Hidden Brain - Misbehaving with Richard Thaler

Episode Date: October 24, 2017

We don't always do what we're supposed to do. We don't save enough for retirement. We order dessert — even when we're supposed to be dieting. In other words, we misbehave. That's the title of Richard Thaler's most recent book: Misbehaving: The Making of Behavioral Economics. If you've read Thaler's previous book, Nudge, you know he's an economist who studies why people don't really act the way traditional economists say they will. Thaler recently won a Nobel Prize for his contributions to the field of behavioral economics — so we thought we'd celebrate by giving you this encore episode. It's still one of our favorites.

This is Hidden Brain, I'm Shankar Vedanta. Here on the show there's a fall tradition we love. It has nothing to do with pumpkin spice or Halloween, although we love those too. What I'm talking about is the annual announcement of the winner of the Nobel Prize in Economics. The Royal Swedish Academy of Sciences has decided to award the Sverius Riksbank Prize in Economic Sciences in Memory of Alfred Nobel to Richard H. Thaler. Richard Thaler has played an outsized role in shaping the field of behavioral economics. He also happens to be a great conversationalist. So we thought we'd revisit our 2015 conversation with him. it's still one of our favorites.

Richard Thaler's latest book is Misbehaving, the Story of Behavioral Economics. I spoke to him before a live audience at NPR's Weekend in Washington, an event that brings together public radio supporters from across the country. I want to start by asking Richard a real softball question. Your friend, whose name is Daniel Coniman, he won the Nobel Prize in Economics some years ago, a well-famous psychologist, brilliant author, and Danny Coniman was once asked to describe Richard Thaler to a journalist.

And he said that Richard's dominant characteristic, the thing that makes him stand out is that Richard is lazy. Can you tell me Richard, why Danny said that, and also why he insists that this was a compliment? Yeah, what's worse is a Danny is my best friend and B. He said this was my best quality. To this day Danny defends this and that he defends A that it true and B, that it's a compliment, because he says that it means I'm only willing to work on things that are important.

The truth is, I'm only willing to work on things that are fun, and that's why I'm here today, because I think we're gonna fun. I think that's exactly right. So I first started talking to Richard maybe about 10 years ago. Let me just ask you to give us a very short introduction. What is behavioral economics? And why has it made such a splash?

Or why has it been so controversial over the last 15 or 20 years? How is it different than garden variety economics? You know, probably sometime in your distant past, all of you have had a class in economics. And you know that standard economics assumes that people are highly rational creatures capable of complex calculations, devoid of emotion, never having any self-control problems, and they're complete jerks. So I call these fictional creatures e-cons. That's short for homo-economicists, the Latin term.

And I believe that for the last 50 or 60 years, economists have devoted themselves to studying fictional creatures. They might as well be studying unicorns, because there are no e-cons. Well, there are a few economists I know who are close, but basically they don't exist. And so we have very fancy models of fictional creatures.

And the people I know have trouble figuring out how to divide a check if there are more than three people. I occasionally, just occasionally, overeat or over drink, have trouble saving for retirement. And contrary to economic theory, some at least are willing to donate to National Public Radio,

which any economist will tell you is a completely irrational thing to do, because you can listen to it for free. So. So. Okay. So when I first started talking to Richard about 10 years ago, it was for a topic that was called mental accounting. And Richard explained to me that mental accounting is something that we all do in everyday life.

And one of the things that I noticed is that as soon as Richard started talking, I started thinking of examples from my own life where mental accounting was playing a really, really big role. Let me just start by having you tell us where mental accounting was playing a really, really big role. Let me just start by having you tell us what mental accounting is, Richard. So a basic concept of economics is that money is fungible, which means that there are no labels on it. There's a video of Dustin Hoffman and Gene Hackman talking and Gene Hackman's telling this story about when they were young actors. Hackman goes to visit Dustin Hoffman in his

little apartment in Pasadena. Dustin Hoffman has asked him to borrow some money and then Hackman goes into his kitchen and he sees these Mason jars that have labels on them and one is rent and one is utility. And there was nothing in the jar labeled food. And so you don't need any money, you've got lots of money in all these jars. And Hoffman says, yeah, but there's nothing in the food jar. And so that's mental accounting, right? And it used to be like certainly in my

grandparents generation that that's literally how people did it. But we still do it mostly in our heads. And it can make us do all kinds of funny things. So one of the things that's happened over the years is that Richard has actually played a psychotherapist for many people who come to him with their economics problems. And I'm actually going to do the same thing here. One of the things I've noticed about myself is that my wife and I, we share our finances. So we have a joint checking account, we sort of draw from the same pool of money. But I've noticed that when I go to restaurants,

