Motley Fool Hidden Gems Investing - Motley Fool Money: 08.22.2014

Episode Date: August 21, 2014

On this week’s show, Motley Fool CEO Tom Gardner talks with Zillow CEO Spencer Rascoff about the big business of real estate. And we revisit our conversation with Think Like a Freak co-author Stephen Dubner. Learn more about your ad choices. Visit megaphone.fm/adchoices

Everybody needs money. That's why they call it money. From Fool Global Headquarters, this is Motley Fool Money. It's the Motley Fool Money Radio Show. I'm Chris Hill. This week, we'll revisit my conversation with Stephen Dubner, the co-creator of Freakonomics. But we kick things off with Zillow CEO Spencer Raskoff. Our own Tom Gardner sat down with Raskoff to talk about the growing online real estate industry and the business of Zillow. Okay, so compare and contrast Zillow and Trulia. Like, what does Trulia as a brand bring that Zillow didn't have?

Well, Trulia has a very different design, for starters. So it's a different color palette, but more importantly, it's more of a list-based view. Zillow is more of a map-based view. And you'd be surprised among real estate shoppers how passionate people are with a preference for one or the other. Trulia has also done a good job of going deeper on some local data at the property level. Crime data, for example, is something that Trulia has really advanced and done a better job of focusing on than Zillow. Zillow's point of differentiation has always been the fact that it's all homes, that your house is there and my house is there. Everyone's house is there, not just those that are currently on the market.

And so that, we think, allows Zillow to be relevant during more stages of the homeownership lifecycle, not just when you're in the throes of a transaction, but when you're a homeowner or a renter or just sort of vaguely interested in the market, you might also look at Zillow as a way to keep track of your most valuable investment in real estate. Do you think that there are more acquisitions like Trulia, or that's the big win in this zone? Well, this definitely won't be our last acquisition. Trulia will be number nine, and we continue to look at others even as we speak. it's it's certainly our largest by far and there's a lot of work to do firstly just to get this deal

to close which will take some time but then once it closes there's a lot of work to do to make sure that the benefits that we think will will come from the acquisition actually come but we'll continue to look at is there an acquisition that helps people come online if such a small percent of the market is online doing this and obviously the future is all pointing this direction is there something that accelerates that i mean not a particular company but just a category or zone well i mean we're riding the coattails of the mobile revolution so what's good for apple and google and microsoft is good for zillow because more and more people using smartphones and tablets clearly zillow as the mobile real estate leader is the beneficiary of that

so every time i read more data about how many more smartphone handsets are shipped how many more tablets are shipping that's all goodness zillow benefits from from that technology revolution okay don't say anything give any secrets away just look at me straight on and don't even answer this one when are you gonna buy house no comment I think you did ask me on air several times how late when I was gonna buy Trulia before it actually happened but houses a great company and you know I love their product when I walk into a Whole Foods I see a whole bunch of product from a bunch of different suppliers and then I see the 365 brand

Don't you think it's possible that down the line... See, when I walk into Target, I see Up and Away, which is their in-house brand. Okay, got it. I guess we're in a different price. Okay, that's fine. When I walk into the dollar store... Costco, you see Kirkland. I got it.

Okay, good. So when I see that, isn't it possible over the next 20 years that Zillow will have a brokerage brand? And isn't there a component in that inside Trulia? Don't they have like... It surely has a software technology that they sell to real estate agents. But the reason it's not possible is because buying cereal or diapers or an airline ticket is a commoditized purchase. And buying a home is not a commoditized purchase. And it's complicated and it requires sophistication and it's infrequent and it's emotional and it's expensive.

And for all those reasons, I think there will always be a practitioner in the transaction and there will always be real estate brokerages that those practitioners work for, either as an employee or a contractor. And Zillow has no designs on that space. We're a media business. We sell ads, not houses, and that won't change. So as our business, The Motley Fool, we're long-term. We're not interested in what's happening today.

