Modern Wisdom - #609 - Uri Gneezy - How To Understand Psychological Incentives

Episode Date: April 1, 2023

Uri Gneezy is a behavioural economist, a professor at the University of California and an author who's research focuses on human incentives. Incentives encourage humans to do things. But they're not as straight forward as you might think. They often have unintended and disastrous consequences for our personal lives, businesses and societies. Basically, a bad incentive is worse than no incentive at all.  Expect to learn why paying citizens 10p for a rat tail is a bad idea, how fining parents for taking their kids on holiday results in more kids missing school, why the Toyota Prius won because of its strange design, how reframing discounts can rapidly change behaviour, why Peloton's sales went up when they increased the price, why Coke machines have an outdoors thermometer on them and much more... Sponsors: Get 83% discount & 3 months free from Surfshark VPN at https://surfshark.deals/MODERNWISDOM (use code MODERNWISDOM) Get $100 discount on the best water filter on earth from AquaTru at https://bit.ly/drinkwisdom (discount automatically applied) Get 20% discount on all Keto Brainz products at https://ketobrainz.com/modernwisdom (use code: MW20) and follow them on Instagram at https://www.instagram.com/ketobrainz/ Extra Stuff: Buy Mixed Signals - https://amzn.to/40pQ4Tj  Get my free Reading List of 100 books to read before you die → https://chriswillx.com/books/ To support me on Patreon (thank you): https://www.patreon.com/modernwisdom - Get in touch. Instagram: https://www.instagram.com/chriswillx Twitter: https://www.twitter.com/chriswillx YouTube: https://www.youtube.com/modernwisdompodcast Email: https://chriswillx.com/contact/  Learn more about your ad choices. Visit megaphone.fm/adchoices

What's happening people? Welcome back to the show. My guest today is Uri Neesey. He's a behavioral economist, a professor at the University of California, and an author whose research focuses on human incentives. Incentives encourage humans to do things, but they're not as straightforward as you might think. They often have unintended and disastrous consequences for our personal lives, business, and societies. Basically, a bad incentive is worse than no incentive at all. Expect to learn why paying citizens ten pens for a rat tail is a bad idea. How finding parents for taking their kids on holiday results in more kids missing school. Why the Toyota

Prius won because of its strange design. How reframing discounts can rapidly change behaviour, why peloton sales went up, when they increase the price, why coke machines have an outdoor thermometer on them, and much more. But now, ladies and gentlemen, please welcome Uri Neese. What are incentives for the people that are not indoctrinated into understanding what that is? Incentives is something that will make you do a thing that you wouldn't do otherwise. To try to push you in this direction, a common mistake is that incentive is only money. It's definitely not. There are many other things that could be. It could be status. It could be playing computer games, not teaching at class. Many other things. But in general, it's something that will make you do a thing that otherwise you wouldn't. What do you think the economists get most wrong about

incentives? It's a long list, but basically it's if you read about incentives in economics, you see a formula as if it's physics, right? As if you're talking about particles or atoms, you or atoms moving around the world. And that's not the case. We're talking about people. Incentives work, that part, the economy's got very much right. But we don't always know how they work. Simplifying assumptions that people just, you know, you give them more money, it's better,

you give them more incentives, you're going to get more of what you want, that's just wrong. The main thing that economists miss, I think, is that incentive send a signal. When I give you incentive, when I tell you, if you'll do X, I'll pay you $10, then you get the $10 plus you get a signal that that's what I want you to do. And then you start thinking, why does it want me to do this? Is that bad for me? Is that good for me? What there is, his motives right?

So you get, you start interpreting this. Incentives basically complete a story. You have a story in your mind, you look at the world, and once you get incentives, it helps you to create one sort of a story. And it's kind of like a feedback loop because for every incentive that I'm given, there is a story about that incentive.

What does it mean? What do I know about Uri? What has Uri incentivized me to do previously? What can I infer about his desires for me moving forward? On-going story that never ends. Okay, so if that's what economists get wrong, what's the missing addition? What gets folded into the economic view of this, which starts to flesh it out a little bit more? So after trashing my economist friends, now I can trash my psychologist friends, basically psychologists when they talk about incentives. So you can take the same class, the same title of class in my business school, one would be taught by economists that will be completely mad, completely out of, it's not people, it's about machinery. And you can take the same class with psychologists

and other data, say that you go to work just because you want fulfillment and all the good stuff that you get from work. That's also a mistake, right? So it's also not the case, it's the combination of the two is what you should think about. I go to work because I need to make money and I go to work because I want to feel better about myself. And the secret is how you get these signals to work together. So that's what I'm trying to do in this. So how to get the money that I give you and you need money when you come to work,

you go because you need the money. But how do I make the payments that I give you such that you actually feel better about yourself, feel better about going to work or do whatever the activity I'm interested in? How common is it to have this more integrated view? It's not common at all. So like I said, if you'll take a class in the business school, you'll take either of

the versions. There are very few that give you both versions, I think. That's pity. That's basically the gap that I'm trying to feel over here. Fascinating. Okay. So break down social signaling and self-sigling for me. What's the difference? So when we're talking about signaling, the first one is quite clear. It's what I want you to think about me. I do things. I dress up. I decide to contribute. I decide to do good things or bad things because I care

about the signals that they send to you. I care what you think about me. What you your listeners, my bosses, my kids, what they think about me. That's the social signaling and the self-signaling is also surprisingly about myself. So I don't really know how good I am. And when I say good, by the way, I don't mean good in the philosophical version of it. Good could be, I could be a mass murderer and good from it would be that I killed 10 people today. Right. So I don't know how good I am at whatever my goals are. And they look at my actions and I learn from it about myself.

I can give you a story from there from the book and example from the book Imagine that you live in a cold place. You see your neighbor walks in the morning and a cold morning to the recycle center with a large bag filled with Andre Tsodakens. What are you going to think about her? She's very altruistic. Oh my god. I can't believe that she's trudging through the snow purely to save the planet very altruistic. Oh my God, I can't believe that she's trudging through the snow purely to save the planet. Perfect. That's what she will probably think about herself as well, right, because she's good. Now imagine, same story, but you live in a place where she get five cents per Soda Candacea's recycling. Now she's a ruthless capitalist. Exactly. Or

just cheap for five dollars, really. So that's the social signaling. What you're going to think about there. And is also self signaling before that in the first version she was, I'm a good person. I care about the environment. I'm recycling. I'm good. The second version I'm cheap. Do I really want to do it? So this tells us a lot more about folding in status and those signals into the pure economics of the situation and also explains about how incentives can be compared. Absolutely. So you learn a lot, I think, from just this simple example, because first of all, there are a few things. You get a signal by the amount in this case.

So because it's only five cents, you deduct it. That's not probably not that important to do. If you would get $5 per Soda Can, then you'll start buying Soda Can and just recycle them, right? So if I'll pay you enough, you think, wow, that's really important. It's good for the world, right? I want to do it.

So the size sends you a signal. Many of the things are sending you signals and all this. So imagine that I'll go to for a skivication and ask my assistant to stay over and work on something that they need to finish over the weekend. I'll come back on Monday and give him $10 as a thank you gift. He'll be insulted by that. If I'll give him a chocolate that costs $10, that's less insulting. If I give him $10,000, he'll be very happy. It's not just the fact that I'm paying you.

