Kurt Nelson 0:00 Kurt, welcome to behavioral grooves. I'm Kurt Nelson. In this episode, we're diving into one of behavioral economics most head scratching problems. Why smart people like Tim keep making predictably bad decisions? Tim Houlihan 0:20 And I'm Tim Houlihan and the guy that continuously makes predictably bad decisions. But I have to admit, that is the question that we've often asked ourselves. Certainly I've asked myself about smart people that we both know, Kurt Nelson 0:34 you and me both Tim and I think in the first two minutes of our interview today, it proves that we are not immune to making all sorts of inconsistent, irrational, not in our best self interest choices. Wouldn't you agree? It's not just you, Tim, it's me too. Tim Houlihan 0:53 No, I think it's more you, though, actually, I'm operating at peak rationality today. Kurt Nelson 1:02 Yeah, you are, yeah. Tim Houlihan 1:05 Okay, just don't ask the question if I'm willing to buy a bottle of beer at an expensive resort that is two times more expensive than the same bottle of beer at some kind of rundown convenience store. Just, oh, okay, Kurt Nelson 1:19 I won't ask that because I already know the answer, because you make bad choices, there you go. Tim Houlihan 1:25 I do. I do. All right. But the good news is this, we're we have a guest today who studies rationality and has some really great insights into what we can do about this exactly. Kurt Nelson 1:36 And we are thrilled to welcome back our friend, researcher and professor and co author of The Winner's Curse, Alex emus, Alex joined forces with Nobel laureate Richard Thaler to revisit the original anomalies columns and book that Thaler wrote from the late 80s and 90s. And these columns became the classic studies that helped define behavioral economics. And so in 2023 the authors asked, do they still hold up? I know. Spoiler alert, they do. Oh yeah, that's a good thank you. Tim, now nobody has to listen to the rest of the show. All right, here we go. So not only do they hold up years later and they just, they don't just hold up in the lab, these biases still show up in boardrooms, financial markets, sports drafts, social media behavior and yes, even when bidding on a jar of coins. Tim Houlihan 2:28 How crazy is that? Now, one thing that we love about Alex's work is that he helps us see that these aren't just cute little lab quirks. These anomalies have real consequences. These anomalies in rational behavior influence how we buy, how we sell, how we cooperate, how we get trapped by complexity. And even more importantly, Alex tackles a really big question, what should economics look like now that we know that the standard models don't match how humans actually behave? Kurt Nelson 2:59 Yeah, so buckle up everybody, because today we're going to go from auctions to loss aversion to oil fields to online shopping carts and the economic theory to psychology of attention bias and decision making all over the board. Tim Houlihan 3:14 Grab your favorite cursed beverage. Settled into your groove and enjoy our conversation with Alex emus. Tim Houlihan 3:28 Alex emus, welcome back to behavioral grooves. Unknown Speaker 3:32 I'm happy to be here again. Thanks. Tim Houlihan 3:33 Thanks so much. We're going to start with speed round, as we normally do so first, first speed round question, would you rather produce the next great punk band sensation or play with them, Kurt Nelson 3:47 play you had a little bit of like that pause there that I Speaker 1 3:55 was looking at a picture of myself. I was looking at the video and seeing like, how much gray do I have no I can still do it. Kurt Nelson 4:03 I can still do Tim Houlihan 4:04 it. Yeah, still do it. Definitely. Okay, Kurt Nelson 4:06 good. All right. Well, this leads right into the next question that we have from a speed round, would you rather live in a 35 year old body with a 95 year old mind, or vice versa? Live in a 95 year old body with a 35 year old mind, oh, my God. You know, normally these aren't like stump the guest kind of questions. I apologize. Speaker 1 4:34 95 year old body with the 35 year old mind, okay. Kurt Nelson 4:39 Well, and today, you know? Well, you know, we have good bodies. Speaker 1 4:43 Robot, right? Yeah, robot arms, whatever. I mean, Kurt Nelson 4:49 it's like Steve Austin and $6 million Man, everything's just replaced. And yeah, you There you go. So, all right, Tim Houlihan 4:56 all right. Third Speed Round question, true or false. And it kind of. Who bought a particular wine for $25 many years ago that is now worth $200 values that bottle more when deciding to drink it than when deciding to buy another of the same bottle at the current price. False, false, yeah, great. Okay, we're going to talk about that, and we'll unpack that for listeners. We'll unpack that a little bit because it's, it's a lot, but it's, it's sort of a failure thing. Kurt Nelson 5:30 Yeah, I'm a stand in. I'll do my best. It's, oh my gosh. You are not a stand in. Come on. Here we go. The last of our so called Speed Round questions here, true or false, people will pay more for a fancy resort beer than a beer from a rundown grocery store, even if the beer is identical. True. Yeah, okay. And I love this study, because this is a study of, I mean, it goes back and we'll get into this, but this is, you know, you bring this up in the book, and actually that the study is like that people are on a beach, and they're not even getting to go to the rundown grocery store or the fancy resort, so they don't even get the benefit of it, but the beer itself, they'll pay more. And I think it kind of showcases what this book is about. So we're talking with you about the book you co authored with Richard Thaler, the winners curse, excuse me. And it's an update, update of an earlier book from 1989 is that right? It was 92 okay, yeah, and it shares the same title, but you're updating some of the information, making sure that it really works. But can you talk a little bit about like, just what you thought like in writing this and working with Richard and kind of taking that example and how that impacted the larger kind of role of economics is a big question, and I'm sorry it's not very clear and hard to unpack. Speaker 1 7:07 I think there's two. There's there's two big questions here. The first one is kind of like, how we kind of got started on working on this, and why it became the book that it, that it became so the first part is Richard. When I first started the University of Chicago, maybe like, eight or nine months in, Richard said, Look, you know, my publisher wants me to update this book from 92 because it's, it's not in press anymore. I want to do something a little bit bigger. And we kind of started talking about what that would look like, rather than, like, you know, sticking out a new intro saying, like, Hey, this is a book. It's still a book. You should buy it. You should let's do something a bit bit more ambitious, and like, I'd like for you to be involved. And that kind of evolved into going from let's do something a little bit more ambitious to spending kind of three years of actively writing it. So it's actually two thirds of the book is brand new. So that's why we don't in the book. We try not to call it like a new edition or something like that, because the book is basically new. We the kind of overall structure that we agreed on is we want this book to be a look back at behavioral economics in the sense that, like all of the original columns from the book on, each of the behavioral economic anomalies are still there. We redid. We rewrote some of them to make the language clear. Did a bit of updating, but basically, our self imposed rule was we were not allowed to include any research that was published after the anomalies column came out. On top of that, what we said is, and that's the key part of the book, is the behavioral economics then and now. And the now part is, we wanted it to be a sort of, let's say a scientist who came up with the theory wakes up, or, you know, is interviewed 34 years later and said, What is the state of your theory? What is the state of your field? And that's the book. That's the now. Part is to say, where are we now on each of these sorts of things? Number one, do they replicate in the first place? So one obvious question is, you know, these were anomalies? Anomalies are surprising. Yes, you should update on them, but like you should also make sure that they're true, because surprising things are often not true as we as we know. And so the first thing to do was we just replicated all of them. So part of the material that comes with the book is a is a very detailed supplementary appendix that's online where not only do you have our own replications of each of the studies in the original book, but also instructions on basically saying, like, don't trust us. You shouldn't why? We're just two random guys, not super random. But I. Ah, yeah, Kurt Nelson 10:02 just University of Chicago, Speaker 1 10:09 one random guy, and you should go out there and replicate them yourself. And we give you the instructions. We tell you exactly how to do this. We tell you how to analyze your own data. Like, don't trust us. Do it yourself. So one of the kind of goals of this, of this book, is like, as a pedagogical tool, like, if you're teaching a class of behavioral economics, use the book. We have slides, we have teaching notes, teach every chapter, run the experiments. And so that was kind of the goal is to like, let's, let's replicate the original anomalies. The second goal is to say, where are we now on the research