The Economic Naturalist | Robert Frank | Talks at Google

Hi everyone, and welcome to today's Authors at Google event. It's my pleasure to bring Robert Frank to Google today. He's the author of several books, including the Winner Take All Society and Principles of Economics, which he co authored with Ben Bernanke. He writes the monthly column the Economic Scene for the New York Times and is currently a professor of management and professor of economics at the Johnson Graduate School of Management at Cornell University. He's here today to speak about his book the Economic Naturalist. We'll be taking questions and citing books afterwards. Without any further ado, please join me in welcoming Robert Frank to Google. Thank you, Ricky. Yeah, it's a pleasure to be here. Just to see the epicenter of the winner take all society is kind of a thrill for me. This book is one I've been having a great deal of fun talking about because it's one I can be effusive in my praise of because it's two thirds of it sourced to my students, as will become clear as I explain the nature of it. There's some great ideas in the book and most of them are not mine, but I'm really pleased to have a chance to share them with you. I've been teaching economics at Cornell for a long time. I started in 1972. Three friends of mine in different cities sent me this cartoon shortly after I started. I'd like to introduce you to Marty Thorndecker. He's an economist, but he's really very nice. I've always thought cartoons are data. If the artist does a drawing and you get it, then that's telling you something about the world. So what is it exactly? I had noticed people reacting to economists with fear and loathing long before I even saw this cartoon. People would ask me at cocktail parties, what did I do? And I'd say I was an economist. I grew to dread saying that I was an economist because you could just see the panicked look of on people's faces. What was it that made them so unhappy to learn I was an economist? So I started asking people, and the great thing is people will try to answer questions like that. So they thought, and they sort of dredged back in memory, why did they have that reaction? And surprisingly often people said to me that they'd had an introductory course all these many years ago and there were these horrible equations and graphs. That was their memory of the course. This is a. A famous graph I clipped from a book, a leading seller in the introductory market that bills itself as a less is more book. It's a graph that the originator and his draftsman argued about endlessly. The draftsman finally persuaded Jacob Viner that it couldn't be drawn according to the economist's specifications. And I won't bore you with the gory details, except to say that this graph doesn't belong in the introductory course. This is just not a good way for economic students to be learning about the basic ideas of our science. It's just a total waste of their time. Maybe at some point this is the right thing for them to. But not during the introductory course. What we've discovered now as a result of systematic investigation of the outcome of the principles course, Is that when students take an exam six months after having taken the basic principles course, you can't tell that they've taken the course at all. They score about the same as people who never took the course. Which, if you think about it, what a scandalous level of performance that is. I mean, if it were in any other sector, there would be lawsuits filed, there'd be people wanting their money back. Here we just offer the course. Nobody learns anything, and life goes on. It's interesting, the insulation from feedback that the course operates in. I think the problem is that people ask, how much can I cover today? And then if they cover a lot, wow, I was good today. I really covered a lot. You really need to ask, how much can people absorb at a setting? And what's the best way in? People don't typically ask that question. So if you took an economics course, here's an idea you should have learned about. Everybody says it's one of the core ideas. Some former students of mine did a paper designed to test whether people did learn about opportunity cost in any meaningful way from the introductory course. So here's the paper. It was published in one of the Berkeley electronic journals. They asked students this question. Here's the preamble to it. You've got a free ticket to see Clapton tonight. No resale value. That's important. The only other thing you're thinking about doing is seeing Dylan tonight. It's his last stop where you are. You won't be able to get to see him again either. They're both on their farewell tours. You don't have a ticket to Dillon. To get one, you have to spend $40. And on a given day, you'd be willing to pay as much as $50 to see Dillon. Okay, you've got your Clapton ticket. There's no other cost associated with seeing either performer. No taxi fares, no babysitters, nothing. Just strip away all the extraneous complexity. So you're willing to pay 50 to see Dillon. It costs 40 to buy a ticket. You don't have one yet. What's the opportunity cost of seeing the Clapton concert? Remember the definition I flashed quickly on the screen said the opportunity cost is the value of what you give up to do it. Okay? And so here, the only thing you're giving up is seeing the Dylan concert. What's the value you're giving up? What's the opportunity cost of seeing Eric Clapton? It was a multiple choice question. Zero was one possibility. 10, 40, or 50. Pick one. There's a uniquely correct answer, and that's it. You're giving up the Dylan concert. It's worth $50 to you, but you got to pay $40 to see it. And so what you're really giving up is the $10 difference. That's your economic surplus. So it's not such an easy question. Maybe. But if you had a decent course that stressed this concept, you ought to have been able to answer it. 7.4% of 270 undergraduates they surveyed got it right. Think about it. If you just guessed, you'd get it right 25% of the time. So you say a little bit of knowledge is a dangerous thing. Here we're steering them in the wrong direction, if we're steering them at all. They looked at some students who'd never had the course. They didn't do so well either, but they did more than twice as well as the students who'd had a course. Okay, as I get again, I say my hypothesis that we're just throwing so much stuff at them and we're not sort of going into it in depth and letting them see how it works, that they don't really get it. It all goes by in a blur. They investigated a different hypothesis. It was that the professors who were teaching them the opportunity cost concept never really learned it very well themselves. They took an introductory course where it was one of a thousand items on the syllabus. So they said, let's see how the professors do. They went to the AEA and in Philadelphia, the annual convention asked 200, almost 200 PhD economists. These are the distinguished ones. The ones who don't do well, don't like to show up at the convention. They're embarrassed. So 25.1% of them chose zero. I can't think of any narrative under which that could conceivably be the correct answer. 