It's also how much I'm paying you. If I'll pay you 10,000, if I'll pay my assistant $10,000 for staying over the weekend, it will be extremely happy. So the amount is important. In other cases that you can think about, imagine that I offered to pay you for sex. Then no matter how much I'm going to offer you, it's going to be insulting, right? Because that means that I think you... No!

Come on, Erie. Everyone's gonna buy it. I didn't say that you wouldn't do it, right? Right. I didn't say you wouldn't do it, but you might be insulted that it's not just your look the time after. Tell me what chocolate bar it was, and then I'll reconsider it. Right. Exactly. What's the difference between the $10 and the chocolate bar?

The all world of gifts is really exciting. It's, we are wasting huge amounts of times and money on trying to buy gifts that will send the right signal. There is an amazing episode in Seinfeld that shows this when Jerry has to buy Lane's birthday gift. So he and George go to the store and he says, no, this is too sexual, this is too, whatever, too domestic. He really needs to find because it sends signals to the gift that I'm sending. At the end, the gift is a cash and she screams that, you might uncle, why are you doing it? So gifts are really sending signals. And if I give you a $10 chocolate bar,

it's still, I'm sending you a signal that I care about you. I went to this place, I thought about you, I bought you chocolate. Now, imagine going to a friend's tonight for dinner and you can bring a bottle of wine, you can be nice and buy a $50 bottle of wine and give them, everyone will be happy. Imagine that you'll go and say, well, I got stuck at work, I had this very boring podcast with Uwi and

I didn't have time to buy it, but here's 50 dollars. That's going to be very awkward, right? So what you give is really signaling something about you. This is why online card sending websites to me have always seemed a little bit odd that part of the purpose of a... I mean, what? Even if you get the most insane pop-up 3D sings a pre-recorded message to you cards. What are you looking at? 15 bucks? Maybe 20 bucks? Absolutely. Top, top, top end, and it'll fly itself there. The reason that you get a card is because everyone knows how much of a mess on it is to do.

Oh, you've had to pick up a pen for the first time in six months since somebody else is birthday that you cared about. I get to see your terrible handwriting and you scretting. That's part of the process. Saying that, now I live abroad, I actually do see the value of this because it's an absolute nightmare to ship stuff across the Atlantic. That being said, did you watch the Netflix series Pepsi Where's My Jet? No, but it's a great title. So in the 1980s, 1990s, Pepsi started releasing Pepsi points.

And if you bought it, can maybe you got a sticker of some kind, I think, and you peeled that off. And if you collected enough, you can exchange it for a pair of sunglasses or a leather jacket. And it had a sending hierarchy of how many points got you a thing. And in the advert, at the very end, this kid that the advert is about turns up at school outside of his classroom

in a harrier jump jet, and it says at the bottom, harrier jumped at one million points. No asterisk, no small print, no subjected terms and conditions, no, this doesn't exist. This is obviously a joke. None of that. And this kid watched it, looked at it and a hundred times realized that it wasn't in there, recruited his rich friend, his father's rich friend who was a founder

and had way more money than he needed, started working out how he could can purchase in bulk all of these Pepsi cans, employee people in different warehouses, distributed around the US, in order to be able to do this, they basically worked out that they were getting a Harrya jump jet, 95% discounted, pro rata, and they then began this massive litigation between this kid and Pepsi. I thought it's a really good documentary. If anyone hasn't watched it on Netflix, I highly recommend that you watch it I will Okay, so we've looked at signals. We've looked at what it says about ourselves what it says socially What's the problem when it comes to mixed signals?

So I can tell you what's important for me But then I give you signals that say something very different right? So remember incentive sense signal and I can tell you that I care about, for example, I care about quality, I really want you to do it this well, but then I pay you for quality for quantity. You're not going to invest that much in quality, you're going to think about the quantity, how much you can do, can you do more than this and you neglect the quality. So here here are a few examples. So, think about drivers, bus drivers. So, in Israel, we have this route in which you have bus drivers that are paid by the hour.

You go on them, they drive very nicely, they are very polite, everything is great. They take their time. On the other end, we have these mini buses that are paid per passenger, the driver is paid per passenger. They drive like crazy, right? Because they need to be there on time to pick up people. They start driving before you seat. Right?

It's really inconvenient. They are less safe. All of the bad stuff. So the quality really suffers, but they produce more. Now, there are lots of stories like that about small, unimportant thing, but if you think about healthcare in the US, that's a great example where it becomes much saider. So imagine two doctors. You go to the doctor and you need

the you have back pain. Now the doctor looks at you and there are three options. Either the doctor says look, she looks at you and she says, that's fine, just rest a bit, it's going to be okay. Or she looks at you and said, sorry, you really need the surgery. Those are two extreme cases, you'll get what you deserve, what you need. In the middle, in the gray area, you'll have lots of places where, yeah, you know, one doctor will say that you need a surgery and not or not. Now, imagine that you live in a place like most of the world in which the physician is not paid for surgery, for a procedure that she's making.

She's going to look at it and make a called decision based on science, how she understands science. Now imagine that on top of that, she's paid a few thousand dollars for operating on you. If you think that that's not going to affect her judgment, you are very naive. She might even not know that that's what she's doing, but she is going to look at it and say, look, you clearly need surgery where if you compare hospitals in which the physician is or is not paid for surgery, you see a big difference in this in back surgeries, in C-sections, in many other things. Think about the said example. Someone goes to the doctor, the doctor tells that person, look, I'm sorry, you're not going to see next Christmas. You're dying from cancer. We did the best we can. That's it. I can give you another round of chemo. It will prolong your life by three months, but that's not the quality of life is not going to be high. You're going to suffer. Or I can

send you on with positive care and make sure that you die in a nice way, right? That's that's one way of saying it. Now imagine that this same physician, this same oncologist, is paid $10,000 if you choose to take this round, another round of chemo. Now without it's not, it's not that this, that this doctor is doing something wrong or immoral, but this doctor might not even know, but it's going to be much more likely to recommend another round of chemo. So all of it is about the quality versus quantity. In my example, I'm judged by publications. How many papers I publish, research papers I publish.

My dean can decide to pay me per paper. And then the signal that I hear is that I need to publish as many papers as I can. But then the quality is going to suffer. I'm going to publish a lot of papers, but they are not going to be very good. Right. So all of this is the quantity versus quality, which is, I'll always tell you, the hospital will always tell the surgeon, look, you care about the patient, that's number one priority. The hospital will never tell you, look, your goal is to maximize the profits per patient.

