You wouldn’t think you could win a Nobel Prize for showing that humans tend to make irrational decisions. But that’s what Richard Thaler has done. The founder of behavioral economics describes his unlikely route to success; his reputation for being lazy; and his efforts to fix the world — one nudge at a time.

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00:00:05Hey there Stephen Upnor holiday season is here which gives us the opportunity they need really to open up the archive play for you a few of the best episodes from our checkered past before we get to that if you still need to buy someone a gift I have
00:00:21a few suggestions first how about a couple tickets to an upcoming show of Freakonomics radio live were in New York on March eighth and ninth in San Francisco on may sixteenth and Los Angeles on may eighteenth tickets go to Freakonomics dot com click the live tab for you
00:00:41need a more tangible gift click the gifts tab where we've got some Freakonomics radio stuff for sale now today's show one of my very favorites and according to our top secret download data twenty yours to nearly two million listens already it's our conversation with Richard thaler who helped
00:00:58create the field we now know as behavioral economics which brought him among other things a Nobel Prize so let's begin right now so let's begin if you would say your name and title I'm Richard thaler I'm a professor at the booth school of business at the university of
00:01:29Chicago I see technically you're called the Charles are Walgreen distinguished service professor of behavioral sciences blah blah blah is that accurate the Walgreens yeah yeah %HESITATION yeah that's accurate but I didn't want to take up the whole podcasts understand with my title I was curious however I guess
00:01:47it's a in doubt chair something is that what that is yeah in fact it's %HESITATION it's a chair that has only been held by three people all of whom have won a certain price %HESITATION interesting %HESITATION more important allowing a note as it said the stood by the
00:02:06wall green family does the position come with the discount at Walgreens drug stores there is no discount that I've been informed that said you and I guess the other to holders of said chair %HESITATION you you are about a million plus dollars richer since you were last on
00:02:24the show because I understand that you went out and won a Nobel Prize and that they give you some money with that now that you mention that you know I won that prize in spite of your best efforts to prevent I so don't know I think this show
00:02:42owes me an apology like on the air this is like sore winner down we're seeing you win the Nobel Prize having been on our show previously talking about %HESITATION potentially winning the Nobel Prize and yet somehow your sour about our theoretically negative influence when in fact the outcome
00:03:04was positive what kind of logic is that will know but it's not the interview with me it was with their Stromberg where are you outed me I'm sure you guys can find the tape yeah we found the tape I'm actually not allowed to to talk so much about
00:03:25that what happens the episode is called how to win a Nobel Prize pair Stromberg is on the committee that awards the economics prize as you pointed out he couldn't say too much about the secret process but he said his committee was very reliant on the reports they commissioned
00:03:42on potential winners our goal is to keep on scanning the field of economic sciences broadly speaking and to keep this up to date we continuously send out these reports basically scanning the field %HESITATION so these are super helpful and and and they're sent to you know really told
00:03:58people in these fields who put a lot of work %HESITATION into these reports of this is probably our most important %HESITATION input innocence and those reports remain confidential for fifty years correct exactly so Richard thaler tells me that he was asked many years ago to write a report
00:04:17he was commissioned to write a report on on the work of Daniel Kahneman and Amos Tversky who you described me %HESITATION revealing I had written a long report on my friends Kahneman intermittently back in the nineteen eighties and and you you told pair I had told you that
00:04:37and and I think his words were %HESITATION he shouldn't have done that I'm not sure he was %HESITATION allowed to say that but fine so okay well that is a problem not mine this show owes me an apology for trying to block my slim chances and drive them
00:04:59to zero well let me ask you just to entertain the counter factual maybe it made that Nobel committee think %HESITATION that Fehler he's his own man he identifies what he thinks are important ideas and he feels it's important to disseminate them even at personal risk to himself and
00:05:18because you know %HESITATION well it would be real a line you could have used you know I was %HESITATION holding off on the lawsuit it was clear I hadn't won %HESITATION %HESITATION but %HESITATION I think you're safe now Steve so we we can we can move beyond and
00:05:42move beyond this we shall today on Freakonomics radio the unlikely rise of Nobel laureate Richard thaler supposed they did all the stats on sale or no one would have drafted him is big Hollywood moment also unlikely well here's Dr Richard thaler father behavioral economics and Selena Gomez explain
00:06:04the rather humble purview of behavioral economics if this sort of thing that your mother might say really you make a living doing that end if he really comics were bumper sticker forty say so we don't think people are dumb we think the world is hard from stature and
00:06:38debonair productions this is Freakonomics radio the podcast that explores the hidden side of everything here's your host Stephen Upnor years ago Richard thaler became enthralled with a new line of research about decision making by the psychologists Amos Tversky and Danny Kahneman Taylor went on to collaborate with them