Your earnings report, congratulations, that's great. That's just the tiniest little blip on the screen for us. We're the guys out in the marketplace saying 10 years from now, 20 years from now. So as we widen the lens on the market opportunity, are there adjacencies to what you're doing? Do you foresee circling 360 degree around the entire home? Interior designers, contractors, services into the home, potential retail partners like Container Store. When you buy a home, why not have it outfitted by the Container Store to be organized for you once you arrive? Are those all open on the table for you?

They are. They are. I think a little bit more in the here and now are things like rentals and mortgages. And here in New York, the StreetEasy property, all of those are businesses, especially rentals and StreetEasy, are things where we have a large audience and we haven't really monetized it yet. So in the case of rentals, we have 15 million people that use Zillow every month to shop for a rental. And we also have hot pads, and we also power My New Place, which is RealPage's rental site. And so charging for inclusion among those listings, charging multifamily property owners and building managers to access that audience is something that we're just starting to do.

So rentals is going to come on as a big part of our business over the next couple of years. Likewise, here in New York, we acquired Stratizia a year ago. We spent the first year focusing on the product and improving its mobile experience and growing its audience. And I think in 2015 and 2016, we'll focus quite a bit more on monetization of StreetEasy. Got it. Do you foresee using different currencies in the future acquisitions that you're making? Or do you see stock as the best alternative for the way your business is set up? Or is there something circumstantial now that you're looking at the valuation?

You're like, hey, we're pretty richly priced out here. Stock is a little bit more attractive to use than cash or debt. But in different scenarios, we might use those. We've used cash in most of the nine acquisitions. We've used cash or at least some component of cash. In the case of the Trulia acquisition, it was all stock, primarily because the Trulia board wanted Trulia shareholders to benefit from the combined company, from the future earnings potential of the combined company.

They wanted Trulia shareholders to own stock in the combined company and run the upside. So that's primarily. In addition, it was a large deal, which we wouldn't have had enough cash to use. for the whole deal, but we certainly could have used part of the deal we could have funded with cash. Can you talk a little domestic versus international and what your view is like looking out many years? So to date, we've been totally focused on the U.S. real estate opportunity because there's so much work to do. The opportunity here is so large and it's still so early and so fragmented. I still feel that way. And I feel like the next year or two, we're going to have a lot of

work to do to make sure that the benefits of the Trulia acquisition bear fruit but the Trulia acquisition does allow us to start thinking about international sooner rather than later and you know that certainly has is one of the many benefits of the announced transaction with Trulia is that international becomes more realistic. Now Zillow shareholders, Zillow employees as evidence on glass door zillow stakeholders love spencer raskoff so how old are you now 38 yeah you're late 30s and when you talk about a 10 20 year vision you presume you think about that as a role that you're playing in leadership of this company i hope so unless you know something i don't well no i mean it would only i think at this point it would come down

to to your i love your energy and enthusiasm for what's happening both are very high i love my job Would you say that Zillow, from a financial standpoint, is using something of an Amazon approach right now? Essentially, really bottom line earnings? The world's out there. The media is constantly saying it. Every article on you says you're not profitable without in any way evaluating the ad spend that you're putting in to grow your market. When you talk about Amazon strategy, there are lots of pieces of it. One is the Hachette book dispute, taking at least publicly a somewhat adversarial relationship with your partners.

That's not our strategy. But if by the Amazon playbook you mean sacrificing near-term profit in order to grow market share and kind of postpone profitability to a later date, yeah, I'll take that criticism. And I'm not even lobbying his criticism. That's his strategy. But I think that, in other words, you would foresee that, hey, we may not have income statement earnings for a long time in this business. That's not the measurement of our success.

