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Big Think Interview With Richard Thaler
Richard H. Thaler is an American economist. He is perhaps best known as a theorist in behavioral finance, and for his collaboration with Daniel Kahneman and others in further defining that field.
He currently teaches at the University of Chicago Booth School of Business, and is an associate at the National Bureau of Economic Research, and has organized a series of behavioral finance seminars along with Robert Shiller, another behavioral finance expert at the Yale School of Management. Previously he taught at Cornell University and the MIT Sloan School of Management
Thaler has written a number of books intended for a lay reader on the subject of behavioral finance, including "Quasi-rational Economics" and "The Winner's Curse," the latter of which contains many of his Anomalies columns revised and adapted for a popular audience.
Most recently Thaler is coauthor, with Cass R. Sunstein, of "Nudge: Improving Decisions About Health, Wealth, and Happiness" (Yale University Press, 2008).
Question: What is a “nudge”?
Richard Thaler: Let me give you an illustration of a nudge. It’s funny, it’s one paragraph in our book, but it’s by far the most famous example from the book. It turns out some genius who, an economist in fact, allegedly at least, an economist who works for the Amsterdam International Airport Schipol, got the brilliant idea to etch the image of a housefly in the urinals in the men’s bathrooms at the airport. This image of a housefly, it looks extremely realistic. You can see a picture of it on our website nudges.org. It’s located just near the drain. It turns out, that men, when they’re taking care of their business, they’re not fully attending to the task at hand, but, I’m sure there’s an evolutionary explanation for this, if you give them a target, they will aim. According to the people who run the airport, spillage has been reduced by 80%. That housefly has become my favorite illustration of a nudge.
So, what’s a nudge? A nudge is some small feature of the environment that attracts our attention and alters our behavior.
Question: What is the difference between a nudge and a push?
Richard Thaler: It comes down to values. When should we nudge and when should we shove, I think, it’s a political judgment. Obviously in some situations we need shoves, we need laws. Fraud is against the law, murder is against the law, drunk-driving is against the law. We don’t need just nudges.
On the other hand, sometimes we can combine the two. So for example, in some states if you’ve been convicted of DWI, Driving While Intoxicated, after you serve your sentence and you get your license back, you also have to equip your car with some device that requires you to pass some sobriety test before you turn the car on. I think that’s probably a good rule. So we can push the two but. Where we’re going to go on various public policy issues will be a political decision, where of course, people will differ.
Question: How can we identify and allocate risk better?
Richard Thaler: I think the people who’ve been the most overconfident in our business in the last decade have been the people that called themselves risk managers. And the reason is they failed to learned the primary lesson we should have learned from when Long Term Capital Management went belly up ten years ago. That is, investments that seem uncorrelated can be correlated simply because we’re interested in it.
LTCM lost money when Russia defaulted on a certain class of bonds, and then they had other investments like on the spread between two different kinds of shares of Royal Dutch Shell Oil Company. Now that seems completely unrelated to Russian bonds. But they were related because other hedge funds saw similar discrepancies and they were all making similar bets.
So the world is much more correlated than we give credit to. And so we see more of what Nassim Taleb calls “black swan events”-- rare events happen more often than they should because the world is more correlated.
I think one lesson we have to learn is that there’s a lot more risk than we’re giving credit to, a lot more what economist calls systematic risk.
I think we also have learned the lesson that we have to have better incentive structures.
Question: How can firms incentivize prudent financial transactions?
Richard Thaler: One simple step firms can take is make sure that people that are getting paid a lot of money, say more than a million or two, that a big chunk of that money is deferred. That’s going to change the whole ballgame. The money has to be deferred with what they call “clawback,” which means they can get it back if I lose it all. So that guy making ten million a year selling credit default swaps, if we’re going to keep five million of it in escrow for ten years, and with the right to go back and get it, if he starts losing money, then we’re going to give people the right incentives not too take so much risk.
The same with the mortgage brokers that were selling people mortgages they couldn’t afford. We shouldn’t pay them on each mortgage they write. They should have what they call “skin in the game,” where they’ve got to reimburse us if the guy who sold the mortgage defaults.