I really like it when my wife pulls out her credit card and pays for the bill. Now, I am effectively still paying for it, but it significantly increases my satisfaction with the meal, not to have to pull out my own credit card. OK, so all right. So here's something that would be even better. Assuming you and your wife trust one another,

I recommend that you each get separate checking accounts. What? No, you can still have a, my wife and I have this arrangement. So we each have a separate checking account and a joint checking account. And splurges, if I buy myself a new set of golf clubs that I desperately need, or she buys her fourth camera because she travels the world taking pictures, I don't see that.

So the splurges come out of your individual checking account? Exactly. And gifts. So if your wife picks up the tab, it will come from her account. That's even better. That's really a good idea. And I mean this is a recipe for a marital harmony. One of the findings of mental accounting is that people keep tabs in their head about how much money they need to make on an annual basis or a monthly basis, or even sometimes on a daily basis. And one of the things that you explained to me was this might explain why it's sometimes difficult to catch a cab on a rainy evening. Can you tell us why mental accounting might make it harder for us to catch cabs on rainy

evenings? So this is a study that some friends of mine and I did a long time ago in New York and we were taking a lot of cabs and we were talking to the cab drivers and we would ask them, how do you decide how long to work? They rent the cab for 12 hours, which is a long time to drive in Manhattan and then they have to take it back within the 12 hours. And a lot of them would say, well, what we do is I set a target. So renting the cab costs me 100 bucks,

and then I have to fill the tank up. Let's say that's another 25 bucks. So I want to make a certain amount above that, say $100. And when I hit that, I go home. Now, an implication of that is, on days like rainy days, where there's lots of demand, they hit their target early, and they go home. Now, what would an econ do?

An econ would drive more on the busy days. And on the sunny day, when nobody nobody needs a cab because they're walking, you know, he would go out for a walk himself. Again, if we go back to getting along with your spouse, imagine the guy comes home at two in the afternoon and his wife says, how come you're home so early? And he says, because I didn't make any money, right? I mean, this is not going to go over well. No, go on. So you've got to go out there and drive around for three

more hours, burning gas, not making any money. Right. But the interesting thing, of course, is that standard economics would predict that people actually would act rationally, that they would actually work more when the demand is higher, and they would work less when the demand is lower. And of course, what we find is exactly the opposite. Exactly.

One of the interesting implications of mental accounting is that where the source of people's money ends up changing how they spend the money. So there was a study by Viviana Zelliser, I believe at Princeton University, looking at prostitutes in Oslo. And what she found is that the sex workers were willing to spend money that they received in the form of welfare checks or other kinds of subsidies on things like rent and important things. But they spent the money that they earned from sex work. They were far more likely to spend that on drugs and alcohol.

That the source of the money determines how you actually spend the money. I saw a clip from a video, it's called Welcome to Me, starring the comedian, Kristen Wig, about a woman who suddenly wins a huge amount of money. And I'm going to play the clip for you, and I want you to talk about this idea. So if you could play the video, please. 14, there's 57, 15, and 54, and 39.

Thanks for calling the California lottery. If you're calling to report a winning, just say, I'm a winner at any time. I'm a winner at any time. What's your name? My name is Alice Cleague, I'm $186 million. You truly won the lottery? Seriously? Can someone Google that? You truly won the lottery? Seriously?

Can someone Google that? You must be the big winner. I am rich. Me too. I want to talk to you with me as the host. I'm going to talk about kind of events. No. OK, step to you.

I want to talk about it. Me? How much will that cost? $15 million. Oh, and I want to come in on a swan boat. You're off your meds. You're living in a reservation casino and you're hosting your own talk show.

