Follow the Anomalies

The transcript below may be for an earlier version of this episode. Our transcripts are provided by various partners and may contain errors or deviate slightly from the audio.

Shankar Vedantam:

This is Hidden Brain. I'm Shankar Vedantam. In the year 1596, a cartographer in what is today the Netherlands noticed a startling anomaly. Abraham Ortelius observed that if you moved around the continents of the known world, like pieces in a jigsaw puzzle, the western coastline of Africa fit like a glove around the eastern coastline of South America. At first, the anomaly was dismissed as a weird coincidence. The idea that the continents of Africa and South America could have once been joined together seemed absurd because sitting between them now was the vast immensity of the Atlantic Ocean.

In time, however, scientists realized that continents do move around. What is today South America was, in fact, once attached to Africa. Intersecting lines of evidence soon began to come together. The fossil record, for example, shows similar species in areas that were once contiguous. Abraham Ortelius' observation was a crucial clue in the development of the theory of continental drift. Anomalies have long been a powerful driver of scientific invention. Paying attention to places where things look odd and weird can tell you where your maps and models of the world are wrong. If you have the humility and patience to sit with anomalies instead of simply dismissing them, they can teach you things about the world that you didn't know before.

This week on Hidden Brain, how a series of anomalies in the way people get money, spend money, and save money led to the development of the field of behavioral economics. Every day of our lives, we make decisions both trivial and momentous. What will we eat for lunch today? Will we ride the elevator or take the stairs? How much money will we save from our paycheck, and how much will we spend? It turns out there's a hidden logic to the way we make such choices, a logic often not rooted in rationality. Richard Thaler is a behavioral economist at the University of Chicago. He has spent decades studying the psychology of our everyday choices. Richard Thaler, welcome to Hidden Brain.

Richard Thaler:

Thank you very much, Shankar. Good to talk to you again.

Shankar Vedantam:

Richard, I'd like to start at the very beginning. I understand that your dad was an actuary, essentially a job that involves using math to help businesses analyze risk. He wanted you to follow in his footsteps. Why didn't you?

Richard Thaler:

Well, that's a good question. Being an actuary, first of all, it's hard, and second of all, it's boring. Sorry to all the actuaries. But he did encourage me, and I took the first one of the nine or 10 actuarial exams-

Shankar Vedantam:

Uh-huh.

Richard Thaler:

... and I thought, "Oh God, I don't want to do this." And I had one insight about myself, which was I'm not a good subordinate. I have a lifetime of deans that will testify to this. So I didn't want a career path that had me starting out as some cog in a large organization. It wouldn't have gone well.

Shankar Vedantam:

I see. And so you chose instead a career in academia, which, of course, is the very definition of a bunch of cats running in every direction possible. When you go to graduate school at the University of Rochester, I understand that you were not necessarily seen as the most promising student. An advisor of yours once said that, "We did not expect much from him." Tell me about that. What happened in graduate school?

Richard Thaler:

It's true that I was not considered an outstanding student, and I think I was not destined to be a great economist. I don't think that I have the skillset that leading economists have. I'm better in math than the average person, but not in the top 1% of 1%. And so I faced a dilemma, which is that it's like if my goal was to become a major league baseball player, I wasn't that good at hitting or fielding. So maybe I need to think of something else.

Shankar Vedantam:

What Richard found himself drawn to was stories. He started collecting anecdotes of people behaving in odd ways, at least odd in terms of what standard economics might predict.

Richard Thaler:

I became preoccupied with these examples that I called the list, and Newton had his apple. I have my cashews. So one of these stories is I invited some other graduate students over for dinner one night-

Shankar Vedantam:

Yeah.

Richard Thaler:

... and put out a large bowl of cashews and cocktails. And there was something cooking in the oven that was smelling very good.

Shankar Vedantam:

Mm-hmm.

Richard Thaler:

People started devouring the cashews at a rapid rate. And at some point, I realized we were going to eat more cashews than we should. So I took the bowl and hid it in the kitchen, and I came back, and everybody was happy. They were, "Oh, thank God you got rid of those cashews."

But this being a group of economics graduate students, we immediately began discussing the fact that, "Wait a minute, we're not allowed to be happy about this because the first principle of economics is that more choices always make you better off." Before my rash act, we had a choice of eating cashews or not. Now, we didn't have that choice. How can we be happy?

