. One is the signal that says, you should be interested in me. I went to college. I studied chemical engineering.

I got all As. I could be a chemical engineer. And the other part is to say, if you would make me an offer, I'd very likely take it so that the efforts you have to go into to assemble an offer and to make an offer to me and not to someone else and to wait while I decide might be worth your while. So there's lots of signaling in the world, not just in the economy. A peacock's tail is a signal that this is a strong peacock who can escape from foxes even though he's got a heavy, colorful tail and that you could see immediately if he'd ever been caught by a fox and his tail had been roughed up. So that's a signal that the peacock sends to peahens that says, you should be interested in me. And going to college is a little bit like that.

You say, I studied things. I'm good at learning. I got great grades. You should be interested in me. And going to college is a little bit like that. You say, I studied things. I'm good at learning. I got great grades. You should be interested in me. But in a market where it's hard to hire people, it also, or just like applying to graduate schools or to law clerkships, you also want to send a signal that says, you know, while you're interviewing me, your other judges will be interviewing other people. And you'll be glad you interviewed me because if you make me an offer, I'll take it. Yeah. It's like everybody's playing their game on their side of the equation. It's like everyone's doing this psychological dance of trying to figure out what's going

on in the head of the other person, trying to read every signal that they can get from them, like soft signals, hard signals, and then see where it lands. Well, this is why game theory has become such an important part of economics. Game theory is the mathematics we use to help us understand how people strategize, how they think about how they can get what they're hoping to get using the available rules and signals and application tools and interview tools and all of those things. Yeah, and speaking of game theory, it's a buzzword and a topic of deep discovery and exploration in the world of business, especially tech entrepreneurship. And I know it's also one of your fields of study. So I guess there's a significant overlap between sort of game theory and matching markets.

Well, absolutely. What I think of the book is about market design. And design is about setting the rules of the market, the rules of the game. And you try to set the rules of the game so that they're easy to use in ways that will allow the market to work well, to yield efficient outcomes. So, for example, one of the things that was wrong with the old New York City school choice system was that you couldn't tell the Department of Education which schools you really wanted to go to because you had to be really careful what you said was your first choice. Another thing that was wrong with it was it just didn't produce enough matches fast enough. So by changing the rules, by changing the institutions through which the match goes through, we're able to ease those concerns. Yeah. If you're looking for flexible workouts, Peloton's got you covered. Summer runs or

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getting you 8 hours of charge in just 15 minutes. The Apple Watch Series X. Available for the first time in glossy jet black aluminum. Compared to previous generations, iPhone XS or later required. Charge time and actual results will vary. It's so fascinating how the part of it is, is logical structure. Part of it is nuance, you know, it is really nuanced and, and just really trying to understand the deep psychology of what's driving decision-making. So it's an interesting example that, um, with some of the work that we do, we run entrepreneurial training

programs. And as part of those, you know, we'll have a group of 40 people and we'll, um, we'll, we'll separate them into four or five persons, smaller group masterminds who are sort of responsible and hold each other accountable and do stuff over a window of months. And part of our question going into this is how do we make those decisions? How do we choose who to group with who? You know, it's not a money thing. Everyone's in the program. But how do we do that matching dance. And so, you know, we have somebody who's a coordinator who pre-interviews everybody and ask them a series of questions about their learning styles and their, you know,

like the form of feedback they like and their, you know, what they're working to build and all these different things. But it's still, and you would figure, okay, we've kind of got the variables dialed in, but it's still a brutally hard thing. And one of the things that we realized very early on is there's this, if we just leave it up to everybody and say, okay, you know, we're all together for the first five days and then, you know, go out and choose up. You can't do that. Um, you know, for a variety of reasons, but the biggest one, which we realized very quickly, um, becomes essentially an end to the success of the entire program is what we call the middle school problem, which is, you know, you've got three people left at the end that haven't been chosen.