But when they give the incentives, that's a signal that the incentive sends. So that's the mixed signal part of it. And it's not, as you said, it's not as if the surgeon is really even capable of removing that signal from their own mind or that incentive, sorry, from their own mind. So you go, okay, even if you were fully aware, even if it's, there's a surgeon who works in America who's listening to this podcast right now, who gets incentivized to be the oncologist, that gets another round of chemo, how on earth are you supposed to do the expected value calculation of, well, I understand that deep down there is an amount of me that will be in toward

wanting to be paid and I'll have to discount appropriately and, you know, it's impossible. It's impossible and we have research joined this. So we have, it's not with surgeons, we don't play around with people's lives, but we do play around with money. So we get people to the lab, we tell them, here's option A, option B, you need to to recommend it to someone else. Most of them choose to recommend option A in this case. We bring another group, we tell them here's option A, here's option B. You need to recommend one of them, by the way, if you recommend option B, you'll get a dollar. Now, most of them recommend option B. Now, you can say either they're cynical and they just lie, or they convince them like themselves, like the

surgeon or the oncologist that you just mentioned, that that's actually better either they are cynical and they just lie or they convince them like themselves, like the surgeon or don't call a just that you just mentioned that that's actually better for that for that person. So we have a third group in which we tell them, here's option A, here's option B, choose one of them, don't tell me which one do you think is better. After they choose to tell them, oh by the way, if you'll recommend option B will give you a dollar. Same incentive as before, but first these people have to make their judgment and only then they learn about the incentives. Now most of them again recommend a, right, which shows that in the second option, the one in which they learned about the incentives

as they learned about the option, they really changed the way they think about it. They self-deceived themselves to think that B is better. I think that very much of that is going on in the mind of physicians or financial advisors, any people, mechanics may be. Yeah, that's the, was it fiduciary agreement that a lot of accountants and investment advisors have that the fiduciary, whatever it is, consent forces them to at least try and have the clients issues in mind. Speaking of, you mentioned buses and mini buses. Didn't you look at something to do with incentives for Uber drivers? Yes, so you mentioned, we talked about the buses and mini buses, right? So how do you get incentives that will give you money per passenger. So you'll actually have reason not to

sit and drink coffee and but rather to think about where am I going to have more passengers. I'm going to make more money while not making you reduce the quality. Drive very fast, dirty car and all this. And I think that the right sharing like Uber lived found a very smart way of doing this by giving the rate by creating the rating system. So now after a ride, if you drive too fast, too aggressively, your car will be dirty. Or something like that, I will give you one star. That's going to be bad for you. So you really care about your ratings.

So now on top of the incentive to be faster, also give you incentives to be good. And that actually works. And interestingly, it doesn't cost the company anything to create this incentive scheme. Right? So you really create something that cost you nothing and was really important. Now, my experience, I don't know about yours, whenever I still use Texas, which is not a lot, it's always less pleasant than the Uber experience. Correct. Uber is always cleaner. The driver is more polite. Everything is nicer. He's incentivized. Yes. Without money, without any cost. Yes. Yes. One thing that I learned that

was interesting about Uber is the drivers do not get paid more if the journey ends up being detoured, if it takes longer, if you get stuck in traffic. And I thought it's a little bit brutal for the drivers, but it's very good for the rider that if you do hit a unrealized challenge of some kind that it is still, you're not going to be paid, you're not going to be charged anymore. And it's not as if the old will take you around the houses, the long route in order to ramp up the extra amount of money. It stops that from happening. So this part is clearly great, right? So they really have the incentive to get you from where they pick you up to the drop place

as fast as possible. I actually think that they're underpaid. I would agree. How do I know that? Apart from the How do I know that? Apart from the fact that I know how much, you know, they tell me how much they make and they work a bit with Uber. Apart from that, I know that it takes too long to get an Uber where I live. So pre-pandemic, it used to be five minutes. Now it's often 15 minutes. 15 minutes means that they're not paid enough.

If they would have been paid more, I would prefer, now I'm privileged, I have the money. So that's true, it's not my daughter would not prefer it. But still, I think that just from the quality of service, how long it takes, I would prefer that they will make 20% more. And I'll get them within five minutes instead of 15 minutes. Right, so and sometimes, for example, it takes them 10 minutes to get here.

So they drive for 10 minutes and then they take me from my home to the university which they get eight dollars. That's kind of I think that that's bad we need. I really I feel good when I pay a fair wage to the people that. Me too. I use Uber. I don't have a car in America so I've been since I moved here about a year ago. I've been absolutely hammering Uber. I must have done hundreds hundreds and hundreds of journeys just in the last year and Yeah, I would agree. It'll be interesting to see what happens with Uber over the next few years. Okay, so one of the other mixed signals that you talk about is encouraging innovation, but punishing failure. What would be an example of that? Right. Right. Right. Right. So you always tell people, you tell your worker, you don't tell them, look, do exactly the same, don't innovate, just do small changes, think about my world, right, I can write lots of papers by changing

a small parameter in something that someone else did, those are going to be really boring bad papers, or I can take a risk, I can think about something completely different, and by taking a risk, basically what I'm saying is that I'm increasing the variance, right? So there is a chance that it will be much better, but there's also a chance that it will be much worse. Now if I work for you and you look at me, you see that I tried something and they failed, and as a result, you fire me or don't give me a bonus or whatever, where you punish me, why would I take this risk?

Why would I go and try something new if I know that it has risks? So the right thing to do it, to encourage innovation is to tell you, look, go ahead, try it. If it doesn't work, tell me fast. Don't drag it. Because if I know that you're going to punish me, I'm going to still throw good money after the bad money and try to make it work, force it to work. No, just whenever, whenever I see that it doesn't work, just kill it, that's fine. And then do this debrief, you know, what happened? Why did it happen? Now, if you find out that it happened because they slept until noon and then drank lots of coffee, then fire me, then punish me. But if you see, look, it was a good idea. The intuition was solid. You tried it, it turns out it didn't work. Let's learn from it from the future. I'll know to make the same mistake in the future and move on to the next thing.

That's the right way to do. I run experiments for living. That's my research. Doing incentives for 25, 30 years. Very often, I have an idea. I go to the experiment, I test it and the students do something else and what I expect. So I get mad at the students, but I try to learn from it, right? Why did it work? Sometimes it's more interesting. If your intuition didn't work, you learn something much more interesting.

And sometimes it's not, but the point is to incentivize really a failure as well. Because if the failure happened because your intuition was wrong but still was solid just don't punish for that. Rory Sutherland has a story where he always talks about the fact that nobody ever got fired for hiring Accenture and his point being that if you have a reliable but boring pursuit no one ever gets in trouble for that whereas if if you say, look, this is something we're not going to use the blueprint. We're going to actually try and go out there and do something that may have an upside of 100x, but a slightly greater downside. It's

supposed to just iterating on what we've done before. And he says that this is one of the reasons why the consultancy model, a lot of advertising, is very safe, very boring. It's handled by accountants and economists rather than by creatives and artists. Right, right. I think that is absolutely right. Now, you can think about the world in which you cannot allow for the downside risk. So, imagine that I don't want my physician to take risks on me. In some cases, but then your message should be, look, I want you to play it safe.

Creativity is important in other places. Be going the paint in your garage after that, after work, but here it's really important. That's fine, that's a message, and then be go with it. But what I'm saying is don't tell them, be creative, but then like you said if if it doesn't work, punish them That's that's the mix signal, right? So if you want creativity don't punish if you don't want creativity, which is also fine Tell them that that's not what you're looking for in this show What was that story about the coke vending machine thermometer? I love this story. So the CEO of Coca-Cola and not a probably either engineer

or economist without social skills. He had the, he learned that he can put a thermometer, there is a thermometer at the vending machine that can tell them whether, let's say, let's divide it to hot and cold days. It took probably Econ 101 to talk about price discrimination and said, look, on a cold day, we'll charge them a dollar and a hope they will charge them $1.50 because they're winning to pay more. That's what airlines do. That's what hotels do. It's fine, right?

So if it's busy, you take more people, of course, got pissed at them. Is that why you're trying to take advantage of us when it's hot? That's, you know, that's not nice. And the right way to do it would have been making the regular price $1.50 and on a call day will give you a discount. It's only a dollar, right? So that's really great, right? That way, you know, you're nice to me actually, when you're nice to me, AMC last month AMC came up with a similar program. They decided that AMC theaters, they decided that they're going to charge different prices for different seats. If you want to sit in the middle of the theater, you'll pay extra.