It comes back to the size of the addressable market. And here is where Amazon certainly has it right. I mean, if Amazon, over the long term, wins the international retail e-commerce pie, then they will have more profits and they will know what to do with it. And they think that by investing today in things like big distribution centers and free shipping and other price subsidization to the consumer, they will earn more of the e-commerce pie. In the case of Zillow, the investments that we're making are in product development, hiring a ton of engineers to build great products, especially on mobile, and advertising.

So last year, we spent $35 million in advertising. This year, we were on track to spend $65 million. And based on the early results of 2014, we increased it to $75 million in advertising this year. Is it possible that you'll look back and say, we probably could have even upped our ad spend even more? We're looking at the balance sheet, looking at the success we're having. You're definitely breaking new ground by doing this, certainly in this market, and you're having success with it, and you're moving it up each time. Is there a chance that you're leaving some on the field?

Although, as I was talking off camera with some of your people, it's not like anyone else is stepping in and taking that portion of the field. Yeah, I mean, at this point, we're spending a lot on advertising, and it's hard to productionalize those extra expenses. I mean, if I came in tomorrow and said, you know, I think we should lean forward and spend $175 million in advertising, that probably wouldn't even be possible. So we're spending a lot on advertising.

I feel like it's the right amount relative to the return that we're able to measure in the near term and relative to a longer-term value that we ascribe to these new users that we acquire today and relative to the impact that it's having on our brand awareness. The backdrop of all this is that even though Zillow is a large real estate site, the largest, we feel like we still have a very long way to go in terms of making Zillow truly a household name, on par with companies like Netflix and Facebook and LinkedIn and Google, companies that have nearly 100% brand awareness in the U.S. We have a long way to go to get there.

And so that's what you're targeting is awareness. Like a lot of your ad spend is not performance-based transactional conversion. It's un-aided awareness. Let's get that. We do both. We do both based on channel. So online, for example, we do a lot of performance marketing where we buy clicks from search engines. We buy spend money buying display advertising.

We buy mobile and social media advertising. All of that's highly measurable and more performance-oriented. TV is also measurable but in a different way. It's harder to attribute certain user behaviors on a website to TV advertising, although you can try, and we do. But it also drives other metrics like brand awareness and brand affinity and brand recall. And you're tracking those, and you're seeing progress to justify that spend. That's awesome. Okay, I've got to close our brief time here together.

I've got some zingers. This is where you run for political office by dodging. You answer the question you want to rather than the one I asked. Would you be willing to buy and sell properties in your own portfolio exclusively based on the Zestimate price? It depends where, and I will tell you a very quick story, which is an investment property. I bid a particular price. They countered at another price. I bid at another price.

They countered at a very odd number down to the dollar, and I asked my agent, what's that number? He said, you dummy, that's the Zestimate. And I agreed to hit the bid. So, yes, I have in one case paid the Zestimate, but there are other examples where the Zestimate's not occurred. Awesome. Would you renegotiate, if you were working with a real estate broker, their 6% fee? Again, you can just go. I won't answer that.

Okay, good. You can dodge anyone you want to. What do you think is the single most irreplaceable thing about a real estate broker? The comfort that they provide in the transaction when a consumer is overwhelmed and scared about whether they're making a big financial error. Will acquisitions lead to the methodical increase of executive compensation at Zillow? No. Yeah, right. Hopefully the company's performance will justify it through ownership.

Every reward for shareholders and executives, but not acquisitions. Can you rank these three things in terms of the priority that you set on them in your daily work? Bottom line earnings, new agent acquisition, company culture. Company culture, new agent acquisition, bottom line earnings. Right on. Spencer Raskoff, Zillow, Trulia, Trillo. Zulu, yeah, congratulations on everything that's going on with Zulu, and we wish you the best of luck in the long term.

Thank you very much. Interviews with business leaders and CEOs is one of the many features in Motley Fool 1, our premier all-access service headed up by Motley Fool CEO Tom Gardner. To learn more about Motley Fool 1 and claim a bundle of free gifts from Tom in the process, just visit fool1.com. Up next, Stephen Dubner will help you think like a freak. This is Motley Fool Money. Welcome back to Motley Fool Money.