00:07:02thereby helping to create the field now known as behavioral economics to mainstream economists thalers research was often in your tent he insisted that the elegant models they use to describe human economic activity were in fact grotesquely inelegant because they failed to factor in how real humans actually think
00:07:23and decide and behave over time however sailors work came to be tolerated if not outright accepted along the way he wrote a few books including miss behaving the making of behavioral economics and nudge improving decisions about health wealth and happiness today governments around the world a running so
00:07:44called nerd units hoping to harness the simple power failures ideas in the pursuit of better outcomes in health education personal finance in crime reduction many other institutions and firms are practicing what Fehler has been preaching often to quite substantial success if Kahneman and Tversky were the architects of
00:08:04this behavior revolution Richard thaler it was the man who turned their sketches into something we could actually in happen I have a lot of questions for you today and we also solicited listener and reader questions civil will toss them in as we go here's one from host say
00:08:26I'll be no son says he writes is an economics major who graduated from Notre Dame in two thousand sixteen so congratulations he wants to know how did you Richard daily use your behavior economics research to not run away with the one million plus prize money of the Nobel
00:08:43Prize and go buy a Ferrari and I should say that's assuming you didn't do that but I like because I'm curious how you use your behavior knowledge to us spend were not spend yet your money well you know like every Nobel winner I think is asked this question
00:08:59what are you going to do with the money and they asked me this at four forty five in the morning the routine is you get this call at four AM Chicago time and once they've convinced you this is not a prank they say okay get ready there's a
00:09:17press conference in forty five minutes and I hopped in the shower and then I'm on a press conference on the first question is what are you going to do with the money and all I could think of was well to an economist this is like a silly question
00:09:34an impossible question most honest perhaps well certainly to a non behavioral ecologist it's easily question because the answer would be it just goes into the pool with the other money it's no different than any others that one right the proceeds of that money half of which will end
00:09:49up in the U. S. treasury are sitting in some accounted van guard and you know if I go out for a fancy dinner there's no way for me to label that Nobel money though that might be a fun thing to do I've thought that may be the he
00:10:13dialectal the optimal way to spend the money would be to get a special credit card in the Nobel about I currently and nice and then when you know I decide to buy ridiculously expensive set of golf clubs hoping that that will turn me into a competent golfer then
00:10:37I just whip out the Nobel %HESITATION that that might be a good idea now I'm curious you do believe and in fact helped identify the notion that we think of as mental accounting which I know that the smart people tell you you shouldn't do that you shouldn't set
00:10:53aside money for vacation or for certain project because money is fungible it's one of the beauties of money and yet as you discovered many people do it and you also argued it's not such a bad idea or at least since so many people do it we should figure
00:11:10out how to how to deal with that but is there a kind of a cookie jar on the counter where you've got the half a million that you can dip into it yeah yeah yeah that would be a really good idea especially what's your address if I may
00:11:24actually if we announce it on the radio but %HESITATION wide wide you stick it in vanguard were just becomes like you know more dollars mixed in with the other well you know I haven't I've been busy Steve so yeah maybe %HESITATION you you're you're getting me to think
00:11:42about %HESITATION labeling it and of course maybe we should figure out what percentage maybe all should go to some because and %HESITATION and that would make me feel good too if there were a cause can you %HESITATION tell us just kind of the general outlines of the calls
00:12:01would be a kind of you know poverty alleviation %HESITATION you know I greatly admired doctors without borders and they are one of the causes that we support %HESITATION but I haven't really figured out what my personal because yeah now let me ask you this %HESITATION your wife fronts
00:12:21you've been married quite awhile I don't know how much credit you give her for %HESITATION being part of the the familial team that %HESITATION produced this Nobel Prize if he were to divide the prize how do you think about giving that up %HESITATION you know first you try
00:12:39to prevent me from winning the Nobel Prize now you try to break up my marriage Steve you know I used to think of you as a friend and %HESITATION so I would say %HESITATION that phones should get a hundred and twenty percent %HESITATION at the after tax money
00:12:59could answer and %HESITATION and you should get minus and I think that would be a great solution early in your academic career and I hope you don't mind me saying this %HESITATION didn't appear as if you were destined for huge distinction in your field %HESITATION I think that's
00:13:23fair yeah the undergraduate and graduate schools you you went to aren't quite elite %HESITATION your place in the economic firmament to was hardly guaranteed so what happened how did that guy get to hear you know I think I is so you're right I I I don't think I