You'll call it premium seats and you'll pay extra. Again, lots of pushbacks. It's not enough that we pay so much for the tickets, that we pay so much for the popcorn. Now you also want us to pay much more for the middle seats, you know? F.U. The way they should have said it is, and then they tried to say, well, inflation, whatever. They should have started with inflation. Look, it cost us more, we have to pay more for labor,

everything costs us more, we have to raise prices. We are really sorry for this, that's not what we want. We want everyone to be able to go. And because of that, we're going to give discount for the first row and for the side, so everyone can still come over and use it, right? So that's exactly the same incentives, but very different story. Think about coming back from the pandemic, a friend of mine told me a story a couple of days ago,

they worked remotely and then they decided to go back to three days a week in the office and their employees were really upset with them. They looked at it as punishment. And what you said is that the right thing to do after listening to this to example, if you said the right thing to do was to say, look, look, sorry, or not sorry, the pandemic is over. We are back to five days a week, however,

because you were so good. And so responsible, we're going to let you work from home for two days. Right, so exactly the same story, but it's not we're punishing you by bringing you to the office for three days, but we're rewarding you by giving you two days to work from home. Right, so this, there is a story out there, our brain completes the story, and the incentives can really change the way we look at the story. This feels like anchoring bias is playing a massive role here.

Anchoring bias and expectations are doing a lot of the heavy lifting. Anchoring, framing, all of the good stuff that we know from the Avali Economics and the Aval Science in general works over here. The twist is that now it's done by incentives, right? So it's not just a story, it's also it's done by the incentive. You give it as an incentive to people. And that's important to understand that incentive tell a story. And if you control it, you're going to do better.

If that's the case, how is it that Palaton saw an increase in sales when they put the price up? So Palaton is a great example. So the CEO wrote that when they started, they charged a thousand dollar for the bike. And I wouldn't want to buy it because they decided that it's probably not a good, they concluded it is probably not a great bike if it costs so little.

Again, tells you something about the people that think that a thousand dollar per bike is little but that's what he said. Double the price, two thousand dollars a bit more than that if I remember correctly. Everyone said wow that must be a great bike and moved in, right? Imagine back to the wine example you go to usually you buy a twenty dollar wine. Now you're celebrating something, you're celebrating birthday. Tonight you're going to the store I'll say tonight I'm going to today. I'm going to buy a $50 bottle of wine. Why? Because we have this price equals quality in our brain which is true in many cases. You want to buy a laptop with more memory?

It's going to cost you more. You want to buy a Tesla with longer range. You're going to pay more But in some cases this is just in your brain and you need to know where to. I'll never forget one of the first ever times that I sat down at A S level business when I was 16 or 17. And they were explaining about the fact that Nike's shoe range and you have the lowest one which is 30 pounds and then 50 pounds and then 70 pounds and all the way up to 250 pounds and this has got all of the fanciest pieces of kit.

But if you look at the difference in terms of the tech that goes into 250 and goes into 150 which might be the next closest, you're not looking at very much. Apart from signaling, I've got the most expensive pair of shoes. They're always going to look different. You're always going to be able to tell that they're look different, especially at the bottom end and at the top end. Maybe you'll be able to tell. I won't.

So you have your people that you really care about them being able to tell. So there is a group of people that look at the shoe and say, look, this is on my wife's 50 pound pair. Right. I wear a $50 sneaker, right? But my wife sometimes tells me, look at this white tennis shoes. Those are $250, sometimes a $1000 shoe, right?

So absolutely. Yeah. And the reason for the right people precisely, that's the first part. But the second part, and I remember thinking, well, look, if we just take a utilitarian amount of shoe per pound spent equation and try and equate that back, why does anybody, including myself, why am I seduced by the shoes at the top? And there is this sort of signaling thing that goes on. But the other reason is that if you look at the area under the curve, under the price

curve, there are people out there who either simply want the absolute best because that's what they want, or have 250 or 300 or 500 or a thousand bucks to spend on a pair of shoes, and if there is one that is within that bracket, that's the pair of shoes that they're going to get. Now, if the best pair of shoes happens to be $150, they go into by that pair. So why not just continue ratcheting up the scene features. These shoes are Bluetooth enabled. These shoes will correct your gluten intolerance. These shoes will do what up like we'll write your papers precisely correct what that would be great for you. Yeah, you just might as well continue to ratchet it up capture as much area under the curve of that. So think about wine. You go to a wine store, you can buy wine from

five dollar bottle up to $50,000. Right? And you know, I drank some of the more expensive wines because someone else was buying it. I couldn't tell the difference. I love wine. I drink a lot. Give me a good $20 bottle of wine, I'm extremely happy with that. But what you said about having very expensive ones, in many restaurants you have, you go to a restaurant, not a very fancy restaurant, and you look at the wine menu, there is a $5,000 bottle of wine over there. And then you ask the waiter, did anyone ever order it? They probably don't even have the wine. But that gives you, that sent you a signal. Look, this is a serious restaurant

because they have this very expensive wine. Probably the same goes with the sneakers, right? So if this company can actually manufacture a thousand dollar pair of shoes, they must be doing something really good. They must be really high quality, even if no one buys them. That sends a signal that they're really good. And some people will actually buy them for the reasons that

you mentioned. Also, by pushing the top end price further up, what you're doing is relatively making the mid-range products seem cheaper, right? We're looking at anchoring again off the top. Okay, so you've got long-term goals and short-term results as another mixed signal that often happens. What's going on there? So there is this saying that we all know by a politician. We all know what's the right thing to do. We just don't know how to get elected with it.

Right, so think about politicians. Think about, I live in California, think about my gunner that understands that building a train from San Diego to San Francisco, a fast train is really important. So if I want to go from San Diego to even to a lay, it's like a three hour trip, it's just impossible. It's not a viable option. And say that our governor will decide, yes, I'm going to invest in this, it's going to cost $50 billion, but we're going to put the money in it, and we're going to do it. He'll have to invest a lot now, and the benefit will be 20 years into future.

He'll be long gone. He will probably not get reelected because he diverted funds from roads today. He can fix the bridge next to my house. I'll let's say, wow, he's a good governor. If he invests in something that I don't see, I will not understand it, right? So why would they invest in the long run if the short run is so much more rewarding

in terms of getting reelected? Think about the CEO that the board tells them, look, we care about the long run. We want to be successful in the long run. This company, please, you know, but then judge the CEO based on the quarterly earnings, quarterly performance. What is the CEO going to do? Imagine that the computer system, whatever the network really needs upgrading. So the CEO can decide to

invest a lot in it in the coming two quarters and then it's going to get huge benefits in the future. But the next two quarters are going to look really bad, really poorly in terms of profits. And that CEO will probably be fired or will not get the bonus or whatever, right? So we tell the people that work for us like the governor or the CEO that look really want you to think about the long run,

but then we give them incentives to do the short run and that's a big problem. Now, there's not always a good solution. So the solution for the governor would be a dictatorship, but I don't want to live in a dictatorship. So I kind of like the democratic system in which they need to report back to us. So you don't always have a solution for that, but we should try at least. For a CEO, say, if I had a company and they needed to elect a CEO, I would tell that person, look, I really care about the long run.