It's a new era, $86 million. We go live in five, four, three. Where is she now? I think she's a little frozen. You're on TV now. Hello, I'm Al's Cleague, and welcome to me. So Richard, why is this? Why is it that when we receive money from certain sources,

the way we think about spending that money changes dramatically? You know, one of my colleagues, my fellow troublemakers, is David Lopes, who's just become the chairman of the Harvard Economics Department. Used to be one of my protegees. Now, you know, anyway. Some of my friends had a roast for me a couple weeks ago because I had a big birthday. And he was telling the following story.

A bunch of us were invited to Washington, must have been 15 years ago, when David was a struggling young assistant professor, and did something for the National Institute of Health, and they gave us a $200 honor a rarium for the day. So I was saying, you know, this is ridiculous. We don't work for $200 a day. We have to go out and spend this money on dinner.

And so we went out and had a good dinner. You could get quite a good dinner for $200, 15 years ago. Now David was not happy about spending $200 on dinner, and he now claims it was more like $300 when I got done with the wine. But you know, this was my way of thinking, I'm not going to work for $200, but I'm happy to have a good dinner as a result of helping out the NIH.

Yeah. So, Sadiya Sifan also, for example, that if you want to reward employees at the end of the year, giving them a cash bonus is very different than giving them a vacation. That even though you're giving them the same amount of money, you're giving them, let's say, $500 as the bonus versus $500 as a vacation, people's report being significantly happier when you give them the significantly happier when you give them the vacation than when you give them the cash. Why is that? Well, because if you give them the vacation, they get to go guilt-free. I rediscovered this last week with my daughter and I made a mistake and it's a mistake. I have all the people shouldn't have made,

but I had good reasons. And I was well-intentioned. So my daughter's a Metz fan. And one of the Metz pictures happens to be a neighbor. So she was a Metz fan. And I thought it would be nice to buy her two tickets to one of the first round games when her neighbor was pitching.

But it was, I got this idea late. So I went online and I found that I could get tickets for about $400. But I didn't have time to buy the tickets and mail them to her. So I sent her an email with a link to this website saying, OK, it looks like you can get tickets for 400 each. I'm going to send you $1,000 by two tickets on this website. And she had already expressed great excitement about getting to go to this game.

So I send her that email. I get back at text. LOL. This is just like one of the examples from your book. If you send me a thousand dollars, I'm not going to spend it on baseball tickets. So now she would have been happy to, had centered the tickets for sure they would have gone to the game, but I send her the $1,000 nothing, so I didn't send her the $1,000. More of my conversation with Behavioral Economist Richard Thaler after this. This is Hidden Brain, I'm Shankar Vedantam.

Back in the 1970s, Stanford psychologist Walter Michelle conducted a series of experiments that came to be known as the Marshmallow Test. Small children were put in a room and told they could either get one marshmallow right away, but if they stayed in the room and didn't eat the marshmallow, they would get a second. Children who tried not to eat the first marshmallow came up with ways to distract themselves. Watching these children on video is hilarious. you. You can either wait and I'll give you another one if you wait or you can eat it now. When I come back I'll give you another one so then you'll have to stay in here and stay in the chair till I come back. I'll play Richard Taylor a video of a marshmallow test in progress where a

small boy tries desperately not to eat the marshmallow placed in front of him. At one point he leans lovingly into the marshmallow and takes a great big sniff and then sadly looks away. How'd you do? Did you do good? You did? You want to eat it, didn't you? Yeah, so that's how you'd give me another one.

The excited boy crams both marshmallows chipmunk style into his mouth. So talk about self-control Richard. Why have classical economics ignored the idea that humans have trouble with self-control? So economic theory says that we optimize and that we always choose what's best for us. So that includes self-control. And so in these experiments, if you'd rather have two marshmallows than one, you should be willing to wait 10 minutes. But as, you know, obviously, kids have less self-control than adults.