itself, like there has been 30 years of research on most of these topics, and these are the updates. So basically half the chapter, half of each chapter, maybe a bit more than each chapter, is where we were in, like the 80s and 90s. The other part is, where are we now? And the big conclusion of that is, one, everything replicates. Everything replicates. But two, Tim Houlihan 11:09 everything within the book, all of these replicate. Speaker 1 11:12 Yeah, yes, Africa. That should not come as a surprise, because, you know, these has been, these anomalies. Columns came from people kind of just like running experiments in their classroom over and over again and seeing the same results over and over again, so we see it again. The thing that should be more surprising and interesting is that all of those anomalies, for the most part, except for a few, were done with college students with low stakes, sometimes hypothetical, like, Does this matter for economics? And where behavioral economics has gone from those original columns is, it's gone into the real world. It's gone into the field. So in those updates, we have really focused on, like, look, we showed loss aversion among students, and maybe we could talk about loss aversion later in the episode. If people don't, don't, don't, don't know what that is. But hey, guess what? Professional traders also display this thing. Professional Golf people, I don't I've never played golf. Golf people display loss aversion all ever you know this is just like a phenomenon that we as economists should care about, because the market actors are displaying these phenomena, and so that's kind of like this. The the last part of the book is like showing that this stuff matters, not just for like, for psychology, necessarily about like human cognition, but it also matters for markets, for for the second part of behavioral economics. Tim Houlihan 12:36 Okay, so for people who didn't read the original anomalies paper, or the original book, or the 2012 reprint, or the blah, blah, blah, what is the Winner's Curse? Alex, what? What is? What is the Winner's Curse? That the people should be aware of? Speaker 1 12:53 The Winner's Curse is the phenomenon that in a competitive auction. So let's say I go to a bar and I want to be really annoying and also make some money. I'll bring a jar of coins and say, Hey, why don't you bid on this jar of coins? And people can bid on the people can bid on this jar, and then the winner gets the jar of coins. Really simple, the highest bid, what you'll see is that most bids are less than what's in the jar of coins, so that people are risk averse all of all of the regular stuff, but the winner, systematically will pay more for the jar of coins than the amount of money in that coin. In the jar of coins, and that's the Winner's Curse, is that by winning, you actually lose, yeah, so that's the gist of it, yeah, Tim Houlihan 13:37 because you're paying more for something that has a very specific economic value, Speaker 1 13:43 exactly which is the money that's in the in the jar. And the the cool thing about the Winner's Curse is that, unlike the other examples in the book, in the original columns, it did not start in the lab. The Winner's Curse was actually documented by oil executives. What they found is that, and they they printed it in these, like oil trade journals by saying, like, look, it seems like every time we're kind of bidding on these oil wells, we do a lot of research. Our engineers tell us this is how much oil is in this. In these wells, they look and if they end up winning the bid, there's less oil in the well. Unknown Speaker 14:25 So what weird? Why is that happening? Speaker 1 14:30 And so the behavioral economist came along and said, hey, it's not just about oil. It's just a very robust phenomenon that when you're bidding on something that has the same value for everybody else, the winner of that auction will end up losing money. Tim Houlihan 14:45 So these are really rational people, the these people who are bidding on something as big and as expensive and as speculative as as the oil richness in a particular area of land. Is this true? For other hyper rational people, MBAs. Wall Street. Wall Street, you know. I mean, do we? Speaker 1 15:05 Yeah, you could replicate this with MBAs. You see, Richard has written papers about sports teams like bidding on players that the people who, like, you know, get the first round pick. There's a certain price for first round pick that you can calculate, and they overbid tremendously. And these are, you know, professional sports teams that are running on billions of dollars, and they're doing a lot of research. It's not like, you know, they're not doing research, but you know, it's, it's a, it's, it's the psychology behind it is super basic, but yet very, very difficult to account for, Unknown Speaker 15:42 talk about that. Speaker 1 15:43 So let's say I'm looking at that jar of coins, or looking at a quarterback pick or whatever, everybody is doing the same research, and that that jar of coins is worth exactly the same to me as it is to you. That's kind of how money works, right? I look at it, I kind of do some research, I estimate it. And because nobody knows for sure what it's worth, each of us is going to get a different estimate. And let's imagine that this estimate is completely unbiased. We're just getting errors around the actual amount. So let's say there's $15 in the jar of coins. Tim, you're going to say it's $12 I'm going to say it's $18 right? Which one of us is going to win? I'm going to bid higher, because I think there's $18 maybe I won't say 18, I'll say 17, I'll say 16, but guess I'm shading my bid down like that's what I'm supposed to do, but because I have a higher estimate than you, my bid is going to end up higher than yours, so I'm going to end up winning, but my bid, even though I'm shading down, is still higher than the amount of money in the coin in the jar. So everybody's kind of like bidding rationally, but they're not taking into account a key thing that they're bidding against other humans. And in order to bid fully rationally, not only are you supposed to do the estimate shade down, but also take into account that everybody else is Tim Houlihan 17:07 doing the same thing, right? And we don't. We don't take that. We don't, yeah, that's, that's, that's like the big error, or part of the, one of the big errors in this whole thing. Kurt Nelson 17:21 Hey, grooves, quick break from the conversation to talk about something we don't bring up enough on the show. Tim Houlihan 17:26 Yeah, that's right. When we're not behind the mic, we're working with organizations to apply behavioral science in ways that actually move the needle for leaders, teams and whole cultures. Kurt Nelson 17:38 So whether it's designing smarter incentives, boosting engagement, setting goals that actually stick, or helping teams navigate change. We bring real science to real workplace challenges, and Tim Houlihan 17:50 we don't just talk theory. Our approach blends research backed insights with hands on strategies that drive results. Now we've seen small behavioral shifts lead to big wins in Fortune 500 companies and scrappy startups and even in mission driven nonprofits. Kurt Nelson 18:06 Yeah, and we bring the same curiosity, creativity and care to our client work that we bring to every episode of the show, really, I think Tim Houlihan 18:15 people might want more than what we bring to the show. Kurt Nelson 18:21 You probably have a point there. You're probably right. Tim Houlihan 18:24 Okay, so we'll bring more care and creativity to our work with you and your teams than what we do on the show. Kurt Nelson 18:30 Yes, more care. So, so if you're ready to build stronger motivation, better team dynamics, and maybe even make your workplace a little more Tim Houlihan 18:39 groovy, yeah, reach out to us, grab us on LinkedIn or Facebook, or just drop us a line. We'd love to help you and your team find your groove Kurt Nelson 18:53 Well, and that's what I that's what I love about this book, and the the research that you show in this are not around all auctions and various different pieces, but they're different parts of what we would normally say, Oh, this is the rational way that we should be doing this. And then, whoops, that's not actually how we do this. And I know the original book was was out there, and the original columns, as they were printed were there to kind of show, hey, you know, to too many of what we would consider classical economists. All right, there's some, there's some things here that we need to be be looking at. And I would say, subsequently, I'd love to get your thoughts on this is, you know, over the past 30 years, there has been a shift. There has been a shift in kind of the way that economists look at behavioral economists, and even if you can now have a distinction on that, where do you see, where do you see that I kind of weigh off on that, or is there still kind of two camps out there, and then, where does this new addition? And as you said, it's not really a new edition. You kind of rewrote this. Where does this fit into that kind of conversation? Speaker 1 20:08 So I think you're totally right. There's not really this. You know when, when Richard was first starting out, there would be these like fights between camps, where it would be like a tiny little camp with, like Richard Danny and Amos and like a few other folks, and they would be giving seminars in a very contentious space, where people would be like, Absolutely not. People are fully rational. And Richard's like, well, you