November 19, 2025 • 60 mins
On this special edition of Masters in Business, Barry speaks with Nobel Prize winning economist Richard Thaler, along with Alex Imas, Professor of Behavioral Science, Economics, and Applied AI at the University of Chicago Booth School of Business about their book, "The Winner's Curse: Behavioral Economics Anomalies, Then and Now". Recorded live on stage at the Economic Club of New York.
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Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio news. This is Masters in
Business with Barry Ritholts on Bloomberg Radio.
Speaker 2 (00:16):
Hey, it's a bonus Masters in Business Live. One of
my favorite economists, Richard Taylor and his colleague at the
Booth School of Business, Alex Emos, We're going to give
a presentation at the New York Economic Club. And they said, Hey,
why don't we make this a live conversation and literally said, hey,
(00:40):
how do you feel about being our intolocutor And any
opportunity I have to spend time with Taylor, I jump
at So sure, let's do that. And so a few
weeks ago I sat down with Professor Richard Thaylor and
Professor Alex Emos, both of the Booth School of Business
(01:02):
at the University of Chicago, live at the New York
Economic Club, talking about their new version of the book,
The Winner's Curse. It was about thirty forty minutes of conversation.
We had some questions from the audience. It was fabulous.
In fact, it was so good. We're going to have
them back in the studio for a full Masters in Business,
(01:26):
which is now already recorded. It won't be out for
a couple of weeks, but in the meantime, to give
you a taste of what that full interview is like,
here is our live Masters in Business conversation at the
New York Economic Club. I'm kind of fascinated by not
(01:49):
only this book, but Richard's entire history, and a lot
of what I know about him really came to the
public eye through the Anomalies columns that began so long ago.
Tell us a little bit about the genesis of what
(02:10):
the Anomalies columns were and how that led to this book.
Speaker 3 (02:15):
Sure, so, about nineteen eighty six, somebody at the American
Economics Association decided it would be a good idea to
start a new journal in which the articles would be
accessible to at least all economists and grad students and
(02:37):
even undergrads, because articles have become more and more specialized.
So that was the idea. I had a friend. I
have a friend named hal Varian who has been the
chief economist at Google. He was a mere professor at
the time and on the advisory board of this journal,
(03:00):
and they were planning some pieces that would appear in
every issue, which is once a quarter, and Hall and
I cooked up the idea of having a feature on anomalies.
So what's an anomaly in economics? An anomaly is something
that cannot easily be explained using the standard assumptions that
(03:26):
people are really smart, unemotional, selfish, no self control problems,
basically not like anybody you know. And so as a
result of that, there were lots of anomalies. And I
(03:46):
did this for almost four years. When it looked like
a pile of them looked like a book, I stapled
them together and that was the original version of The
Winner's Curse, published in nineteen ninety two.
Speaker 2 (04:06):
So the book comes out in ninety two. I was curious,
how was it received by traditional economists. You're challenging core
thesis that they deeply believe in, and did the lay
public take any interest in us?
Speaker 3 (04:22):
So, you know, I'm very good friends with Steve Levitt
and Stephen Dubner. They basically invented a best selling economics book.
Before Freakonomics, there was no such a thing. So this
is pre pre freeconomics. It was read, but the profession
(04:45):
had read the articles in the journal, and the book
was an attempt to reach out. But you know, I've
often said that, you know, I'm a professional heretic and troublemaker,
and I say, I didn't change anybody's mind over the
(05:07):
course of my career, and after realizing that, I decided
instead to have a strategy of corrupting the youth. And Alex, so, yeah,
I'll let Alex tell his version of the story. But
(05:29):
you know, the book sold better than expected and was around.
It was still in print, but for various boring reasons,
it was going to go out of print, and the
publisher asked me if I wanted to freshen it up,
(05:50):
and that turned into a well we first talked about
that five years ago, so you can see how long
it took. But that's that's the story of the book.
Speaker 2 (06:04):
So, Alex, how did you get corrupted by doctor Thaylor?
Speaker 4 (06:09):
I didn't need much much pushing, so I was.
Speaker 5 (06:12):
I was a neuroscience undergrad major, so I was already
kind of interested in, you know, how human minds actually worked.
I took a bunch of abnormal psychology and things like that,
but science like STEM classes were really really hard, and
so I took economics as kind of a way to
boost my GPA. So and I thought it was fun
(06:34):
that the algebra was interesting, and but I didn't, you know,
I didn't think of much of it. And then at
some point I was like, I was moving and I
was a planing of medical school. By the way, I
was pre med, good immigrant kid, and I was I
was driving cross country and I was listening to the
radio and Richard was on the radio.
Speaker 4 (06:55):
This was two thousand and eight. I had no idea
who Richard was. I didn't know what nudge was.
Speaker 5 (06:59):
He was on on NPR talking about NUDGE and it
was about about this field called behavioral economics that I've
never heard about before. And I was like, wait, I
could take this and combine it with that, and that's amazing.
I got to Los Angeles, went online, applied to em
PhD programs right away, didn't end up going to medical school,
(07:19):
and I ended up going to UC San Diego for
my PhD.
Speaker 4 (07:23):
And lo and behold, Richard was not on the roster.
Speaker 5 (07:26):
But he spent his winters in San Diego in the
office next to me.
Speaker 4 (07:32):
And you know, I would come out at first sight.
Speaker 5 (07:39):
You corrupted me just way earlier, and so I was,
you know, we started chatting.
Speaker 4 (07:44):
Then I got a job at Carnegie Mellon.
Speaker 5 (07:46):
Afterwards, we kept in touch and then I got a
job offered at University of Chicago, and I think like
I got there in July twenty twenty.
Speaker 4 (07:54):
I think within like a few months, you gave me.
Speaker 5 (07:56):
A call and say, hey, my publisher is asking I
should freshen up the book, maybe to give it a
new preface, but I want to do something a little
bit more ambitious than that, and you know, we can
play around with it, add some new things. It'll take
about six months, easy, easy work.
Speaker 4 (08:13):
We get to hang out, and.
Speaker 5 (08:15):
I jumped at the opportunity, and then we kept talking
and then it grew and grew and grew, and that
book is about two thirds new content at this point.
So it took five years of writing and going back
and forth. And you know, there's been thirty years of
research since nineteen ninety two, and so that's kind of
the book. The original winner's courses in there a little
(08:37):
bit rewritten and freshened up, but the thirty years of
research are now in there too. So every single anomalies
column there were new anomalies that were added to it that.
Speaker 4 (08:47):
Richard had written afterwards.
Speaker 5 (08:48):
But also every single chapter comes with an update basically
reviewing everything that's happened in the last thirty years of behaviorly.
Speaker 2 (08:55):
So I'm going to circle back to the book in
a moment. But for people who are UNFLI familiar with
Alex this wasn't just a random kid next door. He
wrote what could be one of the most cited finance
papers of recent years, called I'm going to get this wrong,
Selling fast and Buying Slow?
Speaker 3 (09:15):
Is that right?
Speaker 2 (09:17):
Selling fast and Buying Slow? It's a chapter in my
book I've written about it, and you describe how professional
fund managers are really really good buyers of stocks. What
turns out they're terrible sellers of stock. Nobody had discussed
this in this sort of detail, and that's one of
the reasons that paper has become so highly regarded. But
(09:39):
I just wanted the audience to be aware of who
you were. Tell us what it was like working on
the book with Richard.
Speaker 4 (09:50):
It was just a lot of fun.
Speaker 5 (09:51):
I mean, we would get on the phone and you know,
why don't we talk about this topic.
Speaker 4 (09:58):
A lot of the research?
Speaker 5 (10:00):
You know, I kind of wrote, I took lead on
the updates and we kind of went back and forth
on them, and then it was you know, just a
lot of a lot of conversations over the phone during
COVID it was a lot of zoom. Then it moved
on to you know, we were colleagues at the University
of Chicago coffees, just kind of going back and forth
on what should be included, what push, what where. A
(10:23):
lot of it was about framing of where the field
has come and where what we kind of found out.
I don't think this was obvious when we first started
the book, is that where the field has come is
really gone from these lab experiments that were in the
original columns in the Winner's Curse, where it was college students,
low stakes, maybe not even any stakes at all. And
(10:43):
the pushback from the economics profession was, look, we don't
really care about students, We care about market participants.
Speaker 4 (10:49):
The updates are all about Look.
Speaker 5 (10:51):
All of these anomalies, as you mentioned, replicate in some
of the most sophisticated economic participants out there, such as
institutional investors in the case of my paper.
Speaker 2 (11:00):
So there are some ideas in the book down in
effect status quo biased Winners Curse that were or today
are everyday vocabulary, but back then people really know about it.
The whole book has aged fairly well. What do you
think about those original ideas, Richard, and how they present
(11:24):
in the modern world.
Speaker 3 (11:26):
Well, I mean, the one of the one of the
motivations for writing the book is the so called replication crisis.
It's not really a crisis, but there's there has been
several papers and several fields where the original experiments cannot
(11:49):
be reproduced, and some of those papers are, let's say,
adjacent to behavioral economics, and I was worried that some
of that bad aroma would rub off on us. And
(12:10):
I think the reason why things replicate so well is
when I was choosing what topics to write about, I
was picking big stuff. I wasn't picking some little minor thing.
I was picking something with a very big effect size
(12:32):
and topics. There had already been several papers. So you know,
it's not when we started this that we realized there
really wouldn't be any problems. But we were pleasantly surprised
not to find any anything in the attic, so.
Speaker 2 (12:57):
To speak, nothing aged poorly. No, not really what has
persisted or if anything, have become more widely accepted today.
That was a pleasant surprise. Amongst the chapters in the book.
Speaker 5 (13:15):
WHOA the endowment effect now so you know, back then
Bick in the ninety two book, it was about mugs
and pens. So the endowment effect is this phenomenon where
you know, buyers and sellers are in a market. The
idea is that if you assign a good to a
buyer seller. There's a theorem in economics that underlies Basically,
(13:35):
it's one of the fundamental theorems in economics called the
coast theorem. Basically, it means that it doesn't matter who's
assigned property rights, there's going to be transactions where people
the person who wants it the most or values are
the most, that's going to end up with it. And
what Richard showed in a paper with Jack Netch and
Danny Kahneman is that basically, you know half, Let's say Barry,
(13:57):
you are sitting in a classroom. I'm sitting in a
class the professor gives me a mug and doesn't give
you a mug. You have some money in your pocket,
and he's asking what is the lowest amount that you
would be willing to sell the mug? And he's asking you,
is how what's the most you'd be willing to pay
for the mug? Because it doesn't matter we were randomly assigned,
we should have basically the same average valuation, but it
(14:17):
turns out just because I own the mug, I start
valuating it more. This is called the endowment effect, and
what Richard and Danny and Jack showed is that it's
about two and a half times more. So there's like
a breakdown in the market because of this endowment effect.
So what have we found? What has been documented thus far?