Shankar Vedantam:

Now, you might say it's obvious why Richard's guests prefer to have the cashews removed. They lack the self-control to limit the number of nuts they popped into their mouths. But Richard noticed that when economists build models of how people make choices, the models ignored how ordinary people might worry about a problem like self-control.

In effect, an economic model of people's dinner choices might assume that if you give people the choice between eating lots of cashews or saving their appetites to eat a nice dinner, people would make the rational choice to not ruin their appetites. The problem of self-control in economic decision-making was an anomaly that the models ignored. Another item on Richard's list came from a professor, Richard Rosett.

Richard Thaler:

Yeah, so Professor Rosett, he was a wine lover, and he had bottles that he had purchased 20 years earlier that had appreciated greatly in value.

Shankar Vedantam:

Mm-hmm.

Richard Thaler:

And so let's say he had a bottle that was now worth $200 that he had paid $20 for, and he would never dream of paying that much money to buy such a bottle, but he also wouldn't sell any of those bottles. There was a wine shop in Rochester, and there was a guy who said, "I'll buy those bottles from you."

Shankar Vedantam:

But Richard Rosett was not interested in making a deal.

Richard Thaler:

And so he wouldn't buy and he wouldn't sell.

Shankar Vedantam:

Uh-huh.

Richard Thaler:

And in fact, he wouldn't pay more than $30 for a bottle of wine, but he would drink a bottle that costs 200, so is that bottle worth 200 to him or 30? So I took that example, and I started thinking about it that there are lots of situations in which we won't give something up that we wouldn't pay a lot of money to keep. And another principle of economics, and a very important one, is the cost of something is defined as the opportunity cost.

And when Professor Rosett went and drank one of those expensive bottles, he wasn't thinking about that as costing him $200. And in fact, many years later, my friend Eldar Shafir and I wrote a paper about this that we called Invest Now, Drink Later, Spend Never because that seems to be the way wine collectors and lovers think about things. If I buy a case of Bordeaux that I plan to drink in 20 years, that's an investment. Then when I go to drink one, well, that doesn't cost me anything. It's in the cellar. And so I never spend any money, and it's all free. It's great.

Shankar Vedantam:

Again, this was not the way economists would model people's behavior. A bottle of wine that costs $200 is worth, well, $200. But in Richard Rosett's mind, the value of the bottle seemed to fluctuate depending on the context. A third anomaly that Richard put on his list of odd behaviors came from an incident with his friend Jeffrey. The two of them received tickets to see a pro basketball game in Buffalo.

Richard Thaler:

So yeah, we were given these two tickets, and as often happens in Upstate New York in the winter, there was snow and more than a trivial amount of snow. Normally, the drive from Rochester to Buffalo would be a little over an hour, no big deal. But the snowstorm was significant. And I have a phone call with Jeffrey, and he says, "Well, no, we shouldn't go to the game. It doesn't make any sense in the snow."

Shankar Vedantam:

Yeah.

Richard Thaler:

"But if we had paid for those tickets, we'd be going." And now this is what economists call the sunk cost fallacy, S-U-N-K, right. And the idea is, suppose we had paid $100 each for these tickets. That money is gone. Going to the game in no way recaptures that money. It sunk, and you should ignore it. And there are expressions like, "Let bygones be bygones." Or, "Don't cry over spilt milk."

Shankar Vedantam:

"Don't throw good money after bad."

Richard Thaler:

Right, right. Right. So all these kinds of expressions are trying to cure people of the sunk cost fallacy, and we have them because people don't follow the economists' dictums. So if we take these three, you can think of them as prototypes. And for a while, that's all they were, was amusing stories I would tell to annoy my fellow economists.

Shankar Vedantam:

I wanted to ask you about that. When you shared these with your colleagues, did they say, "Wow, that's really interesting. These are violations of our models?" Or did they say, "Here's Richard being irritating again."

Richard Thaler:

The latter. I mean, well, I would say there were some economists who found these examples intriguing, but the vast majority thought they were silly and lightweight. And Professor Rosen, the guy who said that they didn't expect much of me, told me to go back to doing real work. This was just a distraction.

