Nick Kokonas and Richard Thaler, Nobel Prize Laureate — Realistic Economics, Avoiding The Winner’s Curse, Using Temptation Bundling, and Going Against the Establishment (#830)

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Richard H. Thaler (@r_thaler) is the 2017 recipient of the Nobel Memorial Prize in Economic Sciences for his contributions to behavioral economics and the Charles R. Walgreen Distinguished Service Professor of Behavioral Science and Economics at the University of Chicago Booth School of Business. He is also a founding principal at FullerThaler Asset Management, which uses behavioral finance to manage over $30 billion in small-cap US equities.

Thaler has been a professional disrupter. He helped create the fields of behavioral economics and finance that lie in the gap between economics and psychology. He investigates the implications of relaxing the standard economic assumption that everyone in the economy is rational and selfish, instead entertaining the possibility that some of the agents in the economy are sometimes human.

Thaler is the New York Times bestselling coauthor of Nudge: Improving Decisions About Health, Wealth, and Happiness (with Cass R. Sunstein) and the author of Misbehaving: The Making of Behavioral Economics. His new book is The Winner’s Curse: Behavioral Economics Anomalies, Then and Now, co-authored with economist Alex O. Imas.
My co-host is Nick Kokonas (@nickkokonas), an entrepreneur, investor, and author best known as the co-founder of The Alinea Group (sold, 2024) and the reservation platform Tock (now owned by American Express). After revolutionizing how restaurants and experiences are crafted, booked, and managed, he’s now focused on creative ventures that blend business, technology, and art—from immersive theater projects to Napa Valley winemaking. A philosophy graduate of Colgate University, he is as interested in ideas and first principles as he is in building things that last. He lives in Chicago and Napa Valley with his wife and two sons.

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Nick Kokonas and Richard Thaler, Nobel Prize Laureate — Realistic Economics, Avoiding The Winner’s Curse, Using Temptation Bundling, and Going Against the Establishment

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SHOW NOTES & LINKS

Transcripts

SELECTED LINKS FROM THE EPISODE

Connect with Richard Thaler:

University of Chicago Booth School of Business | Twitter

Connect with Nick Kokonas:

Twitter | Instagram | Facebook

Nick’s prior appearances on the podcast:

Nick Kokonas — How to Apply World-Class Creativity to Business, Art, and Life | The Tim Ferriss Show #341
Nick Kokonas on Resurrecting Restaurants, Skin in the Game, and Investing | The Tim Ferriss Show #429

People

Universities

Companies and Organizations

Movies

The Big Short directed by Adam McKay

SHOW NOTES

[00:00:00] Start.
[00:02:33] First principles: What is economics, really?
[00:04:18] The “max” assumption and agents as optimizers.
[00:06:41] Rationality in models: Solving problems like an economist would.
[00:07:29] “Meh” vs “Max” — shortcuts instead of optimization.
[00:08:06] Selfishness, fairness, and self-control in economic models.
[00:10:08] Milton Friedman’s “as if” defense.
[00:12:36] The cashew nuts story: Origin of behavioral economics.
[00:14:02] Removing choice and status quo bias.
[00:17:31] The case for Americans needing forced savings.
[00:19:34] Academic resistance: Psychologists laughing at economic theory.
[00:24:37] Loss aversion: Disease cure experiment.
[00:27:04] Endowment effect: Coffee mug experiment.
[00:29:45] Restaurant reservations and the power of deposits.
[00:31:05] Fairness research: Snow shovels and blizzards.
[00:32:50] Uber surge pricing and the 9/11 thought experiment.
[00:34:37] Behavioral economics in one sentence.
[00:35:00] Nudges: 401(k) auto-enrollment case study.
[00:37:46] The fly in the urinal and nudge durability.
[00:39:07] Lakeshore Drive lines: Making safety easy.
[00:41:30] Choice architecture: Good nudges vs. malicious nudges.
[00:42:40] Online gambling and Robinhood’s gamification.
[00:45:51] Lessons learned from teaching decision-making for 40 years.
[00:46:52] Winner’s curse: The jar of coins demonstration.
[00:49:04] ARCO engineers discover the winner’s curse in oil bidding.
[00:50:11] Writing papers as competitive strategy.
[00:52:31] Amos Tversky’s note: People learn through stories.
[00:53:44] Overconfidence: Amazon River and CFO predictions.
[00:55:59] NFL draft: 53% success rate (barely better than coin flips).
[00:57:12] Trading down in the draft as optimal strategy.
[00:59:26] Applying behavioral insights to daily habits.
[01:01:04] The law of one price and restaurant deposit resistance.
[01:02:39] Being a chef doesn’t automatically make you a good businessperson.
[01:03:33] Sports analytics: The three-point shot revolution.
[01:04:29] Michael Jordan vs Steve Kerr: 50% three-point shooting.
[01:05:56] Finding $20 bills on the street.
[01:06:35] Mental accounting: Money in jeans feels like a windfall.
[01:07:50] Obama stimulus: Lump sum vs. spread out payments — why does it matter?
[01:09:58] Airline baggage fees: “There’s a guy who owns that.”
[01:11:43] Sunk cost fallacy: The dessert we don’t need.
[01:12:37] Nick’s $500 wine example and building Tock on sunk costs.
[01:14:41] Richard’s daughter and the baseball/concert tickets experiment.
[01:16:05] Temptation bundling: Using cognitive biases for self-improvement.
[01:19:06] Big data and natural experiments in the real world.
[01:19:50] Mental accounting in action: Premium gas during the financial crisis.
[01:22:34] Amazon’s hundred-PhD economics department.
[01:23:48] The pragmatic reason Richard invented behavioral economics.
[01:25:47] Strategy: Corrupt the youth, not change old minds.
[01:27:06] The behavioral economics summer camp running since 1994.
[01:28:12] The “Anomalies” column in Journal of Economic Perspectives.
[01:29:44] Citations matter: Writing articles people can understand.
[01:30:31] Availability bias: Homicides vs. suicides.
[01:31:47] Kahneman and Tversky: The reason for everything.
[01:33:11] Systematic bias vs. random errors.
[01:34:08] Amos’ dinner trap: Everyone you know is dumb, except your models.
[01:37:19] Michael Lewis’ The Undoing Project.
[01:38:11] Daniel Kahneman’s assisted suicide decision as peak-end rule applied to life itself.
[01:45:11] What keeps Richard going?
[01:46:44] Why the updated version of The Winner’s Curse should appeal to economists and everyday humans.
[01:49:58] Parting thoughts.