There's a paper in the American Economic Review, the top
(14:40):
journal in the profession, showing that there's an endowment effect
for houses, and you can actually estimate exactly the amount
of loss aversion that people have which drives them to post.
If they own the house, they post the house at
a higher price. And the number the actual quantitative number
in housing markets. This is the crazy part about it
(15:01):
matches the number that Richard documented in the lab. So
there's a there's there's obviously a lot of back and
forth between different experimental is, different different experiments and stuff
like that, but even most of the quantitative magnitudes have
been great.
Speaker 2 (15:17):
It's robust. Let's talk about something that economic theory says
shouldn't happen. Ultimatums and cooperations let's talk about the ultimatum game.
Tell us a little bit about that.
Speaker 3 (15:29):
Okay, sure, So the ultimatum game is pretty simple. Let's
say I give Barry one hundred dollars and I tell
him that he's got to share it with Alex. He
can make Alex an offer for some amount of the hundred.
You can give all.
Speaker 2 (15:48):
Hundred unlikely, I'll take it.
Speaker 3 (15:53):
Alex gets to say yes or no, So it's an ultimatum.
And if he says yes, deal he says no, they
both get nothing. Now that game was invented, It didn't
really surprise us. It was invented because we kind of
(16:15):
knew what was going to happen, which was so. But
before that, let's say, what does economic theory say and
what does game theory say? Game theory says people are
selfish and Alex, if you offer him a dollar, don't
insult him with a quarter or a penny. But if
(16:38):
you offer him a dollar dollars or something, and he
knows the dollars worth more than zero, so he'll take it.
And you know that he knows that, and so you
offer him a dollar and he takes it. No, no
real world person has ever done that.
Speaker 2 (17:00):
Meaning in the lab experiments, what's the number under twenty dollars.
Speaker 3 (17:05):
Under yeah, offers less than twenty percent of whatever the
pie is are more likely are likely to be rejected.
Allfers tend to be fifty to fifty. The profit maximizing
offer is forty percent. So there are a whole We
have two chapters that are about games sort of like this.
(17:29):
The big lesson is that in the world, you're dealing
with people, and if you make insulting offers, they may
get rejected. And if you want cooperation, you have to
be cooperative. Let me tell you a story that's related
(17:50):
to this. Years ago, my wife and I were in
Thailand and we needed to take a cab twenty minute
ride like three blocks here, but it was ten miles
and changed my so and everything is negotiated there. So
(18:11):
I'm negotiating with this cab driver and after wild negotiations,
we agree on some fare out four dollars and we
get to the restaurant and then there was a question
of how are we going to get back? And the
(18:32):
cab driver said, would you like me to take you back?
And notice there's a mutual risk of defection. He could
not be there when we get done with dinner, or
we could get done early and go back with somebody else.
He proposed a contract that no economist would ever recommend.
(18:55):
The contract was, he said, don't pay me anything perfect.
So when dinner's over, of course we went to look
for this cab driver. We're not going to stiff the
cab driver. And in fact he dropped us somewhere else
for some other same thing. Now, what's the lesson there?
(19:18):
He knew that by being trusting he would engender trust,
and that's like a big important lesson both in business
and in life and in politics.
Speaker 2 (19:39):
Coming up, we continue our live conversation with doctor Richard
Taylor and doctor Alex Emos, both of the Booth School
of Business at the University of Chicago, discussing the newest
edition of their book, The Winner's Curse. I'm Barry Ridults.
(20:07):
You're listening to Bloomberg's Masters in Business. Let's continue our
live conversation with Richard Taylor and Alex Amos discussing the
new edition of the book The Winner's Curse. So let's
talk about some other things within the book. The title
The Winner's Curse is really a fascinating story and leads
(20:31):
so many places. Let's start off talking about oil leases.
Tell us about the winner's curse.
Speaker 3 (20:38):
You want to go, you want me to go, you
can do it. So this is the only chapter in
the book that the research original research was not done
by psychologists or economists.
Speaker 4 (20:55):
The lord one price.
Speaker 3 (20:57):
Oh, you're not calling financial economists as aonymous. Oh, and
that gets back to booth. You're going to be in
a lot.
Speaker 4 (21:05):
I'm in a different part of the building.
Speaker 3 (21:09):
So finance is just a branch of economics, it's not
its own field. So we're both dabblers in finance. So
the research on this was done by engineers at Atlantic
Ridgefield ARCO. And here's what they found. They were bidding
(21:32):
for oil leases in what I still call the Gulf
of Mexico. And what they found was that for the
leases they won, there was less oil than they expected.
And they're thinking, we have great geologists, how can we
(21:55):
be wrong? What's going on? And then they got an insight.
The essence of the insight is that when you're in
an auction, the ones you win are not a random
sample of your bids. The auctions you win are when
(22:18):
you bid high. Right now, that sounds like a pretty
obvious point, but it's not because if there are a
lot of bidders. Let's suppose that the version of this
that we would run in classrooms is we'd have a
jar of coins, and we'd have people bid for the
(22:40):
amount of money in the jar, not the coins. And
what happens the average bid is, let's say the jar's
worth a hundred dollars, the average bid is much less
because people are risk averse, but the winning bid is
always more than a hundred, because it's the most optimistic
(23:00):
person or the person with the first eyesight or whatever.
So this insight by the engineers applies everywhere, and contractors
have either learned this or go out of business right
(23:22):
because when they're bidding on a job, it low bid wins,
and if you forget the roof or the hvac, you're
going to go massively over. And so one of the
interesting follow up experiments was to take a bunch of
contractors and put them into one of these experiments and
(23:46):
see what would happen. And the experimenters were a little
worried that the contractors were going to take them to
the cleaners, but they didn't. The reason is the contractors
never understood the math of this. Instead, they had a
fudge so they would figure out what they thought they
(24:06):
could build it for and then add twenty five and
that covers the stuff they forget. But they didn't have
that rule for bidding for jars, and so they were
no better than the undergrads in The Winner's Curse.
Speaker 2 (24:23):
How is this held up since what does the latest
data on the Winter Scurse look like?
Speaker 5 (24:29):
Well, the Winter Skurs will as we discuss in the update,
that it's held up quite well as far as you know,
the experiment replicates. First of all, you know, you run
it in Harvard, you go into econ one to one
at Harvard, you auction off of jar coins. They're going
to be overbidding for the for the coins it's just
(24:49):
and then you know it's hold up, held up with
the NFL teams where you're you're basically bidding for free
agents and things like that.
Speaker 4 (24:56):
So it shows up in the data and the big file.
Speaker 5 (25:00):
Follow up to The Winner's Curse has been the idea
the kind of abstracting from the phenomenon of the Winter's
Curse but thinking about like what leads to the Winter's
Curse in the first place, psychologically and psychologically, what leads
to the Winter's curse is you not taking into account
that you're bidding against other people. You're not just kind
of bidding alone. Oh I think this is worth this much.
(25:21):
That's how much I'm going to pay, shading down a
little bit. It's the fact that if I'm bidding with
a lot of people, if I end up winning, that's
real bad news for me because everybody else is just
as smart as me, and they're bidding a great they
with the similar information. And if I'm the one who's winning,
I'm making a mistake. So you kind of have to
bid down. And so the other follow up experiments have
(25:44):
basically explored where this sort of phenomenon shows up in
other places. So, for example, one setting is you know,
kind of thinking about there's the guessing game to be
beauty contest game, which is meant to model from from
Caines exactly, so the follow up to the idea behind
(26:06):
the winner score. So Kines had the model for the
stock market where he said, the stock market is a
beauty contest in the sense that it's not that the
fundamental value of a stock would determine its price, it's
what everybody else thinks the fundamental value is it's all
about the belief.
Speaker 4 (26:22):
So there was this.
Speaker 5 (26:23):
The reason it's called the beauty contest is the newspapers
used to run these contests where you had a whole
page of faces, and the winner of the contest was
the one who chose the face that everybody else chose
as well. And so he said, the stock markets just
like that. And so you run the beauty contest by
saying something like, all right, what is guess the number
(26:44):
between one and one hundred? The room guesses, everybody submits
a guess, and the winner is the one who guesses
two thirds of the average. Now again this game, think
about it for a second. This game has an e
economic solution. Then what's the solution we can we can
do right now?
Speaker 3 (27:03):
It's the New York Economics Club. Somebody should know the equilibrium.
Speaker 5 (27:07):
Anybody have a guess for the Nash equilibrium?
Speaker 4 (27:12):
Yeah, should be Yeah, it should be one.
Speaker 3 (27:16):
It should be one, would be zero or one.
Speaker 5 (27:17):
If if the lowest number is one is one, it's one.
And the reason is the following. Let's say I think
i'm I'm I'm playing against a bunch of you know,
random people. They don't know what they're doing. They're guessing randomly.
If everybody guesses randomly, the average is going to be fifty.
So I should do two thirds of that, right, But
then I think, all right, if it's two thirds of that,
I guess that. Wait, well, they're probably going to think
(27:39):
the same thing, and so they're going to guess two
thirds of fifty, so I should do two thirds of that.
Speaker 4 (27:44):
But then I think, wait, no, hold on, hold on,
I'm going to do.
Speaker 5 (27:48):
Two thirds of that, and two thirds two thirds, two
thirds I get to one, right, So that's the Nash
equilibrium solution.
Speaker 4 (27:55):
Would you win guessing one?
Speaker 5 (28:00):
No, you would not win guessing one because other people
are not guessing one. So the way that when you
run this experiment, essentially what you see is the majority
of people guess something like fifty times two thirds times
two thirds, so they'd make it to level two and
(28:20):
then they stop.
Speaker 3 (28:23):
I played this game once in the Financial Times with
two business class tickets from London to the US as
a prize, and the winning guess was thirteen. So there
were lots of zero ones and they didn't win. There
(28:44):
were a bunch of ninety nine.
Speaker 2 (28:46):
And one hundred they didn't understand the game.
Speaker 3 (28:48):
No, they were jerks trying to skew the numbers. Yeah,
and they were all from Oxford and they were trying
to pull it all. They weren't disguising they all had
the same dorm address. But but but it was one
(29:10):
guest per person. So my tas and I were the
judges and we had thirteen hundred entrance. But yeah, so again,
this is the sort of thing that we can do
in class. If you do it with NBA students, you're
going to get a number in the teams when.
Speaker 4 (29:31):
Thirteen eight something like that.
Speaker 5 (29:33):
The more so kind of oh I've taken economics, they'll
go like eight, Oh, I haven't taken economics.
Speaker 4 (29:39):
Thirteen sixteen.
Speaker 5 (29:41):
So it's it's always above one, and it just mattered.
You can see these spikes in the data. That's the
craziest part about it.
Speaker 3 (29:47):
So, you know, I've written a paper with one of
my former students showing that the NFL draft is subject to.
Speaker 2 (29:55):
This literally where I wanted to take this inside world.
Speaker 3 (29:58):
You know, esp is one one of my one of
my skills. Arry, So, uh, well, you probably are all
familiar with the NFL draft that the end of the season,
the worst team gets the first pick of the eligible players.