21.6% chose the correct answer. The least frequently chosen one of the four. 25.6% chose 40 and 27.6% chose 50. I was so astonished by this, I wrote one of my New York Times columns about it and I got angry emails from economists saying, oh, why didn't you say you meant net opportunity cost? I thought you meant gross opportunity cost. Well, do a Google search on net opportunity cost and gross opportunity cost in quotes. Nothing comes up. You know, there's no such concept as that. There's a right answer here. And they didn't get it for the most part. So Ben Bernanke and I, sort of animated by these findings, thought, well, if you just pick six or seven ideas and hammer away at them for a semester, showing them how they work in specific contexts that people take an interest in, people ought to be able to master them pretty well in four months time. That's a reasonable goal, and I think we've scored on that. So the opportunity cost concept becomes clearer when you see it in a variety of contexts. And here's a nice one. So why do residents of Manhattan tend to be rude and impatient while residents of Topeka tend to be friendly and courteous? This is obviously a caricature, but if you open a map in Topeka, there'll be people immediately come asking whether you need help in Manhattan. They'll scurry by. Typically, sometimes they'll stop and help. The student who did this question in my course suggested that it might be because the opportunity cost of time is nowhere on the planet higher than in New York. The wage rate is higher per hour there than any other city. The value of the things you could be doing if you weren't working is much higher there than any other city. And so if you interrupt somebody's trajectory in New York, you're imposing a much bigger cost on her than in Topeka. Maybe that's not the right answer, but it's at least an interesting answer. And it's one that makes sense logically and helps you keep the concept in mind. This whole less is more idea I saw for the first time in the language instruction domain I'd like many people taken multiple years of different foreign languages. Four years in my case of high school Spanish, another couple of years of German. I traveled in Spain, I traveled in Germany. I had a very difficult time making myself understood during those first trips. People would look at me. I will try to recreate the exchanges we tried to have, but it was clear that four years was not successful in making me an effective communicator in Spanish. So maybe you just can't learn in four years. Well, it turned out when I was a Peace Corps volunteer trainee, I was set to go to Nepal in 13 weeks. I was going to be teaching math and science to 9th and 10th graders in Nepali. Like most everyone else, I'd never heard a word of Nepali. When I arrived at the camp, they started simple. They didn't do any complicated language equivalents of that graph I showed you on the economics slide. Words at a time, a couple words, then short sentences. There was an enormous amount of repetition. Drill. If you couldn't get it, they would make you keep drilling it until you did get it. And it was always an active learning process. You had to be supplying things on the fly. And that's how you sort of get the knowledge built in in a way where it's actually accessible to you when you can make use of it and then build on your own. That was the theme of the program. It was basically to mimic the way a child learns to speak his native tongue. That's exactly the way they tried to do it. That was the very first sentence I ever learned in Nepali. Yotopi mahango ta. I can say it in my sleep. This hat is expensive. It's a good sentence. You have to bargain for everything. So to be able to say that something's too expensive is right out of the box, something useful. Then they would say lamamosa, that's the noun for long socks. And we would have to, on the fly, say, I tun these long socks, or mangochun, these long socks are expensive. And if you couldn't do it on the fly, then you'd keep drilling it. And it was just this marvelous sense of empowerment. We would go and do these. They wouldn't have to tell us go do conversations in the poly. We wanted to do them just because we could do them. If I had one principle I could teach people. I said, we try to drum five or six of them into students heads during the term. But if there was one I could do, it would be the basic granddaddy of all of them. The cost benefit principle. It's very simple sounding. It says, do it. If the benefits exceed the costs, there turns out to be complication involved figuring out what's the relevant measure of a benefit. But the idea itself is fairly simple. Here's an example. You're about to buy an alarm clock at the campus store right next door. A friend tells you you can get it downtown at Kmart a short drive away for $10. You drive down to Kmart. These are questions I've given students multiple times. Invariably they Will answer, of course, I would go down to the Kmart 90%. It's a cost benefit question, but there's no right answer. It says, how much trouble do you think it is to go downtown to get the clock for $10 at Kmart? So 90% would go downtown. Then I asked them this question. You're about to buy a laptop at the campus store for $2,510. It's available at the Kmart. Same laptop. You got to send it to the same manufacturer. If it breaks, would you go downtown to the Kmart and get it here? They think I've asked a totally stupid question. Well, of course not. Just to save 0.01% on the price of the laptop. Who would be stupid enough to do that? Well, it turns out if you are a rational person and you decide by weighing costs and benefits, there's no right answer. But the answer ought to be the same for both of these examples. So the benefit is $10 in both cases. The cost is whatever it is. If you think it's not worth it to drive downtown for less than a hundred dollars, then you should buy the item at the campus store in both cases. If you think the inconvenience of driving downtown is $2 worth, then go downtown in both cases. So nobody likes to be an irrational person. The students are a little troubled by this, but they like going back to ask these same questions to their friends in the dorms and then pointing out that they're irrational when they answer inconsistently, and