And that's largely unrecoverable for those three people. So we essentially set up, you know, a clearinghouse where we said, we're going to do the sort, we're going to pre interview each of you purely for this purpose, and using our own algorithm, you know, we're going to do the initial sort. And we're pretty good at it know, we're going to do the initial sort and we're pretty good at it, but we were going to tell you in advance, we're going to get some wrong, you know, so let's see how it works in the beginning. And we'll do if necessary, sort of like a refining sort, and maybe two if we really need you to get everybody in the right seats in the

right place. So it's, you know, there's, there's this element of really just thinking through, okay, you know, what, what, okay, what's the hardest data that we can find? But then what's the softest data that we need to consider simultaneously? Putting together teams is a particularly hard matching problem. One of the things I did when I taught at Harvard along with a young colleague named Clayton Featherstone, we built a matching program for Harvard Business School MBAs go on field studies, and you need to put them into countries and then into teams of eight. And putting together teams is a complicated problem.

And there are lots of constraints on what kinds of teams you're willing to put together. It's fundamentally, at the end of the day, we're all human. There's something that you shared actually early in the book that I thought was interesting. You gave an example of, it was in terms of, I don't think it was really topic specific, but it stuck out. I think it was the late 90s where Coke tried to set up their vending machines so that when on hotter days, the price of the Coke went up. And there was a bit of a revolt, it sounded like, against that. It sounded like the press they got was bad enough that they

abandoned that attempt. I've always wondered if what they had said was that on cold, rainy days, when people didn't drink a lot of Coke, they were going to offer a discount, whether it would have turned out differently. Yeah. It's all in the way that you language it, right? But it was interesting. When I read that, what immediately popped into my head was Uber. Because in New York City, everyone's taking Uber all over the place. It's exploding globally now. And the first time that i opened up my app on rush hour in a snowy day and saw the rate was like twice what it normally would be i was angry but i still did it well so they they've had a lot of pushback uber uber is a very interesting

matching market right you as a rider have a reputation just as the driver has a reputation. You know, when you think of markets, you have to think of what a marketplace has to do to succeed. First, it has to make the market thick. It has to bring a lot of people together. So having apps on smartphones helps Uber a lot. You can hardly imagine Uber existing before smartphones. Then the market has to deal with congestion. It has to find you a driver, has to find the driver's passengers. And the app is good at that too. They don't give drivers very long, but they, for a little while, give you to some driver to say yes or no.

And then it has to make the market safe. You're going to get in someone's car. That's potentially dangerous for both of you but the fact that you're messaging each other through an app means that Uber knows who you are, they have your credit card and your name and they know who the driver is so if for instance you were to worry

that someone was making his living by kidnapping and robbing either drivers or passengers Uber reassures you in the centralized clearinghouse is the information about when you got in this car, which is something you don't get when you go to the head of a taxi line, for example, and get into a taxi. Then we might say, last seen exiting the Hotel Excelsior. But if you're on Uber, we know where you are. Someone knows where you are. So that, I think, is part of Uber's success, too. You're not afraid to get into this stranger's car.

You have a reputation. He has a reputation. Someone can identify both of you. So that's quite a successful, interesting marketplace. And smartphones, you know, we all carry marketplaces in our pockets now. So smartphones have made a lot of interesting markets. Think about Airbnb, another market that needs a lot of trust. You're going to go sleep in someone's spare bedroom or spare apartment. They're going to let you into their home. I don't know if they still do it, but I think in the beginning, too, it was very often you're sleeping in one of the bedrooms while they're in the apartment. Yes, yes.

I think that's right. More often it's entrepreneurs now who are starting decentralized hotels. But that's right. You could be renting out your guest room. So you want some information. You need some trust and you need tools that help build the trust and stop predators from taking advantage of it. But there are other problems that Airbnb has that they had to solve. Think about what we talked about with New York City. There was this problem of congestion. It was hard to manage all the offers and acceptances. Well, these days, Airbnb is a giant hotel company, but it's a decentralized hotel company.