What you may not know is there's a chart that
(30:20):
the Dallas Cowboys first created, one of the one of
the owners that plots what somebody thought was the should
be the prices to trade picks. So, for example, you
can trade the first pick for the seventh and eighth picks,
or for half a dozen second round picks. And what
(30:43):
we show in that paper is the early picks are
massively overvalued.
Speaker 2 (30:48):
And where where does the value show up? Round twound?
Speaker 3 (30:52):
Yeah, round two. Now, even bigger anomaly is you can
trade this year's pick for next year. And the rule
of thumb is if you trade a second round pick
this year, you get a first round pick next year.
So you move up one round per year. And we
(31:16):
calculated that's a discount rate of one hundred and thirty
seven percent.
Speaker 2 (31:20):
Really, why such a big discount, right?
Speaker 3 (31:23):
Because owners want to win. Now, we have one former
franchise owner in the room, and I'm pretty sure he
didn't get his money by borrowing at one hundred and
thirty seven percent. But and NFL teams are even more
expensive than NBA teams, But that it's still they still
(31:48):
have that rule. And we're in the process of replicating
that study, and it's.
Speaker 2 (31:56):
All exactly So this conversation reminds me of the discussion
that took place after Michael Lewis's Moneyball. So everyone's familiar
with the book about the Oakland A's and how they
brought a essentially behavioral economic approach to selecting players. What
(32:20):
happened after that book came out.
Speaker 3 (32:23):
Well, it's interesting. I mean, one thing happened is I
got in touch with Michael Lewis, and we didn't know
each other at the time, but through his publisher or something,
I said, if you ever in Chicago, let me know
I'm there next week. And we've become very good friends
and have come to realize that sports analytics and behavioral
(32:47):
economics are the same field. It's trying why, well, what
was Billy Bean, who also lives in our northern California.
What was Billy trying to do? He was trying to
buy a team more cheaply than others by And it's
(33:10):
just like being a portfolio manager, you're trying to buy
undervalued stocks. He was trying to buy undervalued players. Michael
got so interested in this he ended up writing the
book The Undoing Project which is a great book. It's
about my mentors, Danny Kahneman and named mister Vsky. He
(33:31):
did stick an irrelevant chapter in the beginning about Darryl Moury.
Speaker 2 (33:35):
But anyway, the line I was looking to pull from
you is not for nothing, Michael. But what you're writing
about these two Israeli psychologists have been writing about and
experimenting with for years. Moneyball directly led to your relationship
(33:57):
with him and that becoming a book as well.
Speaker 3 (33:59):
Yeah, yeah, And I mean it's about the biases from
psychology and it's also about markets, right, So the difference
between behavioral economics and psychology is markets. So a psychologist
would be interested in the fact that teams are overconfident
(34:22):
in their ability to tell good players from bad. That's
pure psychology. The fact that it gets reflected in the
market for picks, that's economics.
Speaker 2 (34:34):
So let me push back a little bit on this
and The Winner's Curse in that all the topics that
you write about in The Winner's Curse oil leases where
we don't know what the future oil production will be,
first round draft picks where we don't know how that
player is going to perform, and in the market's either
(34:54):
picking stocks, or picking fund managers to pick stocks, or
picking somebody to pick the fund managers in a fund
of fund to pick stocks. They all seem to deal with, Hey,
we really are unaware of how this is going to
play out, and we're making decisions under uncertainty. All of
this comes back to economin and Suvarski.
Speaker 3 (35:19):
Well, I'm not gonna I'm not going to disagree with that.
I mean, look, I became a behavioral economist when I
discovered them. I claim that was my big discovery, was
discovering these two psychologists who were over in Israel that
economists hadn't heard of. And I went and spent a
(35:43):
year at Stanford where when I got winned that they
were going to be there and basically stalked them.
Speaker 5 (35:51):
Well, a lot of the phenomenon they go away when
there's not a lot of uncertainty. The winner's course needs uncertainty. Right,
If we know what the value of the plot is,
there's no winner's curse. It doesn't matter how many people
are bidding.
Speaker 4 (36:03):
If we know.
Speaker 5 (36:03):
So, there's a famous anchoring effect, right, So if I
the anchoring effect is essentially you know, you ask a
question like how many countries are in Africa before but
before I do it, I spin a big wheel, right.
Speaker 4 (36:14):
The wheel has nothing to do with the question.
Speaker 5 (36:16):
And the wheel gets to like seventeen or eight or whatever,
and it turns out wherever that number gets to affects
how what number of people gets about the number of
countries in Africa. But if people know the number of countries,
they're not going to be affected by the wheel. Right,
So all of this has to do Almost every single
behavioral economic phenomenon has is bred and.
Speaker 4 (36:37):
Fed through uncertainty.
Speaker 5 (36:39):
And I think the way that people react to that
uncertainty and shape their preferences and beliefs, that's where all
the biases seep in in the first place. When I'm
certain when experts know what they're doing, when they're you know,
they know the value of the plot, they know what
you know, the whether the stock is going to go
up or down, there's not a lot of biases to.
Speaker 3 (36:59):
Talk, you know. One aspect of this that surprised me
is in the sports world, teams have learned but really slowly.
I mean it's like shockingly slowly. When the three point
(37:22):
shot was introduced in basketball, Darryl Moorey, I always tease him.
He's the general manager of the Philadelphia seventy six ers.
I always tease him that he was the first guy
who figured out that three is one point five times two,
So you should take three point shots because they have
a higher expected value. Every team has somebody who can
(37:44):
make forty of their three point shots, and they make
about half their two point shots. But if you look,
Larry Bird was really good at making three point shots,
and he took two or three a game. Steph takes twenty.
He's a little better than Larry Bird. But now if
you look at that trend, it's really shallow, and it's
(38:10):
the same as football. Teams have learned to punt.
Speaker 2 (38:15):
Less but still sill on fourth down.
Speaker 3 (38:18):
They should go for it on fourth down. They get
it right now half the time they and the closer
they get to if they get over the fifty yard line,
they're more likely to get it right. But they're still terrible.
So the learning is slow, and the reason is people
don't like to look like fools.
Speaker 2 (38:40):
There was a Wall Street Journal article about I don't
remember it was a high school or a college coach
who always went for an on fourth down.
Speaker 3 (38:48):
Yeah, and I love that guy.
Speaker 2 (38:50):
Ten years ago.
Speaker 3 (38:51):
Right, yeah, twenty years ago. Probably he didn't have a kicker.
He didn't have any Yeah, even he he didn't have
a field goal kicker or a punter. Now it's this
is obviously the case for high school because think about
you gotta hike it back to some kid. He has
(39:14):
to catch it, he has to put it down, and
then the other kid has to kick it, and the
weather's lousy. So he just had no kickers and he
was winning the state championship in Arkansas, I mean, not
some place with lousy football. So teams will get better.
(39:36):
People do learn, But you know, people are always asking
me what surprised me. What has surprised me is how
slowly the learning has taken place in Look, how long
did it take it's the World Series? How long did
it take them to add a pitch clock? Baseball had
become unwatchable. They add a pitchclock, It cuts half hour
(39:59):
off the game. Well, you know that's not a genius.
They had twenty four second clock in basketball for forty years,
so they could have figured this out.
Speaker 4 (40:10):
But it's not just sports.
Speaker 5 (40:12):
I think, like the thing that economists push back with
behavioral economics, it's oh, people just don't know, have opportunities
to learn right in the endowment effect. If they trade enough,
if people know what they're doing for long, even for
a short period of time, they'll figure it out. These
biases are going to go away. That's the whole Like, look,
these are just confused subjects. They go to the market,
they'll get some feedback, everything will be fine. But I
(40:34):
think that's the biggest I think with Richard being surprised,
I think not just in sports everywhere that these anomalies
have held up, and the fact that these anomalies are
holding up in very, very experienced people. So in the
paper with traders, you know there, we find that they
trade really well when they're buying, but on the selling
they have to do a lot of selling. They sell
all the time, they have to sell it order to buy.
(40:56):
They sell all the time. Some of them have years,
decades of experience, and they're doing worse than random and
they're selling well.
Speaker 2 (41:03):
Explain that, because that was what was so brilliant about
that paper. In order to figure out how well they sold,
you guys came up with the solution of let's randomly
sell anything else from that manager's holdings and compare it
to what they actually sold, right, so what are the results?
Speaker 5 (41:21):
The results are, so we basically said, look, we want
to give these guys a large benefit of the doubt.
We don't know what their conditions are, so we're just
going to compare them to a very very easy counterfactual.
I don't know what they're facing. I'm just going to
throw a dart in their portfolio and sell that instead.
And they did worse than random. And basically what we
(41:42):
found is that they were they didn't have they weren't
spending a lot of time on the selling decisions.
Speaker 4 (41:48):
We interviewed them and we said, like, what are you
guys doing. It's like, ah, selling is not really that important.
It's not really an investment decision.
Speaker 5 (41:54):
And I'm like, you know, all right, I told my
friends at the University Chicago finance department. They were very
surprised that selling wasn't an investment decision, and so they
were just not really paying attention to it. So they
were just selling the things that were very very salient
on their screens and the things that they were least
(42:14):
attached to. So going back to the endowment effect, they
were selling the things that they had recently bought, but
if you're good at buying, that's not what you should
be selling.
Speaker 4 (42:23):
You should be holding onto that for longer to get
that alpha out.
Speaker 5 (42:27):
And we actually we have a graph in the paper
called like the alpha decay graph and it was about
nine months and they were selling it around six.
Speaker 3 (42:35):
You know, we all have blind spots. And you just
wrote a book recently, you have a chapter on selling
because of Alex. If I hadn't written that paper, you
wouldn't have had a chapter on selling.
Speaker 2 (42:50):
I would have had a different chapter. It wouldn't have
been as good.
Speaker 3 (42:53):
Or there are no articles about selling, basically very few,
very few. So if you look at the Journal of
Finance or one of the other top journals, there'll be
one hundred articles of the form. Use the following three
criteria a former portfolio, hold for one year, then sell.
(43:16):
And these guys said, oh, maybe selling could be interesting
and they could maybe double their alpha if they're selling
decisions or as good as they're buying decisions.
Speaker 2 (43:30):
Coming up, we continue our live conversation with doctor Richard
Taylor and doctor Alex Emos, both of the Booth School
of Business at the University of Chicago, discussing the newest
edition of their book The Winner's Curse. I'm Barry Ridults.
(44:02):
You're listening to Bloomberg's Masters in Business. Let's continue our
live conversation with Richard Taylor and Alex EMUs discussing the
new edition of the book The Winner's Curse. Well, we
talked about this last time we discussed this issue. The
buys are very quantitative and rigorous. The cells are just squishy,
(44:27):
and every emotional bias that comes in, Oh, this is
starting to falter. It's not doing what I expected. Something
else shiny comes along and catches their attention. They need
to make room in the portfolio. You mentioned blind spots.