I'm Chris Hill. Joining me now from Freakonomics Studios in New York City is Stephen Dubner. He is the co-author of the best-selling Freakonomics books. He's the host of the Freakonomics radio podcast, which with 4 million downloads a month, makes it just a little bit more popular than Motley Fool Money. His latest book with co-author Stephen Levitt is Think Like a Freak. Mr. Dubner, thanks for being here. Hey, Chris. Thanks for having me.

Let's jump right into the book because this new book is all about helping us retrain our brains to think like a freak. I don't know if it is by mere coincidence that the release of this book comes just a few weeks before the start of the World Cup, but you kick things off in the book with an example from soccer. Can you walk us through thinking like a freak when it comes to taking a penalty kick? Yeah, sure. So this is, you know, one eensy weensy teeny part of any given soccer scenario or I've now been trained. My 13-year-old son is a fanatic, so he doesn't let me say the word soccer anymore. When I say soccer, he said, what's that? I have to say football. Then when we talk about the NFL, which we're big fans of, I have to say American football. So if I slip and say football, you'll know I'm actually talking about soccer. OK, but I'll try to say soccer.

So obviously soccer is an interesting sport for a lot of reasons. But we look at one very minor instance in which a thought process, rethinking your thought process can help, and that's the penalty kick. So as most people probably know, penalty kicks in soccer are not that common. scoring in soccer is pretty low, ergo, penalty kicks tend to be really important. And especially if you're in a shootout, which doesn't happen that often, but it can in the World Cup where there's a draw, and you need to have a series of penalty kicks to decide who's actually going to win and lose. So if you look at the data on all penalty kicks at the elite level, which we did for a couple leagues, you find that 75% of them are successful, which is pretty good. So we asked

the question, you know, if that's your baseline, if you want to think like a freak and you want to try to increase your odds a little bit, might there be a way toward thinking your way to greater success? So then we look at where penalty kicks tend to be aimed. So most kickers are right-footed, which makes the left corner of the goal their strong side target. For those kickers who are left-footed, obviously the right side of the goal is their strong side target. And so because of the nature of a penalty kick. It's you standing there just, I think, 12 yards from the mouth of the goal with the keeper ready to try to stop you, but he's going to fail three times out of four. So what he's got to do to try to stop you is guess which corner you're going in and jump in

that direction. Because if he waits until after you kick it to try to jump and stop it, he's too late. So usually what you see is a kicker will get up, start to kick, and as he starts to kick, The keeper will leap either left or right. So as it turns out that the keeper leaps to your strong side, the left corner, I think about 47 percent of the time, leaps to the other side about 41 percent of the time, and he almost never stays in the middle. So then we say, well, what would happen if you, rather than going for a corner, which seems to be a much smarter kick, actually kick it directly in the middle? What happens in cases where the kicker actually does that? And it turns out that even at the elite level, a penalty – a soccer player who takes a PK directly at the center right where the keeper is now standing but where he'll soon vacate. It turns out that that is about – you have about a seven percentage point better chance to succeed by kicking straight down the center.

So one, I like the metaphor of this because sometimes in life, you know, going straight up the middle is kind of the boldest move of all. You think, why don't people do it all the time? Well, it's because if you kick center and fail, you kind of look like an idiot. You know, kicking to a corner and being stopped is sort of a noble failure. Kicking center and being stopped would be a pathetic failure. And so we argue that this is one, again, really small example of how if you want to think like a freak, you'll think about what's my real incentive here. If my incentive is to win the match for my team, then I want to go center because the numbers say that's better. If my incentive is to protect my reputation personally, kind of the private incentive versus the public incentive, then I'll kick corner.