know, they're making these mistakes. Now, it's like, you know, there's enough evidence, where it's like, yeah, people are not rational, like, as in, and what I and I want to preface this, like, what I mean rational is like violating a set of axioms. I don't mean like people are stupid. That is not what I'm saying. And we make this very clear in the book, exactly. And we say from the beginning, it's like people are doing their best with the cognitive constraints that they have. And now it's like people in economics have acknowledged this. So it's like, when I give a behavioral econ seminar, doesn't really matter so much where I go. There's some pushback on like, if I'm proposing a new mistake or a new way that people are violating the Standard Model, but for the most part, people, people are kind of people are just in the broader field of economics. Understand this. There's not too much pushback. The question, and this is what we write about in the Epilog, is, to what extent has this made it into the mainstream economic models? And that's where we're still very much behind, and that is why we wanted to write this book as both a book that anybody interested in behavioral economics can book pick up and read, but also can use in a behavioral economics course or even a standard economics course as a supplement. Because right now, behavioral economic models are still sorry, standard economic courses and models are still very much, you know, expected utility maximizers, hyperbolic, non hyperbolic discounting, regular exponential discounting, things like that. So, like, the models haven't really changed, even though there's like, just like, mountains of evidence that everybody agrees with, yeah, like, especially on like, stuff like rational expectations. We can argue about expected utility, but come on, yeah, rational expectations is just, it's done right. Should not be teaching it right. Tim Houlihan 22:38 And the downstream effect of this in if a whole bunch of college students are coming out of college with this classical economic training, they're going into the world believing that rational decision making and classical economic models apply, right? And if I understand you correctly, Alex, what you're saying is that the education needs to be updated to sort of reflect reality, right? Speaker 1 23:07 And but that that's that's also on us, right, as behavioral economists, that that's on, that's not just on, like the undergraduates who are getting the education. It's not on the professors teaching the economics. It's like, you know, if we don't have a textbook for behavioral economics, if we don't have models that we allow labor economists to use very easily, they're not going to do it. And as a result, there's, there's going to be a gap in education. And so I don't want to, I don't want to put it on anybody. I think the main vector of the issue is behavioral economists needing to engage with economists on a level where the synergies are more evident than they have been in the past. And people have done this, like, you know, Matt Rabin has been and David lalson have really been pushing this idea that, like, look, we need to think about models that can be used in by standard economists. But if you open up a standard econ 101, behavioral economics just not going to be Kurt Nelson 24:18 there, yeah. Well, and it's interesting to me. And again, we can talk about this. You talk a little bit about this in the book about, you know, Herb Simon and bounded rationality, and how that was part my understanding. And again, I apologize if I'm getting this wrong, but that was part of some of the more standard workings. And then it shifted. And is this more? Are we just trying to get back into more of the making sure that we're encompassing the entirety of, as we said, bounded rationality, the psychology of humans? Is and not this strong model that is the standard model that holds up that this is a way that we can now measure things in a macroeconomic component, that that makes sense, and we need to forget that we are actually people to a certain degree. Yeah. Go on that. Speaker 1 25:19 Yeah, yeah. I mean, this partly has to do with the sort of models that were being proposed by, say, Kahneman Tversky in the 1979 paper. I think people were at some point like, within like, let's say 15 years of the original paper. Economists would agree with the empirical results, but the models are still very hard to swallow for economists, because, you know, there are these parameters which seem like degrees, extra degrees of freedom. They're very cumbersome to use in empirical work. If you've ever done empirical work where you're trying to, like, estimate something or like do like, you know, macro with loss aversion. It's like very difficult. So part of like the the return to Herb Simon, in some ways, which we talk about in the book, which which for the listeners, is the first behavioral economist who won the Nobel Prize. He was at Carnegie Mellon, which is where I started my career. A brilliant guy who proposed the idea of bounded rationality, essentially saying that, look, people are optimizing, or doing some sort of or optimizing, broadly speaking, they're trying to do the best that they can. That's, that's the way that the best way to put optimizing and but they have they're not compute, they're not super computers. They're not they don't have infinite memory, they don't have infinite attention. So let's put those constraints into the models and say like, what happens the problem is that the models that he was working with were not sophisticated enough to generate systematic biases. They were only able to generate unsystematic biases like random errors, and if you have a random error, economists are fully comfortable with that. But the problem is, it doesn't change any predictions. They're random. So people, economists were like, Fine, let's give you a Nobel Prize. We're not going to do anything. Tim Houlihan 27:21 I would have loved to have been at the table for that discussion. Yeah. Speaker 1 27:25 I mean, like, he was not influenced, you know, he was extremely influential in, like, stuff, like AI or robotics, like almost every other field that he was involved in, but like, he wasn't really influential in economics. That's, that's my perception of it. The influential, the influential part of behavioral economics started with Kahneman. First key to say, hey, the biases are actually systematic. They go in a predictable direction. So you do need to change your models. And economists were saying, we're basically like, yeah, we do, but it's too hard. Kurt Nelson 27:55 Well, let's, let's dig in. You talked about how loss aversion is too is difficult to put in there. Let's talk a little bit of, I mean, I think most of our listeners understand loss aversion, but let's give you know for those, those few that might not, let's talk a little bit about that, and then why that that doesn't fit, or how we can try to maybe fit it in. Yeah. Speaker 1 28:15 So basically, I'll spend, like, a couple minutes reviewing like you had us have to start with the Standard Model. The standard model says I have a utility function which, like basically corresponds to how much pleasure or pain I get from any from consumption. And that utility function is defined over not only what I'm doing right now, but also about what's going to happen to me in the future, that includes all my projected wealth into the future. So everybody in college, believe me, it's not defined over 20 bucks. It's defined over, like, more than a million dollars. Because everybody who's in my college classroom at the University of Chicago, their lifetime wealth is going to be well over a million dollars, right? And so it's defined over this giant pot of money, and the way that it models things like risk aversion, the fact that people like you know, would prefer a safe outcome over a risky outcome with the same expected value is through diminishing utility, namely, that the next dollar is worth less to me than the previous dollar. So, like, if I'm eating a piece of cake, I love the first bite. The second bite is like, pretty good. The 20th bite is like, I need to go to the bathroom, right? So, so basically, that's diminishing expected utility, but the fact that it's defined over the entire wealth that the person has means that the concavity is actually not that steep. So when you're when I, for example, I give you a gamble. Let's say it's upside of $4 downside of $2 and with 50, 5050, odds, it's a positive expected value gamble. People would reject it. Or, let's even simpler, but. Upside of $2 downside of $1 positive expected value, right? And a lot of people reject it, and loss aversion came out of that behavioral fact. Because if I take that gamble and put it into expected, expected utility, the amount of curvature over $2 in order for you to reject that upside is just completely insane. It implies that if all of my risk aversion is driven by curvature, means you're so risk averse, do not get out of bed in the morning. There might be a bird that flies into your eye when you come out, come out the door. It's a possibility. The risk is low. But if you're risk averse to turn down that gamble, you're risk averse about the bird too. And so you need something Kurt Nelson 30:44 else, yes. So the standard model would say nobody in their right mind would ever turn down that bet that everybody should be taking. If there's an upside of two and a downside of 150, 50, you take that bet every single time. Exactly. That's not what we see in real life, exactly where we were