Your friend Danny Koneman used to talk about. I used
(44:47):
to ask him on occasion, how do you avoid all
of these biases we all succumb to? And he's like,
I'm subject to every one of them. We all have
a bias, blind spot. There's no getting a way from it.
Is there hope for us?
Speaker 3 (45:02):
Well, the only way you can learn anything is feedback,
and most of us don't bother, so we don't get
the feedback. And you know when when my friend Caide,
my former student that I did the football paper with,
(45:24):
we were hired for a while by one of the
NFL teams, and we're they're showing us around their facility
and we go and there's some room about the size
of this, full of file cabinets, and we say, what's
in there? Oh, old scouting reports. Our eyes are getting back,
(45:49):
you know, like, well, have you ever studied those? No? Right,
so you know that they have. They have probably twenty
scouts going around watching games. They've built a two billion
dollar taj Mahele Stadium. But do they invest a little
(46:14):
research in improving the process of picking players? No, And
I must say most firms are not that much better.
Really well, firms still do interviews, interviews.
Speaker 2 (46:31):
Symphonies are doing blind auditions.
Speaker 3 (46:33):
Yeah, they but they still listen.
Speaker 2 (46:38):
Yes, so arguably.
Speaker 3 (46:41):
Interview look, and I think a great musician can here
whether you're playing well or poorly, learning anything useful about
how somebody is going to do on the job from
the usual job. Interview is very.
Speaker 4 (47:01):
One of our postdocs.
Speaker 5 (47:02):
Actually, as a paper Brian Dreberian on So he worked
with a company in the Philippines. They replaced all first
round interviews with artificial intelligence, and retention ended up increasing. Basically,
they were able to extract the signals that they needed
to extract at that stage, and the humans were missing.
Speaker 2 (47:21):
So let's talk about this before we're going to open
up this up for questions in a minute. But let's
talk about that sort of choice architecture, and I just
have to share some numbers with people as to how
significant this could be. Richard's book Nudge described a variety
(47:42):
of different ways to affect decision making. Perhaps the most
significant was when you open a four oh one K,
there's no obligation for you to participate in the company.
When money goes into it, there's no obligation to put
that money to work. Sure convinced the SEC and the
government to change that so that the default is that
(48:06):
you're assumed to participate and the money goes into some
qualified fund, either a balance fund or a target date fund.
And to just put some flesh on how significant that is,
the US's four oh one K, not counting today's trading action,
is four point seven trillion dollars. Historically, forty percent of
(48:29):
that was defaulted to cash, which means there's two trillion
dollars being invested today that otherwise would have been sitting
around in cash for god knows how many years. So,
given what we know about choice architecture, how should we
be addressing choices and options, whether it's in hiring or
(48:49):
putting money to work or bidding in auctions? How should
what should we be doing well better?
Speaker 3 (48:55):
I mean there's so you know. Let on the retire
and saving thing. We did three things. One was changed
the default, and we had to get congressional approval for
all of this because companies said, oh, if we enroll
(49:16):
somebody without their permission, some lawyer is going to sue
us as soon as the market goes down. So we
were able to get a bill passed in two thousand
and six that said it was okay to automatically enroll,
it was okay to invest in something I could target
day fund even though it could go down, and it
(49:38):
was okay to slowly ramp up their contributions what I
call save more tomorrow because we all have more self
control next week. So that you know, those three ingredients
(49:59):
were important. Maybe that for trillion is twice what it
would have been without it. It's it's not easy to
just say, you know, what, what can you do to
solve obesity or some other problem. My mantra is make
(50:28):
it easy. If you want people to do something, make
it easy. I always say, what I would like is
a world that's like GPS. I have a terrible sense
of direction, and now I don't get lost hardly ever. Right,
(50:49):
And notice the GPS doesn't tell you where to go.
You had the wrong address coming tonight. So but but
I plugged in the right address. You know, well I
just had to walk down Fifth Avenue. But even I
could do that. But right, So for complicated things like
(51:11):
improving your diet or exercising more, or whatever problem you're
trying to solve, you have to figure out what's preventing
people from getting it right and then eliminate that. And
you know, when when David Cameron was elected Prime Minister
(51:35):
in the UK, he had get this. They have They
don't have platforms, they have manifestos. And they had told
me that they were going to put in their manifesto
that if they got elected they were going to create
a nudge unit. And I said, yeah, yeah, because I'm
(51:58):
used to the US. So but they did it, and
they called me up and said, hey, we're starting this thing.
You better come over and figure out how to do this.
And the main lesson I learned was we'd go to
the branch. One of the things we did was we
(52:19):
changed the way they dealt with people who owe money
on their taxes. And what do you do, Well, we
send a letter. What does the letter say? Oh, well,
they showed us the letter. Oh I think we can
improve the letter. So and we told them truthfully, ninety
percent of people paid their taxes on time. That increased
(52:41):
the speed, so brought in money very fast. Costs nothing, Right,
they're sending a letter. It doesn't cost anymore to write
a good letter. But you have to talk to the
experts and understand what it is that's preventing them from
(53:03):
doing the right thing, and then make it easy for
them to do that.
Speaker 2 (53:07):
Remove the obstacles, make it easy. All right, So we
have a few more minutes. Let's get some questions. Can
I see some hands? Wait for the mic. Let's start
right up front and work our way back.
Speaker 6 (53:20):
Thank you so much for super interesting discussion. I'm curious
Robert Oman has a theory that says that reasonable people
can't disagree, and I'm curious, like how you would relate
that to the winner's person if you've ever had a
discussion with.
Speaker 3 (53:35):
Him about that. Reasonable people can't disagree.
Speaker 2 (53:39):
He's never been online.
Speaker 3 (53:40):
I mean, you know, Alex and I are both extremely reasonable.
We disagree, we disagree on all kinds of things.
Speaker 5 (53:49):
Well, his theorem is basically, if you have the same
information set, you have to arrive in the same belief
the same information you need, common knowledge, you need.
Speaker 2 (54:00):
You need com each other's rationality.
Speaker 3 (54:03):
You don't need the same confition.
Speaker 5 (54:05):
But and then you arrive at the exact same posterior belief.
Speaker 3 (54:10):
Right.
Speaker 5 (54:10):
But the problem is that people have confirmation bias in
the real world, right, so they seek out information that
confirms their beliefs. So they end up not only uh,
they basically end up in completely different worlds thinking that
they're rational and somebody else who's not agreeing with them
is irrational. And that if you go back to Robert Auman,
(54:33):
that breaks that that condition for being able to agree.
So one of the things about the Internet age and
digital the digital transformation is that look, if you read
like the texts of what technologists we're writing, we're going
to be in a utopia, millions of library of Alexandria's
at our fingertip. Everybody will have all information at the
same time. We should all agree, right, but we're not
(54:57):
there yet, we have all the information, we are there yet.
Speaker 3 (55:00):
But what ended up happening agreeing?
Speaker 5 (55:03):
But it's because people are seeking information that confirms their
priors and confirms the priors of the people that they're
the and and because you can't think that your prior
is wrong if you could, if you meet somebody with
a different prior or a different belief, you assume that
they are irrational. And then we're not going to agree.
I'm going to hold out to my belief. You're going
to hold onto your belief. And the more this kind
(55:25):
of ramps up, the ability to anddogenously gather information and
the feeding of that process from the information providers gets
worse and worse.
Speaker 2 (55:36):
The fascinating part about the stock market is all the
economic data is out there, all the market analysis is
out there. Bulls and bears go out and they find
what supports their view. They rarely seek disconfirming advice. And hey,
trade is where there's a disagreement on value, button agreement
(55:57):
on price, and it's all the same information people check
pick And.
Speaker 3 (56:00):
Perhaps the biggest anomaly in financial markets is the volume
of trade.
Speaker 4 (56:05):
That people are trading from place.
Speaker 3 (56:07):
That that's the counter example, how can we have a
trillion shares traded if everybody agrees? Yeah, right, the mic right.
Speaker 2 (56:21):
So this is actually a related question.
Speaker 7 (56:24):
You've heard a paper in nineteen ninety seven on the
equity premium puzzle. You finished it by saying, you have
any issues with this, call me in twenty seventeen. So
in twenty seventeen, two fourth years at the University of
Chicago studied economics. Email do you try to call you
on your bluff? You met with them, which me and
my now husband do appreciate, and we both work in
(56:46):
finance now and I am curious, especially you mentioned, like
the volume of trading Democratization of trading Robin Hood Traders.
As you're refreshing this book more broadly, how is technology
changed or magnified some of the behavioral confects that you
were writing about in nineteen ninety two.
Speaker 3 (57:04):
So, of course I vividly remember this. And there's a
bridge over in here, Brooklyn, you know the So you're right,
there was a chapter. It wasn't a chapter in the
original book, but I did write a column on the
equity premium puzzle and then a paper about it, and
(57:26):
we talked about whether it included. Instead, we just have
a couple pages saying the equity premium is within one
percent of what it was when the first paper was published.
It's going from seven down to six or something like that.
So it didn't seem worth a chapter. But I'll let Alex,
(57:50):
who's the now part talk about the technology.
Speaker 5 (57:56):
Yeah, So I think the democracy you mentioned the democratization
of finance, and I think there was this hope that again,
you know, people have access to basically there's no transaction fees,
you log onto your phone, you have access to these
equities and financial products that you didn't have access before.
So now everyday people have you know, can can get
a piece of the pie. They can get a piece
(58:18):
of the real growth of the economy. So some of
our colleagues wrote a paper at the University of Chicago recently.
Speaker 4 (58:23):
I think he came out.
Speaker 5 (58:24):
This year doing an audit of what people are trading
on platforms like Robinhood. They're trading weekly options and they're
losing billions of dollars. I think within the last two
years they lost six billion dollars, right, and so, and
why is that? Well, the same sort of biases that
(58:45):
you have that you're documenting them lap that you document
in the field, they're on steroids in digital spaces. Right.
Speaker 4 (58:51):
What is robinhood doing? Where is it making its money?
Speaker 5 (58:54):
Because the Robinhood does make money, it's making it on spreads, right,
and the itis spreads are crazy instruments like options that
generate these lottery like returns that we know human people
are really attracted to. And so it's making money off
of behavioral biases and people are losing a lot of
money on it.
Speaker 2 (59:14):
So it's not even the weekly options, it's the single
day options now have become the biggest volume.
Speaker 3 (59:20):
Right. And of course pure gambling sports gambling is even
worse odds.
Speaker 2 (59:29):
Where you can bet on every play, not even the
outcome of the well.
Speaker 3 (59:33):
And now they're learning that these bets on what a
specific player does, they've got to get rid of those
because there's just going to be too many scandals.
Speaker 2 (59:45):
That was my live conversation with Richard Taylor and Aleximus.
Be sure and check out the full version of this
coming sometime in the coming months. I would be remiss
if I didn't thank the Cracked team that helps put
these conversations together. A special thanks goes to the Economic
Club of New York for hosting this event. My audio
(01:00:06):
engineer is Justin Milner. Anna Luke is my producer. Sean
Russo is my researcher. I'm Barry Renaults. You've been listening
to a bonus live edition of Masters in Business on
Bloomberg Radio.