so on. But it's a way of sort of hammering the message home. It's the message in a familiar context. That's how the message sinks in much more readily. Always give them an example once they've seen these, just to hammer it one more time. You know, there's not a such thing as too much repetition in this process. So you got a flight coupon. You can get a discount on one of two trips you're going to take in the next weeks. You're going to use it for one or the other, not both. There's no other trip you can use it for. You can either save $90 on your $200 trip to Chicago or $100 on your $2,000 trip to Tokyo. Which one should you use it for? And everybody gets it right. They all say, correctly, that you should use it to save $100, because that's better than saving $90. But it's not a waste of time to ask the question. It's another chance to sort of flex that brain Muscle and get it a little bit more firmly cemented in. Here's a nice application of the cost benefit principle. So my former student Bill Joa asked this question. Why do the drive up keypads on the ATM machines have braille dots on them? You know you can't drive if you're blind. Why do you need braille dots on those machines? Why bother? And his explanation was that they're going to make the machines with braille dots on the keypads for the walk up locations anyway, having made them, why not make them all the same way? Rather than keep two separate inventories and worry about which machines go to which destinations. It's just easier and cheaper to do it that way. So same benefit. It doesn't bother the drivers that they're there, nobody's inconvenienced by them and it's cheaper. So why not braille dots on keypads? Here's the assignment I give them and this is where I think 90% of the learning in the course takes place. You have to show them the principles and how they're done, but the real progress takes place when they try to pose these questions and answer them. So the assignment is, is really inspired by the field biologist's approach. If you've had a biology course, you know you can go out in the wild and see things that you never noticed before. There's suddenly interesting textures and patterns in the landscape that just escaped your notice before that. So if you watch animals and you've had a Darwinian evolution course, then there's a very interesting pattern that you'll see, which is that invertebrate species, the males are almost always bigger and more colorful than the females. Why is that? Well, Darwin had a nice concise answer. That's the bull elephant seal. You can go down to the Ano Nuevo preserve south of here and see them in the wintertime. The bull weighs 6000 pounds, 23ft long, bigger than a Lincoln Navigator SUV. This animal, the cow, 8 to 1200 pounds. They have to mate side by side or else the bull will crush her to death in the act of mating. Why is the bull so much bigger than the cow? Darwin's theory was that in vertebrate species you see mostly polygynous species. That means males take more than one mate if they can. You stress if they can. Because if some males take more than one mate, that means other males aren't going to get any mates at all. And so it's a huge winner take all contest to see who gets mates. And they square off on the beach and they battle until one of them lumbers off, bloodied and exhausted, four or five hours later. And the winner claims a huge prize. In the Darwinian scheme, it's 50 to 100 females. Every one of them are going to carry his genes for larger body size, which were what helped him win the fight with the other would be dominant male. It's bad for the seals as a group to be so big. They'd be all of them better off. They weighed half as much. They're much more vulnerable to predators. They have arthritis. At a younger age, they have to. Their workday is very onerous. They have to eat way more fish than they would if they were smaller. But for any individual male to be smaller, that would be a disaster. So it's an interesting theory that sort of pops into your mind if you've got some background principles. You see things that make sense to you and you learn the principles a lot more effectively by seeing them in action. It's everywhere. So in polygynous species, the elk have way broader antlers than would make sense for elk as a group to have. When they're chased into the woods, they're dead meat. They're surrounded and killed easily by wolves. But if a male had smaller antlers than other males, he wouldn't end up having a crack at being the dominant male. And so the genes for his smaller antlers would die with him. That's the sort of ultimate loser category in the Darwinian scheme. It's a useful theory. And if you're willing to think about this kind of theory in scientific terms, the test is to look for circumstances where the theory doesn't apply. People, I think, mostly use the expression the exception that proves the rule incorrectly. They've got some theory, somebody points out a counterexample and they dismiss it, saying, oh, that's the exception that proves the rule. Well, how exactly does that prove the rule? It seems like it disproves the rule, and you're sliding away from the uncomfortable fact of that. I think the correct understanding, or at least the one that makes sense to me of the expression, is that it refers to the older sense of the verb to prove, which means to test. It's the exception that tests the rule. So you look at a species that's not polygynous, a monogamous species like the albatross, the prediction there is not that males will be bigger, there's no reason for them to be. They're not fighting for access. And so, in fact, in the albatross and in other monogamous species, it's typically very hard to tell the males from the females. They're about the same size and color. These are all examples of what's come to be called the narrative theory of learning. They're stories. There are actors in them. There's a plot. The human brain absorbs narrative like a water sponge gets sucked up. Water sucks up into a sponge. It's just like a key sliding into a lock. There's no swimming upstream if you're trying to get a narrative into the human brain. That's how we evolved as storytellers. We didn't squat and draw equations in the dirt with a twig. It was, you know, you told your story to someone and that's how it got across. And that's just the easiest way for people to absorb information. And if you can get it into a narrative, why not take advantage of that natural strength of the human brain? Joan Bruner says that if a kid doesn't catch an experience in narrative form, it's lost forever. The kids who do managed to tell a story about an experience can re access that experience multiple times, mull it over, learn from it. If you don't catch it that