going, yeah. Speaker 1 31:02 So the gist of expected utility theory is that you're risk averse over wealth, but you're risk neutral over any sort of gamble that you could possibly think of, right with low stakes, and people are risk averse over low stakes. So here comes loss aversion to say people don't take all their wealth into account when making decisions, they think they take into account what's in front of them. You give me a gamble, and I'm like, Oh, it's a gamble. I'm not thinking like, oh, how much? How am I going to pay back those loans that job, and then should I take the gamble if I have that internship in three years? You know, people are doing that. There's they see the gamble in front of them. They're like, at I don't want to lose a buck. I don't want to gamble. And so that's loss aversion, the fact that people don't consider the entire stream of wealth in their lives. They're just view the gamble in isolation. And on top of that, they don't they like the the potential upside the $2 less than losing the dollar they losses loom larger than gains. So that whole idea is loss aversion. Tim Houlihan 32:10 Yeah, so here, here's something that I think you kind of addressed this to some degree in the book. But if we are predictable in our in these in how these biases impact our decision making, loss aversion being a great example, to what degree could marketers and and and organizations exploit that and are we basically getting into, especially in a big data kind of world, some kind of exploitation arms race with, you know, companies just trying to increasingly profit from from these predictable biases. Speaker 1 32:50 Oh, yeah, absolutely. I mean, before we used to have very little data on each individual, companies would have very little data, unlike me or you, and so they would have to design pricing policies and just general kind of infrastructure for the average consumer who might not be loss averse or might not have a bias. Right now, the scope for targeting is just so much greater, because our individual data is out there being collected by companies, and can be very easily linked to us, which means that, you know, here's one example, depending on which browser you use, Chrome or Safari, you might get a different price for an airline ticket because companies have figured out that Chrome users, I forget which direction it goes, are richer than Safari users, so we're charging more, right? Wow, that's just one simple little thing, like, but, but there's like, so much more data out there than that, yeah, and some parts of it are illegal, like, you can't, you can't, you know, use protected characteristics, for example, to charge people more or less, like, if I'm a man and there's a woman out there, you can't unless there's, like, risk reasons, so like, car insurance, obviously you can charge men more than women, because men are, you know, they'll drive into a tree. Yeah, it's a great experience and but, but for other reasons, just because, you know men do you, it's illegal to use some protected characteristics to price discriminate, but a lot of other characteristics, it's not illegal. And so on top of doing price like standard third degree price discrimination, there's also kind of targeting on, there's going to be targeting on behavioral biases. So Amazon and all of the tech companies that are, you know, selling product on a mass scale, they're doing this like all that all day. They're doing a B testing on like this, how they're displaying products, and if somebody has like, let's say, is more likely to. Buy because of, like, a salience bias towards one direction. They're gonna make sure that product the page is designed to take advantage of that. I mean, but you really have to get into social media. I mean, social media is just like a product designed to take advantage of every single psychological cork that we have. Unknown Speaker 35:20 Yay. Not, Kurt Nelson 35:23 oh my god, which is to the degree. I mean, we've talked about this on the show before, and it's scary to that component where, because these are impacting us at a level where we're not always consciously aware of them. And that's always happened to that degree that you said, you know, there's, there are pricing models out there. There are various different things we've always been influenced by, things that we don't know, but they weren't targeted specifically at us based on our unique signature that now is out there, and different pieces. And so there's a whole new world where do you see that? And this is going well beyond the book, and just asking your personal thought on this. And this is a podcast, so you feel free to just air your thoughts. Where, where do you see economics and behavioral economics in particular, you know, looking at that in the future is, is there a role for us is, as behavioral economists to like, have a say in how this, this operates, and what should that be? Speaker 1 36:30 If there isn't that we failed colossally, because this is the, this is where behavioral economics has the most to say about like how social media companies and other sort of tech companies are exploiting people's biases and reducing welfare. So there's already work on this. My colleague Leo Bernstein has has work on this, right? So the paper collective traps about social media that people are both willing to pay substantial amounts of money to destroy and like, like, basically shut down the company of Facebook and Tiktok, but yet, are also willing to pay money to stay on those platforms as long as other people are on them. So which says is, like, long term, like, you know, overall, when I'm thinking about my welfare, I know that this is bad and I want it to go away, yeah, but short run, I'm like, I gotta get on my app. Like, what are you doing? Like, digital addiction is another paper by by Matt genskow and colleagues, like, talking about, you know, the addictive power of social media, about how the algorithm is literally designed, like, you know, I wouldn't put it far from heroin. Unknown Speaker 37:48 Yeah, right, yeah, yeah. Speaker 1 37:51 It's like, it's, it's designed like to, it's to engage with our, with our, with our, with our physiology, of our neurophysiology, to get us to not put down the phone, Kurt Nelson 38:04 yeah, yeah. The dopamine, the dopamine rush that you get when you get that ding, when you get that hey, it's the, it's the lottery effect, like, all right, this next post might not be interesting night, not right now, yeah, but this one, oh yeah, there it is. So I got to keep scrolling, because, yeah, there you go. Tim Houlihan 38:22 Well, in the chapter, thinking about this, this the way that we discount things in time. There's the chapter on now and then, or the now and later. Excuse me, originally, I think it written with George Lowenstein, your colleague from Carnegie Mellon and but at the end of that paper, of the original paper, there was a comment that, you know, that maybe, maybe this idea on exponential discounting could be one of the most relevant aspects of what was written back in the original book. And then today, you're kind of coming back and saying, maybe it's actually time to, time to retire exponential discounting. It might be time to, and I'm not asking to to have to get into explain exponential discounting in great detail, but in general, did you find, I mean, to what degree did you find, like there are some things that we should it's time to move on. But is there another class of things that you discovered in reworking the book that go this is more prevalent than ever. This is more meaningful than ever. Speaker 1 39:32 I think the idea so the anomalies should be viewed as separately from for the explanations for the anomalies, right? So that I the anomaly in that chapter about people having self control problems and people being myopic is more relevant than ever. Yeah. The explanation for that anomaly, which is, you know, exponential discounting, maybe quasi hyperbolic. Discounting probably should be retired in some ways. It's useful to some extent, and it's useful in some domains. But if you talk about the psychology of what gets a person to like, ignore their child who they love, to like, look at a cat video, that psychology is not Beta Delta, yeah, yeah. It's much more closer to like the cue based addiction models that we have in other parts of psychology that Doug Bernheim, by the way, and Antonio Rangel wrote a paper about in the early 2000s and it's not going away, and it's not going away. And so, you know, the Beta Delta model might be good for thinking about how people think about retirement savings and things like that, but it's not. I can't. I don't find it very compelling to explain self control problems and impulsivity and things like that in kind of the domains that we've been talking about for Kurt Nelson 40:55 last 10 minutes. Yeah, it's that's very interesting. So I'm going to take a different tact here. Do you think Mark Twain would have made a good behavioral scientist? Tim Houlihan 41:08 Nice segue, yeah. All Kurt Nelson 41:13 right. Listeners here, this is going to be, you know, but you write a little bit about this in the book, because you talk about this idea of, all right, the whitewashing of the fence and the whole story. And you said, let me get, make sure I get this right, that he pretty much nailed constructed preferences, you know, in Tom, sorry, so can you give a little bit of like explanation for our our listeners what constructed preferences are, and how that story of Tom Sawyer getting all of his friends to actually whitewash pay him to do the favor of