I think that there are lessons that the financial services industry can learn and, as I said, they should either aggressively take these steps on their own or expect Congress to act.
Question: How can people be encouraged to save money?
Richard Thaler: Everyone’s lost a lot of money on their 401k plans. I’ve heard some people calling them 201k plans. So it’s even more important to get people to be saving more for retirement. Behavioral economics has helped us learn a lot about how to do that.
One simple way is what’s called automatic enrollment. Now this is just changing what are called the default options.
In a typical 401k plan, when you first become eligible you get a big pile of forms and you’re told, fill out these forms if you want to join. Tell us how much amount you’ve saved and how you want to invest the money. In, under automatic enrollment you get that same pile of forms but the top page says, if you don’t fill out these forms, we’re going to enroll you anyway and we’re going to enroll you at this saving rate and in these investments. If you don’t want to join, then sign here that says I don’t want to join. That increases the number of people who joined, and the speed at which they joined, by a huge amount.
There’s a second component of a good savings plan, which is something that a colleague of mine called Schlomo Benartzi and I developed many years ago, that we call “save more tomorrow.”
“Save more tomorrow” is a nudge to help people do what they know they want to do, which is save more, but they can’t bring themselves to save more now. Just like many of us are planning to go on diets next month, or maybe in two months, certainly not tonight.
So, here’s how “save more tomorrow” works. A company invites their employees to sign up for a plan where every time they get a raise, some part of that raise goes to increasing their contribution rate to the 401k plan. In the first company we convinced to adopt this plan, saving rates tripled.
No one was forced to do it, right? So, this was a nudge.
Question: How can the US government nudge companies to nudge employees to save money?
Richard Thaler: In 2006, Congress adopted the following law, it’s called the Pentium Protection Act. It’s actually a 900 page bill, but there’s two paragraphs that are nudges. What it says is, that if a company has those two features, automatic enrollment and a primitive kind of “save more tomorrow”, they have to enroll people at least a 3% saving rate and they have to automatically escalate that at least 1% a year, for at least three years, and if they do those two things, and they have a match, so the company contributes something to the plan as well, so they have those three things, then they get a free pass on some compliance form that companies find very onerous, that shows that not too much of the benefits are going to the highest paid workers. They get that free pass because if they’ve adopted those things, then it’s almost certainly the case that they’re in compliance.
I think this is a perfect illustration of nudging, of light handed regulation, it’s not telling companies you must have automatic enrollment, you must have “save more tomorrow,” you must have a match. It’s telling them if you want to do that, then here’s a little carrot, you won’t have to fill that form out. I think that’s a great model for how government can use nudges in regulation.
Topic: “Well-intentioned” capitalism.
Richard Thaler: I think there’s an opportunity here for new kinds of businesses who can sell trust and it’s tricky.
Let’s take the credit card market. Credit cards have been extremely profitable to banks. They’re profitable not from the fees they collect from the retailers that use the credit cards, that pays the bills, but the real profits come from the interest payments and the charges to users that are unexpected.
So I miss my payment by a day. They hit me with a $50 penalty. They increase my interest rate by 5%.
Is there a market for somebody selling a credit card that helps people pay down their balances? I think the question is yes. But it would have to be sold by a bank that’s really willing to invest in being a trusted partner with its consumers, because they will make less money on each consumer. If rather than setting the minimum balance as the lowest possible amount, so we keep people in debt for as long as possible, we raise the minimum payment and encourage people to pay off their credit cards, we’re going to make less money, but we’re going to have costumers that are more solvent.
Here’s a very practical example in the credit card business. One thing credit card companies often do is. They’ll tell you, you have a $2000 credit limit, now you might think that means that if I go over that, the card will be rejected. No that isn’t what it means. The card companies will often, as a courtesy, honor that credit card, but hit you with a penalty. And you keep swiping your card for $3 at Starbucks for your latté, and you’re getting hit with a $25 penalty because it’s over your credit limit.