And so we use this as an example to show how much – how very much of our behavior, which we think is meant to be kind of good for everybody or pro-social or whatnot, that in fact, you know, we're pretty self-interested animals. Now, that's – I'm not saying that as a bad thing or a good thing. It's just a thing. It's the way that humans are. We respond to incentives. So if your idea is to solve problems in life and to help more people do better, and that's kind of the message of Think Like a Freak, how can the average person help solve a bunch of problems, whether for him or herself or for everybody else? You know, what are some ways to think a little bit more productively, more creatively, more rationally? And that's the story.

Coming up, what you need to know before buying that next bottle of wine. More with Stephen Dubner. Stay right here. This is Motley Fool Money. Welcome back to Motley Fool Money. Chris Hill talking with Stephen Dubner, co-author of Think Like a Freak. There are people making daily predictions about the market in general, about individual stocks. And you sort of touched on this, that the cost of coming out and saying, well, I don't know, is higher than the cost of being wrong. It's better, almost better,

to make a bold prediction. How should we weigh the daily predictions that people are making about the stock market? I think you should generally weigh predictions with a sledgehammer and just crush them. Because, you know, I mean, we write about this at some length in Think Like a Freak. And, you know, Nate Silver wrote a really nice book called The Signal and the Noise. I think that was the right title, which is largely about prediction. And if you look at the data on predictions in various realms, stock market especially, and we write about that to some degree in this book, geopolitics, sports, you will find that even the, quote, best predictors, meaning the most pundity of the pundits, are generally no better than chance at making

predictions. So again, if you take a step back and think a little bit like a freak, you think, well, wait a minute, are they dumb? Does that mean that the experts are really dumber than the average person? The answer to that is probably no. But what is true is that the incentives to make bold predictions are really strong. So if you think about it, let's say I – on this show right now, let's say, you know, Chris, I really see the Dow being at 30,000 by – and I'll give you some totally cockamamie number – 14 and a half months from now, just to make you think that I actually did some research, right? And let's say that happens to come true. I will be hailed as a wizard for a long time, and I will be talked about. I will be remunerated incredibly well.

The next hundred things I have to say, people will tend to believe and so on. If, however, the market doesn't get to 30,000, it will generally be forgotten. And that's what you see is our media and our kind of whole prediction infrastructure rewards and remembers the big bold predictions. So, you know, one of my favorite examples of this is Joe Willie Namath was famous for predicting that his underdog New York Jets were going to beat the Colts in the Super Bowl years and years and years ago. And guess what? They did. And now every year, Joe Namath gets to come on whichever network is broadcasting the Super Bowl, make his prediction for this year's Super Bowl as if he's an oracle. Right. Well, I hate to tell you this, but every year there's

somebody on the underdog team and there's always an underdog team who says, hey, you know what? we're going to win. And sometimes they do. And usually they don't. That's what being an underdog is kind of all about. We tend to remember the big, bold, brash predictions that happen to come true and forget the rest. So, you know, predicting the future is incredibly hard. That should not be a radical statement. That should be an obvious statement. But honestly, a lot of what we think of as thinking like a freak is trafficking in the obvious. It's kind of not being afraid to say, hey, you know what? I know all the smart money is here saying that we can predict X, Y, and Z really well. But if you think about it, if you think about what the future actually is, if you

think about the stock market and how much not only real market forces affect it, but how much psychology affects it, you'd think, wow, no wonder that's really hard to predict. You're listening to Motley Fool Money, talking with Stephen Dubner, co-author of the new Freakonomics book, Think Like a Freak. You mentioned, and you're right, when it comes to the daily stock market predictions, most of those are forgotten, most of those predictions. But here's one that is not forgotten. And it comes from Nobel Prize winning economist Paul Krugman, who in 1996 wrote, by 2005 or so, it will become clear that the internet's impact on the economy has been no greater than the fax machine. Now,