Shankar Vedantam:

When we come back, how a chance meeting helped Richard realize that his anomalies were more than just oddities. You're listening to Hidden Brain. I'm Shankar Vedantam. This is Hidden Brain. I'm Shankar Vedantam. Economist Richard Thaler began bucking the conventional wisdom of his field right from the time he was in grad school.

Classical economic theory held that human beings were always optimizing, but the people Richard knew in his personal life weren't anything like that at all. He started keeping track of examples where people he knew deviated from the classical model of the rational economic actor. He called this collection of anecdotes the list. Richard, you tell the story of a friend, Lee and his wife. Their economic conundrum had to do with a very expensive sweater. Tell me Lee's story.

Richard Thaler:

So yeah, Lee's story was that he had admired some cashmere sweater at the department store and decided, no, it was too much money. He couldn't justify paying for it but then was immensely pleased when his wife gave him that sweater for Christmas. Now, Lee and his wife had all joint checking accounts, ... they have one household budget.

Shankar Vedantam:

Uh-huh.

Richard Thaler:

So how can it be that the sweater was too expensive for him to buy but great for his wife to buy out of the same pool of money?

Shankar Vedantam:

One last story from the list. This is your friend Stan, who used to get terrible hay fever when he mowed his lawn. And so you came up with a very common sensical solution for his problem. What did you suggest?

Richard Thaler:

I said, "Stan, why don't you hire a neighborhood kid to mow the lawn, pay the kid 10 bucks, and then you'll be done with it." And he said, "No, he won't pay somebody to do that." And I said, "Well, how much would you charge to mow your neighbor's lawn?" And he wouldn't mow his neighbor's lawn for $100, and he didn't think of himself as in the business of providing lawn mowing services.

Shankar Vedantam:

Mm-hmm.

Richard Thaler:

If he were doing that, it would take more than $10 to get him to do it, but yet he wasn't willing to pay the neighborhood kid 10 bucks to get the kid to do it.

Shankar Vedantam:

When Stan decided to mow his own lawn, instead of paying a kid $10 to do it, he was saying, in effect, that mowing the lawn was worth less than $10 to him. So why was he not willing to mow someone else's lawn for $100? Again, for non-economist, there is a simple answer to that question. We are not just economic actors. We care about social norms, relationships, and hierarchies. If my neighbor asked me to mow his lawn because he was feeling sick, I would be delighted to help. But if he offered to pay me $100, I would feel insulted.

In the period after World War II, economics had come to ignore such psychological complexities. Economists created an archetype of people as rational economic actors. This simplification allowed economists to describe the behavior of people using mathematical models, but they ignored a vast range of psychological factors that influence our choices. The people in Richard's list of anomalies did not merely try to maximize their economic self-interest. They were guided instead by feelings, worries, and biases. You could call such behavior irrational. But Richard says he dislikes the term.

Richard Thaler:

And the reason is that it has all kinds of connotations to different people. And if you say something is not rational, then that sounds pejorative. And in some cases, some of the things we've talked about should be considered illogical, let's say.

Shankar Vedantam:

Mm-hmm.

Richard Thaler:

But economic rationality is this concept that people solve by optimizing, and if they're solving in some other way, it may or may not be optimal. So my friend Cass Sunstein and I like to say that we don't think people are dumb. We think the world is hard. We have a model that says people will do A, and we observe B. So these are violations of economic theory. And so I try, especially in my writing to a popular audience, to avoid that word when I can.

Shankar Vedantam:

One of the things that we haven't quite touched on is that some of the models predict that people will act essentially always in their own self-interest. And there's been a lot of work that's looked at the issue of tipping. You go to a strange new city. You're passing through for a night. You're never going to come back to that town ever again. You stop at a restaurant. You have a nice meal.

Do you tip the waiter or waitress after you're done with the meal? You're never going to see them again. So there's no real sense of, "If I tip them, I'm going to get better service when I come next time." You can leave without paying a tip because, in fact, you would save 20% on your bill. And yet, in every part of the country and perhaps every part of the world, people don't do this because what's best for them is not just what's best for their checkbooks.

Richard Thaler:

Yeah. And again, this is a good follow-up to the discussion of rationality because this is clearly a case where we don't want to say that leaving a tip in a strange restaurant is irrational.

Shankar Vedantam:

Mm-hmm.