I'm going to let you do this for two years and just run with it. I'm going to sit and watch you. Hopefully you'll do well. I'll try to find a person that I can really trust and just let them run with it. I would not look at the short run performance. I wonder whether tenured professors have the same sort of sense. Now, one of the problems that you have, obviously, if you lock somebody in and you guarantee them an amount of time that they're

going to stay employed or supported by you, that means that they can drag their feet. That then creates another challenge that you have, which is completely disagree. Tenor is the best thing that God ever created. You sound like you might have some progressive incentives here. Maybe, maybe, maybe. So it's, look, first of all, we are tortured

for many years, until we get tenure, right? So that's that that part is, is there. And you try to really, when we decide whether to give someone a tenure, we really try to figure out, did we get this person addicted to, to doing research, to doing his or her job, right? If we didn't get them addicted, then the second will tenure them. They can just go, I need to teach three weekends a year. I can be in the Caribbean for the rest of the time. No one can do anything. Unless I'll do something horrible, I'd say the racist things or something like that,

I will keep my job. Yet I'm working very hard, right? Because I really enjoy it. So that's part of what I said at the beginning that I'm doing it because I'm getting paid, but I could have worked much less and still get the same amount of money. I enjoy it, right? I want to convince people to buy my book. I'm here trying to do that, right? So we are intrinsically motivated. But that's not always working, right? Sometimes you tenure people and they just quit. See lots of them. You call them that would in the in the in our faculty and you see this and it's very hard to do now

I think that the main reason for tenure in with you know Academic faculty was the freedom of speech because now I can really say whatever I think again within reason I cannot say racist things I cannot say some other stuff, but I can say radical opinions that maybe my university doesn't like it. And many other people will not like it, but I can still express it. And that seems to be really important. And you can pursue innovation.

You can focus on the long term, et cetera, et cetera. Yeah, I don't disagree. It's very interesting. I didn't really know what tenure was until I started the show. I haven't involved myself in the inner workings of how employment of professors at universities actually goes on all that much. So given what we're trying to do there is incentivize good behavior, why is it that finds a so ineffective at incentivizing against unwanted behavior? Just to finish the previous one, exactly what you said, the longer I can invest in the book, I talk about the female genital mutilation project that we're trying to do. We're working on it

for six years, it's going to take many years until it's ready. I can do it because I don't have to worry about the short run. Let's talk more about that. I want to talk about this female genital mutilation thing. How are you trying to change the incentives of these places where it's a common practice? When you go to Africa, there are many places. So tens of millions, if not more than that, of young women that go through this female genital mutilation, which is a horrible, horrible procedure. We focus on the mass eye trial because over there, as far as we know, the data is not clear, but the vast majority of girls around the age of 10 to 12 go through this procedure. Now, we might say that, oh, again, these Americans come and try to change the behavior of the culture of our indigenous people etc.

All the good stuff that was done way too often in the past, this case is not the same because people who understand what they're talking about say that it's worse than rape, what happens over there, right? So it's not something that if it was raping 10-year-old girls, no one would say, well, it's part of the culture, we should allow it, right? FGM is worse than that by many cases. So the question is why does it happen? So we look to it and try to understand why does it happen? And it turns out that to a great extent, it happens for economic reasons. Because the girl after she goes through this FGM

are valuing the marriage market is much higher. And that's, you know, it's a very patriarchal society. Basically, the value of a woman is measured in the number of cows. How many cows you're going to get for? Is it 10 cows or 15 cows or whatever? And the value of the girl for her family is going to be higher if she's going through this procedure.

And she'll be able to find a better husband. So that's why it happens. Why? Because she can be part of this over the group of women over there. If she's not caught and everyone, all the other girls are, then women later on, they still treat her like a baby. They, she'll be outcast to a great extent. Have you considered the motives, the culturally adaptive reasons why this would have first come about. I'm going to throw my bro science evolutionary psychologist hat on here and guess that maybe one of the reasons why, you know, speaking as a westerner who quite enjoys it when the girls

that you have sex with, most of my friends want their partner to enjoy it. I'm going to guess that this is because if the incentive for individual women to have sex gets dropped through the floor, chastity is something that you can expect much more highly. Is that what it seems to be? Everything you said, it has a few layers, but first of all, according to people who understand, I'm not an anthropologist, I'm not an historian,

but apparently the man used to go for a year to fight or some way come back, find their wife pregnant. They wanted to prevent this. Now, interestingly, what you said about sex, you asked the young man that needs to decide what they're going to marry. Do you want your wife to enjoy sex? They also say, yes, we want it. Exactly like you said, we want her to enjoy sex as much as we do. But then what are you going to marry? Well, I'm going to marry a woman that went through this procedure because then she'll be a better wife, in a sense. There are values of wife.

So it's really complicated, right? But it's all about the economics of it. Now, what we came up with is how can we create an alternative economic institution that will compensate for this? For the loss of value of the woman in the marriage market. What we found is that they really want the girls to go to high school. High school is far away. Costs a lot of money.

Think about college for us. It's really, it's a boarding school that costs lots of money. If the girl goes there for high school comes back when she is 18, then her value is much, much higher already. She doesn't need to go through FGM. She is already an independent woman. She can be a teacher or nurse or whatever. She is really going to do well. But the parents don't have money to send her out. What we said, look, we're going to have nurses check, validated that they're not, they didn't perform this horrible procedure in them. If you didn't, we're going to pay for high school. As long as she is uncut, we're going to pay for high school.

And we think that that's going to be a very strong motivation for the parents again because of the economic aspects of this. And hopefully, you won't have to do it forever because once you have enough women that will not be cut, the peer pressure will switch from, oh, you're not cut, you're a baby, we don't have to consider at all to, oh, you're cut, that's unfortunate. Right?

Yeah, this is a... Yeah, this could change that. Also, that would mean that the women who are cut are also most likely to be uneducated, which is a signal that women would not want to be associated with. This is something, it's a, again, neither of us, fully educated anthropologists or evolutionary psychologists,

but the knife edge that different cultural technologies, the way that the status of different types of behavior of viewed in society to me seems. It's so, I mean, you know, we're talking about here, a relatively small intervention to stop an incredibly heavily ingrained piece of culture. And it's just, I find it so interesting how fine the line is between those two things.

And they have lots of other problems that over there I can see the problem of people with us changing the culture because they have, so a girl is getting married at 14 with a 30 year old man. They start having kids and they have lots and lots of kids. Now pre-enterbiotics about half of the kids died. So it was manageable. Now they have too many kids in the sense that the resources that they have cannot support them. Right? So in terms of planning, it's much harder to do and they have serious problems with that as well, right? So like you said, very simple thing, very simple incentive, very simple change in what you do can really have

a huge impact on the society. Given that you're not quite the fully robotic behavioral economics professor, but probably are not used to having such a fundamentally benevolent impact on a culture with the work that you do, how does it feel personally crossing into pretty much a universal good being able to utilize what you've learned in your theory to really make a pretty important change to the world here. How does that feel for you? So, that's what happens with age, I think. So, as a young man, I wanted to publish as many

papers, become famous, be successful, whatever. Now when you get older, you start to think about, again, how can I use it to really impact the world? So I work with companies, but that's usually not doing good to the world, right? So I help companies make more money. That's not, come on, that's, that's not creating value to the world, that's creating value to the company and to me. And then you can think about few things that are like this, that if I can help these girls, right, if I can help, if I can save one girl from going through this, that's already I'll die much happier, right, and clearly if we can have more.