It would be much more consumer friendly for them to beep you when you swipe your card that says, uh-oh you’re over your limit, are you sure you want to use that? Maybe you’ll take the cash out. So a credit card company or a bank that goes into the business of saying we’re going to be the broker, we’re going to sell you a mortgage that you’re going to be able to pay off, we’re going to help you reduce your credit card debt, we’re going to help you save for retirement, we’re going to put you into mutual funds that have low fees rather than high fees. I think there’s an opportunity for such a bank.
Topic: A practical example of “well-intentioned” capitalism.
Richard Thaler: Suppose I’m a wine lover, suppose that’s my vice, that I can’t walk past a wine shop without walking in and browsing and the next thing I know, there’s some expensive bottle I’m walking out with.
Well I might be interested in a credit card that I tell them, don’t honor this credit card in wine shops. Or I’m not allowed to spend more than $500 a month on wine. If I go over that, stop me. Why should a bank offer that credit card, right? They’re making less money, unless I realize, gee that’s great that they’re offering me that card it’s really helping me out, so when I need a mortgage, I’m going to go to them. When I need IRA, I’m going to go to them, maybe when I get older and I’m thinking about buying an annuity, I’ll go to them.
But it’s only going to work if they really are your trusted friend.
Recorded on: June 19, 2009.
A conversation with the author and behavioral finance theorist.
Sallie Krawcheck and Bob Kulhan will be talking money, jobs, and how the pandemic will disproportionally affect women's finances.
Want help raising your kids? Spend more time at church, says new study.
- Religious people tend to have more children than secular people, but why remains unknown.
- A new study suggests that the social circles provided by regular church going make raising kids easier.
- Conversely, having a large secular social group made women less likely to have children.
Be fruitful and multiply<p>Scientists in the United Kingdom collected data on more than 13,000 mothers and their children. Most of them were religious, but 12 percent were not. The data included information on their church habits, social networks, number of children, and the scores those children achieved on a standardized test.</p><p>In line with previous findings that religious women have more children than secular women in industrialized countries, a connection between at least monthly church attendance and fertility was confirmed. However, religious parents showed they could avoid the pitfalls that having more children can bring. </p><p>Typically, more children in a family leads to reduced cognitive ability and height in each <a href="https://academic.oup.com/ije/article/37/6/1408/729795" target="_blank">child</a>. Some studies find that children do less well in school for each <a href="https://link.springer.com/article/10.1007/s13524-016-0471-0" target="_blank">additional sibling they have</a>. This makes a kind of intuitive sense, as parents with more children would have to divide their time, energy, and resources among more people as families expand. One would expect that the larger families would also lead to things like lower test scores. </p><p>Despite the expectation, the children of religious parents didn't have lower scores on standardized tests. There were small positive relationships between the size of the mother's social network, the number of co-religionists helping out, and the children's test scores. However, this association was small, didn't show up in all of the testings, and was unrelated to other variables. </p> These effects might be explained by the size and helpfulness of the social networks around the more religious. Women who went to church at least once a month had more extensive social networks than those who never go or who attend yearly. These social networks of co-religious people mean that there are more people to turn to for help with child-rearing, a point also demonstrated in the data. The amount of aid women got from their fellow churchgoers was also associated with a higher fertility rate. <br> <br> Conversely, an extensive social network was associated with fewer children for secular women. This finding is in line with <a href="https://journals.sagepub.com/doi/10.1207/s15327957pspr0904_5" target="_blank">previous studies</a> and suggests that the social networks comprised of co-religious individuals differ from those found elsewhere.