Richard Thaler:

What we can say is that it became a social norm, which isn't really explaining it as much as giving it a name. And, of course, social norms are not the same around the world. So in much of Europe, tipping is not the norm.

Shankar Vedantam:

Mm-hmm.

Richard Thaler:

In France, it used to be that when you paid in cash that you would sort of round-up. Whereas, in the US, I remember being in a cab in New York and in a big hurry getting off at a train station, and the fare was 9.50 and I gave the driver $10 and got out of the cab and ran, and he threw a quarter at me. So tipping is not always completely voluntary.

Shankar Vedantam:

Yeah. But the idea that social norms play a huge role in our behavior is a powerful idea because, of course, you can ask what is maximizing your benefit, but maximizing your benefit is not just about paying as little as you can because we care about our social reputations, we care about what other people think of us. All these things matter to us.

Richard Thaler:

Right. I mean, most of us don't walk around naked. Now, there are certain neighborhoods in San Francisco where there are different social norms, and there are some beaches that there are different social norms, but we all follow many social norms.

Shankar Vedantam:

So, now, a compilation of your friends and colleagues doing odd things is not really grist for an academic paper or an academic career. And for a long time, your list remained just that, a list, a collection of anecdotes. But at one point you stumbled across the work of Amos Tversky and Danny Kahneman. Tell me how you encountered that work, Richard, and the effect that it had on you.

Richard Thaler:

So yeah, I sometimes joke that my greatest scientific discovery was discovering Amos Tversky and Daniel Kahneman. They claimed to have existed before my... But this is a discovery sort of the way Columbus was alleged to have discovered America. So I was at a conference, and I met one of their graduate students and ended up talking to him for quite a while. He was a psychologist, so I told him some of the stories on my list, and he said, "You know, you would be interested in the research that my advisors have been doing."

Shankar Vedantam:

Those advisors, Amos Tversky and Daniel Kahneman were blazing a trail in the field now known as behavioral economics. They were interested in a range of cognitive biases that shape how we see the world, make predictions about the future, and grapple with wins and losses. Richard was intrigued. And so when he got back to the University of Rochester, he made a point to look up their research.

Richard Thaler:

And when I got back to Rochester, I had to go find a new section of the library because I used to being in the economics section, and now I'm on the psychology floor. And the first paper I read was a paper that's now very famous, a 1974 paper in science called Judgment under Uncertainty: Heuristics and Biases. And it was sort of a little greatest hits collection of a series of papers they had written in the early 70s. And the phrase heuristics and biases is very well-chosen and insightful. So their work can be summarized in the following way. Life is complicated. We use rules of thumb to help us. Heuristics is a fancy word for rules of thumb.

And using those makes sense because those rules of thumb are usually useful. That's why they exist. But they also have predictable biases. So a famous example is the availability heuristic, which is that we judge the frequency of something by how easy it is to recall instances of that type. So if you ask people, "What's more common, homicides or suicide?" People think homicide by maybe two to one, and the opposite is true. Suicides are about twice as likely. And once you think about it, you realize, why? Well, homicides get lots of publicity. Suicides tend to be quiet. But the big light bulb that went off when I was reading this paper was the word bias and the idea of systematic bias.

Shankar Vedantam:

What Richard means by systematic bias is that there were regularities to the anomalies he had collected. These were not merely a collection of weird, unrelated behaviors. Instead, they pointed to underlying patterns.

Richard Thaler:

My stories, economists would brush them aside, usually with the phrase, "Well, look, yeah, we all know that people make mistakes," but if the mistakes are random, then economic theory is fine. Now, if the errors are all in the same direction, then we're going to have a bias.

So if we go back to the sunk cost fallacy, we know that the economic theory says the amount of money you paid for that ticket is irrelevant. And we know absolutely for sure that the amount of money you paid will be a very good predictor of how likely you are to drive in a snowstorm or go sit in the rain.

Shankar Vedantam:

And in fact, as you were telling the stories on your list, I found myself asking what I would do if I was in one of your stories. And in every one of those cases, my intuition about how I would behave lined up precisely with the way that people actually did behave. So I would be very happy sitting in your living room if you took away the bowl of cashews.

I would drink a bottle of wine that has become quite expensive just by virtue of sitting around for 20 years. But I would hesitate to buy a bottle of wine that is very expensive. And absolutely, if I paid several hundred dollars for a concert ticket, I would drive through a hurricane to make it to the event.