And you can think about other things that we try to do. So I mentioned don't call it just we're trying to do end of life kind of Planning to help people plan better to the end of life and and this kind of things and I find it much more exciting Then running another lab experiment about some negotiation game that I still find interesting, but That's less exciting, like you said. You've become an ascended individual, a patriarch who is trying to bestow his insights on the world. Do you just need a white beard, a long white beard? I think that you could grow it out. I think it would look wonderful.

What about the fines in terms of stopping unwanted behaviour? What's the problem, sir? The problem is with your perception, I think you're wrong. So, all we know about finds comes from really silly experiments, in which, now, first of all, you cannot come to my lab and live with less money than you came in. So, I can't really give you a fine in my lab. And much of what we say, exactly what you said is the perception in psychology, and I think that it's wrong. That fines don't work.

Well, small fine don't work. So I have this study about the decars. So our girls used to go to a decor in my wife and I lived in a suburb of Tel Aviv. And we needed to pick them up by 4 p.m. in the afternoon. We used to go to Tel Aviv to have lunch, then one day there was traffic, I drove like crazy in order to be there by 4 p.m.

because you don't pick up your kids too late. Then the principal decided that she'll put a $3 fine if you come more than 10 minutes late. Again, we were in Tel Aviv again, traffic, this time I didn't drive like crazy because I'm not going to risk my life for $3. It doesn't make any sense. Right, so findover did change the perception. And by the way we found when we ran the experiment we found that indeed many people came late, more people came

late. And it's not because they thought about it as babysitting system, I'm paying for babysitter because when we remove the fine after a while they kept coming late. So what happens, what we think happened, it's all the worst you can't end up dying, what we think is that before that you didn't know how bad it is to come late. Now we told you that it's three dollars bad, right? If it's only if it's dead, it cannot be important. Now you can never remove that anchor. Exactly. There's knowledge. Once I learned it, you can't take it. Now, if in some places in the US, it's $10 per minute, then you think about a friend of mine told me that in Paris, there is a place where if you're late, they take your kid to the police station and you have to pick

up your kid from the police station. That's big. Wow. Yeah. And you've got the social impact of that. You've got increasing convenience. So I remember, so it's not that finds don't work. It's small finds that don't work. Interesting. Okay. Now I remember learning about Estonian speed traps. Have you heard of these?

No. So in Estonia, they have police by the side of the road. and what they do is they'll ping you. If you're going over the speed limit, they'll catch up, they'll take you to the side of the road. And you'll have the choice between, I think it's a really, really high fine. I think it's 350 euros maybe, or you can stay by the side of the road for 30 minutes. And nice. And I thought that that was a really interesting way, you know, most people that are gonna be pulled over by the Estonian police are not making 700 euros an hour, right? But there are people for whom I'm on my way

to pick my kids up from nursery, we have a wedding, we're getting to, we're making a flight, we're doing whatever. And it just really makes people, I think, question the time and the money element. And it's much more interlinked. I thought that was a very smart way to do it. I would put both, so why not pay 350 and wait 30 minutes? Some people are reaching off, some people are reaching after they don't care about the money. Some people are rich enough, some people are rich enough that they don't care about the money. Some people, let's think about it this way, if you do do that, what you are optimizing for are people who are both time rich and money rich. Exactly. So that's equalizing, you know,

everyone is going to suffer. One way that they did it in many places is this preventive driving. So if you, if you take it, you get a ticket, you have to go to this school. That's pure punishment. You don't really learn anything over there, but it's very effective punishment. So now I think you can do it online, but in the past you really had to go there. I was fortunate enough not to go there, but my friends who did said that it was like three afternoons real punishment. I was very fast, I really had to go there. I was fortunate enough not to go there, but my friends who did said that it was like three afternoons real punishment.

So, everybody in the UK will be aware of the speed awareness course, which is what you're talking about. So, in the UK, you're allowed a 10% over the speed limit. That was originally introduced because analogue speedometers had a 10% tolerance where the car may be sufficiently inaccurate. The fact that that's been legacy grandfathered in in a world with digital speed ometers that are probably accurate to 0.1% of a mile per hour, etc. is still hilarious, but, and then I think it's the next 10% over that if you are in that bracket, you have the choice between a hundred pounds fine and three points on your license.

If you hit 12, then you lose your license. Or you can go and do a speed awareness course. The speed awareness course is a morning or an afternoon with an incredibly grumpy gentleman stood at the front asking you, I've been, so this is personally relevant to me. The most banal boring questions, wagging his finger, saying, you are driving down the street. How can you tell if you're going too quickly? Like just, oh my god, it's torture. However, you're only allowed even one of those, I think once per two year period.

So you only even get one of those grace periods. So there's this sort of ascending punishment ladder that you can go through. And if you use that, you lose one of your lives. But honestly, I think that the, you know, I have a number of friends who are regularly in and out of points on their license. I've only ever got pinged by this once either through my great driving or through fortune or whatever. However how the speed awareness caused stuck in my mind. I can remember

the the classroom that we sat in. I can remember how boring the tapes were. I can remember the effort of having to drive there on the more. I can remember everything about it, right? That's a very, very strong, disincentive. So you see, fines do work. You just need to find the right fund. What whatever will make you drive carefully after that. Whatever hurts the most. Talking about cars. What was that online car shop? Edmonds.

Right, Edmonds, yes. So that's actually interesting. Edmonds is a great company. I worked with them there from LA. And what they do is give you information about cars. So you want actually interesting. Edmunds is a great company. I worked with them there from LA. And what they do is give you information about cars. So you want to buy a car, you go there, you check, I don't know, Toyota Corolla from, you know, a new Toyota Corolla and you learn about it. And then when you want to buy, when you're ready to buy, they have ads from local dealerships. So you put in your zip code and they know where you are, they offer you deals. Now if you buy through them, so if you click on the link over there and you end up buying the car,

they, that's of course good for them because then the dealerships are going to pay them more for advertising. Now what I did is gave you say, say that you bought a $20,000 car, they gave you $500 discount. If you clicked on Edmonds and went over there. Now, $500 is a lot of money, but not when you compare it to $20,000. So we know from previous research, all research from the 70s and 80s that imagine that you're going to buy a mouse for your computer, right? You'll go to the store and the guy will tell you it's $50, but if you'll walk 10 minutes there is another store they have it 50% off you get $25 off. Most of us will go. Many of us will go.

I imagine that you buy a computer and then you also buy this, you pay $2,000 for the computer and you also want as one of the accessories and mouse. And now the guy will tell you, you can either pay $2,050 over here, or you can go and buy it over there and pay $2,025 over there. You say, well, it's not. Right, so you compare it to the deal itself. So $500 in itself didn't, it worked, but not as good as you would imagine.

What we thought is something that is called mental accounting, mental accounting is basically what you care about. What is it that you really care? Not all money is created equal and what we thought about is gas money. Right? So if I give you a credit card for $500 that you can spend on buying gas, now you can imagine yourself standing in the gas station and fueling your car.

A $500 is a lot of money. You can fuel it for a long time. This is something that you really don't like to do. And now you get it for free. That has much stronger impact. The same amount of money actually we found in our experiment that we did with them, the $200. In gas money, we were more effective than $500 cash.