way, it's lost forever. Students aren't so different from children. Adults aren't so different from students. You know, this goes all the way up the chain. I tell my students they have to do two of these a semester. One at midterm, one at the end of the term. Their question has to be interesting. Now tell me, if I. If I don't think your question's interesting, why on earth would I want to read your answer to it? Don't ask. Why do we order out for pizza when we're tired? Yeah. Well, because it's too costly to cook when you're tired. Yeah, that's true, but it's not interesting. So they have a hard time the first round coming up with an interesting question. Many of them, they come by, oh, is this question interesting enough? And oftentimes the question isn't interesting. But they're smart kids and they think about lots of questions to come up with an interesting one. And the really best ones truly are interesting. And I say that it's good to have an interesting question because then you're going to want to work harder to come up with an answer to it. But mainly because when somebody hears your question, he'll want to repeat it to someone else. And it's each retelling of the story that gets the idea more firmly rooted in the brain. That's, I think, the really deep beauty of this assignment. I think my all time favorite submission was by Jen Dolsky. I'm going to see her at dinner tonight. She and her husband were my students in 1997. She had gotten married about six months earlier. She wanted to know why brides who know they'll never wear their wedding dress again spend thousands of dollars on it, while grooms who will have scores of opportunities to wear tux in the future, rent a cheap one. It's a great question because it seems on the surface that it should be just the other way around. You're never going to wear the dress again. Rent the thing. You know, if you're going to have a suit you're going to wear, many times, you know, get one. Her answer began with what some people think is a strong assumption, but no one's ever said it seemed unreasonable. It was that in most societies, on big occasions, it's more important for a woman to make a fashion statement than for a man. No one's ever come up after I've discussed this example. No, that's not the way it is around here. And you can get that assumption from some biological reasoning. In monogamous or largely monogamous species, there's a lot more ornamentation on the female than the male. So if you start with that, then it's a matter of simple economics of the rental business. You'd need 100 or so gowns in each size to enable a bride to make a fashion statement. They would rent out every eight, nine, ten years. The cost of carrying that inventory would mean the rental fee would be, I don't know, 110% of the purchase price just to cover their cost. Who would rent for 110 when you could buy for 100? So that's essentially a non viable business. Maybe there'll be an Internet rental gown business that springs up. That's what you'd predict from the Long Tail theory. But so far mainly it's been brides by if you're a guy and you don't care that you wear the same suit everyone else wears, then the companies can hold two or three suits in inventory. They'll turn over rapidly eight or nine times a year and you can rent one for a quarter of the purchase price. You can save a few bucks on a time when cash is tight and so many men do that. Why are child safety seats required in cars? You drive to the supermarket three blocks away. They'll ticket you in Ithaca if you don't have your kid strapped into one. You can get on a flight at FSO and fly to New York with your kids sitting loose on your lap. Why that distinction? A lot of people say, well, it's because if the plane goes down, doesn't matter whether you're strapped in. So, so fine. But that's mainly not why you have seat belts. In the event of a crash, you are probably going to die. If the plane crashes, it's because there's turbulence or there's other untoward events in flying. And being strapped in really does help as much as being strapped in. A seat belt in a car helps in crashes. And so why is it that they don't make you strap your kid in? The benefit side's not so different with Mr. Ballot Reason. He said there's a big difference on the cost side. If you've got room in your back seats, essentially free to strap your kid in to a safety seat. If you're on a full flight to New York, you're talking about an extra seat which might cost 1000 bucks. So nobody wants to say it's too expensive to keep you safe on this trip, kids, we're just going to hope for the best. But basically, costs and benefits are in the mix when people make decisions about health and safety, just like anything else. Carol Hittle wanted to know why you have to pay more if you start in Honolulu and fly a round trip to Kansas City than if you do the trip the other way around. Same plane, same everything. She argued that if you're starting in Kansas City, going to Honolulu, you're probably going on vacation. There are lots of places you could go. If they don't offer you good fare, you'll go somewhere else. If you're starting in Honolulu, going to Kansas City, you're probably not going on vacation. You're probably going to see family or personal business, something you're not choosing among destinations. You're more of a captive customer. It's a nice, simple explanation. Here's one of my longtime favorites. It may not even be a fact in the world. I've heard the story many times, so it might be a fact. But the interesting thing is it could be a fact and it wouldn't be mysterious. So the, the rumor always was that before the scratch and dent sale, Sears would send clerks out to the warehouse with ball peen hammers to dent up some more stoves and refrigerators. They were going to run out the next morning. It started off this sale because appliances would get damaged in transit and so they would want to have Stock on hand to put on sale periodically rather than send them back to be fixed. It was just cheaper to sell, sell them at a cheap price. But the sale was so successful that it's become what I call an example of the hurdle model of price discrimination. You want to give the buyer who cares about price, who won't buy at a high price, a discount, but you don't want to make that discount available to the people who would pay the high price. So what do you do? You put a hurdle in the buyer's path and say, all right, if you want to jump that hurdle, we'll sell it to you on the cheap. You don't want to jump the hurdle? Fine, pay the list price. That's. Here's an exercise. Go out and look at the products you buy. Try to find examples of ones that don't offer you that option. It's very rare. There are some. But it's very rare to see