Sponsored by Greenhaven Road Capital, finding value off the beaten path.
When asked about ‘Econs’ (a utility maximizing computational automaton – that doesn’t exist) and humans on the tour Thaler said, “You don’t get a representative sample of humanity at book talks.” This gets a good laugh and gives a good example of the sampling bias.
Varian said he’s a student of behavioral economics (BE) because he needs to be, “If you’re going to engage in business if you’re going to understand human behavior, you have to start with human behavior. You have to look at how people behave and adjust to that even though you ‘know’ they should be behaving differently.” This approach was central to Nudestock 2018 too.
It’s prioritizing action over answers. Street business forces this ordering more than academic avenues. Sunk costs, for example, shouldn’t matter, but they do. People will almost always eat until their plate is clean rather than until the marginal utility of the next bite is too low. I’ve never seen a cookie and calculated a cost-benefit analysis on chocolate chips.
Behavioral Economics is like a friction coefficient for a system. Want to sell more stuff? Decrease friction. Want waste less? Increase frictions. Nudge yourself. Or, said Mohnish Pabrai, frame sunk costs this way:
Framing and other BE tools use the indirect approach. Jocko Willink calls it ‘flanking’. Phil Jackson wrote “One thing I’ve learned as a coach is that you can’t force your will on people. If you want them to act differently, you need to inspire them to change themselves.” Lowenstein wrote about Buffett, “Instinctively, he shrank from confronting his adversaries, but he was superb at winning them over without a fight.”
Nudges are indirect. Save More Tomorrow is indirect. Talks at Google are indirect too.
On the spectrum from Econs to Humans, we might think Google engineers are closer to Econs than most. However, when Google IPO’d, and many became rich, Varian didn’t arrange financial lectures. He invited a broad base of speakers. “And I can’t count the number of people who came up to me afterwards and said, ‘Thank you, that was a great thing to do.’…I thought the Googlers were Econs but I guess not.”
Another indirect approach is not to fight the old but teach the new. Thaler said the behavioral economics summers camp is an application of Max Planck’s intuition that an idea advances as “its opponents eventually die.”
Behavioral Economics is like a finicky classic car. It looks great once you get it running. Rory Sutherland noted that replication crisis isn’t that much of a crisis, but a point about how important the nuance is. BE takes tinkering. It takes experiments.
You want your data to come from experiments, said Varian, rather than HIPPOs – Highly Paid People’s Opinions. Experiments are (one of the reasons) BE has worked so well for finance said Thaler, because, “there’s fantastic data, you can test anything. You also have very crisp predictions. We were able to test ideas and disprove them.”