So think of how different it would be to get a hotel in Hilton Hotels if when you called up to reserve a room, you could only ask about a particular room. You know, hello, next Friday, is room 527 available? No, I'm sorry, it's full. Click. And then you call up and you say, how about room 528? That's a little bit the problem Airbnb has because many of their proprietors just operate one property. So when you, so to speak, when you call up Airbnb, you're asking about room 527. Is it available?

And they're going to say to you, yes or no. So Airbnb had a giant congestion problem to overcome. And among the ways they've overcome it is when I ask to reserve your room, they remove it from the web so that other people aren't queuing up behind me to try to reserve the same room, which is effectively no longer available, even though you may not have noticed yet and accepted my application, my reservation. They've also encouraged hosts to use their smartphones. I think when they first started and were sort of a couch surfing operation, many people would post their Airbnb listings on their laptop before they went to work, and then they'd come and look at it in the evening. And what that meant was after you applied for try to reserve room 537, it would take you a whole day

to find out that it was full and that the next day you could try another room. And of course, it's very hard to compete with Hilton Hotels if it takes a really long time to find out whether you get the rooms you want. Yeah. The interesting thing there also is when you have that lag time, I don't remember in the early days if it immediately flagged the property as off the market. I wonder if there was a potential for three or four people to... I think there was in the early days when everyone was on their laptop. I think that you would come home offering a room and you would see that there were four people who had expressed an interest. You would choose the one you wanted and reject the rest. So that it wasn't at all unusual that you could try to reserve a room and then at the end of the day find out that you hadn't gotten it.

Yeah. So somebody who is trying to game that a little bit also could have gone back to the four people and said, hey, listen, there are three other bidders for this room. What do you want to give me? I don't know how much of that actually ever happened. But dating, dating is another interesting. I guess you could get especially the online dating world, right? Matching markets of sorts. Well, I think, you know, dating and matrimony has always been a matching market. You know, there's a story in the Talmud, one of my favorite stories, in Vayikra Rabah,

which a Roman matron approaches a rabbi, Rabbi Yossi Bar-Alafta, and she says to him, how long did it take God to create the universe? And he answers her very specifically, says, you know, six days, and on the seventh day he rested, and he explains where that is in the Bible. And then she sort of springs her question. She says, so what's he been doing since then? And what Rabbi Halafta answers her is he's been making matches. He's been making couples and the story goes on she conjectures that that must be pretty easy and they figure out that it's hard but um you know you can't just choose your spouse you also have to be chosen that's true online it was

true offline as well and in most places many places and many times of course there were places where uh where the people getting married didn't always have a choice, particularly the women. But in much of the world now, it's a two-sided matching market. Indeed. So we talked a little bit about repugnance, things like paying for kidneys or, you know, like paying for things that people think you shouldn't be able to pay for or paying more for something. There's another example that Hugh brought up also which struck me, which is that for a while, if you go into a store, I guess there was a different price for cash and a different price for credit.

And then I guess there was enough consumer backlash that that evaporated. But to my knowledge, at least in New York, there's still one place where that difference is huge, and that's at the pump. You still drive up to a pump. I remember, in fact, last year driving up to a pump on Long Island, and the price that was up on the big placard was, you know, 20 cents a gallon less and everywhere else and you drive up. And then the difference between the cash price and the credit price was close to a dollar

actually. And I became so incensed that I went online to actually find out what was like, is this could this conceivably be legal? It couldn't possibly be legal. And in fact, it is because what they just say is that the credit price is the actual price, but they're just discounting for cash. So it's almost like there's – in certain scenarios, it's okay because it's just become the accepted course of dealing. But in others, it infuriates people.

Well, repugnance changes over time. Think about standing online and how you would feel if you were standing online at a theater, say, to buy your ticket when maybe there weren't going to be enough seats available for everyone online and someone wanted to buy a place at the beginning of the line. That would be pretty repugnant. It might be a dangerous thing to try to do. On the other hand, when you fly in the airlines nowadays and you fly business class, you get priority boarding.