a product that doesn't give you the option of a rebate coupon or a temporary sale every once in a while. Here the hurdle is there are three hurdles. You got to find out when it is, clear your schedule, get there on that day, and then live with the knowledge that there's a dent in your refrigerator. That wouldn't bother me especially. It's going to be up against the wall. No one will see it. But some people, well, we don't have to have a refrigerator with a dent. That's not the kind of people we are. So it's a good. And those are the people who are willing to pay less price. It's a great device. It turned out to be. The tux finds its way into lots of my students examples. This is another, I think, very good. The good questions have this twist to them. Yeah, why is that? It should be the other way around. You got a $20,000 car, you rent it for 40 bucks a day, $500 for 90 bucks a day, a car, 20,000 bucks, 40 bucks a day. What's going on here? It seems like it shouldn't be that way. I like this one. My wife asked me. We were visiting Boston and we're going through Quincy Market. There was a stall that had one of these signs. Why do they have those signs? I could tell her that a student had just turned this one in a few weeks ago, and it's that the cashier, if she doesn't ring the sale up, can pocket the money and be out of there at the end of the day. There's no way to reconcile the inventory in the back. With what goes through each register, the owner could hire people to stand there and watch the cashier. It's just much cheaper to say to the customer, you get a free meal if it's not rung up. Because once it's rung up, then the cashier is responsible for the cash in the drawer to match what went out across the counter at her register. Very simple application of the cost benefit reasoning. That's Gisele Bundchen. Depending on which source you read, she either earned $30 million last year or $15 million last year. Anyway, there's no male model I could find last year that earned even a million dollars last year. Why the huge difference? There's some reason to think blondes are smarter than brunettes. There's better evidence that athletes are smarter than non athletes if you look at the correct random sample of the population. Why are there so many jokes about dumb jocks and dumb blondes? It's an interesting question. What's going on there? Grasimos estimiados. One of my favorite questions. The Broadway theaters will sell you a half price ticket at the last minute. You want to buy an airline ticket at the last minute, you pay double or triple. Interesting. It's the same perishable seat in both cases. If you don't sell it, it's going to be lost forever. Why do they take such a different approach in the two cases? I've got a chapter in the book Psychology meets Economics talking about some of the limitations of the cost benefit model. So you could say, well, maybe the pilots are going to hit turbulence. You want them to get there safely. Or maybe they won't be able to find the target. You want them to come back. None of the cost benefit models sound that plausible. But the kamikaze pilots were pilots first and foremost. They weren't bus drivers selected to fly these missions. And pilots wear helmets. That's what pilots do. So that's maybe a better explanation than the cost benefit explanations. Everybody, males in particular, think, oh, polygamy, that'd be a great deal. They think, wow, I could have three wives. They don't think of the downside. But if it's such a great thing for males, why do the male legislatures typically make it illegal? It's against the law. You can't have three wives. The Big Love series sort of documents the life and times of a typically successful, attractive male who's managed to land three very desirable females. What goes on in the background is the other part of the math. If you've got 10% of the men with three males, three mates each. That means that in the rest of the population there's going to be nine men for every seven women. So imagine that you're the modal man, one of the guys who doesn't get three mates. You're going to be searching in a pool where there's nine of you for every seven of them. And supply and demand work much more forcefully in the relationship market than in many other markets. The terms of trade would shift sharply against men under the circumstances. So you need to work on your abs for an hour a day now. Well, maybe two hours a day under a polygamy law. Or maybe need two dozen roses. Not a dozen roses. It would just get a lot tougher for males the same way it is for the bull elephant seals. You've got to be £6,000 to be a player. Better to avoid that arms race. Okay, Rick, I'm going to ask how we're doing for time. I don't want to shortchange the question period. We've got 20 minutes or so. I've got. There's a collection of slides I left for the last that sort of highlight this distinction between what's attractive to the individual actor and why the rational individual choice often adds up to an outcome that's not very attractive for the group as a whole. I can talk about those quickly and then take questions, or we can skip that. I'll go through that. Okay. I've got another book just out called Falling behind and these themes are more fully explored in this book, but they're also. There's a chapter devoted to them in the Economic Naturalist. So Adam Smith, he thought, or his modern day defenders at any rate, say he thought that if you just turn people loose and tell them to do whatever they want, you'll get great results. Smith didn't think that. He's been way oversold by some of his modern disciples. What he did say was that if you turn individuals loose and tell them to do what they want, you'll often get surprisingly good results. So you know the contest among producers to come up with cost saving ideas to increase their market share. Eventually that all redounds to the consumer in the form of lower prices. It's amazing. Nobody had that story clearly in mind before Smith wrote about it. But he was very well aware that. That you don't always get good results when the individuals battle with one another for market supremacy. And Darwin in particular, who was influenced very clearly by Smith, never thought competition among individual animals produced the greater good for the species. Sometimes it did, but oftentimes it didn't. So that's the example of the boy elephant seals and the elk. And so, if you'll think about the many aspects in life that resemble a contest, a whole host of important aspects of life are graded on the curve. There's just no way to describe it than that. It's not how well you do, it's how well you do compared to the people you're competing with that determines whether you're going to get a satisfactory reward