00:13:45was well I certainly wasn't a great student and I don't think I was a great economist in the way economists are usually judged I'm it in the sense that I wasn't a great mathematician and %HESITATION my econometric CSE skills were not superb so suppose there was an economics
00:14:15combine like the NFL combine and %HESITATION the if they did all the stats on sailor no one would have drafted and so %HESITATION what I really ended up having to do to survive in this sounds like premeditated and it and of course it wasn't was to figure out
00:14:43of kind of way of doing economics that would be something I was good at and had I not done that %HESITATION I might well have not gotten tenure and gone off and you know maybe I would be competing with you and book writing you've summed up behavioral economics
00:15:06as a collection of quotes supposedly irrelevant factors that when it comes to help people actually live their lives are in fact not irrelevant can you give an example sure you know one of the one of the first things that I noticed back when I was a graduate student
00:15:27%HESITATION puzzling through the behavior I saw %HESITATION was that people don't follow the economist's advice to ignore sunk costs you know %HESITATION if you paid for some expensive rich dessert and after one bite you were already full and %HESITATION your waistline doesn't really need it but %HESITATION you
00:15:56remember how much you paid for it and so you think you need to eat it following all kinds of mothers bad advice to finish what's on your plate then you are failing to follow the economist advice of ignoring that money because you're eating it doesn't get the money
00:16:18back and so sunk costs are something that economists predict will have no affect on behaviour and there are a class of these supposedly a relevant factors in fact it's almost the only set of things about which economists have precise predictions so you know consider the supply and demand
00:16:48if the price goes up people will demand less well how much less %HESITATION sorry the theory doesn't specify that all it says is less so we're eyes here sunk cost will matter precisely zero so says the theory at least in reality says a great deal that matter a
00:17:09great deal right that's why would I call them supposedly a relevant factors you know another example is %HESITATION default options which box is checked on a form that again according to economic theory the cost of clicking the other box is infinite testable and yet we know that making
00:17:37enrollment in a retirement plan the default option increases enrollment rates to over ninety percent and so again the communists would predict confidently that that would have zero effect and it does a massive of in an earlier episode of this podcast called how to launch a behavior change revolution
00:18:02we heard Danny Kahneman who one is %HESITATION Nobel Prize in two thousand to describe the history of behavioral economics he pointed out something that distinguished Richard thaler for many other economists Richard he hates saying the next two things I'll say about him I mean one of them I
00:18:19think you would tolerate I think he's a genius that's what he said I think I think he's lazy I've made him famous you've been accused or really pres %HESITATION by your collaborator and mentor and friend Danny Kahneman as being extremely lazy and Furthermore he argues that laziness has
00:18:45in fact been a big part of your success what's what do you mean by that and should we all try to be a little bit Lazier well I you know I don't know whether I can recommend blazing %HESITATION and he is %HESITATION Danny insists in great earnestness that
00:19:04%HESITATION this was intended as a cop %HESITATION although he described it as my best feature and I object to that you know I I concede some laziness but that that being my best feature really Danny you know %HESITATION so I think what he means is that I'm well
00:19:30at least I'm going to interpret it this way that I have little patience for working on things that are into it at least to me both interesting and somewhat important and so %HESITATION compared to to many economists or or academics I haven't written super large number of papers
00:20:01and I don't follow the habit of writing twenty versions of the same paper %HESITATION or the same on the same topic because I get bored and %HESITATION the fourth paper on some topic is not nearly as interesting as the first one so %HESITATION Danny claims that it's my
00:20:24laziness that %HESITATION forces me to work on things that are important rather than unimportant and and that's his story anyway and the mechanism of that benefit is what because you're lazy you just don't want to waste time on things that aren't going to be potentially important and or
00:20:44interesting yeah yeah that's the idea so the I hate to inject our personal history in this but it does bring up a memory is I remember coming to visit you in in Chicago I think that was the first time we met and it was probably fifteen sixteen years
00:21:01ago and I had really fallen hard for this whole behavioral idea common first Kian Fehler and %HESITATION I like the economics a specially like the psychology and I came to you and I said Herr professor thaler I at young and ambitious journalists at The New York Times would
00:21:17be most interested in writing a book that incorporates your research and incorporate your own view of the world I'd love to include you in it as some kind of collaborator subject so on and if I recall correctly I'm just curious to know what your call recollection is you
00:21:33basically said sounds like a lot of work and I got other stuff going on so I'll buy you lunch but then scram that was my recollection I've always been disappointed that we never worked on a book together I'm curious yeah where it really isn't too bad for you