Richard Thaler:

So I sometimes say that the things I discovered were only surprising to economists. And so it's interesting. There's one group of people that are sure you're wrong, and the other people are sure that why is this news to anybody.

Shankar Vedantam:

When we come back, how the scientific study of supposedly irrelevant factors birthed through creation of a new field of study and became a powerful vehicle for understanding human nature. You're listening to Hidden Brain. I'm Shankar Vedantam.

This is Hidden Brain. I'm Shankar Vedantam. Richard Thaler is the author of Misbehaving: The Making of Behavioral Economics. Early in his career as an economist, he noticed people often fail to act in the ways models of economists might predict.

He collected stories of friends and colleagues behaving in this manner, but a collection of anecdotes is not science. Richard started running experiments to see if the behavior of his friends and colleagues were generalizable. One of the items on your list that we haven't talked about, Richard, involves a friend of yours who was buying a clock radio, and eventually, this story turned into an experiment that you published in a paper in 1980. Tell me the story about the clock radio.

Richard Thaler:

Well, the story of the clock radio was... and it's funny now I'm thinking people don't even know what clock radios are. But somebody's going to buy a clock radio and it costs $25, and they get to the store, and the clerk says, "Actually, this same radio is on sale at our other branch for $20. You could go buy it there." And then there's another version of this story where you're buying a television set that costs $500, and the clerk says, "Well, this television is on sale for 495 at the other branch of the store." The other branch is 20 minutes away. Would you drive?

Shankar Vedantam:

So in both cases, you're saving five bucks.

Richard Thaler:

In both cases, you're saving five bucks for 20 minutes, and no one even thinks about doing it for the large purchase, but many think they should do it for the small purchase. And the first step towards science was just to ask people those questions. You know, get one group to answer the radio question and others to answer the television question and show that...

Shankar Vedantam:

There was a gulf between them.

Richard Thaler:

Yeah. And that people's intuitions lined up with my story. I would say that kind of experiment would not impress economists today, but it was at least a step toward science.

Shankar Vedantam:

Remember the story about the wine bottle worth $200 that Richard's professor would neither buy for $200 nor sell for $200? Richard came up with an experiment to demonstrate that idea too.

Richard Thaler:

Danny Kahneman and I ran an experiment to illustrate the same point. And in this case, we used coffee mugs, and this was done at Cornell, later done at many other universities. But we would put coffee mugs on every other desk and then say, "If you got a coffee mug, it's yours. If you didn't, you should look at the person's mug next to you and examine it." And now we're going to have a market for mugs.

Shankar Vedantam:

Mm-hmm.

Richard Thaler:

And the people who have mugs fill out a form at each of the following prices. Would they be willing to give up their mug, say, start at $10 and go down and 50-cent increments, and then the people who don't have a mug, "At the following prices, would you be willing to buy?"

Shankar Vedantam:

Mm-hmm.

Richard Thaler:

Now, if people assign a value to this mug, they should be willing to buy if the price is less than their value and sell if it's greater. And we've handed out the mugs at random. So buying and selling prices for the two groups should be about the same, and that implies that about half of the mugs should change hands. And what we found was there was very little trading, much less than half, and that's because the people who had mugs demanded twice as much-

Shankar Vedantam:

Wow.

Richard Thaler:

... to give it up-

Shankar Vedantam:

Wow.

Richard Thaler:

... as the people who didn't were willing to pay to get one. And this is what I had back in the day called the Endowment Effect, that you demand more to give something up than you'd be willing to pay to get it. And here we were, showing this for an object you had owned for a minute. Danny liked to call this the Instant Endowment Effect.

Shankar Vedantam:

Yeah. And you can see how this might work at a larger scale. If I'm selling a house to you, I've lived in that house for 15 years, and now I'm trying to sell it to you, Richard. I'm going to value that house significantly higher than you might value it if you are the buyer.

Richard Thaler:

Well, that's right. And it explains partly why it can be hard to assemble a parcel of land without the right of eminent domain because people who've been living in a house all their life would demand a lot to give it up much more than the market price. Now, again, we don't want to say whether that's rational or irrational. There could be lots of sentiment and so forth, but there's no sentimental attachment to a coffee mug that I've owned for one minute.