Bloomberg Audio Studios, Podcasts, radio news. This is Masters in
Business with Barry Ritholts on Bloomberg Radio.
Speaker 2 (00:16):
Hey, it's a bonus Masters in Business Live. One of
my favorite economists, Richard Taylor and his colleague at the
Booth School of Business, Alex Emos, We're going to give
a presentation at the New York Economic Club. And they said, Hey,
why don't we make this a live conversation and literally said, hey,
(00:40):
how do you feel about being our intolocutor And any
opportunity I have to spend time with Taylor, I jump
at So sure, let's do that. And so a few
weeks ago I sat down with Professor Richard Thaylor and
Professor Alex Emos, both of the Booth School of Business
(01:02):
at the University of Chicago, live at the New York
Economic Club, talking about their new version of the book,
The Winner's Curse. It was about thirty forty minutes of conversation.
We had some questions from the audience. It was fabulous.
In fact, it was so good. We're going to have
them back in the studio for a full Masters in Business,
(01:26):
which is now already recorded. It won't be out for
a couple of weeks, but in the meantime, to give
you a taste of what that full interview is like,
here is our live Masters in Business conversation at the
New York Economic Club. I'm kind of fascinated by not
(01:49):
only this book, but Richard's entire history, and a lot
of what I know about him really came to the
public eye through the Anomalies columns that began so long ago.
Tell us a little bit about the genesis of what
(02:10):
the Anomalies columns were and how that led to this book.
Speaker 3 (02:15):
Sure, so, about nineteen eighty six, somebody at the American
Economics Association decided it would be a good idea to
start a new journal in which the articles would be
accessible to at least all economists and grad students and
(02:37):
even undergrads, because articles have become more and more specialized.
So that was the idea. I had a friend. I
have a friend named hal Varian who has been the
chief economist at Google. He was a mere professor at
the time and on the advisory board of this journal,
(03:00):
and they were planning some pieces that would appear in
every issue, which is once a quarter, and Hall and
I cooked up the idea of having a feature on anomalies.
So what's an anomaly in economics? An anomaly is something
that cannot easily be explained using the standard assumptions that
(03:26):
people are really smart, unemotional, selfish, no self control problems,
basically not like anybody you know. And so as a
result of that, there were lots of anomalies. And I
(03:46):
did this for almost four years. When it looked like
a pile of them looked like a book, I stapled
them together and that was the original version of The
Winner's Curse, published in nineteen ninety two.
Speaker 2 (04:06):
So the book comes out in ninety two. I was curious,
how was it received by traditional economists. You're challenging core
thesis that they deeply believe in, and did the lay
public take any interest in us?
Speaker 3 (04:22):
So, you know, I'm very good friends with Steve Levitt
and Stephen Dubner. They basically invented a best selling economics book.
Before Freakonomics, there was no such a thing. So this
is pre pre freeconomics. It was read, but the profession
(04:45):
had read the articles in the journal, and the book
was an attempt to reach out. But you know, I've
often said that, you know, I'm a professional heretic and troublemaker,
and I say, I didn't change anybody's mind over the
(05:07):
course of my career, and after realizing that, I decided
instead to have a strategy of corrupting the youth. And Alex, so, yeah,
I'll let Alex tell his version of the story. But
(05:29):
you know, the book sold better than expected and was around.
It was still in print, but for various boring reasons,
it was going to go out of print, and the
publisher asked me if I wanted to freshen it up,
(05:50):
and that turned into a well we first talked about
that five years ago, so you can see how long
it took. But that's that's the story of the book.
Speaker 2 (06:04):
So, Alex, how did you get corrupted by doctor Thaylor?
Speaker 4 (06:09):
I didn't need much much pushing, so I was.
Speaker 5 (06:12):
I was a neuroscience undergrad major, so I was already
kind of interested in, you know, how human minds actually worked.
I took a bunch of abnormal psychology and things like that,
but science like STEM classes were really really hard, and
so I took economics as kind of a way to
boost my GPA. So and I thought it was fun
(06:34):
that the algebra was interesting, and but I didn't, you know,
I didn't think of much of it. And then at
some point I was like, I was moving and I
was a planing of medical school. By the way, I
was pre med, good immigrant kid, and I was I
was driving cross country and I was listening to the
radio and Richard was on the radio.
Speaker 4 (06:55):
This was two thousand and eight. I had no idea
who Richard was. I didn't know what nudge was.
Speaker 5 (06:59):
He was on on NPR talking about NUDGE and it
was about about this field called behavioral economics that I've
never heard about before. And I was like, wait, I
could take this and combine it with that, and that's amazing.
I got to Los Angeles, went online, applied to em
PhD programs right away, didn't end up going to medical school,
(07:19):
and I ended up going to UC San Diego for
my PhD.
Speaker 4 (07:23):
And lo and behold, Richard was not on the roster.
Speaker 5 (07:26):
But he spent his winters in San Diego in the
office next to me.
Speaker 4 (07:32):
And you know, I would come out at first sight.
Speaker 5 (07:39):
You corrupted me just way earlier, and so I was,
you know, we started chatting.
Speaker 4 (07:44):
Then I got a job at Carnegie Mellon.
Speaker 5 (07:46):
Afterwards, we kept in touch and then I got a
job offered at University of Chicago, and I think like
I got there in July twenty twenty.
Speaker 4 (07:54):
I think within like a few months, you gave me.
Speaker 5 (07:56):
A call and say, hey, my publisher is asking I
should freshen up the book, maybe to give it a
new preface, but I want to do something a little
bit more ambitious than that, and you know, we can
play around with it, add some new things. It'll take
about six months, easy, easy work.
Speaker 4 (08:13):
We get to hang out, and.
Speaker 5 (08:15):
I jumped at the opportunity, and then we kept talking
and then it grew and grew and grew, and that
book is about two thirds new content at this point.
So it took five years of writing and going back
and forth. And you know, there's been thirty years of
research since nineteen ninety two, and so that's kind of
the book. The original winner's courses in there a little
(08:37):
bit rewritten and freshened up, but the thirty years of
research are now in there too. So every single anomalies
column there were new anomalies that were added to it that.
Speaker 4 (08:47):
Richard had written afterwards.
Speaker 5 (08:48):
But also every single chapter comes with an update basically
reviewing everything that's happened in the last thirty years of behaviorly.
Speaker 2 (08:55):
So I'm going to circle back to the book in
a moment. But for people who are UNFLI familiar with
Alex this wasn't just a random kid next door. He
wrote what could be one of the most cited finance
papers of recent years, called I'm going to get this wrong,
Selling fast and Buying Slow?
Speaker 3 (09:15):
Is that right?
Speaker 2 (09:17):
Selling fast and Buying Slow? It's a chapter in my
book I've written about it, and you describe how professional
fund managers are really really good buyers of stocks. What
turns out they're terrible sellers of stock. Nobody had discussed
this in this sort of detail, and that's one of
the reasons that paper has become so highly regarded. But
(09:39):
I just wanted the audience to be aware of who
you were. Tell us what it was like working on
the book with Richard.
Speaker 4 (09:50):
It was just a lot of fun.
Speaker 5 (09:51):
I mean, we would get on the phone and you know,
why don't we talk about this topic.
Speaker 4 (09:58):
A lot of the research?
Speaker 5 (10:00):
You know, I kind of wrote, I took lead on
the updates and we kind of went back and forth
on them, and then it was you know, just a
lot of a lot of conversations over the phone during
COVID it was a lot of zoom. Then it moved
on to you know, we were colleagues at the University
of Chicago coffees, just kind of going back and forth
on what should be included, what push, what where. A
(10:23):
lot of it was about framing of where the field
has come and where what we kind of found out.
I don't think this was obvious when we first started
the book, is that where the field has come is
really gone from these lab experiments that were in the
original columns in the Winner's Curse, where it was college students,
low stakes, maybe not even any stakes at all. And
(10:43):
the pushback from the economics profession was, look, we don't
really care about students, We care about market participants.
Speaker 4 (10:49):
The updates are all about Look.
Speaker 5 (10:51):
All of these anomalies, as you mentioned, replicate in some
of the most sophisticated economic participants out there, such as
institutional investors in the case of my paper.
Speaker 2 (11:00):
So there are some ideas in the book down in
effect status quo biased Winners Curse that were or today
are everyday vocabulary, but back then people really know about it.
The whole book has aged fairly well. What do you
think about those original ideas, Richard, and how they present
(11:24):
in the modern world.
Speaker 3 (11:26):
Well, I mean, the one of the one of the
motivations for writing the book is the so called replication crisis.
It's not really a crisis, but there's there has been
several papers and several fields where the original experiments cannot
(11:49):
be reproduced, and some of those papers are, let's say,
adjacent to behavioral economics, and I was worried that some
of that bad aroma would rub off on us. And
(12:10):
I think the reason why things replicate so well is
when I was choosing what topics to write about, I
was picking big stuff. I wasn't picking some little minor thing.
I was picking something with a very big effect size
(12:32):
and topics. There had already been several papers. So you know,
it's not when we started this that we realized there
really wouldn't be any problems. But we were pleasantly surprised
not to find any anything in the attic, so.
Speaker 2 (12:57):
To speak, nothing aged poorly. No, not really what has
persisted or if anything, have become more widely accepted today.
That was a pleasant surprise. Amongst the chapters in the book.
Speaker 5 (13:15):
WHOA the endowment effect now so you know, back then
Bick in the ninety two book, it was about mugs
and pens. So the endowment effect is this phenomenon where
you know, buyers and sellers are in a market. The
idea is that if you assign a good to a
buyer seller. There's a theorem in economics that underlies Basically,
(13:35):
it's one of the fundamental theorems in economics called the
coast theorem. Basically, it means that it doesn't matter who's
assigned property rights, there's going to be transactions where people
the person who wants it the most or values are
the most, that's going to end up with it. And
what Richard showed in a paper with Jack Netch and
Danny Kahneman is that basically, you know half, Let's say Barry,
(13:57):
you are sitting in a classroom. I'm sitting in a
class the professor gives me a mug and doesn't give
you a mug. You have some money in your pocket,
and he's asking what is the lowest amount that you
would be willing to sell the mug? And he's asking you,
is how what's the most you'd be willing to pay
for the mug? Because it doesn't matter we were randomly assigned,
we should have basically the same average valuation, but it
(14:17):
turns out just because I own the mug, I start
valuating it more. This is called the endowment effect, and
what Richard and Danny and Jack showed is that it's
about two and a half times more. So there's like
a breakdown in the market because of this endowment effect.
So what have we found? What has been documented thus far?
There's a paper in the American Economic Review, the top
(14:40):
journal in the profession, showing that there's an endowment effect
for houses, and you can actually estimate exactly the amount
of loss aversion that people have which drives them to post.
