Richard H. Thaler — The Winner's Curse and Going Against the Established (#830, with Nick Kokonas)
Executive Summary
A Tim Ferriss Show conversation with Nobel-winning economist Richard Thaler, founder of behavioral economics, about what economics assumes, why people are not the perfectly rational 'agents' in textbooks, and how this applies to pricing, savings and mental accounting. PARTIAL COVERAGE: the episode runs about 118 minutes and the available caption text is cut off, so this summary covers roughly the first 40 percent, up to the discussion of mental accounting, and not the later topics. Examples and figures are the speakers' own. This is a summary of their views, not financial advice.
Key Takeaways
Why people sometimes want fewer options
Thaler tells a story of hiding a bowl of cashews at a dinner party, where guests thanked him for removing the choice.
What economics assumes
He says economics is people interacting in markets, but after World War II models assumed people maximise perfectly because that was easiest to write down.
Agents, not people
He says textbooks speak of agents, not people, and that a model counts as better if its agents are smarter.
Fairness and surge pricing
He says people are psychological in markets, and that Uber surge pricing of 10 times made little money while upsetting millions, which he thought was dumb for a firm needing city permissions.
Status quo and savings plans
He says only about half of new workers joined matched savings plans in the first year, and that the status quo bias suggests changing the sign-up default.
Basketball and three-pointers
He says the value of the three-point shot was slow to be recognised, and that the 76ers general manager, a friend, was among the first to calculate that 0.4 times 3 beats 0.5 times 2.
Why people sometimes want fewer options
Thaler tells a story of hiding a bowl of cashews at a dinner party, where guests thanked him for removing the choice.
What economics assumes
He says economics is people interacting in markets, but after World War II models assumed people maximise perfectly because that was easiest to write down.
Agents, not people
He says textbooks speak of agents, not people, and that a model counts as better if its agents are smarter.
Mental accounting
He says economic theory says money has no labels, but humans sort it into categories, so a windfall in a pair of jeans feels different from other money.
The Conversation Breakdown
Why people sometimes want fewer options
⏱ Untimed topicThaler tells a story of hiding a bowl of cashews at a dinner party, where guests thanked him for removing the choice.
What economics assumes
⏱ Untimed topicHe says economics is people interacting in markets, but after World War II models assumed people maximise perfectly because that was easiest to write down.
Agents, not people
⏱ Untimed topicHe says textbooks speak of agents, not people, and that a model counts as better if its agents are smarter.
Fairness and surge pricing
⏱ Untimed topicHe says people are psychological in markets, and that Uber surge pricing of 10 times made little money while upsetting millions, which he thought was dumb for a firm needing city permissions.
Status quo and savings plans
⏱ Untimed topicHe says only about half of new workers joined matched savings plans in the first year, and that the status quo bias suggests changing the sign-up default.
Basketball and three-pointers
⏱ Untimed topicHe says the value of the three-point shot was slow to be recognised, and that the 76ers general manager, a friend, was among the first to calculate that 0.4 times 3 beats 0.5 times 2.
Why people sometimes want fewer options
⏱ Untimed topicThaler tells a story of hiding a bowl of cashews at a dinner party, where guests thanked him for removing the choice.
What economics assumes
⏱ Untimed topicHe says economics is people interacting in markets, but after World War II models assumed people maximise perfectly because that was easiest to write down.
Agents, not people
⏱ Untimed topicHe says textbooks speak of agents, not people, and that a model counts as better if its agents are smarter.
Mental accounting
⏱ Untimed topicHe says economic theory says money has no labels, but humans sort it into categories, so a windfall in a pair of jeans feels different from other money.
Core Frameworks & Ideas
People, not agents - Thaler's one-line summary
Design for real customers and employees, not perfectly rational ones.
Money has labels - Thaler's mental accounting
People treat money differently depending on where it came from.
Status quo bias - Thaler's observation
Defaults shape whether people sign up.
People, not agents - Thaler's one-line summary
Design for real customers and employees, not perfectly rational ones.
Money has labels - Thaler's mental accounting
People treat money differently depending on where it came from.
Status quo bias - Thaler's observation
Defaults shape whether people sign up.
Actionable Next Steps
- ✓Look for one place where your product assumes people always choose the best option.
- ✓Check what default a sign-up form uses and whether it helps people.
- ✓Note one case where you treat money differently depending on its source.
- ✓Check the savings-plan and surge pricing figures against public research.
- ✓Look for one place where your product assumes people always choose the best option.
- ✓Check what default a sign-up form uses and whether it helps people.
- ✓Note one case where you treat money differently depending on its source.
- ✓Check the savings-plan and surge pricing figures against public research.
Notable Quotes
“Economics is really two things.”
“In economic theory, there's money and it has no labels.”
“Everyone is a psychological creature when it comes to markets and interaction.”
“Economics is really two things.”
“In economic theory, there's money and it has no labels.”
“Everyone is a psychological creature when it comes to markets and interaction.”
The One Thing to Remember
Thaler says that if your customers and employees are people, not the perfectly rational agents of textbooks, you have to do business differently.