00:21:48because when you got done with me he said I'm going over to the economics department talked to this young guy Levitt and then I think you abandoned the idea of writing a book with me %HESITATION because sumo wrestlers are more important and %HESITATION mental accounting %HESITATION but my
00:22:11my recollection of this story %HESITATION was that I %HESITATION I thought maybe I had a book in me M. M. eventually ID obviously did in two more and maybe maybe more beyond the %HESITATION so you know this is %HESITATION the tallest **** theory but you know by economists
00:22:37standards I write well and so yeah I thought that maybe I should write a book and that it should probably be in my voice and %HESITATION it worked out well for all three of us I do agree ray %HESITATION you right well even not even for an economist
00:22:56you're you're a good writer but %HESITATION in economics it is especially stands out I read a piece of yours %HESITATION recently that I would recommend to everybody it's %HESITATION was published in I believe JP journal of political economy %HESITATION and it was an essay about the history of
00:23:11behavioral economics in this was so interesting to me you're right that it it nearly got fully under way at the university of Chicago about a hundred years ago but didn't catch on can you talk a little bit about that yeah so the but the background is the university
00:23:27of Chicago house journal the journal of political economy one of the top five journals in the world they were celebrating their hundred twenty fifth anniversary and they asked a bunch of Chicago faculty members to write short essays on their field and how it's been represented in the journal
00:23:48and for being a really comics are there were pretty slim pickings %HESITATION but there was this article written exactly a hundred years ago in nineteen eighteen by a guy called John Maurice Clark he was the son of a more famous guy John Bates Clark for a room %HESITATION
00:24:09and an award is named and he writes something like that the the economist can tried to invent his own psychology but it will be bad psychology and if they wanna stick to economics they should borrow their psychology from psychologists Clark you ray ends up leaving Chicago for Columbia
00:24:36and you write it seems fair to say that the subsequent editors of the JP did not take up his call to arms which was essentially to integrate psychology in economics why did it take so long do you think well you know I don't know really what was going
00:24:50on in nineteen eighteen but it it is the case that economics ones behavioral you know Adam Smith was a bay road columnist for sure and canes was a behavioral economist the single best chapter on behavioral finance was written by John Maynard Keynes in the general theory in which
00:25:17was written in nineteen thirty six so I think until World War two there wasn't something called but he really can I mix but economics %HESITATION was kind of behavioral at and then what happened is there was a mathematical revolution %HESITATION the took place right after World War two
00:25:41and it was led by people like Paul Samuelson and Kenneth arrow and it's Sam isn't in particular %HESITATION his it was a university of Chicago undergraduate and then %HESITATION went off to graduate school in his thesis was called foundations of economic analysis so all he did was redo
00:26:08all of economics properly and %HESITATION so starting with that economists got busy writing down Greek letters and formalizing economics and it turns out the easiest way to do that is to describe behavior as some kind of optimization problem because he if you've taken a high school calculus class
00:26:41then you'll know how to solve for the maximum %HESITATION you take the first to riveted in setting with his hero and you're done so it was the bounded rationality of economists ironically that led them to make everything rational it's interesting because a lot of the the hallmark anomalies
00:27:10I guess %HESITATION identified in recent decades by people like you and Kahneman Tversky we talk about loss aversion and mental accounting in the endowment affected all the cognitive bias sees recency bias in the status quo bias the availability buys you know it strikes me that none of them
00:27:30actually even seem remotely new I mean can't you find most of them in Shakespeare can't you find a man you know Roman and Greek and earlier philosophy don't you find in the Bible and other ancient texts so if what you're describing now is a kind of mid century
00:27:48modern renaissance of a sort of more more holistic thinking about economics %HESITATION that was there from Adam Smith onward until World War two %HESITATION when I guess the real question is is that really worth the Nobel Prize is to have rediscovered this rich rich rich tradition of people
00:28:08say they want to do one thing but often do another yeah I think it's the sort of thing that your mother might say really you make a living doing that you know much less the Nobel Prize so I'm I mean I guess it's fair to say that %HESITATION
00:28:29just pointing out that people aren't all that smart would not to get you an overall price you had to do something with it and %HESITATION there that turned out to be more work than I'd like to %HESITATION %HESITATION but yeah there was a long debate and by no
00:28:52means have I convinced everyone will you were once asked about the degree to which quote mainstream economists have embraced behavioral economics and you said I don't think I've changed anyone's mind in forty years you basically don't change minds given that I've turned to the strategy of corrupting the