So this experiment kind of exaggerates that. But what you get from those videos, those precious videos, is the real important idea, which is that self-control is work. Resisting temptation is work. This is important, you know, 30% of Americans are obese. Half of Americans are not saving enough for retirement. So these are enormous problems that we as a society face,

and they are at their core because exerting self-control is difficult. In some of these marshmallow experiments, they used Oreos. And my favorite one of these, in one condition, there was a kid, and he had three Oreos in front of him. And he could have one now, but he was looking at the three. And what he does is as soon as the person leaves the room, he opens up the Oreos, licks

out the middle, and then puts them back together. And I have a deep suspicion. These were done many years ago at Stanford. I'm pretty sure that guy is Bernie Madoff. But... LAUGHTER There's interesting work that you've cited by George Lonestein and others looking at the difference between hot and cold emotional states, which is that if you ask me right now, would you be able to resist having dessert at lunch?

I would say, yeah, sure. I can probably resist having dessert at lunch, but an hour and a half from now, when I'm really hungry and I'm sitting down at the table and there's dessert in front of me, the person whom I am at that point is very different than the person I am right now. Right. So, you know, we can all relate to that. We all know the hazards of going to the grocery store hungry. And let's say you're there on Thursday and you missed lunch and it's six o'clock and you're buying dinner not just for tonight, but also for Saturday. Now, your hunger now should not affect the size of the roast you buy for Saturday,

but you'll buy a bigger roast. Yeah. The other thing, of course, we often do sometimes when we have problems with self-control is that we try and have an external enforcer. We try and appoint somebody who will help us run that kind of self-control is that we try and have an external enforcer. We try and appoint somebody who will help us run that kind of self-control. This of course goes back to the old idea, the myth of the Fulicis who was sailing by the sirens.

He was afraid that he was going to drift close to the sirens. And so Eulisis had his men bind him to the mast of his ship so that they would be able to sail close to the sirens. And here the sirens song without actually being tempted to go toward the sirens So people have tried variations of this and all kinds of things are trying to address are the temptations that we expect to face in the future I came by a very nice clip from the TV show Curb your enthusiasm Where Larry David is essentially asked to be the enforcer for one of his friends take a look at the clip So yeah hungry starving good is essentially asked to be the enforcer for one of his friends. Take a look at the clip. So, you hungry?

It's starving. Good, we got a great meal. And some fabulous desserts. Which, by the way, I need you to keep me away from no matter what. Oh, OK. Yeah? Because I put a lot of time into this. I need a dessert referee.

All right, I'm your guy. You promise? Yeah, I promise. OK, I'm counting. All right. Ah. Ah. No, no, no, no. I'm just going to have a bite. Oh, no, Okay, I'm counting. All right. Ha ha ha ha. No, no, no, no, no.

I'm just going to have a bite. Oh, no, no, no, no, no. Just a bite, come on. You know what? You told me specifically not to let you have any dessert. I appreciate it, Larry, but I changed my mind. Yes, yes, yes. But you said no matter what.

But you know what, I'm changing it. And this is now I'm saying, thank you for helping me. I'm going to have some care. No, no, but you can't change it. That's why you say no matter what. But you know what, I'm changing it, and this is now I'm saying thank you for helping me. I'm gonna have some care. No, no, but you can't change it. That's why you say no matter what. This is the what. But now what? That's why you asked me and not these other people

because you knew I wouldn't let you. What would it look? Larry, you told me that to Larry. Oh, yeah. I said I was. She said no matter what. Okay. Oh, no.

No, no. No. No. No. No. No. He said no matter what, okay. Oh, no, no dessert in the face, you know, let me add it. Thank you all so much and thanks Richard Taylor. That was Behavioral Economist Richard Taylor. His latest book is called Misbehaving, the Making of Behavioral Economics. This week's show was produced by Karamagar Galeson, Maggie Pennman and Max Nestrak. Our team includes Tara Boyle, Raina Cohen, Parts Shah, Jennifer Schmidt and Renee Clarre. Our Ronsang heroes this week are Adam Osman, Nikki Strickland, Thomas Bussey, and Don Gooden. Adam, Nikki, Thomas, and Don work on our facilities team here at NPR,

and they recently helped us move to a new floor of the building. They intuitively understood how important a good work space is to be creative and productive. They put in long hours, including on the weekend, and helped us pack, unpack, and get settled in our new space. I'm so grateful for their hard work.