You get to go to the head of the line. So that's something that I think would have been repugnant, but with all the changes in airline travel that have happened, that one just slipped in, and we don't find it repugnant anymore. There can be a long line for economy class, but business class has a much shorter line. I don't know if that's a good thing or a bad thing, but it's something that's changed. So

repugnant ideas of what's fair and what isn't, these aren't things that are fixed forever. They're things that can change. But how they change is a little bit of a mystery. And the fact that they can change doesn't mean that they aren't enormously powerful at any given moment. Again, there are lines that you can't buy your way to the front of, and it would probably be a big mistake to try. And the ones that you can buy your way to the front of also, I do think for a lot of those, there tends to be a certain amount, you know, the phrase gaming the system.

There tends to be a lot of anger with people who follow the rules, do what's prescribed, but figure out how to actually get ahead within the rules of the game in a way that other people don't. And there's a lot of anger towards those people, even though all they're doing is following the rules of the game as prescribed, but they're just, they're following them differently. Well, and the rules can change over time. The airlines, I think, used to have everyone go through the same lines, and now they allow you to go through different lines.

TSA PreCheck and all this, yeah. Now, TSA PreCheck is a different story. So is using the kiosk at passport control when you come in. Right, the global entry. Right. The line itself, the long queue to see an immigration officer and show them your passport and be welcomed back into the country, that's not good for anyone. And if you can find a way to get some people out of the line, that's good not only for

them, it's also good for the people who are on the line, not to have the frequent travelers ahead of them getting welcomed back to the country by the same slow process. So the immigration service, if you go and visit them when they, you know, they'll make an appointment, it's not necessarily a convenient one, but you can be registered so that you can go up to a kiosk and instead of showing your passport to a human being, you can show it to a machine and skip the line. And that is good, I think, for everyone, that we shouldn't have to interview everyone by the same slow process.

Yeah. Let's zoom the lens out a little bit. So the book you've just written is a really, it's a fascinating exploration of the way that we make these choices. And then the markets that exist all around us that we probably don't consider markets, but they basically are. We don't label them markets, but we don't label. I think your average person isn't going to look at the kidney exchange and say, well, there's an interesting market to get a kidney in the United States. Well, so because we don't use money, we often don't use the word market, but we're allocating scarce resources. People's lives depend on getting kidneys and there aren't enough of them. And when we look at kidney exchange, people are exchanging kidneys. And that's what a market is about. It's about people coming together to make each other

better off by a mutually beneficial exchange. So I think of kidney exchange as almost a prototypical market, except that it doesn't use money. But there are so many markets which, even if they use money, that isn't what determines who gets what, like college admissions, for example. Just because you can afford to go to Stanford doesn't mean that you can be admitted. So part of what I'm doing in this book is I'm trying to alert people that a lot more things are markets than we may customarily think about as markets. So and what's, why? Why do you think it's important for them to be alerted to that?

Well, markets of all sorts with a lot of variety are ancient human inventions. And all economics is about all the ways that we cooperate and compete and coordinate with each other. And those ways of competition and cooperation and coordination are typically markets. How you aggregate the information that people have, how you put together all the different things that people want to turn it into something that people like better. That's what markets do. When you think about the New York Stock Exchange,

which trades in financial commodities. It's a marketplace. People come together to trade with each other. So a lot of what we do is mediated by markets, but they're not as all easily identifiable as the New York Stock Exchange. Yeah, I mean, it's interesting for me. I think one of the things that came out of exposure to your work in this conversation as well is just the idea of kind of looking around at the way that I interact with the world and almost, you know, like asking

the question, huh, you know, is, is this in fact some form of market? Is it, is it a matching market? Is it more of like a straight cash market? And, and what are the rules of the game? What's really going on here? And can I understand them better so that I can understand how to interact with this market and have the optimal exchange, the optimal experience, not to so much benefit me more, but just to create the right balance between me getting what I need and serving society on a level that feels right to me. I think that's a good way to think about it. But also in a matching market, remember, you know, transactions are mutually beneficial.