00:29:10youth and indeed there are a lot of young economists %HESITATION it really interested behavioral stuff is that really true did you really change no mines and and if so we're even if not I guess what have you learned about the human capacity to change your mind I mean
00:29:25we don't want to just write off anyone over the age of twenty five do we as in capable of %HESITATION entertaining new thoughts well it's hard so I think Richard pose near the great judge had I think he's changed his mind a bit but I I think it
00:29:47is hard to change people's minds but economists in graduate school now they don't have a big some cost in the traditional methods there there there was an economist once early in my career who said to me you know if you're right what am I supposed to do what
00:30:11what I know how to do is solve optimization problems and I said you know I really I don't know I'm sure you'll think of something it's interesting though because if you look at the world at large political systems and health care institutions and so on is not exactly
00:30:30the same core problem that we're facing which is people come along with what could be really useful solutions but %HESITATION institutions being what they are the people with the power to change have often the least incentive to changes in that a huge issue and the lack of progress
00:30:49well I get what you're saying which is the farm at the top of the heap %HESITATION why do I need to change but on the other hand it it's often the the C. E. O. that is the most reluctant to change and that guy and he's unfortunately still
00:31:12usually a guy potentially has a lot to gain from from changing I mean if you think of companies that have come and gone %HESITATION like Kodak which invented the digital camera but they had a almost monopoly in film and %HESITATION didn't really think this digital thing would go
00:31:37anywhere and do you know there are lots of blockbuster video which came along and put tens of thousands of mom and pop video stores out of business only to be put out of business by Netflix coming up after the break wait a minute the Nobel Prize in economics
00:32:00isn't a quote real Nobel prizes it you know it's a pretty good substitute what the award ceremony feels like if you're the one getting the award I will say that I found the whole thing to be pretty emotional partly because of where I came from intellectually end what's
00:32:21thaler got to say about past and future economic meltdown you know we seem to learn one lesson and then are not able to extrapolated to the next one I don't know what the next bubble will be or whether we're already in one Freakonomics radio sponsored by rocket mortgage
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00:33:03rate drops it's what you'd expect from America's largest mortgage lender to get started go to rocket mortgage dot com slash freak reach shield approval only that within certain thirty your purchase transactions additional conditions or exclusions may apply based on quicken loans data in comparison to public data records
00:33:22equal housing lender licensed in all fifty states in M. L. S. consumer access dot org number thirty thirty in December of two thousand seventeen Richard thaler went stock home for a multitude of Nobel festivities at the Nobel Prize banquet one winner from each prize as to give it
00:33:46to produce zero the grand jury in store openness anti at a his target and all of that is six times please economist we often scoffed too loud for the band's mean that Richard thaler %HESITATION so my toes began by saying that my fellow winners said discovered things like
00:34:13gravitational waves and circadian rhythms and I discovered the existence of human and in the economy then there were other events including the Nobel lecture professor filer place the stage is yours thanks to all the members of the committee and thanks for that great introduction %HESITATION so I've I've
00:34:45been interested in gravitational waves for a long time %HESITATION no in an earlier episode about the Nobel Prize and how to win one %HESITATION we did speak with your colleague in our friend Steve Levitt and he said the way I know it's about season is that around Chicago
00:35:07a lot of people tend to get hair cuts in the few days leading up to the announcement of the prize until if I see all my colleagues with a really short %HESITATION well maintained here I know that the price must be somewhere right around the corner we have
00:35:20a a question here from a listener in Aaron wicks he writes to say your professor thaler did you get a hair cut in hopeful anticipation of receiving your Nobel memorial prize no I did and I will also say that I've heard of a columnist and other scientists who
00:35:42set their alarm and ended they practice sounding sleepy like three forty five %HESITATION so that they'll be alert which I was the opposite of when the phone rang and I'm in a good enough amateur psychologist to know that this is a horrible idea it would mean a really
00:36:07dreadful idea so let's suppose my chances of winning were one in twenty setting my alarm gives me a ninety five percent chance of being a wait to get the bad news where as you know my strategy had always been to %HESITATION sleep soundly and then you know here
00:36:33on NPR in the morning or now %HESITATION you know breaking news on your phone %HESITATION %HESITATION isn't that nice that is John to role was a fabulous fellow won the Nobel Prize and you can be happy about that so so no I didn't get a hair cut and
00:36:53%HESITATION and my alarm was not set in the very near aftermath of having been informed that you won the Nobel you said this and I'm like Bob Dylan I do plan to go to start because in you did go to stock home %HESITATION tell us about that experience