So, how quickly should I join a local religious group?<div class="rm-shortcode" data-media_id="6RrmYM8M" data-player_id="FvQKszTI" data-rm-shortcode-id="9eb4740a7d1e10108a75fd2ed627a90f"> <div id="botr_6RrmYM8M_FvQKszTI_div" class="jwplayer-media" data-jwplayer-video-src="https://content.jwplatform.com/players/6RrmYM8M-FvQKszTI.js"> <img src="https://cdn.jwplayer.com/thumbs/6RrmYM8M-1920.jpg" class="jwplayer-media-preview" /> </div> <script src="https://content.jwplatform.com/players/6RrmYM8M-FvQKszTI.js"></script> </div> <p>The study is not without its faults, and more investigations into the relationship between fertility, childcare, ritual, and social networks are needed.</p><p>These findings all show correlation, not causation. Though it might be said the results point towards causation, various alternative interpretations of the data are apparent. The authors note that most religions are explicitly pro-natal. It is possible that religious women have internalized these values and simply choose to have more children than secular women do.</p><p>This idea is similar to a potential interpretation of why large social networks have the opposite effect for secular women. The authors suggest that, in some cases, these more extensive social networks are associated with work and exert an anti-natal influence. Again, the people who build such networks may be people unlikely to have large families under any circumstances.</p><p>However, the researchers' hypothesis endured. The help religious women get from their church-based social networks allows them to have larger families than those who lack these support systems. In some instances, these support systems also prevent the adverse effects of larger families. </p>
The community religion offers<p>As we've mentioned <a href="https://bigthink.com/culture-religion/what-is-secular-humanism" target="_blank">before</a>, religion offers a community, and a community provides social capital. As religion continues to decline in the West, the social bonds of faith communities that used to tie social communities together begin to decay. However, as has been noted by a variety of observers for the last few decades, fewer and fewer new organizations appear ready to replace religion as a source of community in our lives.</p><p>While many different organizations might offer social support that religion once provided the whole of western society, this study shows that different social circles can differently affect the people in them. This finding must be considered by those trying to find new communities to join or the authors of future research. </p><p>The community offered by religious groups provides real benefits to those who join them. As this study shows, having the support network religious community offers allows some parents to avoid pitfalls that bedevil those lacking similar support. It suggests that previous studies demonstrating that group ritual offers benefits like increased amounts of <a href="https://journals.sagepub.com/doi/10.1177/0956797612472910" target="_blank">group trust</a> and <a href="https://journals.sagepub.com/doi/10.1177/1069397103037002003" target="_blank">cooperation</a> are onto something and that those benefits have a variety of applications. </p><p>While this study is not without its blind spots, it offers a strong starting point for further investigations into the nature of ritual in our modern lives and how local support networks remain vital in our increasingly globalized world. </p>
Health officials in China reported that a man was infected with bubonic plague, the infectious disease that caused the Black Death.
- The case was reported in the city of Bayannur, which has issued a level-three plague prevention warning.
- Modern antibiotics can effectively treat bubonic plague, which spreads mainly by fleas.
- Chinese health officials are also monitoring a newly discovered type of swine flu that has the potential to develop into a pandemic virus.
Bacteria under microscope
needpix.com<p>Today, bubonic plague can be treated effectively with antibiotics.</p><p style="margin-left: 20px;">"Unlike in the 14th century, we now have an understanding of how this disease is transmitted," Dr. Shanthi Kappagoda, an infectious disease physician at Stanford Health Care, told <a href="https://www.healthline.com/health-news/seriously-dont-worry-about-the-plague#Heres-how-the-plague-spreads" target="_blank">Healthline</a>. "We know how to prevent it — avoid handling sick or dead animals in areas where there is transmission. We are also able to treat patients who are infected with effective antibiotics, and can give antibiotics to people who may have been exposed to the bacteria [and] prevent them [from] getting sick."</p>
This plague patient is displaying a swollen, ruptured inguinal lymph node, or buboe.
Centers for Disease Control and Prevention<p>Still, hundreds of people develop bubonic plague every year. In the U.S., a handful of cases occur annually, particularly in New Mexico, Arizona and Colorado, <a href="https://www.cdc.gov/plague/faq/index.html" target="_blank">where habitats allow the bacteria to spread more easily among wild rodent populations</a>. But these cases are very rare, mainly because you need to be in close contact with rodents in order to get infected. And though plague can spread from human to human, this <a href="https://www.healthline.com/health-news/seriously-dont-worry-about-the-plague#Heres-how-the-plague-spreads" target="_blank">only occurs with pneumonic plague</a>, and transmission is also rare.</p>
A new swine flu in China<p>Last week, researchers in China also reported another public health concern: a new virus that has "all the essential hallmarks" of a pandemic virus.<br></p><p>In a paper published in the <a href="https://www.pnas.org/content/early/2020/06/23/1921186117" target="_blank">Proceedings of the National Academy of Sciences</a>, researchers say the virus was discovered in pigs in China, and it descended from the H1N1 virus, commonly called "swine flu." That virus was able to transmit from human to human, and it killed an estimated 151,700 to 575,400 people worldwide from 2009 to 2010, according to the Centers for Disease Control and Prevention.</p>There's no evidence showing that the new virus can spread from person to person. But the researchers did find that 10 percent of swine workers had been infected by the virus, called G4 reassortant EA H1N1. This level of infectivity raises concerns, because it "greatly enhances the opportunity for virus adaptation in humans and raises concerns for the possible generation of pandemic viruses," the researchers wrote.