whitewashing the fence, and what that is one of Speaker 1 41:53 my favorite behavioral econ papers is by, again, My friend and colleague, George Lowenstein, drosn and Dan about coherent arbitrariness, and it's the idea that people appear coherent in their preferences. So if you give them, if you ask them, is five more than four, people be like, yeah, sure, but there's no coherent, like preference relation over things in the sense that the and this is the Tom Sawyer story, and it's, it's, it's, it's incredible. So Tom Sawyer is asked by his aunt, like, paint this fence. And he's like, I don't want to paint this fence. So he goes out there, and all his friends are out there, like, having fun. They start trying to make fun of him, being like, Oh, we're passing a ball around. You got to paint this fence. And he's like, yeah, I get to paint this fence. That's awesome. And they're like, huh, can, can I paint this fence? And they're he's like, Well, no, it's I got the opportunity to paint the fence. If you want the opportunity to paint the fence, you got to give me something. And so all of the friends keep coming up to him, and he ends up not painting the fence and with all their stuff while they're busy painting the fence for and that's the idea that, like, is there a stable paint fencing utility function? I mean, no, because at first they thought painting the fence is terrible, and all of a sudden, Tom was like, well, it's not, I'm getting this opportunity. And they're like, actually painting the fence is great. And so, you know, in the book, sorry, in the paper, coherent arbitrariness, they show this like, you know that this happens all over the place, like one of the authors was going to read a Robert Frost poem, and that people were asked, how much are you willing to pay to listen to this? And they were saying, like, 10 bucks. 11 bucks. Great. I love this poem. Or they were asked, how much would you need to be paid for this? And they'd be like, Oh, terrible. Give me 10 bucks, at least. What is the stable preference about listening to the poem? It's either positive or negative. But the coherent part is that when you said, How much do I need? Do you need to be paid for five minutes? And they'd be like, All right, I need 10 bucks. What about 10 minutes? They're like, Well, okay, so I it's bad. So and 10 minutes is more than five so I need to pay, paid more. And the same thing on the flip side, oh, I'm willing to pay $10 for five minutes. Oh, it's 10 Minute reading of this poem. Wow, I got to pay 15 bucks for that. So there's coherence in like, the scale that more is more and less is less. But like, the direction of where the curve goes is completely arbitrary. You would think would Kurt Nelson 44:35 be the bigger part, right? It's less. If I like Robert Frost, I like Robert Frost. If I don't, right? I don't that's not the case in this. It's like, and this Speaker 1 44:43 is the idea of constructive preferences, and it's the idea that we're are using our environment to gain information about the value of things. Yeah, yeah, which makes sense. I don't know what the hell is going on. Most of. Of time, and I'm using the available information to figure it out. Tim Houlihan 45:06 Yeah, yeah. I want to stick with pop culture and refer to Monty Python's Dead Parrot sketch, which is just one of my all time favorites, but, but it it. I bring it up because I guess I'm wondering, is there it? But we'll explain it later, but it's about the Norwegian blue being dead. And is it possible that there is an elegant, fantastic, beautiful theory of behavioral economics that is just waiting to be discovered right now, but is right now. People are going, No, it's just the Norwegian blue. It's just, it's dead. It's a Dead Parrot. Unknown Speaker 45:52 No, I don't think so. Yeah, Tim Houlihan 45:55 the great stuff that we've got in this from this body of literature so far in behavioral economics is there are no dead parrots? Speaker 1 46:05 Yeah, I think, I think there a lot of economists came from physics or physics envy, and from reading Asimov and like all of these beautiful ideas of like, we are just a couple years away from writing down an equation to solve human behavior. Wouldn't that be nice? It turns out that that's probably not going to be the case. There's not going to be one model that's very simple to rule them all. And you know, the most that we'll probably be able to do is to have models for that are we can predict in what domain they are relevant. And that's probably the most that we'll be able to do. That's my personal opinion that there's not like, this unifying, grand, beautiful little equation, like E equals MC squared, where we're going to be like, All right, we figured out humanity, Kurt Nelson 47:13 so there's no psycho history then, Speaker 1 47:18 yeah, exactly. And I wish people in economics and in tech read more LEM than Asimov. That's my only. If that is the only thing that I will do on this world is to just take the Asimov off their bookshelf, then I will succeed. Tim Houlihan 47:39 How about this? How about this, if you could identify one anomaly, this is picking your favorite child. Basically, that's what this question is. That best explains the human decision making failures in modern society? What would it Speaker 1 47:54 be the failure to incorporate information into your understanding of your environment. So we we are in, we have an objective information environment that we are facing. So like, let's say, let's keep it simple. Let's say there's a form that I'm filling out for, like, getting a loan, right? I have the form has objective characteristics, like interest rates, all of this stuff. I have objective abilities to repay this that I know or I have beliefs over. The standard economic model is I take the constraints that are written in this form, I put them into my utility function, including my beliefs over, like my ability to reframe to pay back the form, the benefits that I would get from this loan. And then I maximize I decide to take the loan or not. The anomaly that I think is most interesting is the fact that people have limited attention, limited memory, biased beliefs. I know I'm listing a bunch of anomalies, but the anomaly, the but, but, but the anomaly is the fact that there will be a systematic difference between people's representations of what they think that they're facing and what they're and what they're actually facing. The reason that I think is important is because all of law and all policies for the most for the very most part, other than a few exceptions, are predicated on the idea that these things should be equal. So if I took a loan and I was not able to pay it back, I should be sued because of the fact that I knew what I was getting into. I signed a contract and I didn't pay it back, I owe a debt, and if I can't pay back a debt, I need to be sued. But if there's a systematic difference between what people think that they're doing and the what they're actually doing, and you could predict that, then this sort of equivalence sort of breaks down, especially if companies are exploiting it in which they are. Yeah. So I think the biggest kind of, the most interesting anomaly for me personally, is this idea that we need to put structure on this problem, in the sense that being able to predict when there's going to be a larger deviation, when are people going to be more confused than other cases? How when is this is the idea that we talk about the very end of the book, complexity, when things are simple. This is not a problem like, right? If you ask me, Do I want, you know, two hot dogs or one hot dog? I'm always gonna go with two hot dogs. That's a simple problem. I like hot dogs. You don't. We don't need policy. We don't need a hot dog policy for me. But if you have, like, a very complicated decision that people are confronted with, and this is very consequential for them, that has legal sort of repercussions later on, or large wealth repercussions later on, we need policy that takes into account that people might not be making a decision of the type that we think that they're making. They may be making a very different decision, like thinking, Oh, this, this interest rate will never change, and this looks like a good interest rate. I want this loan. And all of a sudden, in two years, they're like, oh, it doubled. Let's get this guy's house. Let's, let's, you know, take his car. Kurt Nelson 51:20 Yeah. And given and given today, as we talked about earlier, the the information that people have, or that companies have on us, and you know, not necessarily interest rate component, but other factors that we know, we can predictably know that these people are going to exactly fall on this side of this component, so we can take advantage of that. That's where we need policy. Speaker 1 51:46 This is where we need policy, and this is where we need laws to be changed like we after the financial crisis, we should not have been suing people who failed to pay back their mortgage Tim Houlihan 52:01 and explain why that is the case. Speaker 1 52:05 Because they were we know this. This is not my opinion. We know that they did not know what deal they were signing when they were given these subprime mortgages. So if a person does not know what deal they're signing, and they are convinced that they're they're signing a certain type of deal, then we need policy to take that into account. And the the people holding the bag should not be the ones who you know don't have a lot of money, had this hope for a house, thought that they were getting a great deal. No, it should probably