00:37:12well it's a week long marathon the laureates are there for eight days of con of constant interviews and dinners and talks in various things %HESITATION and there is a hierarchy in the stock comprises the peace prize is given by Norway in in is done in Oslo and the
00:37:39hierarchy is physics chemistry medicine literature economics and so my line is that among sciences the Swedes consider economics just after literature and that's because of course the economics prize as we know and as I'm sure some of your listeners will point out call in and inform you idiots
00:38:09it's not a real Nobel Prize liver before you go on with it so let's just get this straight the Nobel Prize in economics is not what they call an original Nobel was established in nineteen sixty eight insufficiently called the central bank of Sweden prize in economic sciences in
00:38:26memory of Alfred Nobel but as you point out a small but vocal contingent always extra mind us of this fact whenever the economic prize is referred to as a Nobel Prize what do you say to that small vocal contingent this as well it's not really a Nobel Prize
00:38:41you know it's a pretty good substance and and I will say the Nobel foundation makes exactly no distinction so %HESITATION you're all treated the same way but because of this this order I spent a lot of time standing in lines and sitting next to Kazushi Goro the literature
00:39:05winner who was charming and wonderful but I will say that I found the whole thing to be pretty emotional partly because so you know of where I came from intellectually so %HESITATION you know as as we were saying I am not someone that you would have predicted would
00:39:32be a Nobel Prize winner and when that finally happened that was %HESITATION yeah it was a an emotional experience are either of your parents still alive no era they they're very slow %HESITATION the Nobel committee you're talking the yeah the Nobel committee %HESITATION you know they're working their
00:39:56way through the nineteen eighties so that means that %HESITATION are typically in their late sixties and early seventies %HESITATION when they need it win the Nobel Prize which that means there are very few parents that get to see their children when who do you think was most proud
00:40:18of you Danny Kahneman in well he was happiest he kept telling me come on within this before I die and %HESITATION he's eighty four so I you know he's a friend so I had to do it you know the the bribes were finally well worth it so let's
00:40:43move on to talking about how he really can omics has been applied %HESITATION by various people in various intensities in many different places around the world so you've said there are roughly seventy five what are called night June it's named after you were and %HESITATION Cassin's dean's book
00:41:00knowledge about using a really comics in policy essentially does not the latest numbers two hundred goodness gracious that's that's a a tripling in what span of time just a year to a yeah I don't know and I'm I'm not the one keeping track but someone at the %HESITATION
00:41:17we see the %HESITATION as a map with two hundred M. though some of these are it %HESITATION in municipal yeah like that yeah yeah there's one in Chicago for example all right but what would you say today has been the greatest %HESITATION kind of specific contribution of behavioral
00:41:37economics in other words the greatest %HESITATION instance in which the under the research and the ideas have been applied to policy and successful measures I guess you'd have to say retirement savings plans because for one K. plans and their ilk %HESITATION defined contribution plans I have really been
00:42:01transformed to because of Babel economics research on two dimensions one is %HESITATION changing the default so what's called automatic enrollment so you're in in less you actively take some step to opt out that is gotten enrollment rates to be here %HESITATION north of ninety percent and then %HESITATION
00:42:29what my colleague Shlomo Ben artsy and I called save more tomorrow which is a plan where you ask people if they want to increase their saving rates every year %HESITATION until they hit some reasonable level %HESITATION the generic version of that is now called automatic escalation so that
00:42:53means you get a raise and you contribute a higher percentage but because you're getting a raise you still are bringing home a little bit more money and you don't feel the pain is that the idea right and and you commit yourself to this off in the future because
00:43:09we all have more self control next month when when we're gonna start going to the gym every morning at six you've written that the I'll quote you to yourself the sub field of economics in which the behavioral approaches had the greatest impact is finance I'm I'd like you
00:43:29to talk about that for a minute you know one thing I've never understood about behavioral finance is you know once the notion of behavioral anomalies is widely accepted and they seem to be now in finance and investing aren't they just subsequently priced out of the market well the
00:43:49that's an interesting question %HESITATION and the answer is to some extent yes but I've been involved with the money management firm called fuller and Taylor that it's been around for twenty five years or so and the things we do don't seem to work in a less well than
00:44:12they did twenty years ago I know fuller and Taylor describes itself as having pioneered the application of behavioral finance to investment management your exact words in what ways just describe in what ways is the firm's strategy actually baby girl so we're explicitly thinking about what are a class
00:44:40of situations in which people are likely to make a mistake so it's like you know you going to some restaurant and somebody's leading you to your table and there's that one step down and they say you watch your step and they say watch your step because if they