Now, he's a smart guy, Stephen, and that's about as wrong as you can possibly be. So I'm curious what your thoughts are on how someone that smart can be that wrong. Yeah. So first of all, yeah, Krugman's a really smart guy, really good economist. He doesn't really do much economics anymore. He's moved into the public, you know, punditry sphere where he's gotten much more involved and, you know, policy, often very partisan, which makes people who used to love him as an economist not like him so more. I would say that, honestly, I think it's a lot easier for smart people to make

predictions that turn out to be wrong than people who are not so smart. And the reason I say that is because when you're smart, which is a combination of, you know, a lot of things, education, knowledge acquisition otherwise, general brain power, CPU. There's a lot of factors in it. When you're smart, you have a lot of experience with being right, generally. And a lot of people telling you you've been right and marking your papers of having been right and rewarding you for being right. So it's kind of natural that you'd think, well, of course, I'm going to be right about the next thing I say. And so you see that that kind of assumption, which can bleed into arrogance could make it a lot easier for smart people to make predictions

that turn out to be not right. And in fact, a fellow named Philip Tetlock, who's a political scientist now at Penn, who's done great research on predictions and how generally poor they are over many, many years, very nice empirical work. When I asked him once, what would be a characteristic of someone who turns out to be a particularly poor predictor? And he said, oh, that's easy. Dogmatism, you know, being locked into your position, knowing how right you are, having a great amount of certainty and so on. So I think, you know, look, the lesson here is not to be dummies. The lesson is not to not learn. The lesson is to be humble about what we can and can't know, work like dogs to figure out what we don't know and appreciate that there are some things

that we will continue to not know because the future isn't as knowable as we'd like. Let's talk about wine for a moment. Absolutely. Nassim Taleb, bestselling author of the book The Black Swan, was on this show a while back. And one of the things I asked him about was wine because he's a connoisseur. He knows a lot more about it than I do. And he basically said to me, never pay more than $15 for a bottle of wine. Just don't ever do it.

And I thought that was just someone smarter about wine than me giving me his best advice. But in your book, Think Like a Freak, you guys actually have the data that backs up what Nassim Taleb said. We do. So honestly, I didn't know that he's a wine guy. I know him a little bit, and I love his brain. He has got a ginormous and very unusual brain, which I love to listen to. And I happen to, in this case, yes, run very parallel. So we've done – my co-author Steve Levitt did a little bit of an experiment and then we interviewed on Freakonomics Radio two guys, another one of whom did a little experiment. But one guy, Robin Goldstein his name is, who did a big experiment of blind wine tastings.

And this was really nicely done. I'm sure there are – I know there are wine people who argue with it because they feel they're ticked off at what he found. But the question he was basically out to ask was, do more expensive wines taste better? So if you think about that, you know, if you think about do more expensive X's, are more expensive X's generally better than less expensive ones? You know, we think we have a pretty good grip on what function price serves in modern society. Things that cost more are generally better than things that cost less. And we also understand that there's such a thing as style and trend and I might pay $1,000 for a purse by some fancy designer that, no, will not be 100 times better than a purse by a lesser-known designer. Personally, I don't know if I'd ever pay even $100 for a purse if I were the kind of person who uses purses.

But that said, we tend to think that price correlates pretty well with quality. In the case of wine, however, wine is one of those things where there's a lot of mysteries, a lot of intimidation, and there's a lot of subjectivity. And so what Robin Goldstein did is ran a ton of blind tastings with expensive wines, medium-priced wines, cheap wines, red, white, rosé, on and on, people who were experts, people who were novices, people who were wannabes. And at the end of the day, the long story short is that no, more expensive wines do not taste better. Therefore, if you want to reach a conclusion from this research, you probably couldn't do any better than what Nassim says, which is don't spend more than $15 because the chances that you're going to get a great bottle of wine just because it's expensive are pretty slim. And the chances that you might get a pretty good one for $7 are pretty good. And therefore, drink what you want, what you like, and don't be intimidated by the kind of unicorn quality of the correlation between price and quality. Coming up, we'll talk about the upside of quitting.