A neuroscientist argues that da Vinci shared a disorder with Picasso and Rembrandt.
- A neuroscientist at the City University of London proposes that Leonardo da Vinci may have had exotropia, allowing him to see the world with impaired depth perception.
- If true, it means that Da Vinci would have been able to see the images he wanted to paint as they would have appeared on a flat surface.
- The finding reminds us that sometimes looking at the world in a different way can have fantastic results.
The study<img type="lazy-image" data-runner-src="https://assets.rebelmouse.io/eyJhbGciOiJIUzI1NiIsInR5cCI6IkpXVCJ9.eyJpbWFnZSI6Imh0dHBzOi8vYXNzZXRzLnJibC5tcy8xODc3Mjc2NS9vcmlnaW4uanBnIiwiZXhwaXJlc19hdCI6MTY1MTA4MDg2NH0.T-98YvLjS9mUCQkgqHyV43Q7h_JIiubrev-Fp_0j4Pg/img.jpg?width=1245&coordinates=0%2C38%2C0%2C579&height=700" id="58346" class="rm-shortcode" data-rm-shortcode-id="674799ba34e115a2e9a3e94c366bfc26" data-rm-shortcode-name="rebelmouse-image" />
The Virtuvian Man. Christopher Tyler suggests that Da Vinci used his own image as a template for the face in the drawing.
Vitruvian Man, by Leonardo da Vinci created c. 1480–1490<p><a href="https://www.city.ac.uk/people/academics/christopher-tyler" target="_blank">Professor Christopher Tyler</a> of the City University of London's optometry division analyzed six pieces of Renaissance art by or held to be images of Da Vinci, including the famous <em>Vitruvian Man. </em>By looking at the paintings, drawings, and statues and applying the same techniques optometrists use on patients, Tyler was able to conclude that the eyes of the men depicted were misaligned.</p><p> He concluded that, if the images he analyzed were truly reflective of how Da Vinci looked, that the great artist had a mild case of exotropia. </p>
How would this have helped him paint?<span style="display:block;position:relative;padding-top:56.25%;" class="rm-shortcode" data-rm-shortcode-id="b221010aa7688734d4d6a41f0df5933f"><iframe type="lazy-iframe" data-runner-src="https://www.youtube.com/embed/j6F-sHhmfrY?rel=0" width="100%" height="auto" frameborder="0" scrolling="no" style="position:absolute;top:0;left:0;width:100%;height:100%;"></iframe></span><p><a href="https://shileyeye.ucsd.edu/faculty/shira-robbins" target="_blank">Shira Robbins</a>, a professor of ophthalmology at the University of California at San Diego, who was not involved with the project, explained to <em><a href="https://www.washingtonpost.com/news/morning-mix/wp/2018/10/19/leonardo-da-vincis-genius-may-be-rooted-in-a-common-eye-disorder-new-study-says/?utm_term=.d3f44ed91c16" target="_blank">The Washington Post</a> </em>how individuals with exotropia often turn to additional information to help understand the world around them:</p><blockquote>"What happens in some people is when they're only using one eye . . . they develop other cues besides traditional depth perception to understand where things are in space, looking at color and shadow in a way that most of us who use both eyes at a time don't really appreciate." </blockquote><p>Dr. Robbins agrees that, if the artworks analyzed accurately depict Da Vinci, then he probably had exotropia.</p><p>If Da Vinci did have a mild form of the condition, which would allow him to focus with both eyes when concentrating and with one when relaxed, Tyler asserts that the famed artist could have viewed the world in two or three dimensions at will, showing him the world exactly as he would need to recreate it on a flat surface. Quite the superpower for an artist.</p>
Does this mean Da Vinci would have been a hack if he had normal eyesight?<img type="lazy-image" data-runner-src="https://assets.rebelmouse.io/eyJhbGciOiJIUzI1NiIsInR5cCI6IkpXVCJ9.eyJpbWFnZSI6Imh0dHBzOi8vYXNzZXRzLnJibC5tcy8xODc3MjY5NS9vcmlnaW4ucG5nIiwiZXhwaXJlc19hdCI6MTYyMjYwOTgxOH0.eSu3YBpCuaDj59-4lzSeZ1WgwtV2ETGiWHqczzW3how/img.png?width=980" id="9c323" class="rm-shortcode" data-rm-shortcode-id="edd4e9e9d9c1156a53242df6288d7cc0" data-rm-shortcode-name="rebelmouse-image" />