be the company's, you know, taking advantage of the consumers. Yeah, and that didn't happen, by the way. No, no. Tim Houlihan 52:55 What drew you to the project? I mean, working with Thaler, you know, could have been, could have been a factor, but, you know, but you've got a lot of things going on your life. Why did you choose to get involved with this? Speaker 1 53:10 So we talked about this in the preface of the book. I've been using the anomalies to teach for I developed my own course in behavioral economics at Carnegie Mellon, there is no textbook and behavioral economics that. So I was just using the anomalies columns. And the way that the thing that got me excited about the project is to write a text, essentially a book that I could use in my class, that I could give to my parents, to that I could just, you know, tell people like, Hey, this is what I do for a living, and this is what you should know about the field of economics. So for me, the aspect of like, being able to teach using material that I'm like, very that were like, you know, tailored to the way that I teach and the way that I think people should think about behavioral economics is just an exciting project. I mean, working with with Richard was a nice side Kurt Nelson 54:00 effect, a little bonus on top of things, you know, side effect. I like that. There's, there's an aspect of this that I think is, again, the way that you, you structured the book, I think is really neat you talked about at the beginning of this, this episode. But it is. It's like, All right, here's all the stuff that went into the original and then All right, now, what do we know, And was there anything in the now part that surprised you, that like kind of took you going either this was way deeper than we thought it was, or whatever else Is there one of those, or a couple of those? Speaker 1 54:43 I mean, I think the the thing that and it wasn't surprising to me, because, you know, I am in the literature. I think it's surprise. It's surprising to people who would have probably made forecasts in the 90s about where the field would be. I think most people would agree that. Like consumers might not be perfectly rational. We have a market for extended warranties, right? That's it shouldn't be that surprising. But I think that surprising part is the fact that, you know, people trading millions of dollars a day have these anomalies. Yeah. And I think even the most optimistic behavioral economists who were, you know, the some of the co authors on the original columns would probably not have forecasted the extent of the biases amongst sophisticated market participants. So we have a chapter. My personal favorite chapters, the last chapter on on behavioral finance, where we basically show that, you know, financial markets are like exactly where we should not find anomalies. Maybe we should have a market for extended warranties. Maybe we have like, you know, Tom Sawyer grifting his friends. But financial markets are like, you know, super competitive, high incentives, repeated decisions, plenty of opportunities for learning everything in economics. Should say there should be no anomalies, and yet that is like the gift course that Kip keeps on giving, as far as anomalies, yeah, I probably talked to you guys about this paper on the last episode that I did with you about the selling fast and buying slow paper that we published last year. You know, where we find that professional institutional investors, not investors, institutional investors, they have billion dollar portfolios. They're really good at buying stuff. They're doing their research. They're but guess what? They have to sell in order to buy. And if you throw a dart at their portfolio, I can do better than what they actually do. They're terrible at selling. And kind of like, you know, hopefully your audience knows that selling is the same thing as buying, as far as the returns that you could have in your portfolio. It's just with a minus sign, it's the same decision. So being really, really bad at selling, while you're really good at buying, it's it's not, it's not a great look. Tim Houlihan 57:15 Alex, you know, on behavioral grooves, we do talk a lot about people finding their groove, getting into their groove, having a good groove in their life. What keeps you in your groove? Unknown Speaker 57:26 Being excited about what I'm working on, being just absolutely stoked about, Speaker 1 57:35 you know, getting, getting to get up and drink a cup of coffee and sitting down and working. That's it. That's it's the biggest thing I love. What I do. Tim Houlihan 57:41 Does that give you some resilience to really hard tasks, to taking on some really hard things, to kind of give you some buffer? Unknown Speaker 57:53 Yeah, I mean, easy tasks are not really that interesting. So that's a personal statement. Speaker 1 58:06 Obviously, I like hard tasks. I like kind of we talked, and this is I definitely talked to you about this in the last episode about the Tom Waits, quote about, you know, the fingers are like dogs. They get into their groove, and they stop being interesting after a while playing the same instrument over and over again. That's why he keeps learning a different instrument for each record. I live by that quote, like, I love getting into new fields, and like learning and starting hard new things. That's what keep, think keeps things exciting. Tim Houlihan 58:40 That's That's fantastic. Speaking of music, did you listen to music while you were writing the book, while you were any specific playlists? I guess, Speaker 1 58:49 nothing specific, nothing related to the book. I would say, I always, I have a yearly playlist. So I have, like, a 2025 playlist, I have a 24 playlist, I have a 23 playlist, and I, in 2020 I made the conscious decision to when you're a kid, you just listen to the music, right? There's no conscious decision you listen to music. Oh, that's cool. That's that's cool. As you become older, you keep going back. There's a tendency to going back to what you listened to when you were 18. Yeah, right. And it's like, oh, for me, it's like, oh yeah. The Strokes are the best band ever, obviously, which is a true statement. Tim Houlihan 59:36 We can have a debate about that. Not universally true. We might, we might debate about that, but let's, for the sake of, for the sake of your conversation, you're the guest. Let's go with it. Speaker 1 59:49 But, but what I started in 2020 was like the conscious effort to listen to new music. For where my the majority of my listening is new music. And. The majority, the vast majority, of my playlists are new music, like the playlist from 2025 they're bands from 2025 Kurt Nelson 1:00:06 so who is new on the 2025 playlist that you think maybe some of our listeners, or Tim and myself, should take a listen to anybody. So I really like Speaker 1 1:00:22 so this is a hilarious band name given my name. There's a band called Alex sucks, not a joke. You can Google it, but they're actually really, really good. So my friend sent it to me eight months ago, and I thought he was making fun of me, so I never opened the link. Oh no. And then I, like, heard this song, and I, you know, shazammed it. I was like, this is a cool song. And I'm like, What the hell Alex sucks? Is the world playing a trick on me? It turns out it's a really cool band, and I've been really getting into their record this year, kind of like a rock, like a good rock record. I like Fontaine's DC. I've liked them every record I've listened to. I've really enjoyed. They're like an Irish post punk band. Kurt Nelson 1:01:12 You got us into, you got me into into them last time. And I actually made Tim listen to a couple of their songs, and I was in North Carolina with them. So there you go. Speaker 1 1:01:23 Yeah, I'm still into them. They released a really good record. The new record is Tim Houlihan 1:01:27 awesome, yeah, so is this? Is this part the band doesn't have to be new in 2025 but Right, right. But they have to have released new music in 2025 in order to be considered for your playlist? Speaker 2 1:01:41 Yeah, exactly, exactly. So some of the bands are, how many? How many Tim Houlihan 1:01:46 is the playlist like, a dozen? Is it two dozen? Is it 1000 how many songs do you accumulate throughout? Speaker 1 1:01:51 I usually, I usually end up like, 300 songs, something like that. Tim Houlihan 1:01:56 Yeah, that's that's cool. I have a playlist that I call dinner. I don't know why. I actually, I don't even recall. And I thought, well, maybe it started with, Oh, I thought that might be nice through dinner, thinking of music as being an experiential thing, right? And now it's just, you know, it's just become this behemoth, you know, of just monstrous proportions. And I happened to be on the road and have two hours to myself, and I listened to a good portion of it in two hours. I was like, damn, I picked some pretty good, pretty good stuff, and and I didn't recognize 80% of the artists, like, I didn't even know that that was this person, was an artist, and I was pretty happy with that, actually, to be sort of surprised that there's a lot of new music, unfamiliar artists in in that playlist. Okay, I'm editorializing. Speaker 1 1:02:49 Yeah, yeah, no. So I also have, like, I have a dinner playlist. I have a playlist called dinner. It's for my wedding dinner. Oh, and it's a playlist that I, me and my wife spent a long time crafting. So it's got, like, a lot of songs, because we were we just shuffled it. And I still go back to that playlist all the time. You do kind of like, I think Kurt Nelson 1:03:10 it's, I