by your lights. So it's a commonplace idea. So the context influences the kind of gifts you have to give. You have to give a dozen roses to show your wife you love her. In a rich society, a rose will do, said Richard Laird. In contests, typically you get an arms race as the contestants try to position themselves to win. And the investments in performance enhancement often do good things, but they almost always go too far. And the organizers of every contest figure out ways to try and limit the investments in positioning by the contestants, just in the mutual interest of all the competitors. And so there's a lot of regulations out there that I think don't make sense except when seen through this lens. So how do we interpret regulations? I think if they're common in a lot of settings, the most parsimonious way to think about it is, well, what are these regulations trying to achieve exactly? What are they trying to keep us from doing that we would do if they weren't there? And why is what we would do on our own bet? Here's a nice example from Tom Schelling. He wanted to know, why is it that hockey players will vote unanimously in a secret ballot to require helmets, yet when they're given the choice on their own, never wear them. This experiment's been done many times. Any league that doesn't have a helmet rule, very quickly, no one wears a helmet. Goalies didn't used to wear helmets. If you can imagine in the NHL, there were helmets horribly disfigured by the time they'd been in the league for a few years. But basically, there's an individual competitive advantage. If you don't wear a helmet, you can see and hear better. Maybe you're better able to intimidate your opponent. And so that's a reason for an individual to find it attractive to skate without a helmet. The obvious complication is that if I can skate without one, so can you. And then we all skate without them. And 50% of the teams win, 50% of the teams lose. The same as if we all wore Helmets. So obviously rather than all take a greater risk of being injured, better to have everybody forced to wear a helmet. So it's sort of an interesting take on the concept of individual liberty. Nobody would complain about a military arms control agreement, that it limits the signatory's ability to do what they please. That was the whole point of it. Well, does this regulation violate the hockey players freedom? It doesn't seem to me a coherent charge. That's what the hockey player was trying to do. He didn't want to be free to skate without a helmet because he knew he would have to. In that case there were rules governing duels. Thank heavens we don't have to have duels anymore. We've got an even stronger rule now. It's against the law to duel. You want a duel? I would love to, but we can't. It's against the law. Have your guy call my guy. In the old days if you offended somebody, he would challenge you to a duel. You'd have to show up at dawn with the weapons specified. And there were very tight rules about what the weapons could look like. They could fire only a single shot. They couldn't have spiral scoring on the barrels, the whole point of which was to make the bullet come out with a spin and be more accurate. So it would go like a Bart, I mean a Brett Favre pass. It would be a nice tight trajectory to the target. They didn't want that. They wanted to come out floating and dancing like a knuckleball so they'd miss. That was their aim in these rules. They didn't want multiple shot weapons. Think about a duel. You're going to take some paces, turn and fire. You're both going to go down for sure. If you have multi shot weapons, one shot, that was the rule limiting investment in performance enhancement. That's the only sensible interpretation of these kinds of rules. If you're thinking about when to have your kids start kindergarten, everyone else is starting at 6. I'm kind considering holding my boy back till 7. What are the benefits and costs? Well, he'll get out of school a year later, that's no big deal. But while he's in school, he'll be bigger, stronger, smarter, more socially mature than the kids he's in class with. And since school of all places we know is graded on the curve, he's going to be more likely to get into Stanford when the time comes. If I hold him back, the rub, I hold mine back, you hold yours back. Then we've got seven year old kindergarteners, then eight Year old kindergartners. How far does it go? It doesn't go forever. You wouldn't see 40 year old kindergarteners, just like you don't see 50,000 pound bull elephant seals. But they can't regulate that arms race. We can and we do. We say if we don't have a mandatory start date for kindergarten, we get kids starting kindergarten at some advanced age. That doesn't serve the social purpose. It's not a sensible scheme. So if Your kid turns 6 this year, he's got to go to kindergarten this year. Unless you hire a bevy of doctors to claim he's not ready. I'll show you one last example. The way we talk to each other is influenced by these kinds of context effects. So if you think about formalism and economics, you're always better off to be the more rigorous of two economists if you're looking for a job. All right, I can do rigorous. You can do rigor. So you do more rigor than me. I'll have to match that if I want to stay competitive. And so this is a typical paragraph in an economics journal. Nobody looks forward to taking it home to read it. It's rational for the individual economist, not rational for economists as a group. Perhaps it's not to say formal analysis isn't useful, it's just what's the optimal level of formalism? And this is truly the last one. I'll show you. I was in a seminar with social scientists and humanists. The humanists would assign readings as we would, and be a discussion leader. I thought, wow, this will be interesting to see what they think. There was an article by Maria Lugones called Tactical Strategies of the Streetwalker. I couldn't wait to read it, but then I got into it and this is a typical paragraph from it. I propose to embrace tactical strategies in moving and disruption of the dichotomy as crucial to an epistemology of resistance liberation. To do so is to give uptake to the disaggregation of collectivity concomitant with social fragmentation, and to theorize the navigation of its perils without giving uptake to its logic. What's going on here? I have no idea what that means. A friend of mine, we just hired him from Stanford's business school to come take a professorship at Cornell. I told him about this example. He said, show me that. I've taken some humanities courses, I'll tell you what it means. And he read it. And he looked up, he read it the second time, said no, he had no idea. I'm guessing that at a time when they were