A graph showing the difference in where each eye is focused for each painting, drawing, and statue used in the study. The larger the difference, the more pronounced the exotropia is in the image.<p>Not at all. What Dr. Tyler is suggesting is that the tendency of people who have exotropia to rely on using one eye to see the world and thereby lose some depth perception allowed Da Vinci to understand better how the three-dimensional objects in the world could be translated into a two-dimensional image on a canvas. This could account for some of Da Vinci's skill in depicting shadow and subtle changes in color, since he would have relied on these details to understand the world. <br><br>His polymathic brilliance extended far beyond art, and nobody is claiming that his ideas for flying machines, tanks, or <a href="http://www.da-vinci-inventions.com/davinci-inventions.aspx" target="_blank">other inventions </a>were at all influenced by a vision problem.</p>
How can we know this? He has been dead for five hundred years.<span style="display:block;position:relative;padding-top:56.25%;" class="rm-shortcode" data-rm-shortcode-id="c26fc51b0aebbcd6905593015fec79e5"><iframe type="lazy-iframe" data-runner-src="https://www.youtube.com/embed/LRAptNtN9-A?rel=0" width="100%" height="auto" frameborder="0" scrolling="no" style="position:absolute;top:0;left:0;width:100%;height:100%;"></iframe></span><p>There are reasons to be cautious anytime we make claims about people who are long dead. In this case, we have the bonus problem that we aren't 100 percent sure that the images used are supposed to look like Da Vinci. </p><p> That is the major caveat of the idea; all of the images used as evidence of his condition are assumed to look like him. While some of the images, like the <a href="https://en.wikipedia.org/wiki/David_(Verrocchio)" target="_blank"><em>David</em> by Andrea del Verrocchio</a>, are generally agreed to be based on Leonardo the other pictures are claimed to be reflective of him based only on his statement that "[The soul] guides the painter's arm and makes him reproduce himself, since it appears to the soul that this is the best way to represent a human being." </p><p>Tyler also argues that the portraits he claims are based on Da Vinci share similarities with the images generally accepted to be portraits of him; including similar hair and facial features. This lends weight to the idea that the artist incorporated his own traits into his artwork, including his vision problem. </p><p>Leonardo da Vinci was undoubtedly one of the greatest geniuses of all time. If he had exotropia, then it was merely a minor addition to his artistic skills. It does, however, give us a literal example of how people who look at the world differently can use that vantage point to their advantage to create things we all can appreciate. </p>
The word "learning" opens up space for more people, places, and ideas.
- The terms 'education' and 'learning' are often used interchangeably, but there is a cultural connotation to the former that can be limiting. Education naturally links to schooling, which is only one form of learning.
- Gregg Behr, founder and co-chair of Remake Learning, believes that this small word shift opens up the possibilities in terms of how and where learning can happen. It also becomes a more inclusive practice, welcoming in a larger, more diverse group of thinkers.
- Post-COVID, the way we think about what learning looks like will inevitably change, so it's crucial to adjust and begin building the necessary support systems today.