If they own the house, they post the house at
a higher price. And the number the actual quantitative number
in housing markets. This is the crazy part about it
(15:01):
matches the number that Richard documented in the lab. So
there's a there's there's obviously a lot of back and
forth between different experimental is, different different experiments and stuff
like that, but even most of the quantitative magnitudes have
been great.
Speaker 2 (15:17):
It's robust. Let's talk about something that economic theory says
shouldn't happen. Ultimatums and cooperations let's talk about the ultimatum game.
Tell us a little bit about that.
Speaker 3 (15:29):
Okay, sure, So the ultimatum game is pretty simple. Let's
say I give Barry one hundred dollars and I tell
him that he's got to share it with Alex. He
can make Alex an offer for some amount of the hundred.
You can give all.
Speaker 2 (15:48):
Hundred unlikely, I'll take it.
Speaker 3 (15:53):
Alex gets to say yes or no, So it's an ultimatum.
And if he says yes, deal he says no, they
both get nothing. Now that game was invented, It didn't
really surprise us. It was invented because we kind of
(16:15):
knew what was going to happen, which was so. But
before that, let's say, what does economic theory say and
what does game theory say? Game theory says people are
selfish and Alex, if you offer him a dollar, don't
insult him with a quarter or a penny. But if
(16:38):
you offer him a dollar dollars or something, and he
knows the dollars worth more than zero, so he'll take it.
And you know that he knows that, and so you
offer him a dollar and he takes it. No, no
real world person has ever done that.
Speaker 2 (17:00):
Meaning in the lab experiments, what's the number under twenty dollars.
Speaker 3 (17:05):
Under yeah, offers less than twenty percent of whatever the
pie is are more likely are likely to be rejected.
Allfers tend to be fifty to fifty. The profit maximizing
offer is forty percent. So there are a whole We
have two chapters that are about games sort of like this.
(17:29):
The big lesson is that in the world, you're dealing
with people, and if you make insulting offers, they may
get rejected. And if you want cooperation, you have to
be cooperative. Let me tell you a story that's related
(17:50):
to this. Years ago, my wife and I were in
Thailand and we needed to take a cab twenty minute
ride like three blocks here, but it was ten miles
and changed my so and everything is negotiated there. So
(18:11):
I'm negotiating with this cab driver and after wild negotiations,
we agree on some fare out four dollars and we
get to the restaurant and then there was a question
of how are we going to get back? And the
(18:32):
cab driver said, would you like me to take you back?
And notice there's a mutual risk of defection. He could
not be there when we get done with dinner, or
we could get done early and go back with somebody else.
He proposed a contract that no economist would ever recommend.
(18:55):
The contract was, he said, don't pay me anything perfect.
So when dinner's over, of course we went to look
for this cab driver. We're not going to stiff the
cab driver. And in fact he dropped us somewhere else
for some other same thing. Now, what's the lesson there?
(19:18):
He knew that by being trusting he would engender trust,
and that's like a big important lesson both in business
and in life and in politics.
Speaker 2 (19:39):
Coming up, we continue our live conversation with doctor Richard
Taylor and doctor Alex Emos, both of the Booth School
of Business at the University of Chicago, discussing the newest
edition of their book, The Winner's Curse. I'm Barry Ridults.
(20:07):
You're listening to Bloomberg's Masters in Business. Let's continue our
live conversation with Richard Taylor and Alex Amos discussing the
new edition of the book The Winner's Curse. So let's
talk about some other things within the book. The title
The Winner's Curse is really a fascinating story and leads
(20:31):
so many places. Let's start off talking about oil leases.
Tell us about the winner's curse.
Speaker 3 (20:38):
You want to go, you want me to go, you
can do it. So this is the only chapter in
the book that the research original research was not done
by psychologists or economists.
Speaker 4 (20:55):
The lord one price.
Speaker 3 (20:57):
Oh, you're not calling financial economists as aonymous. Oh, and
that gets back to booth. You're going to be in
a lot.
Speaker 4 (21:05):
I'm in a different part of the building.
Speaker 3 (21:09):
So finance is just a branch of economics, it's not
its own field. So we're both dabblers in finance. So
the research on this was done by engineers at Atlantic
Ridgefield ARCO. And here's what they found. They were bidding
(21:32):
for oil leases in what I still call the Gulf
of Mexico. And what they found was that for the
leases they won, there was less oil than they expected.
And they're thinking, we have great geologists, how can we
(21:55):
be wrong? What's going on? And then they got an insight.
The essence of the insight is that when you're in
an auction, the ones you win are not a random
sample of your bids. The auctions you win are when
(22:18):
you bid high. Right now, that sounds like a pretty
obvious point, but it's not because if there are a
lot of bidders. Let's suppose that the version of this
that we would run in classrooms is we'd have a
jar of coins, and we'd have people bid for the
(22:40):
amount of money in the jar, not the coins. And
what happens the average bid is, let's say the jar's
worth a hundred dollars, the average bid is much less
because people are risk averse, but the winning bid is
always more than a hundred, because it's the most optimistic
(23:00):
person or the person with the first eyesight or whatever.
So this insight by the engineers applies everywhere, and contractors
have either learned this or go out of business right
(23:22):
because when they're bidding on a job, it low bid wins,
and if you forget the roof or the hvac, you're
going to go massively over. And so one of the
interesting follow up experiments was to take a bunch of
contractors and put them into one of these experiments and
(23:46):
see what would happen. And the experimenters were a little
worried that the contractors were going to take them to
the cleaners, but they didn't. The reason is the contractors
never understood the math of this. Instead, they had a
fudge so they would figure out what they thought they
(24:06):
could build it for and then add twenty five and
that covers the stuff they forget. But they didn't have
that rule for bidding for jars, and so they were
no better than the undergrads in The Winner's Curse.
Speaker 2 (24:23):
How is this held up since what does the latest
data on the Winter Scurse look like?
Speaker 5 (24:29):
Well, the Winter Skurs will as we discuss in the update,
that it's held up quite well as far as you know,
the experiment replicates. First of all, you know, you run
it in Harvard, you go into econ one to one
at Harvard, you auction off of jar coins. They're going
to be overbidding for the for the coins it's just
(24:49):
and then you know it's hold up, held up with
the NFL teams where you're you're basically bidding for free
agents and things like that.
Speaker 4 (24:56):
So it shows up in the data and the big file.
Speaker 5 (25:00):
Follow up to The Winner's Curse has been the idea
the kind of abstracting from the phenomenon of the Winter's
Curse but thinking about like what leads to the Winter's
Curse in the first place, psychologically and psychologically, what leads
to the Winter's curse is you not taking into account
that you're bidding against other people. You're not just kind
of bidding alone. Oh I think this is worth this much.
(25:21):
That's how much I'm going to pay, shading down a
little bit. It's the fact that if I'm bidding with
a lot of people, if I end up winning, that's
real bad news for me because everybody else is just
as smart as me, and they're bidding a great they
with the similar information. And if I'm the one who's winning,
I'm making a mistake. So you kind of have to
bid down. And so the other follow up experiments have
(25:44):
basically explored where this sort of phenomenon shows up in
other places. So, for example, one setting is you know,
kind of thinking about there's the guessing game to be
beauty contest game, which is meant to model from from
Caines exactly, so the follow up to the idea behind
(26:06):
the winner score. So Kines had the model for the
stock market where he said, the stock market is a
beauty contest in the sense that it's not that the
fundamental value of a stock would determine its price, it's
what everybody else thinks the fundamental value is it's all
about the belief.
Speaker 4 (26:22):
So there was this.
Speaker 5 (26:23):
The reason it's called the beauty contest is the newspapers
used to run these contests where you had a whole
page of faces, and the winner of the contest was
the one who chose the face that everybody else chose
as well. And so he said, the stock markets just
like that. And so you run the beauty contest by
saying something like, all right, what is guess the number
(26:44):
between one and one hundred? The room guesses, everybody submits
a guess, and the winner is the one who guesses
two thirds of the average. Now again this game, think
about it for a second. This game has an e
economic solution. Then what's the solution we can we can
do right now?
Speaker 3 (27:03):
It's the New York Economics Club. Somebody should know the equilibrium.
Speaker 5 (27:07):
Anybody have a guess for the Nash equilibrium?
Speaker 4 (27:12):
Yeah, should be Yeah, it should be one.
Speaker 3 (27:16):
It should be one, would be zero or one.
Speaker 5 (27:17):
If if the lowest number is one is one, it's one.
And the reason is the following. Let's say I think
i'm I'm I'm playing against a bunch of you know,
random people. They don't know what they're doing. They're guessing randomly.
If everybody guesses randomly, the average is going to be fifty.
So I should do two thirds of that, right, But
then I think, all right, if it's two thirds of that,
I guess that. Wait, well, they're probably going to think
(27:39):
the same thing, and so they're going to guess two
thirds of fifty, so I should do two thirds of that.
Speaker 4 (27:44):
But then I think, wait, no, hold on, hold on,
I'm going to do.
Speaker 5 (27:48):
Two thirds of that, and two thirds two thirds, two
thirds I get to one, right, So that's the Nash
equilibrium solution.
Speaker 4 (27:55):
Would you win guessing one?
Speaker 5 (28:00):
No, you would not win guessing one because other people
are not guessing one. So the way that when you
run this experiment, essentially what you see is the majority
of people guess something like fifty times two thirds times
two thirds, so they'd make it to level two and
(28:20):
then they stop.
Speaker 3 (28:23):
I played this game once in the Financial Times with
two business class tickets from London to the US as
a prize, and the winning guess was thirteen. So there
were lots of zero ones and they didn't win. There
(28:44):
were a bunch of ninety nine.
Speaker 2 (28:46):
And one hundred they didn't understand the game.
Speaker 3 (28:48):
No, they were jerks trying to skew the numbers. Yeah,
and they were all from Oxford and they were trying
to pull it all. They weren't disguising they all had
the same dorm address. But but but it was one
(29:10):
guest per person. So my tas and I were the
judges and we had thirteen hundred entrance. But yeah, so again,
this is the sort of thing that we can do
in class. If you do it with NBA students, you're
going to get a number in the teams when.
Speaker 4 (29:31):
Thirteen eight something like that.
Speaker 5 (29:33):
The more so kind of oh I've taken economics, they'll
go like eight, Oh, I haven't taken economics.
Speaker 4 (29:39):
Thirteen sixteen.
Speaker 5 (29:41):
So it's it's always above one, and it just mattered.
You can see these spikes in the data. That's the
craziest part about it.
Speaker 3 (29:47):
So, you know, I've written a paper with one of
my former students showing that the NFL draft is subject to.
Speaker 2 (29:55):
This literally where I wanted to take this inside world.
Speaker 3 (29:58):
You know, esp is one one of my one of
my skills. Arry, So, uh, well, you probably are all
familiar with the NFL draft that the end of the season,
the worst team gets the first pick of the eligible players.