think it's interesting. I'm sorry we're getting weighed down in some weird things. My My child, you know, we I talk about a playlist, and I put a playlist together, and I put songs, and I move shift songs around, because I like this song, following the song and different things. And you're just talking about shuffle, right? And my daughter is mad when I play my my playlists in the cars or driving, because it's the same songs in the same order all the time. And I go that it's on purpose. I've curated this for this reason. And she's like, more of the I just want the shuffle, just, I'm okay with the songs, but put it on a shuffle. Don't have it be the same every time. I don't know I'm a shuffle. Are you shuffling? I'm always shuffling. Yeah. See, I have that like I want to, I want this song, and then that leads into this song, and then I need a change of pace. So I want this song here, and I will do a shuffle. I'm not like anti shuffle, but I do like the curation. Tim Houlihan 1:04:13 Well, just to weigh in, I'm a shuffle guy, except when I want to listen to a specific album, Dark Side of the Moon. I want to hear, I want to hear the progression of how Pink Floyd went from song to song to song, deja vu, Crosby Stills national I want to start with, I want to I want to hear David Crosby at the at the beginning of that. I want to hear the beginning of the second side. I want to hear Stephen still's acoustic guitar at the opening of the first side. I want to have that experience interesting and Kurt Nelson 1:04:49 Alex, before we go, I just want to, I want to end with a line that you wrote in the book. I think it was you. Maybe it was, was Richard, I don't know, but it was in the bottom line section of the chord. Cooperation chapter. So I'm assuming it was probably, probably you, where you wrote, The world is a better place if people cooperate, even if doing so seems to be selfishly foolish. You know, all groups, from firms to communities to team members, share a bigger pie, if they at least consider the group's welfare in addition to their own. And I just found that really powerful and really striking. And just wanted to ask, how do we get that message? How do we spread that message far and wide and get a greater acceptance of it? Because I do believe it is very true that the world would be a better place if we were all focus more on cooperation. Unknown Speaker 1:05:43 I think everybody agrees with us. The I think people, even who are actively Speaker 1 1:05:52 making actions and you know, to prevent this from happening, would agree with that statement. I think the key part of that chapter is, how do you actually get at that to work? Yeah, and so we have some examples in the book. One of the kind of potentially counterintuitive parts about getting cooperation to work is that people need to be willing to sacrifice in order to get other people to cooperate, you need to sacrifice in order to create a social system where anti social behavior is sanctioned. Because if there's no sanctioning, then people will free ride. They will tell you, like, look, I like a cooperative world. I'd love for everybody else to cooperate, but, you know, my money's my money, or I want to do this. I'm just going to do it, and I want everybody else to cooperate. I prefer a cooperative world. That statement, I agree with it. I just don't want to be the one to sacrifice for it. And the key for a cooperative world is for people to say, Hey, you, yeah, you who just did that? Here's a sanction. And, you know, we could, I could spend an hour on this, because this gets into, like, things like cancel culture, which is obviously, like a very, kind of, like a toxic manifestation of that sanction mechanism. But in general, there's a lot of research showing that in order to generate cooperation in groups, in kind of doesn't matter how what the size of that group is, you need that sort of element of people being willing to Tim Houlihan 1:07:35 do that. Thank you. Alex EMAS, thank you once again for being a guest on behavioral grooves. Unknown Speaker 1:07:43 Thank you. This was awesome. Thanks for having me again. Kurt Nelson 1:07:53 Welcome to our grooving session where Tim and I share ideas on what we learned from our discussion with Alex. Have a free flowing conversation and groove on whatever else comes into our cursed brains. Yeah, yeah. Like that was a simple, easy one, yeah. I went the easier. I was gonna say your winner's brains, but then go, nobody would believe that. So not you and me, not we are definitely don't have winners brains. We have maybe cursed brains. Kurt are just average getting by brains. How about that? Tim Houlihan 1:08:27 Yeah, maybe not medalist. But you know, we could be, we could be contenders. We could be honorable mentions, maybe contenders. Kurt Nelson 1:08:36 Week, I could have been a contender, if only a contender in the podcast wars. Yes. All right. Oh, okay, that was, that was a great conversation. I always love talking with Alex. You know, he's such a such a bright guy, such a articulate and then, you know, even when we screw up, like at the beginning, and he just comes in and yeah, whatever. Tim Houlihan 1:09:04 Yes, we are fortunate to fortunate to be able to talk to him about all the great stuff that he's doing. So what are we going to talk about today? Kurt Nelson 1:09:13 We're going to talk about the Winner's Curse. Okay, talk about what we talked about with Alex. We're gonna talk about the cost of apples, you know, we're gonna talk about where you're going on vacation next what you know, like, Hey, do you guys have snow? No, we're talking about, you know, we're grooving, man, we're gonna groove. Tim Houlihan 1:09:39 How about if we could we narrow that to to one topic Kurt Nelson 1:09:43 with what one topic Tim Houlihan 1:09:47 I like? The Tom Sawyer stuff. I like this, this, this coherent arbitrariness. I think that that's a super cool idea. Kurt Nelson 1:09:56 It is. I think it's really, I agree with you, that. It okay, we can narrow it to that. I like that. Yeah. Tim Houlihan 1:10:02 I mean, when Alex said, I'm actually going to look Peter because I can't, I don't want to misrepresent but he says, you know that the idea that that people appear coherent in their preference is really is a fallacy on some levels. Like, if you ask, is five more than four? People like, yeah, definitely five is more than four. Absolutely got that. But then when we get to the Tom Sawyer story, is there some kind of stable fence painting, utility function, Kurt Nelson 1:10:39 spoken as a classical economist, you know a fence painting utility function well, but we know that it's dynamic. The idea that the utility that you get from painting a fence is dependent upon a number of things, and in some of those are contrived. In the Tom Sawyer example, right? They are based upon what Tom is talking about, and the the kind of in, in imbued. That's the wrong word I'm looking for, where Tom is, you know, implying how great this is, and what an honor it is, and all of those things in the classical in the story, right? He makes it feel desirable when it's a chore, yeah. And it goes into like, expectation effect. It goes into framing. It goes into all of these different aspects of it. Tim Houlihan 1:11:39 Let's, let's bring cialdini's influence into it. How about liking? Let's start with liking. Because the boys know Tom like he's, he's kind of one of them, maybe even unity. I mean, they're, they're part of the same tribe. They hang out together a lot. And so when Tom says it's a really good thing, that's, that's a pretty good thing. Then there's also this sort of authority that Tom kind of plays up this. I know something about fence painting that you don't know. I've got the inside scoop on this, and you should be listening to me, because I have this special knowledge about fence painting. And then the third thing on the Cialdini influence story is scarcity. He's like, there's only so much fence to paint. Kurt Nelson 1:12:24 I would, yeah, and I think that's a big one. I would also add in, you know, social proof, like, because it became, like, not just one, but all of a sudden you have everybody, everybody, like, I can, how can I join in? Because everybody else is doing it. So, yeah, yeah, so, so Mark Twain, essentially, just published a behavioral economics paper 50 years ago, or whatever it was, is that right Tom Sawyer is a behavioral economics tome? Tim Houlihan 1:12:55 I think we can absolutely, couldn't. We can absolutely conclude that that Twain and Sam Clemens was definitely that. But back to coherent arbitrariness, like this idea that we don't have stable preferences. You and I have talked about how important it is in decision making to try to parse things out and say okay, to step a little bit outside yourself to be able to think, to ask yourself, How valuable is this to me? And asking how valuable something is is really difficult when our preferences are changing constantly Kurt Nelson 1:13:33 and they're dynamic. It's not that it's like, oh, we flip flop. It is this dynamic aspect of preferences that change because we change. That change because the environment around us changes. That change because there are other factors that come into play, and then to the degree I mean, and this is again, behavioral economics. Sometimes it is like, if A is better than b and b is better than C, then A should be better than C. But that doesn't always happen exactly, exactly. And sometimes it's like, no, C is better than a. So you're, you know, it's the comparison components of this, and that doesn't always hold true for