You're listening to Motley Fool Money. Because I can't cut loose without my juice. Welcome back to Motley Fool Money. Chris Hill talking with Stephen Dubner, co-author of the new Freakonomics book, Think Like a Freak. The legendary American football coach, Vince Lombardi, said that winners never quit, quitters never win. You guys write about the upside of quitting. It's a good thing Lombardi's not still around. He might have issue with that.

He'd beat the crap out of us. So we should say he didn't invent that phrase. That actually came from – I want to – I'm probably going to misquote. I think it came from a fellow named Nathaniel Rich, and I may have that wrong off the top of my head, a guy who was writing kind of advice books in the early part of the 20th century and kind of feeding off Andrew Carnegie's gospel about how to – how self-made people and so on. But yeah, so Lombardi was famous. A winner never quits. A quitter never wins. Churchill famous for, I believe the quote was, never, never, never, never, never, never give up.

And then he went on to say in matters large and small and so on. And you know what? If you're Winston Churchill and you are the prime minister of a great nation that is literally facing extinction at the hands of the German Nazi government, then I would say, yeah, not giving up is the way to go. But most of us, the stakes aren't so high. Most of us are in situations routinely, whether it's a job or a career or a startup or a project or a relationship or whatever it is, where we're afraid to quit because we've been told that quitting is bad and we are failures for doing so. And so we make the argument that if you want to think like a freak, you should see the upside of quitting? What is the upside of quitting? The biggest one is that every time you

do something, there's something else you can't do. It's known as opportunity cost. So for every dollar or hour or brain cell I spend on something, that's an hour or dollar or brain cell I can't spend on something else. And so the upside of quitting can be real. But I appreciate that's not necessarily the sensible or an easy thing for a lot of people to do. And you guys also provide the Freakonomics approach to helping people save money because, let's face it, saving money, not nearly as much fun as spending money. Not nearly, yeah. So I love this story. I should say a lot of these stories I'm telling you are based on – and I hope I'm making this clear – based on research and projects that other people have done.

It's not like we're running around solving the world's problems. We're not that good. If we're good at anything, it's finding people who are good at that and writing about them. But in the case of saving money, yeah. So this is a tradition in many countries, but there are some folks who have been trying to bring it to the U.S. And the generic name for this is called a prize-linked savings plan. And the idea is this. People love to gamble, love to play the lottery.

But if you look at the lottery and how much Americans love it, we spend, I want to say, $60 billion a year, although I may be wrong on that number. We love it. I think it's actually $20 billion. Sorry. I think it's $20 billion a year on lottery. But if you think about it as a game, it's a pretty cheap game. If, however, you think about it as an investment, it's a terrible investment because the expected value is about negative 40 percent because the lottery does not pay out very well. And yet a lot of people, particularly a lot of lower income people, literally view the lottery as their best chance ever to gain a large amount of money. And so this idea of a prize-linked savings is kind of marrying the excitement of a lottery

payout with the safety of a savings plan. So what happens is I deposit my money, let's say $1,000, into a special savings account. And instead of the bank paying me the 1% or whatever they're offering, which is pretty good these days. They'd offer me 0.75%. So what happens, that extra quarter of a percentage point of interest, it gets pooled along with the interest from all the other depositors. And once a month or once a week or whatever, that money is randomly divvied into a prize pool and distributed. And maybe I get to win $10,000 or $100,000 or maybe even more. So it's never going to pay off as much as the lottery because the lottery is paying off all those other suckers

principle. This is paying off all the other depositors' interest, a shard of it. But it is a creative, clever, fun way to think of a policy that will help people by having fun while doing what is for them the right thing. And that's really thinking like a freak is super, super concentrated on if you want to get people to do the thing that's good or right, make it easy, make it fun. Don't preach at them. Don't tell them how bad and stupid they are for not doing the right thing. You're listening to Motley Fool Money, talking with Stephen Dubner, co-author. I love how you say that. You just bring on this radio guy voice. I want to learn how to do that. What are you talking about? You do that every week.