So in a matching market, you are matching with someone and finding the right someone to match with, whether it's to marry or to work for or to employ or to go to school or to have in your school. These are beneficial for both sides. Being able to find a college where you'll thrive and find a job where you'll succeed, this is good not just for you, but for your college or for your employer. So I think that there isn't a sharp distinction necessarily between your selfish interests and the social interests. One of the things we like markets to do is to work well in lots of people's interests.

Now, markets do also take on lives of their own. And part of the story about market design is if markets aren't working the way we would like them to, if they're not providing the social benefits that we expect to see from them, then we can change their rules. That's because the design of a market, the rules of a market are its design. Yeah. And I love that because the idea that you can actually step back and say, huh, there is a logic here.

It may not appear to be logical or functional, but there are rules. And if I can deconstruct them, understand the deeper dynamic, and then rebuild a better set of rules, better algorithm, maybe we can all benefit in some powerful way. Well, I think that's right. And I like to think of a little bit of an analogy between markets and marketplaces and languages because they're both ancient human artifacts. Markets are made by people and so are languages. But languages, we really don't think of ourselves as designing. We're speaking

to each other in English. I wrote my book in English. If I were to try to simplify all the spellings of English words, you would just think that I was illiterate. You'd say, look, he can't spell. He doesn't know how to spell the word enough. So we just deal with the English language the way we've received it. But markets we can influence more. So market design is an engineering part of economics where we look at markets and see if they're working as they should, in which case we can leave them alone, or whether they're working badly, in which case maybe we can tinker with them and fix them. Or if they don't exist and should, in which case maybe we can build them from scratch. Yeah, I like that because it implies I don't just function within the system, but I have the capacity to potentially influence the system.

Markets are human artifacts. We're the humans. We are indeed. Most of us. So the name of this is actually is Good Life Project. And so the final question I always offer out to everybody is if I offer that term to you to live a good life, what comes up? What does that mean to you? Well, a lot of living a good life has to do with the relationships you have. And that's one of the reasons why it's rewarding to study matching markets,

because these are the markets in which you make the relationships, many of the relationships you have, where you go to school, where you work, who you date, who you marry. And, of course, thinking about a good life and thinking about relationships means taking a long view right the the transactions you make aren't cash on the barrel head this comes back to the question a little bit of repugnance which things can you use money for when i go to a restaurant at the end they give me a bill and i pay it and i extinguish my debt i don't have to invite them to dinner at my house.

But if I were to come to dinner at your house and try to pay for the meal, you know, I'd say, this is a great meal. You know, can I just pay you for it? You'd think, you know, who is this guy? Doesn't he understand that we're not a restaurant? When we invite someone to dinner at our house, it's an offer of friendship. And, of course, I could bring you a nice bottle of wine that would cost as much as I would pay for a meal. I could invite you to come to my house. I could invite you out to a restaurant, but I can't pay you. And part of that has to do with the fact that inviting someone to dinner at your house is part of building a relationship. Thank you. You're welcome.

Hey, I really enjoyed that conversation. If you found it valuable as well, would so appreciate if you would just head on over to iTunes, take a couple of seconds, and let us know. Share a review or rating. Always honest. And if you found this episode, the conversation, valuable, and you think other people, maybe friends or family,

would enjoy it and benefit from it, go ahead and share it with them as well. And as always, if you want to know what's going on with us at Good Life Project, then head over to goodlifeproject.com. And that's it for this week. I'm Jonathan Fields, signing off for Good Life Project. The Apple Watch Series 10 is here. It has the biggest display ever. It's also the thinnest Apple Watch ever, making it even more comfortable on your wrist, whether you're running, swimming, or sleeping.

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