What you may not know is there's a chart that
(30:20):
the Dallas Cowboys first created, one of the one of
the owners that plots what somebody thought was the should
be the prices to trade picks. So, for example, you
can trade the first pick for the seventh and eighth picks,
or for half a dozen second round picks. And what
(30:43):
we show in that paper is the early picks are
massively overvalued.
Speaker 2 (30:48):
And where where does the value show up? Round twound?
Speaker 3 (30:52):
Yeah, round two. Now, even bigger anomaly is you can
trade this year's pick for next year. And the rule
of thumb is if you trade a second round pick
this year, you get a first round pick next year.
So you move up one round per year. And we
(31:16):
calculated that's a discount rate of one hundred and thirty
seven percent.
Speaker 2 (31:20):
Really, why such a big discount, right?
Speaker 3 (31:23):
Because owners want to win. Now, we have one former
franchise owner in the room, and I'm pretty sure he
didn't get his money by borrowing at one hundred and
thirty seven percent. But and NFL teams are even more
expensive than NBA teams, But that it's still they still
(31:48):
have that rule. And we're in the process of replicating
that study, and it's.
Speaker 2 (31:56):
All exactly So this conversation reminds me of the discussion
that took place after Michael Lewis's Moneyball. So everyone's familiar
with the book about the Oakland A's and how they
brought a essentially behavioral economic approach to selecting players. What
(32:20):
happened after that book came out.
Speaker 3 (32:23):
Well, it's interesting. I mean, one thing happened is I
got in touch with Michael Lewis, and we didn't know
each other at the time, but through his publisher or something,
I said, if you ever in Chicago, let me know
I'm there next week. And we've become very good friends
and have come to realize that sports analytics and behavioral
(32:47):
economics are the same field. It's trying why, well, what
was Billy Bean, who also lives in our northern California.
What was Billy trying to do? He was trying to
buy a team more cheaply than others by And it's
(33:10):
just like being a portfolio manager, you're trying to buy
undervalued stocks. He was trying to buy undervalued players. Michael
got so interested in this he ended up writing the
book The Undoing Project which is a great book. It's
about my mentors, Danny Kahneman and named mister Vsky. He
(33:31):
did stick an irrelevant chapter in the beginning about Darryl Moury.
Speaker 2 (33:35):
But anyway, the line I was looking to pull from
you is not for nothing, Michael. But what you're writing
about these two Israeli psychologists have been writing about and
experimenting with for years. Moneyball directly led to your relationship
(33:57):
with him and that becoming a book as well.
Speaker 3 (33:59):
Yeah, yeah, And I mean it's about the biases from
psychology and it's also about markets, right, So the difference
between behavioral economics and psychology is markets. So a psychologist
would be interested in the fact that teams are overconfident
(34:22):
in their ability to tell good players from bad. That's
pure psychology. The fact that it gets reflected in the
market for picks, that's economics.
Speaker 2 (34:34):
So let me push back a little bit on this
and The Winner's Curse in that all the topics that
you write about in The Winner's Curse oil leases where
we don't know what the future oil production will be,
first round draft picks where we don't know how that
player is going to perform, and in the market's either
(34:54):
picking stocks, or picking fund managers to pick stocks, or
picking somebody to pick the fund managers in a fund
of fund to pick stocks. They all seem to deal with, Hey,
we really are unaware of how this is going to
play out, and we're making decisions under uncertainty. All of
this comes back to economin and Suvarski.
Speaker 3 (35:19):
Well, I'm not gonna I'm not going to disagree with that.
I mean, look, I became a behavioral economist when I
discovered them. I claim that was my big discovery, was
discovering these two psychologists who were over in Israel that
economists hadn't heard of. And I went and spent a
(35:43):
year at Stanford where when I got winned that they
were going to be there and basically stalked them.
Speaker 5 (35:51):
Well, a lot of the phenomenon they go away when
there's not a lot of uncertainty. The winner's course needs uncertainty. Right,
If we know what the value of the plot is,
there's no winner's curse. It doesn't matter how many people
are bidding.
Speaker 4 (36:03):
If we know.
Speaker 5 (36:03):
So, there's a famous anchoring effect, right, So if I
the anchoring effect is essentially you know, you ask a
question like how many countries are in Africa before but
before I do it, I spin a big wheel, right.
Speaker 4 (36:14):
The wheel has nothing to do with the question.
Speaker 5 (36:16):
And the wheel gets to like seventeen or eight or whatever,
and it turns out wherever that number gets to affects
how what number of people gets about the number of
countries in Africa. But if people know the number of countries,
they're not going to be affected by the wheel. Right,
So all of this has to do Almost every single
behavioral economic phenomenon has is bred and.
Speaker 4 (36:37):
Fed through uncertainty.
Speaker 5 (36:39):
And I think the way that people react to that
uncertainty and shape their preferences and beliefs, that's where all
the biases seep in in the first place. When I'm
certain when experts know what they're doing, when they're you know,
they know the value of the plot, they know what
you know, the whether the stock is going to go
up or down, there's not a lot of biases to.
Speaker 3 (36:59):
Talk, you know. One aspect of this that surprised me
is in the sports world, teams have learned but really slowly.
I mean it's like shockingly slowly. When the three point
(37:22):
shot was introduced in basketball, Darryl Moorey, I always tease him.
He's the general manager of the Philadelphia seventy six ers.
I always tease him that he was the first guy
who figured out that three is one point five times two,
So you should take three point shots because they have
a higher expected value. Every team has somebody who can
(37:44):
make forty of their three point shots, and they make
about half their two point shots. But if you look,
Larry Bird was really good at making three point shots,
and he took two or three a game. Steph takes twenty.
He's a little better than Larry Bird. But now if
you look at that trend, it's really shallow, and it's
(38:10):
the same as football. Teams have learned to punt.
Speaker 2 (38:15):
Less but still sill on fourth down.
Speaker 3 (38:18):
They should go for it on fourth down. They get
it right now half the time they and the closer
they get to if they get over the fifty yard line,
they're more likely to get it right. But they're still terrible.
So the learning is slow, and the reason is people
don't like to look like fools.
Speaker 2 (38:40):
There was a Wall Street Journal article about I don't
remember it was a high school or a college coach
who always went for an on fourth down.
Speaker 3 (38:48):
Yeah, and I love that guy.
Speaker 2 (38:50):
Ten years ago.
Speaker 3 (38:51):
Right, yeah, twenty years ago. Probably he didn't have a kicker.
He didn't have any Yeah, even he he didn't have
a field goal kicker or a punter. Now it's this
is obviously the case for high school because think about
you gotta hike it back to some kid. He has
(39:14):
to catch it, he has to put it down, and
then the other kid has to kick it, and the
weather's lousy. So he just had no kickers and he
was winning the state championship in Arkansas, I mean, not
some place with lousy football. So teams will get better.
(39:36):
People do learn, But you know, people are always asking
me what surprised me. What has surprised me is how
slowly the learning has taken place in Look, how long
did it take it's the World Series? How long did
it take them to add a pitch clock? Baseball had
become unwatchable. They add a pitchclock, It cuts half hour
(39:59):
off the game. Well, you know that's not a genius.
They had twenty four second clock in basketball for forty years,
so they could have figured this out.
Speaker 4 (40:10):
But it's not just sports.
Speaker 5 (40:12):
I think, like the thing that economists push back with
behavioral economics, it's oh, people just don't know, have opportunities
to learn right in the endowment effect. If they trade enough,
if people know what they're doing for long, even for
a short period of time, they'll figure it out. These
biases are going to go away. That's the whole Like, look,
these are just confused subjects. They go to the market,
they'll get some feedback, everything will be fine. But I
(40:34):
think that's the biggest I think with Richard being surprised,
I think not just in sports everywhere that these anomalies
have held up, and the fact that these anomalies are
holding up in very, very experienced people. So in the
paper with traders, you know there, we find that they
trade really well when they're buying, but on the selling
they have to do a lot of selling. They sell
all the time, they have to sell it order to buy.
(40:56):
They sell all the time. Some of them have years,
decades of experience, and they're doing worse than random and
they're selling well.
Speaker 2 (41:03):
Explain that, because that was what was so brilliant about
that paper. In order to figure out how well they sold,
you guys came up with the solution of let's randomly
sell anything else from that manager's holdings and compare it
to what they actually sold, right, so what are the results?
Speaker 5 (41:21):
The results are, so we basically said, look, we want
to give these guys a large benefit of the doubt.
We don't know what their conditions are, so we're just
going to compare them to a very very easy counterfactual.
I don't know what they're facing. I'm just going to
throw a dart in their portfolio and sell that instead.
And they did worse than random. And basically what we
(41:42):
found is that they were they didn't have they weren't
spending a lot of time on the selling decisions.
Speaker 4 (41:48):
We interviewed them and we said, like, what are you
guys doing. It's like, ah, selling is not really that important.
It's not really an investment decision.
Speaker 5 (41:54):
And I'm like, you know, all right, I told my
friends at the University Chicago finance department. They were very
surprised that selling wasn't an investment decision, and so they
were just not really paying attention to it. So they
were just selling the things that were very very salient
on their screens and the things that they were least
(42:14):
attached to. So going back to the endowment effect, they
were selling the things that they had recently bought, but
if you're good at buying, that's not what you should
be selling.
Speaker 4 (42:23):
You should be holding onto that for longer to get
that alpha out.
Speaker 5 (42:27):
And we actually we have a graph in the paper
called like the alpha decay graph and it was about
nine months and they were selling it around six.
Speaker 3 (42:35):
You know, we all have blind spots. And you just
wrote a book recently, you have a chapter on selling
because of Alex. If I hadn't written that paper, you
wouldn't have had a chapter on selling.
Speaker 2 (42:50):
I would have had a different chapter. It wouldn't have
been as good.
Speaker 3 (42:53):
Or there are no articles about selling, basically very few,
very few. So if you look at the Journal of
Finance or one of the other top journals, there'll be
one hundred articles of the form. Use the following three
criteria a former portfolio, hold for one year, then sell.
(43:16):
And these guys said, oh, maybe selling could be interesting
and they could maybe double their alpha if they're selling
decisions or as good as they're buying decisions.
Speaker 2 (43:30):
Coming up, we continue our live conversation with doctor Richard
Taylor and doctor Alex Emos, both of the Booth School
of Business at the University of Chicago, discussing the newest
edition of their book The Winner's Curse. I'm Barry Ridults.
(44:02):
You're listening to Bloomberg's Masters in Business. Let's continue our
live conversation with Richard Taylor and Alex EMUs discussing the
new edition of the book The Winner's Curse. Well, we
talked about this last time we discussed this issue. The
buys are very quantitative and rigorous. The cells are just squishy,
(44:27):
and every emotional bias that comes in, Oh, this is
starting to falter. It's not doing what I expected. Something
else shiny comes along and catches their attention. They need
to make room in the portfolio. You mentioned blind spots.
Your friend Danny Koneman used to talk about. I used
(44:47):
to ask him on occasion, how do you avoid all
of these biases we all succumb to? And he's like,
I'm subject to every one of them. We all have
a bias, blind spot. There's no getting a way from it.