00:45:05don't you know three people at night will fall down and they'll have a lawsuit so you know you can be a spectator watching that and say that god is about to make a mistake now you would have made that mistake to %HESITATION so what what we tried to
00:45:28do is find those steps that are not quite in sight that will throw a majority of market participants off let me ask you a a related question this is from home Ryan who writes that he's an accountant in Dublin Ireland related to what we've been speaking about and
00:45:52with with very high stakes I should say so here's is questioned given that you could apply behavioral principles to help understand what led to the two thousand seven crash do you see any similarities or indeed differences and what's going on in the world today and before we we
00:46:10let you answer the question we should say that you Richard thaler would seem particularly well suited to chance this difficult question because in the film the big short Selena Gomez helps you explain synthetic CDOs collateralized debt obligations well is doctor Richard thaler father behavioral economics and Selena Gomez
00:46:30explain okay so here's a synthetic CDO work let's say I bet ten million on the Black Jack ten million because the sand is meant to represent the single mortgage bond so first of all %HESITATION which you pretty good teacher you you understood CDOs better after that %HESITATION I
00:46:50don't mean that yeah let me just say that %HESITATION Selena unlike me it was very good at memorizing lines and I think it's fair to say that I mean she was a very charming young women and I'm deeply grateful to her because being in that movie is the
00:47:12only thing that I've done that as impressed my granddaughters who are big Selena Gomez fans but I think it's fair to say Selena knew nothing about collateralized debt obligations nor Black Jack so she's a great actress then because the impression is that she knows quite a bit about
00:47:33both yeah issues a much better actor than me %HESITATION SO of possibly funny story is that in the script the first hand she's dealt a twenty one which of course in Black Jack means you win and she was dealt twenty one and didn't react and so I had
00:47:53to take over as Black Jack coach and director both of which are uncredited in the movie I my dad and say silly that when you get dealt twenty one that means you win and there is a a shot in there where we were high fiving and that's because
00:48:14she had learned in sub second takes that when she gets out to anyone %HESITATION that she's supposed to be happy okay so let's get back to %HESITATION comb Ryan's question about the two thousand seven melt down %HESITATION and now %HESITATION similarities differences %HESITATION what do you see well
00:48:33you know I think I don't think we will repeat that mistake but that crisis followed if quickly after the tech crash in two thousand right it we moved and started like in two thousand six so if we're barely over the tech bubble and we get this real estate
00:49:02bubble and you know we seem to learn one lesson and then they are not able to extrapolated to the next one I don't know what the next bubble will be or whether we're already in one I do think that we have done some things to make banks less
00:49:25fragile especially big ones %HESITATION but you know there are things like bit Klein around %HESITATION which you're not a fan we should saying %HESITATION of which I'm not a fan you're not not a fan of blockchain itself correct but as a currency not a fan of that is
00:49:44that about right correct I mean I don't know why anyone engaged in strictly legal activities would want to use a currency that is so volatile it's just the opposite you know suppose you suppose you sell another book and the publisher offers you an advance and bit Klein %HESITATION
00:50:08unless you were trying to cheat the IRS you would say no tell tell me what it's going to be in dollars because I could end up getting half of what what what what you're offering me in that that's not an attractive feature so have you shorted bit going
00:50:25no no because because you know Warren Buffett says a lot of smart things and one thing sees says is don't make investments and things you don't understand and I have no clue as I mean I don't think that the intrinsic value of bitcoin is worth thousands of dollars
00:50:49%HESITATION but I also think it's entirely possible that it will go up rather than down the so %HESITATION stay away is the best advice some people including some economists argue that behavioral economics is really just another way to suggest that individuals can't be trusted to make good decisions
00:51:11and so institutions particularly the state should take more control %HESITATION indeed your your co author on the book knowledge of legal scholar Cass Sunstein for several years ran a a White House unit called the office of information and regulatory affairs which sounds about as Orwellian as you can
00:51:30%HESITATION there are noted units in dozens of federal governments around the world you've described your work as libertarian paternalism and Furthermore argued that that phrase is not an oxymoron why shouldn't we dismiss your work as a kind of new softer form of state ism well I think first
00:51:54of all when we use this phrase libertarian paternalism %HESITATION we're using libertarian as an adjective and the so we're we're trying to say we're gonna design policies that don't force anyone to do anything so the claim that we're trying to tell people what to do or force them
00:52:20to do things is just completely wrong we also not trying to tell them to do what we think is smart we're trying to help people do what they want to do so I like to use G. P. S. as in an analogy of what we're trying to do