writing clear English, which we know was true, not in the too distant past, somebody discovered that by throwing in an unfamiliar word or phrase, she could seem more erudite than others. Wow, there's this word she knows that I don't. And so you could score points by doing that. Others could easily mimic that strategy. And so the level of obscure phrases and locutions started to escalate. That's where it seems to be now. Is that the best thing for the discipline as a whole? I wouldn't want them teaching my kids how to write. I don't think optimal for one is not the same as optimal for. There's a very clear distinction in many cases. All right, I'll leave that slide on the board. Just because it seems to be one that will be intelligible in the context. I need 70,000 square feet. Because he has 70,000 square feet. They'll think my business isn't doing well if I have 50,000 square feet. So we all need bigger. But is bigger really better? It's a pain in the neck to have 70,000 squares square feet. I'll take your questions if you have any. Thanks again, Ricky, for inviting me to come. He wants to pass a mic over, so I'll wait until you get the mic. It's actually picking up on the discourse thing. One of the phenomenon, I think, is that as more and more people become better trained as economists, they may decide, you know what, I can really explain everything through this nice flexible language. So I won't really think about something called ethics anymore because it's so squishy and hard to sort of get the rigor. So I'd just be curious your sense of the effect of a more successful education on things like how of ethical discourse. And, you know, we saw at the beginning of the century the same thing with science sort of driving out these things. I'm just sort of curious. Your. Yeah. So the question is, has formalism and economics sort of driven out the more humanistic concerns, the ethical and humane concerns which were, by the way, once an integral part of economics? Adam Smith's first book was A Theory of Moral Sentiments. He was a moral philosopher by training, and the early economists were very much steeped in moral philosophy. And I'm happy to report a revival of interest in that subject. I published a book in 2004, what Price the Moral High Ground, which is an attempt to bring economic analysis to bear on ethical questions. And the economic model is one of the main underpinnings of One of the main branches of ethical theory, modern ethical theory, consequentialism. It's a theory that says the right choice is the one that leads to the best consequences overall. And that's essentially a cost benefit model of ethical reasoning. And it's not a self interest model. It's a if I can take an action that will cost me 10 but will benefit the community by 20, then I ought to take it. It's my ethical duty to take it by that reckoning. So yeah, economists have gotten much more interested in this and I think the formalism was not a good development for that part of the discipline. But you know, it's reviving now. It's great to have been able to hear you speak. I've been a big fan of yours for a long time. I thought the Winner Take All Society was a great book and I've been recommending it to people. Should I continue to do so or has it been superseded by your newer books? So what's the natural scarcity that would keep you from recommending all these books? You became a professor, I know you're not self interested. So the question is, should she keep recommending Winner Take All Society to her friends or are there other newer books that should be recommended in a Society books of yours? The Falling behind book whose cover I flashed up briefly is sort of a revisiting of issues that I talked about in the follow up book to Winner Take All Society which was titled Luxury Fever. This one's only 125 pages long. So the only reason I would recommend only one book to someone is if I thought well there's no chance that person, busy as she is, is going to read two books, so recommend the shortest one. And that's Falling Behind. You don't even need to read the whole thing. It's a. It's repetitive at 125 pages. Have you done the follow up study with your students of your more focused economics class a year later to see if they actually pass the test now? So the question is, have I done any thing to investigate whether this new approach to teaching the introductory course is more effective? And it's a great question. I wish I had some data to show you. We're working now on test questions that would meet the consensus of the profession that yes, if they could answer those, then we'd all agree they had learned what we really care about. Once we've got those, then we will start administering them to students who've taken the various kinds of courses. I have to say though, that the bar we have to meet here is very low. There's no measurable value added from the course. Economists say, well, if they take the intermediate course, then they'll recognize the concepts more quickly if they've had the introductory course. Well, yeah, I guess that's probably true, but is that enough to say you've added value? Most students don't take the intermediate course because they took the introductory course, felt like they didn't learn anything and didn't want to take the intermediate course. So what I can tell you is that students come back for reunion and they come and see me and they just want to say here's some questions I've answered in the years since. So if you read the book, I think send me an email and let me know whether it had an effect on you. Because so many people have said to me that it was a transforming experience to read the book, that they everywhere they go now, they're seeing patterns and trying to explain things. This is such a fun book for me because I can brag about it being so good since really it's not so much my book as my students book. But I think if you go through enough examples, you don't need a course. You just learn to see the ideas at work in context and see if it doesn't have that effect on you. I think it's a fabulous way to learn the subject. It's not painful, it's just fun to read about these examples. I just wanted to ask what's been the reaction from your colleagues in other universities? Have you seen other professors start teaching this way? The question is, have others rushed to adopt this wonderful new method of instruction? No, they haven't rushed to adopt it. Ben Bernanke and I wrote a book patterned on this vision of the course and I told the publisher that we were going to have to fight for every adoption just because it was such a different approach to the course and nobody wants to start from scratch again. We have fought for every adoption, but we've seen the book grow sharply. It's