Kelly welcomes Richard Thaler, the 2017 recipient of the Nobel Memorial Prize in Economic Sciences to the podcast along with his co-author, professor Alex Imas to talk about their updated version of Thaler’s seminal book “The Winner’s Curse.” 

One of the stories I love from the book was how Richard saw how farmers used a kind of honor system when selling produce – but it wasn’t completely an honor system. 

“I was at Cornell at the time and I thought that these farmers had the right model of human nature. That if you put fresh corn out on the table and ask people to pay, enough will to make it worth your while to put the stuff out there. But the box containing the money was nailed to the table because if you just left the money out, there are selfish jerks and somebody will steal the money. And so, it’s not that everybody’s a jerk, but there are some people who are jerks. And quite amusingly, Alex and some other behavioral economists were at a conference in Switzerland this summer, and I got a photo texted to me from them. There was the same thing: in the Alps there are these random little cute houses that you’re just hiking along, there’s nobody in the house, but you walk in if it’s raining or you just kind of want to rest. And in this particular house there was a spread of wine and cheese and a little box that said take the cheese, take the wine, take whatever you want, put the money in. The box was locked down. Same idea.” 

Can you explain the ultimatum game? I think that illustrates a similar point. 

The rules here are pretty simple. I give $100 to Kelly, and I tell Kelly that you can divide this with Alex, and you just decide how much you want to keep and how much you want to offer to Alex. And you make an offer to Alex and… it’s an ultimatum, meaning take it or leave it, Alex. So, either he takes it and you get what you kept, and you give him the rest, or he says no, in which case you both get nothing. And so, economic theory predicts that everybody’s a selfish jerk. And you know that Alex is a selfish jerk. But he prefers some money to none. So, you offer him a dollar, because a dollar is more than nothing. And he takes it. And believe it or not, there were serious game theorists who thought that would happen.  And there was a German economist named Werner Guth who started running these experiments. And what you find, not surprisingly to anyone who’s not an economist, that if you offer less than about 20 % of the pot, you’re going to get an impolite no. So, again, this is just a little game to illustrate human nature. And you know, I think it’s a particularly interesting game in the times we’re living in. 

Alright, one more – explain the Faulty Telescope. 

Essentially, the way the faulty telescope works is the way that people should think about time is that the distance between tomorrow and the next day, the next day and the next day, the day before that, the day after that, it should all be the same distance, right? But it shouldn’t be. Today shouldn’t be special compared to tomorrow or something like that. Everything should kind of just be linearly progressing. You should think about retirement even though that’s at some point in the future. But that shouldn’t be in kind of an infinite amount of time in the future. And the faulty telescope is this idea that we put a lot more weight on things that are happening sooner than we do on things that are happening later.” 

Photo Credit: Simon & Schuster