Is there hope for us?
Speaker 3 (45:02):
Well, the only way you can learn anything is feedback,
and most of us don't bother, so we don't get
the feedback. And you know when when my friend Caide,
my former student that I did the football paper with,
(45:24):
we were hired for a while by one of the
NFL teams, and we're they're showing us around their facility
and we go and there's some room about the size
of this, full of file cabinets, and we say, what's
in there? Oh, old scouting reports. Our eyes are getting back,
(45:49):
you know, like, well, have you ever studied those? No? Right,
so you know that they have. They have probably twenty
scouts going around watching games. They've built a two billion
dollar taj Mahele Stadium. But do they invest a little
(46:14):
research in improving the process of picking players? No, And
I must say most firms are not that much better.
Really well, firms still do interviews, interviews.
Speaker 2 (46:31):
Symphonies are doing blind auditions.
Speaker 3 (46:33):
Yeah, they but they still listen.
Speaker 2 (46:38):
Yes, so arguably.
Speaker 3 (46:41):
Interview look, and I think a great musician can here
whether you're playing well or poorly, learning anything useful about
how somebody is going to do on the job from
the usual job. Interview is very.
Speaker 4 (47:01):
One of our postdocs.
Speaker 5 (47:02):
Actually, as a paper Brian Dreberian on So he worked
with a company in the Philippines. They replaced all first
round interviews with artificial intelligence, and retention ended up increasing. Basically,
they were able to extract the signals that they needed
to extract at that stage, and the humans were missing.
Speaker 2 (47:21):
So let's talk about this before we're going to open
up this up for questions in a minute. But let's
talk about that sort of choice architecture, and I just
have to share some numbers with people as to how
significant this could be. Richard's book Nudge described a variety
(47:42):
of different ways to affect decision making. Perhaps the most
significant was when you open a four oh one K,
there's no obligation for you to participate in the company.
When money goes into it, there's no obligation to put
that money to work. Sure convinced the SEC and the
government to change that so that the default is that
(48:06):
you're assumed to participate and the money goes into some
qualified fund, either a balance fund or a target date fund.
And to just put some flesh on how significant that is,
the US's four oh one K, not counting today's trading action,
is four point seven trillion dollars. Historically, forty percent of
(48:29):
that was defaulted to cash, which means there's two trillion
dollars being invested today that otherwise would have been sitting
around in cash for god knows how many years. So,
given what we know about choice architecture, how should we
be addressing choices and options, whether it's in hiring or
(48:49):
putting money to work or bidding in auctions? How should
what should we be doing well better?
Speaker 3 (48:55):
I mean there's so you know. Let on the retire
and saving thing. We did three things. One was changed
the default, and we had to get congressional approval for
all of this because companies said, oh, if we enroll
(49:16):
somebody without their permission, some lawyer is going to sue
us as soon as the market goes down. So we
were able to get a bill passed in two thousand
and six that said it was okay to automatically enroll,
it was okay to invest in something I could target
day fund even though it could go down, and it
(49:38):
was okay to slowly ramp up their contributions what I
call save more tomorrow because we all have more self
control next week. So that you know, those three ingredients
(49:59):
were important. Maybe that for trillion is twice what it
would have been without it. It's it's not easy to
just say, you know, what, what can you do to
solve obesity or some other problem. My mantra is make
(50:28):
it easy. If you want people to do something, make
it easy. I always say, what I would like is
a world that's like GPS. I have a terrible sense
of direction, and now I don't get lost hardly ever. Right,
(50:49):
And notice the GPS doesn't tell you where to go.
You had the wrong address coming tonight. So but but
I plugged in the right address. You know, well I
just had to walk down Fifth Avenue. But even I
could do that. But right, So for complicated things like
(51:11):
improving your diet or exercising more, or whatever problem you're
trying to solve, you have to figure out what's preventing
people from getting it right and then eliminate that. And
you know, when when David Cameron was elected Prime Minister
(51:35):
in the UK, he had get this. They have They
don't have platforms, they have manifestos. And they had told
me that they were going to put in their manifesto
that if they got elected they were going to create
a nudge unit. And I said, yeah, yeah, because I'm
(51:58):
used to the US. So but they did it, and
they called me up and said, hey, we're starting this thing.
You better come over and figure out how to do this.
And the main lesson I learned was we'd go to
the branch. One of the things we did was we
(52:19):
changed the way they dealt with people who owe money
on their taxes. And what do you do, Well, we
send a letter. What does the letter say? Oh, well,
they showed us the letter. Oh I think we can
improve the letter. So and we told them truthfully, ninety
percent of people paid their taxes on time. That increased
(52:41):
the speed, so brought in money very fast. Costs nothing, Right,
they're sending a letter. It doesn't cost anymore to write
a good letter. But you have to talk to the
experts and understand what it is that's preventing them from
(53:03):
doing the right thing, and then make it easy for
them to do that.
Speaker 2 (53:07):
Remove the obstacles, make it easy. All right, So we
have a few more minutes. Let's get some questions. Can
I see some hands? Wait for the mic. Let's start
right up front and work our way back.
Speaker 6 (53:20):
Thank you so much for super interesting discussion. I'm curious
Robert Oman has a theory that says that reasonable people
can't disagree, and I'm curious, like how you would relate
that to the winner's person if you've ever had a
discussion with.
Speaker 3 (53:35):
Him about that. Reasonable people can't disagree.
Speaker 2 (53:39):
He's never been online.
Speaker 3 (53:40):
I mean, you know, Alex and I are both extremely reasonable.
We disagree, we disagree on all kinds of things.
Speaker 5 (53:49):
Well, his theorem is basically, if you have the same
information set, you have to arrive in the same belief
the same information you need, common knowledge, you need.
Speaker 2 (54:00):
You need com each other's rationality.
Speaker 3 (54:03):
You don't need the same confition.
Speaker 5 (54:05):
But and then you arrive at the exact same posterior belief.
Speaker 3 (54:10):
Right.
Speaker 5 (54:10):
But the problem is that people have confirmation bias in
the real world, right, so they seek out information that
confirms their beliefs. So they end up not only uh,
they basically end up in completely different worlds thinking that
they're rational and somebody else who's not agreeing with them
is irrational. And that if you go back to Robert Auman,
(54:33):
that breaks that that condition for being able to agree.
So one of the things about the Internet age and
digital the digital transformation is that look, if you read
like the texts of what technologists we're writing, we're going
to be in a utopia, millions of library of Alexandria's
at our fingertip. Everybody will have all information at the
same time. We should all agree, right, but we're not
(54:57):
there yet, we have all the information, we are there yet.
Speaker 3 (55:00):
But what ended up happening agreeing?
Speaker 5 (55:03):
But it's because people are seeking information that confirms their
priors and confirms the priors of the people that they're
the and and because you can't think that your prior
is wrong if you could, if you meet somebody with
a different prior or a different belief, you assume that
they are irrational. And then we're not going to agree.
I'm going to hold out to my belief. You're going
to hold onto your belief. And the more this kind
(55:25):
of ramps up, the ability to anddogenously gather information and
the feeding of that process from the information providers gets
worse and worse.
Speaker 2 (55:36):
The fascinating part about the stock market is all the
economic data is out there, all the market analysis is
out there. Bulls and bears go out and they find
what supports their view. They rarely seek disconfirming advice. And hey,
trade is where there's a disagreement on value, button agreement
(55:57):
on price, and it's all the same information people check
pick And.
Speaker 3 (56:00):
Perhaps the biggest anomaly in financial markets is the volume
of trade.
Speaker 4 (56:05):
That people are trading from place.
Speaker 3 (56:07):
That that's the counter example, how can we have a
trillion shares traded if everybody agrees? Yeah, right, the mic right.
Speaker 2 (56:21):
So this is actually a related question.
Speaker 7 (56:24):
You've heard a paper in nineteen ninety seven on the
equity premium puzzle. You finished it by saying, you have
any issues with this, call me in twenty seventeen. So
in twenty seventeen, two fourth years at the University of
Chicago studied economics. Email do you try to call you
on your bluff? You met with them, which me and
my now husband do appreciate, and we both work in
(56:46):
finance now and I am curious, especially you mentioned, like
the volume of trading Democratization of trading Robin Hood Traders.
As you're refreshing this book more broadly, how is technology
changed or magnified some of the behavioral confects that you
were writing about in nineteen ninety two.
Speaker 3 (57:04):
So, of course I vividly remember this. And there's a
bridge over in here, Brooklyn, you know the So you're right,
there was a chapter. It wasn't a chapter in the
original book, but I did write a column on the
equity premium puzzle and then a paper about it, and
(57:26):
we talked about whether it included. Instead, we just have
a couple pages saying the equity premium is within one
percent of what it was when the first paper was published.
It's going from seven down to six or something like that.
So it didn't seem worth a chapter. But I'll let Alex,
(57:50):
who's the now part talk about the technology.
Speaker 5 (57:56):
Yeah, So I think the democracy you mentioned the democratization
of finance, and I think there was this hope that again,
you know, people have access to basically there's no transaction fees,
you log onto your phone, you have access to these
equities and financial products that you didn't have access before.
So now everyday people have you know, can can get
a piece of the pie. They can get a piece
(58:18):
of the real growth of the economy. So some of
our colleagues wrote a paper at the University of Chicago recently.
Speaker 4 (58:23):
I think he came out.
Speaker 5 (58:24):
This year doing an audit of what people are trading
on platforms like Robinhood. They're trading weekly options and they're
losing billions of dollars. I think within the last two
years they lost six billion dollars, right, and so, and
why is that? Well, the same sort of biases that
(58:45):
you have that you're documenting them lap that you document
in the field, they're on steroids in digital spaces. Right.
Speaker 4 (58:51):
What is robinhood doing? Where is it making its money?
Speaker 5 (58:54):
Because the Robinhood does make money, it's making it on spreads, right,
and the itis spreads are crazy instruments like options that
generate these lottery like returns that we know human people
are really attracted to. And so it's making money off
of behavioral biases and people are losing a lot of
money on it.
Speaker 2 (59:14):
So it's not even the weekly options, it's the single
day options now have become the biggest volume.
Speaker 3 (59:20):
Right. And of course pure gambling sports gambling is even
worse odds.
Speaker 2 (59:29):
Where you can bet on every play, not even the
outcome of the well.
Speaker 3 (59:33):
And now they're learning that these bets on what a
specific player does, they've got to get rid of those
because there's just going to be too many scandals.
Speaker 2 (59:45):
That was my live conversation with Richard Taylor and Aleximus.
Be sure and check out the full version of this
coming sometime in the coming months. I would be remiss
if I didn't thank the Cracked team that helps put
these conversations together. A special thanks goes to the Economic
Club of New York for hosting this event. My audio
(01:00:06):
engineer is Justin Milner. Anna Luke is my producer. Sean
Russo is my researcher. I'm Barry Renaults. You've been listening
to a bonus live edition of Masters in Business on
Bloomberg Radio.
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