RICHARD THALER QUOTES FROM THE INTERVIEW

“Economics is really two things. It’s people interacting in markets, and then what are those people doing? And what happened is sometime right after World War II, economists started getting interested in making their models more rigorous and more mathematical. And the easiest model to write down of what somebody’s doing is to write down a model in which they’re doing it perfectly.”

— Richard Thaler

“My joke is, instead of writing down ‘Max,’ suppose we wrote down ‘Meh,’ because what people are doing isn’t really max, right? It’s ‘I’ll do something.’ Where I come in on that part of the story is, ‘Okay, if people are not capable or interested in solving and they’re doing something else, taking some shortcut, then what?’ So that’s principle number one.”

— Richard Thaler

“You are a pretty good golfer. I’m a mediocre golfer. Neither of us play like Tiger Woods. So, even though you’re a pretty good golfer, we wouldn’t want to predict the way you’re going to hit a shot by saying, ‘What would Tiger do?'”

— Richard Thaler

“I think the important lesson is that, if you’re doing business in the real world and you have customers and employees that are people, not agents, then you have to do things a bit differently. And that’s the one-sentence summary of behavioral economics.”

— Richard Thaler

“What do they remember? They remember stories. That is the only thing people remember. They do not remember a formula. They don’t remember some abstract concept. They remember a story or they remember a demonstration.”

— Richard Thaler

“I was not the best grad student in my class and I wasn’t in the best department. I mean, actually I wasn’t a great student in any way, but I certainly knew I was not the best grad student in my class. … I more or less had to invent behavioral economics to have a career, otherwise I would’ve done something else.”

— Richard Thaler

“Sarcasm doesn’t really convince people. … The strategy I adopted to broaden the field, I always say, instead of changing people’s minds, I would corrupt the youth.”

— Richard Thaler

“I don’t really think people are dumb. I think the world is hard. But people deal with this hard world using shortcuts and so forth, and the shortcuts are useful but not perfect, and they lead to predictable mistakes.”

— Richard Thaler

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Want to hear another episode with someone who understands asymmetric risk and making bold decisions during uncertainty? Listen to my last conversation with none other than Nick Kokonas, in which we discussed how he pivoted his Michelin three-star restaurants during the COVID-19 crisis, creating Tock To Go in days instead of months, the three-shoebox business model his father taught him, why buying today’s food with tomorrow’s revenue is a trap, asymmetric risk-taking opportunities, the importance of having skin in the game, his floor-trading experience informing crisis strategy, and much more.

The post Nick Kokonas and Richard Thaler, Nobel Prize Laureate — Realistic Economics, Avoiding The Winner’s Curse, Using Temptation Bundling, and Going Against the Establishment (#830) appeared first on The Blog of Author Tim Ferriss.

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