00:52:41so I have a terrible sense of direction and %HESITATION you know Google maps is a lifesaver for me now if I want to go visit you I can plug in your address and the you know suppose I'm walking across the park and I see %HESITATION who lose their
00:53:05careers a softball game over there I think I'll go watch that for awhile Google maps doesn't scold me %HESITATION you know it will %HESITATION re computer new route if I've gone a bit out of my way %HESITATION doesn't suggest to dresses to me it just suggests the route
00:53:27and if there's a traffic jam it suggests maybe you should alter your route so we don't think people are dumb we think the world is hard I mean figuring out how much to save for retirement is a really hard cognitive problem that very few economists have solved for
00:53:49themselves and it's not only cognitively hard it involves delay of gratification which people find hard so it's just like navigating in a in a strange city is hard so why not try to help when I first was working with the U. K. Babel inside team the first no
00:54:13June it the phrase I kept saying in every meeting with some minister was if you want to get people to do something make it easy remove the barriers that's what we're about let me go back to you and the Nobel so what would you say have been %HESITATION
00:54:34the biggest changes in your life since winning the prize both of of the observable sore and unobservable well I mean I think I spend more time talking to people like you of my in box my email is completely out of control and there are some downsides you know
00:54:59the university all of a sudden has a lot of things that they would like you to do fundraisers %HESITATION of of that ilk so I was a pretty happy guy you you you know you've known me for years and we saw those other recently that I seem to
00:55:19monster Billy happier you looked a little taller better looking but otherwise I think that was my perception I think you were yeah yeah that's that was no that was just your jealous but %HESITATION but look I absolutely don't want to sound like a sore winner a sore winner
00:55:36or an ungrateful winner I'm saying that most of the people who win were already pretty successful people with pretty good lives and there you know there's what psychologists call a feeling affect so I had a pretty happy life %HESITATION as you know I've been nice wife and %HESITATION
00:55:59I have kids I love and you know that yes this may be happy and it was very gratifying but if you have this image that you're gonna be on cloud nine and you know then there is life %HESITATION it you know you still get flat tires even a
00:56:21noble prize use you know you still have leaks %HESITATION at home that nobody seems to be able to fix so yeah they need to fix that and say that if you get a Nobel Prize nothing can leak in your house %HESITATION I'll I'll end with where should have
00:56:43started %HESITATION congratulations %HESITATION kissed highway and I know everybody who listens to you is %HESITATION happy for you proud of you and and most of all %HESITATION we're pleased %HESITATION in a selfish way to keep learning from you because we learned a lot and %HESITATION I thank you
00:57:00especially for that and I look forward to the next time we speak %HESITATION so do I coming up next week on Freakonomics radio do your family holiday gatherings train into this he jumped on the sofa and he pointed at me and with each point and each balance of
00:57:20him %HESITATION so if he says all I wouldn't you lose all I wouldn't you lose if that sounds like your family you really need to hear our next episode is called how to win games people that's next time on Freakonomics radio Freakonomics radio is produced by stature and
00:57:41debonair productions this episode was produced by Greg results ski our staff also includes Alison Cratloe Greg rip in how the military Huggins and second skin our theme song is Mister fortune but hitchhiker's all the other music was composed by the we scare you can subscribe to Freakonomics radio
00:57:57on apple podcast store every get your podcast entire archive is available on stitcher at war at Freakonomics dot com or we also publish transcripts and show notes and much more if you would like to hear the entire archive ad free plus lots of bonus go to state your
00:58:13premium dot com slash Freakonomics we can also be found on Twitter Facebook and linked in or via email at radio at Freakonomics dot com Freakonomics radio also plays on many NPR stations check your local station for details as always thanks for listening stitcher I mean it's not like
00:58:47%HESITATION a brutal murder during the course of an armed robbery was a routine daily event in this part of the state right this is something that happened very very infrequently it %HESITATION Georgia a town of roughly five thousand people not far from the Florida state line in nineteen
00:59:02ninety eight there was a shocking murder there police investigators quickly put a man in jail for the crime he swore he was in a sense basically there was going to get somebody black kid in a late but then some eighteen months later a second brutal murder and just
00:59:19months after that two more you see some savagery like that it's it's like you know who is somebody that does as a straight cycle path and the chance of two different people doing the same kinds of things I mean it just seems kind of crazy right I'm Jordan
00:59:39Smith and I'm only in a cigarette were porters for the intercept together we have more than thirty years experience investigating wrongful convictions we know how they happen and help putting the wrong person in prison for murder needs a killer goes free murder bill Georgia right now on apple
00:59:58podcast or wherever you listen

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