humans. Tim Houlihan 1:14:18 So that, and that's a wonderful thing, right? That our that we'd have this dynamism in our preferences. But the way a donut might be perceived as being better than an apple, it's like, well, that's, you know, it's healthier the apples, or, excuse me, the donut being less desirable than the apple. Apples more preferential. Kurt Nelson 1:14:37 Sorry, you were right the first time. Tim, the donut is more preferable than the Apple, right? I mean, it's tastier, it's better, it's it just, it's all these wonderful things, yeah, more desirable, but less healthy. But then, if, then it's, Tim Houlihan 1:14:54 if we pose the question between the donut and, say, a piece of cheesecake, yeah? One. Now we've got kind of a conundrum now we start to get into, well, do I just I haven't had a donut in like, six years? It'd be really fun to have a donut or or I don't know, or Kurt Nelson 1:15:10 crazy person are you that hasn't had a donut in six years? Oh my gosh, I thought I knew you. I don't. I don't know you at all. Tim Houlihan 1:15:19 No, I look like I'm more donut friendly than I am, but I'm not donut friendly, but Right? But then all these experiential things come into it, and the situation matters. So our preferences could change, whether it's a hot day or a cold day, or it's been if Kurt Nelson 1:15:39 it's a dessert or if it's just a snack, right? I mean, they're like all. There's so many factors, so your preferences aren't stable in that perspective, right? And then again, going back to this, that was we talked about this in the intro. It's the do I pick a beer? I mean, how much am I willing to pay for a beer. You know, it's the same damn beer, but yes, it changes how I think about it. If I know you're going to buy it from a fancy hotel, you know, resort area, versus the little shack on the corner that's down there, which seems totally irrational, but it's how we work. Tim Houlihan 1:16:24 And I would argue that the dynamism of, if you're sitting in the resort hotel bar and and they say, and they say, you want a beer, and I say yes, and I want this particular product, and I know that that that product goes for, you know, less than half of whatever I'm paying for it at the retail store, I'm still going to pay it because I'm having that experience of sitting in the ambience of that lovely luxury resort hotel. Kurt Nelson 1:16:52 There's value in that. The where there isn't value is when you bring me that beer and I'm sitting on the beach and I don't the beer. I don't know where the beer came from, or if I assume the beer came from one versus the other dude, you know, and that gets into that whole conundrum, do I? I'm willing to pay $6 for the beer from the corner place, and I'm willing to pay $10 for the beer from the resort, and but when you're on the beach, you're not getting the benefit of either one of those. I'm not getting. Yeah, it doesn't matter, but you could make a profit and just go, Hey, I bought this beer at the resort, and so I'll pay you $10 when, really, in fact, you bought it at the corner, because I'm I would be none the wiser. You know, Tim Houlihan 1:17:42 you know me too well. Kurt, you're always trying to make a buck 10. Well, in fact, I'd probably go, and I'd go, I'd find a Costco and buy it in bulk, and then it would be only $3 and I would tell you that I only have this one. I played the scarcity game, and there's only one left. Yeah. So I normally only charge 10, but because it's the last one, I'm gonna have to charge 15, sorry. Kurt Nelson 1:18:07 So So framing is an important aspect. Then, huh, Tim Houlihan 1:18:14 especially when our preferences are dynamic. Yes, it makes a huge difference. And that also ties into happiness. What about happiness? Happiness is dynamic, right? Like there is no single objective measure for happiness. We can't put happiness on a spreadsheet and just say today it's a 9.6 Kurt Nelson 1:18:35 Well, in your happiness is you know how you feel? I will never be able to know, right? I won't know. Oh, you can get you give yourself a 9.6 on the happiness scale today. But is your 9.6 my 7.4 or is it my 10.8 we can't because I'm much happier than you. I'm always above 10, above 10 because my happiness level goes to 1111, I'm one happier Tim Houlihan 1:19:08 because it goes to 11. Kurt Nelson 1:19:10 But so but again, this is this. That's an that's an absolutely interesting aspect, right? It is happiness is dynamic in and of itself. It is also subjective. It's this idea of the expectations that we have the situation that we're in. Are we reflective back on it? Is it something we are anticipating? Are we in the moment? There's all of those factors that come into play. Tim Houlihan 1:19:39 Yeah, when I was graduating from high school, I filled out a career in interest form, and it came back and said, you'd be really good as being either a priest or a forest ranger. And, well, you laugh now, but I was, I'm really good with solitude. You know that? That's totally fine with me, but at that particular time in my life, I was really good at it because of the environment that I was living in. Yeah, and just spoiler alert, I didn't become either a forest ranger or a priest, either one. You know, I went off in a totally different direction, but, but those preferences were actually sort of a natural outcome of the world that I was living in and the life that I was living at the time. So in some ways it wasn't, it wasn't odd, but it really wasn't who I was at the core of who I am. It was just reflecting my circumstances. Kurt Nelson 1:20:37 But is that? Is that a result of where your life then where you took your life you might have if you decided to become a priest, would you have been more of that? Would would Tim the podcaster and cool guy, you know, have evolved instead of that to be Tim the priest, yeah, yeah, this and you're going, that's not really who I am at my core, but that core is developed because of everything that you've experienced and gone through in your life. That's right. And so, I mean, we are creating who we are all the time again, going back to our preferences, our preferences are being dynamic, that the preference I have isn't necessarily the preference that I had yesterday, because I am not the same person I was yesterday. And so Tim Houlihan 1:21:38 Wow, for not liking philosophy, that's a pretty philosophical thing to say. There Kurt Kurt Nelson 1:21:44 not like philosophy. You know, most of it's well over my head. I don't understand Tim Houlihan 1:21:49 you don't like philosophers or what. Kurt Nelson 1:21:53 I wish I could follow along with what you're saying, but it just you run me in circles, and now I'm chasing my tail that I don't have. So okay, all right, what else Tim Houlihan 1:22:05 I think that that's a good question. Maybe the last thing that I'd want to just say is that I want to reinforce this idea that because our preferences are dynamic, we are, in many situations, apt to be open to the power of persuasion. Yes. And you know, again, we've been spending a lot of time on Robert cialdini's work recently and influence. But it certainly makes me think that in this world where our preferences are not rock solid, and most of the time they're not, and in many situations that they're not, we're going to be subject to to a variety of persuasion techniques, and we were joking about them earlier. But I think that it's important to remember that if you're going to make important decisions that reflect that are long term in nature, have long term consequences, get in touch with who you are, at least at the moment, and try to make the best decisions that you can. Kurt Nelson 1:23:05 I think I'm going to tap into that too and add understand who you are in the moment, but be open to the idea that who you are today is probably not the same person that you will be tomorrow, next month, next year, and in your decisions, take that into account. Not that you can predict Tim the priest becoming Tim the podcaster, but you should at least understand that who you are today isn't the person that you will be in five years, 10 years, etc, the Dan Gilbert component, oh, yes, looking at all that, right? Yeah, exactly. Anything else you want to cover, I think that's it. I think we can wrap it up. Okay, so we mentioned Robert Cialdini, you just did right? And we want to let you know that we are actually doing a lot of thinking about Robert Cialdini, because we are putting together a three part series on his work and life, and that should be coming out March ish, hopefully of 2026 I know you have a hard number here, but I know how we work, so spring time of 2026, and we're super excited about it, where we've done 10 plus hours of interviews with Bob and 15, no, almost 20 different other people talking Bob's work and influence. So super excited. Tim Houlihan 1:24:40 Just to clarify, spring to somebody in Minnesota means like June 15, right Kurt Nelson 1:24:47 in the last snow melt. So it's dynamic, Tim as we just like our happiness, right? Yeah, okay, Tim Houlihan 1:24:55 by the way, if you are not signed up for our sub stack, I would want to. Encourage you to go out and check out our sub stack. Please. We'd love you to join, and if you have other people that you'd like to share it with, please do that as well. It's there's a free option. But of course, if you feel like being generous, we're more than happy to accept your generosity. Kurt Nelson 1:25:17 Yeah. And with that, we hope that you use Alex's thoughts on coherent arbitrariness and use it this week as you go out and find your group you you. Transcribed by https://otter.ai