Yeah, but I'm a total amateur with the radio. But you have that thing where you're talking, you're listening, then you come in like half an octave lower and you listen. It's such a good signal. It's like a good reset. I feel it's a palate cleanser. That's what I'm trying to do. I'm just trying to cleanse the palate of the ear before we move on to the final topic. What is the palate of the ear called? I don't know. I'm still trying to figure out your use of the word pundity. Yeah, I think I made that up. Sorry. I think you did. You and your co-author, Steve Levitt, you are both married. You both have kids. I am curious, as your kids are getting older and this is now your third book, what I know what your son thinks of your use of the word soccer. But what do your children, to the extent that they are thinking about what you and Steve do for a living and Freakonomics, I'm just curious.

I'm assuming as they are getting older, they are starting to pay attention and possibly even, unbeknownst to them, helping you in your research. Oh, honestly, they do. And it is my favorite thing. So Levitt's kids, I can't really speak so much for. I don't know. You know, I know them pretty well. And, you know, he talks about the kids quite a bit, but I don't really know the for instances. But I know like with my my kids, like they couldn't care less that, you know, I mean, they like that I do this thing I do.

And once in a while they come and they're guests on the podcast. So my son is going to be a guest on an upcoming World Cup episode we're doing. And my daughter almost made this episode. It was great, great, great tape. But the lawyers wouldn't let us use it for reasons that I better not get into. But she didn't do anything wrong. But I do love – I love how children have ideas that are so native to them and which don't seem at all amazing to them. They're just ideas and to us they seem so fresh and that's partly because we get conditioned out of thinking like kids.

You know, we get conditioned out of bringing up those crazy suggestions or asking those wild questions because, you know, we think that someone will think we're not so sophisticated or smart. And so it is just one of the great joys in life is when your kids will just have an idea that just, you know, it may work or it may not work, but it just shows that like the synapses are firing. And in fact, you know, we do kind of give that advice in this book is that we should all think like a child more. And it was more about the kind of, you know, practical structural end, which is what I was saying a minute ago. Kids ask questions that we may not. They make observations we don't. But as we went on and you begin to look at the brain science of it, you see that the human brain is never sharper, more perceptive, more cognitively adroit, faster than between the ages of, I guess, roughly, let's say, 13 to 24, let's say. So, you know, the bad news is that everybody on the other side of 24, we're all just in a state of slow, steady decline, which we kind of know.

We fake it. You know, we cover it up with experience and BS. But we're getting dimmer by the day. And the good news is that for the kids, not only are they really good at thinking, but we should exploit them more. So I think rather than looking at kids as kind of inchoate, sloppy, inattentive versions of ourselves, I think we should look at them as kind of better, wilder versions of ourselves. You know, as one child psychologist I interviewed recently put it to me, you know, we're kind of adults are kind of like the marketing and sales divisions of the human team. And the kids are the hardcore R&D. And you got to give them the room to do what they do.

And so I try to do that with my kids. I'm sure I fail a lot because once they go really off the rails, I get all, you know, parenty and say, oh, I don't think that's a very proper idea for you to have. But, you know, the older I get, the more I try to catch myself doing that stupid stuff in reverse field. Think Like a Freak is available everywhere. So pick up a copy because who knows, depending on how the book tour goes, Steve Leavitt might not be around much longer and it will really be a collector's item. Stephen Dubner, thank you so much for making the time. Chris, my pleasure. This was a lot of fun.

Thank you. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this week's Motley Fool Money. The show is mixed by Rick Engdahl. Our engineer is Steve Broido. Our producer is Matt Greer.

I'm Chris Hill. Thanks for listening. We'll see you next week.