going to be in its fourth edition coming up and it's grown very sharply. It's the only book in the McGraw Hill stable that's growing sharply in the last decade or so. And so I think in time we'll see a tipping point, I'm hoping, where everyone said, oh yeah, sure, we knew that was the way to do it all along. But yeah, it's been an uphill battle, but we're starting to see some nice results from. First of all, thanks. I'll give my daughter, who's just struggled through her first economics class and struggled. As I said, I'll give her the book. It's just a trivial question really, about your bull. Maybe it's a biological question, but it seems to me that why wouldn't the females benefit from those large male genesis and they themselves grow big just with the males? Are there really separate DNA for male weight and female weight? The question is why don't the female elephant seals grow big too? Yeah, that's a fairly common pattern in vertebrate species that the females are much smaller. In fact, you can tell how polygynous a species is by looking at the extent of sexual dimorphism. So males in human species are a little bigger than females. It's a very small degree. So that means we're not perfectly monogamous, but we're toward that end of the spectrum. There's just no advantage to a female being bigger than her rivals. They don't fight for access to males. This is just the basic reproductive asymmetry. Males can sire indefinitely many offspring. Females have a fixed capacity. Let me just ask it again, but maybe I'm wrong, but it seems to me that the argument is the genes in the male produce bigger future males. Yes, but it seems that those genes should affect both males and females, not males, selectively. Well, in that reasoning, all male traits ought to appear on females, and we know that doesn't happen. There are a lot of traits that are on the. Let me see if I get this right. The Y chromosome, that's the male chromosome. And so traits that are beneficial to males but not females are typically housed on the Y chromosome. And yeah, it's true, the females aren't the female elephant seals aren't like house cats. They're 1200 pounds, some of them. So you don't want huge disparities, but the male traits don't have to appear in the female. While we're talking about biological bases, for examples, with the wedding example, it seems a little counterintuitive that the woman should want to wear the showiest clothing possible on the one day when she's guaranteed to be associated with a single monogamous male. So how does the theory explain that? One step further. So the question is, why would you spend so much to look your best on a day when you were going out of circulation in the dating market? Basically, yeah. Maybe this is one like the kamikaze pilots women just want to look their best on. That's what women do. It's a part of female identity. You don't abandon your identity so easily in specific circumstances where the costs and benefits might not add up. Right? I mean, a student just posed the question, why do they swab the prisoner's arm with alcohol before administering the lethal injection? It's very hard to come up with a cost benefit rationale. But it's easy to imagine that if you're a doctor, there are just routines you follow. I mean, maybe you shouldn't be there in the first place if you're a doctor. But the people who administer injections just have routines, and that's part of your identity if you do that. And so that's what you do. We have time for one more question. Anyone interested? To what extent are economists working with psychologists? Maybe, I mean, you've demonstrated points where people aren't completely rational actors. What sort of models can you make that, you know, account for, you know, weird kooky behavior? So the question is, to what extent are economists working together with psychologists? And that's in fact been the growth area in the past two decades in economics, behavioral economics. You've probably read about examples of it in the popular press. Daniel Kahneman, who, with Stanford's Amos Tversky was one of the pioneers of the ideas that underlie much of behavioral economics, was awarded the Nobel Prize in Economics in 2002. He's a psychologist. He's never taken an economics course. The kinds of things that they've studied are sort of judgmental heuristics. That's been the main thing. They focus on rules of thumb people use. And Amos Dversky used to say, my colleagues, they study artificial intelligence. Me, I like to study natural stupidity. I just wanted to sort of focus on those situations where you had all the relevant information and yet still you got the wrong answer. So, I mean, everybody feels he's immune from advertising messages. You just discount that garbage. They did a nice experiment where they wanted you to estimate the proportion of United nations members or the proportion of countries in Africa that were members of the United Nations. They asked students this question. Of course, nobody in the US Would have the foggiest idea what the answer to that question would be. But the interesting wrinkle in their experiment was they had you spin a random number wheel before they asked you the question. So it would stop on an integer between 0 and 100. Without comment, just spin the wheel and then we're going to give you another task. Then they'd ask that question. If you got less than 25 on the. If you got less than 10 on the number wheel the average estimate of the fraction of African countries in the UN was 25%. If you got more than 65 on the wheel, your estimate was 45%. And you could ask people, well, what's the relationship between the number you got on the wheel and the number that are in the un? They would say, what, are you kidding? No relationship at all. Of course not. But you see a number and that illustrated their anchoring and adjustment. You have to make an estimate of something. You have to start somewhere. So you pick an anchor and then you adjust. So the anchor can be the flimsiest thing, but you got to start somewhere and it has an effect. Yeah, I liked your suggestion. You were going to get the book for your daughter. There was a guy who reviewed the book on his blog and he endorsed the concept very warmly. And he said that he'd been telling his 11 year old son about examples from the book at bedtime. He said he can't get his kid to go to sleep. He just keeps demanding another one. So I think an 11 year old can learn more economics than a typical freshman learns in an economics course. And it's not a lot of work. So that's the good news of the book. Anyway, thank you again for the invitation. It's fun to get a chance to come out and visit with you. I'll hang around and sign books and chat with you as long as you want.