Now, if I'll ask you, what do you prefer? That I'll give you $500 in cash or $200 gas money. Of course, you'll choose the $500. But because it was separated, it was different. People did not look at it as part of the deal. They said, oh, I'm going to get this. That's great. And that was more effective. And that's again about the story that you tell yourself, what it means in order to get this money. Another car that you looked at, the Toyota Prius, what was interesting about that? So in the late 90s, early 2000, both Honda and Toyota came up with hybrid cars.

And fortunately for them, those were really bad cars. Why fortunately? So today if you buy a Prius, it's a competitive car. It's a very good car. Back then they were bad and that was great because if you wanted to see, now look, I'm a good guy. I care about the environment. You should buy a hybrid car because for the same amount of money, you could have bought

a much better car. The only reason that you would buy some, the Prius or whatever the alternative will get to it in a second by Honda is because you care about the environment. That's why you buy hybrid cars. So that's great, right? And that's very good. And that's why people were actually attracted to it, I think, to a great extent. But then Honda made a decision that was probably dictated by the engineers who said, look, do it based on the Honda Civic, the parts are going to be the same. Everything is going to be

much easier. Toyota took a very different approach. They said, let's redesign the car completely. Now, when you see a previous, you know that you see a hybrid car. I imagine that you're driving to the park in lot with your not-so-great car. In one case, there is a small plant at the back saying hybrid car. That's the Honda example. In that case, everyone sees it from distance. Look, who are you, a great guy? You're driving this hybrid car. And according to every people, all the people that understand, that's why Toyota won the market

because they produce a bad car and it was clear to everyone that you're driving a bad car. So you're a good guy. Cosly single. That's exactly. And something important to note over here is the importance that not all incentives are good for everyone. Right?

So in this case, we're talking about people who care about the environment. If you think about the guys that drive pickup trucks, those incentives will mean nothing to them. Right? You really have to target when I tell, when I say that you send a signal and you complete the story, you need to think about the people that you care about. It might be, if you want to sell a hybrid car, don't create signals that talk to the pick-up drivers.

It's about freedom of the open road and loud country music. Whatever, right, exactly. Whatever they care about, give them and whatever incentives these people care about. And that's true about, in general, when I think, when you design incentives, you really think about the signal that you send, and you really need to think about it, we need the culture that you're talking about. So it could be a culture like we use, maybe the US, you can make it more competitive in Japan, competitive incentives are not good.

But even within San Diego, it could be taxigrivers, versus teachers, versus lawyers, versus doctors. Everyone will have a different culture and they'll care about different things and you need to adjust your story. And very often, I wouldn't know it. The people that are there, they should know what, what is it that people like that care about? It's very culturally dependent in that case, which also means the advertising company,

the behavioral economists that are working, whoever it is, there is still an incredibly important role for you to couch whatever the deal is, whatever the incentives are within understanding the incredibly inter complex played structure of all of the different ways that status and stories and framing and anchoring and so on and so forth happens not only within the country, not only within this particular demographic, but within this region, within that cohort, et cetera. You mentioned the shoes. Don't ask me about shoes. I really have the same shoe. I buy five of them every year, $50, great shoes.

Don't ask me about the sneakers, it's cost $1,000. Well, you can ask me, I can guide you through what you need to learn in order to understand it. There are some rules that I can tell you, but the details of this, you really need to figure out yourself, you need to find people that care about it. Don't ask me about TikTok. I heard about it. I don't know exactly what it is, right? So it's really, you need to find the people that understand what you're talking about.

Is a bad incentive worse than knowing cent of it all than? Yes. No question about that, because bad incentives will, like, you ask me at the beginning, the first question was the first question was what's incentive incentive incentive will take you in the direction that I want you to go bad incentives will take you away from the direction I want you to go. So think about the takeer example instead of getting parents to come late last time we got parents coming late more times. And you wanted maybe a UK example. So in Wales, they had something similar. And they, parents will really identify with this example. We always go to vacations during spring break, say, when it's crowded and it costs much more, because that's when the kids are off school. So parents took their kids away from school

either the week before or the week after. It was much cheaper and much nicer vacation. Schools didn't like it. What did they do? Put a fine of 60 pounds of parents coming late, right? That mistake because now people, instead of saying, look, it's bad to do it. Now they said 60 pounds. I'm going to save a thousand pound by not going during the crowded time. So what was that, does that story about, is it cobras in India? Yes, so that story is a bit fishy, but there is a similar story that I think

is more grounded in reality. And that's by the way, one of my favorite past times to look at the incentives gone bad. I call it stakes and mistakes. So the French came to Anoy, Vietnam today, and they wanted to have sewage, because that's what French people wanted to do. With sewage came, you know and they wanted to have sewage because that's what French people wanted to do. With sewage came, you know, they wanted toilets, with sewage came rats, rats

are not nice and they decided to kill them and someone really smart came up with the incentive scheme instead of sending my own people, hiring people to do that. Let's give the people, power to the people. So they decided to give say one cent per rat tail per person right so if you bring a rat tail to the city you'll get ten cents or One cent whatever whatever it was. So you had this poor guy the city hall that counted rat tails Great great example what can go wrong right? That's that's that's a good We want you to get rid of them well turns out first all, that you started seeing a tale less rats running around the city, because why would I kill the rat?

We want to have more of them. We want to have more babies. People started to farm them. So you had rat farms. People started bringing rats from other places, right? So you need to be careful. The idea was good. The implementation was less good.

You asked me, are bed incentives worse than no incentive? Yes. Especially when related to rat tails. Yes. What about using incentives to identify problems that seems like a pretty big opportunity? Right. So in many cases, we think that we know what's going on, but we don't. I have this paper with my friends in which we looked at

PISA testing. PISA is something that is done by OECD. In Brussels, they look at many places, many countries, and try to have the same test to everyone and try to evaluate who's best in math, for example. Turns out that the US invests lots of money per student and is ranked somewhere in the mid-30s, not doing very well. And China, for example, Shanghai was number one. Now, the question why, and the interpretation by everyone is, look, it's because of the ability, we need to learn from the chain needs. So Finland, for example, is ranked very high, we need to go there and try to understand what they're doing better than us. So the assumption is always that the kids are doing better, that basically what you measure is the ability in doing math, for example.

Now the way the test is done is they take a bunch of 15 year old kids, put them in the room for three hours, tell them, look, answer these questions as best as you can. You'll never know the outcome, your parents will never know your teachers, the school, no one will know some, a content in Brussels will know. But it's really important that you work on it. I don't know if you can relate to your 15-year-old self. I can think about myself that I would have told them, you know, I wouldn't work that hard. So basically, what they're measuring is your ability to do math and your willingness to invest effort in the test, right? We wanted to test how important is this second ingredient, your willingness

to actually your intrinsic motivation to do well if you like. So what we did, we took kids, we didn't tell them what we're going to have kids in the US kids in Shanghai, like I said, number 35 versus number one. In one case, we just gave them a test. We saw similar differences as in the pizza. Then we paid them per success. So for every question that they got right, they got paid. Now we saw that the Chinese student didn't do better because they were probably already at the top.

No matter how much you pay me to do well in the SAT, I have the limit that they I cannot do better than that. Probably that's what I can do. The American kids and the other really improved. They did significantly better when you pay them. We showed that it wasn't just ability. If you don't know, if you sit down in an hotel, I'll pay you more if you'll be successful. If you don't know the math, you can't do better.

If I'll take you and ask you to fill up some testing Hebrew, no matter how much I'll pay, you're going to fail, right? Apparently they knew the material well enough that when we pay them, they improved drastically. So the US kids, for some reason, if you just ask them to do it, didn't invest. You can think about culture, maybe in China, it's more of a collective culture in which if I ask you to work hard on this, you'll work hard on it, even if you don't get individually rewarded for it, whereas in the US, it's not like that. So the diagnostic aspect of this is we thought that it's just ability or people thought that it's just ability. We showed no, it's ability plus your willingness to invest effort. Plus, ruthless American capitalism. That's what it was.

You want me to work, pay me. Precisely. What's the pay to quit strategy? I love this one. So I teach negotiation and I tell my students that no matter what, they shouldn't lie in negotiation. It's bad for ethical reasons, it's bad for your reputation, just don't lie. With one exception, the one exception is that when you apply for a job,

even if you're not excited, you should pretend that you're excited. So imagine that I would come to your podcast and I said, I really want to take a nap now. Okay, ask me your question. No, I need to pretend that I'm excited. I'm really excited, but I need to pretend if not, right? Because otherwise, the podcast is going to be much more boring. And the

same is true for the job. If you are going to, if you're looking for a job and you say, well, I'm really disappointed that that's where I landed, but you know, I have no other options. I'll come over. Then I don't want you. I want only people that are excited because otherwise they're not going to do the job well. Right? So if I just ask you, say that you work from Indusky, are you happy? You'll say yes, because otherwise I will fire you or something. But I can devise a way that will be what we call incentive compatible for you to tell the truth.

So I can find a way to use incentives to get the truth out of you. And the way is by offering you this pay to quit. Say that I offer you, you know what, if you'll quit, I'll pay you $10,000. No, it's going to upset with you. I want you to stay, but if you want to leave, here's $10,000, let's depart his friends and you can go. Now, if you are, you know, on the margin, you want to leave, but you're waiting, you'll take this $10,000, you leave us, you're not going to bed mouth us. I don't have to suffer through firing you. Everyone is going to be happy.

I lost 10,000 dollars, but I gained something that a person who didn't want to work here is not working here. And the people that stay, first of all, I know that they're really motivated, otherwise they wouldn't be here. And second, they left to convince themselves, now that they're not stupid, that what they did was not a mistake. If it was a mistake, if they would have taken the $10,000, they would be better off. If they decide to stay, they really need to justify why it wasn't a mistake to take the $10,000. Right? So they're going to work harder to convince themself that that was a good idea. Otherwise, why would they stay?

There's a little bit of sort of continuity bias of some cost fallacy of opportunity cost, all pushing people forward once. Okay, we've passed this threshold. I need to make sure. You mentioned that that you teach negotiation. Yes. What do most people who've never studied negotiation get wrong about negotiation?

There are many things, one of them, so you have a large group of people who just don't negotiate. It's surprising what is negotiable. As long as you do it in a sensible way, many things are negotiable. So it could be when you check into the hotel, you can start and you can try and negotiate a better room. You might be surprised, you know, what you can get or when you rent a car and it's true later on.

So many people just accept what is offered to them or not accept, decide not to take it instead of trying to negotiate them. So if there is one thing that my students take out of the class, if the one thing that they take out of the class is now they enjoy out to negotiate, that's already a lot. The second thing is like we said about creativity and failing. Deep brief what happens, so think about what happened, why did it happen, how can I do better in the future. So think about what happened, why did it happen, how can I do better in the future? So after each negotiation try to debrief with yourself, try to learn from your own experience. That's also something really useful that you can take out that people don't do.

What is your favorite strategy from negotiating that seems to convert incredibly well, whether it's a framing of how you say something, whether it's a way to broach a particular topic, is there something that you think is a long lever when it comes to negotiating? So one that pops to mind is, imagine that we both, we are going to negotiate something. You're trying to sell me a car, you're working a dealership, you're trying to send me a car, but you're stuck with only yellow cars.

Right? Or you need to get rid of as many yellow cars as you can. And I'm coming to buy a car from you. Now, in one case, you can tell me, you know what, if you'll buy a yellow car, I'll give you a discount. Now, I might say, no way, I don't want a yellow car, or I might say, sure, or I might say, actually, oh, great, don't want a yellow car or I might say sure or I might say actually oh great. I also want a yellow car that would be a mistake by me so if you're telling me

I'll give you a discount if you have a yellow car. I should tell you I shouldn't lie to you But I should tell you okay wanted yellow to sell me a yellow car. Let's see what else you can give me in order for me to to take it Right, so in many cases we go into this that either we, that likely we want something different and we'll need to compromise somehow. In many cases we want the same. And if we want the same, I should let you speak first to tell me about your preferences. And then I shouldn't say, oh, great, that's exactly what I want,

but I should say, look, okay, that's what you want. We can, I can work with this, let's see how. Right, so try and get something out of you by doing this without lying, but without revealing the information that we want the same thing. One of my friends that I spent last weekend with in Las Vegas has a method of negotiating that he uses on his wife when he wants to go to a particular restaurant. So give me your thoughts on how effective this is. So let's say that he wants to go to Cheesecake Factory. So that's his desire. He doesn't know what she wants to do for the evening. As opposed to saying, I would like to go to Cheesecake Factory

this evening or where do you want to go for dinner tonight? What he'll say is, would you be opposed to going to Cheesecake Factory? And she's not going to say, I'm not opposed to going to Cheesecake Factory. Maybe the replaces that I would prefer to go ahead of that. And he said, well, look, I would quite like to go to Cheesecake Factory. And if you are not opposed to going to Cheesecake Factory, that seems like we've got a pretty good setup here. Unfortunately, now that he's talked about it on a podcast, she's become wise to the trick that he was playing on her.

So I think that he has sacrificed his restaurant choice for the good of everybody else. But yeah, that's his negotiation tactic. So few thoughts about this. First of all, you need to find friends that don't want to go to the cheesecake factory. Come on. I'm fine if cheesecake for Uri. Yeah, you're not going to do it anymore, you know, it's such a great podcast. And at the last moment, we had to fall out about cheesecake factory. It's an elite establishment. Okay. I okay. But so so a serious one and a joke and one so where the serious thing about this imagine that you go with that I go with my wife to a restaurant and the movie. So one way is to find a compromise that will go I want the cheesecake factory she wants a sushi place and we end up in Italian place.

And with the movie I want the movie with lots of blood people killing each other. She wants lots of romantic and we end up in the middle. That's a mistake. The right thing to do is to find what she cares about more and what I care about more. So it might be that I really care about the restaurant and she really cares about the movie. So compromising is not necessarily, you shouldn't compromise on each one of the items that you have, right?

So find what who cares more about what and then try to compromise this way. And the real answer is, you know, I'm with my wife for 34 years now, just do whatever she wants. That's the easiest thing to do. When you're talking about worldly wisdom, I think that that is absolutely perfect. Oory Neesey, ladies and gentlemen, if people want to check out the work that you do, why should they go? So my website has all the academic work that I have, and if people want, I'm always happy to get emails from readers that are interested in some other things and start a conversation.

Getting to the... Fantastic. Mixed signals will be linked in the show notes below. I very much appreciate it. It's super, super easy and accessible to read. I think I love the fact that you integrated flowcharts. You put drawings in there and illustrations and stuff. It's really, really good. And today is the day that the book launches. So congratulations.

I know that you've been working hard on it. Thank you. It was a lot of fun. Thank you, Frank.