Shankar Vedantam:

Mm-hmm. Yeah. But you can see how powerful this effect might be in all manner of economic transactions because, of course, every economic transaction involves someone being willing to give up something that they have in exchange for money and somebody being willing to pay money to acquire something.

And if people are systematic, this is not just a question of the sellers wanting to make as much money as they could and the buyers wanting to pay as little as they could. It's not just that. It's also the fact that they're actually valuing the thing differently. They genuinely feel, "Once I have the mug, this mug actually is worth $10. And when I don't have the mug, the mug genuinely feels like it's only worth $5."

Richard Thaler:

Right. Obviously, we want to see, "Well, does this matter when we raise the stakes?" And here's an example of that. When housing prices fall, what you observe when that happens is prices don't fall as much as volume falls. So you just see no houses changing hands. And the reason for that is that let's suppose that you have some house that similar houses were selling for 500,000 a year ago, and you could now only get 450.

Well, you say, "Look, my neighbor sold his house for 500. I'm not going to take 450. My house is better than his." Whereas the buyers say, "Well, no, prices have fallen. I'm not going to pay more than..." And so you just see people are unable to agree on a price, and it can take several years. If the prices going down is permanent, it takes quite a while for the owners to realize, "Well, if they're going to want to sell this thing, they're going to have to lower the price."

Shankar Vedantam:

This is the new price. Yeah. We talked earlier about the idea of mental accounting, which is: we have different mental buckets in our heads, and this is always one of the domains of your work that has fascinated me for the longest time as well. In 1997, you published a paper with Colin Camerer, Linda Babcock, and George Loewenstein, looking at taxi drivers in New York City. Tell me about that study, what you did, and what you found.

Richard Thaler:

So, yeah, let me tell you the background. Colin Camerer and I, along with Danny Kahneman, we're spending a year in New York City visiting the Russell Sage Foundation. And Colin and I were spending a lot of time together taking cabs, and we would talk to the cab drivers, and we started asking them how they decided how long to work each day. And the way it worked was they would pay a certain amount, say $100, to rent the cab for 12 hours. And the rule was you had to return the cab full of gas before the 12 hours was up, but most drivers didn't want to work that much. So we would ask them, "Okay, how do you decide how much to work?"

And many told us that they had a target amount of income they wanted to make, so they had to pay for the rental of the cab and the gas. And let's say their target is $100 per day above expenses. When they hit that, they would quit. Now, some days are busier than others. So, for example, on rainy days, cab drivers make a lot more money because they spend more time with people paying and less time driving around looking for customers. But if they have a target income, it means that they work less on busy days and work more on slow days. So they could make more money just by flipping that.

Work a lot on the days where you're making a lot of money. And then, on slow days, go home and play with the kids. And we found evidence to support this. It turns out this paper became controversial. There were lots of papers back and forth. Does this happen? Doesn't it happen? I believe the current view is yes, it does happen. But this is a good example of how the field is progressing. So we start with an anecdote, and then we do a survey, and then we do an experiment with... for real money with those mugs. And now we're going out and studying actual labor supply decisions of real people in their work environment. It's always getting closer to studying the real world.

Shankar Vedantam:

Richard, you once looked at how teams select players in the NFL draft. For our overseas listeners who are unfamiliar with American football, the 32 teams in the league get to pick new players each year, and to even out the quality of players on different teams, the league allows the team that has the worst record the previous year to pick first. Obviously they get to select the strongest player. The strongest team from the previous year gets to pick last, meaning they are likely to get weaker players.

Now, an important quirk of the system is that where you get drafted eventually determines how much you get paid. So teams drafting players early are on the hook eventually to pay the top players more. Now, most teams, of course, want to pick as early in the draft as possible. But along with a researcher at Yale, you analyzed where the best deals were in the NFL draft, and you eventually wrote a paper about your findings titled The Losers Curse. What did you find, Richard?

Richard Thaler:

So yeah, this is a paper I wrote with a former student named Cade Massey. And what we found was teams really value going first. You can trade the first pick for the eighth and ninth picks. So that's saying the eighth pick is worth half as much as the first pick, even though you're going to have to pay the first pick about twice as much.

And you could trade the first pick for five or six players in the second round, meaning the players ranked 33 to 64. So the teams are acting as if the right to pick first is really valuable, that you're going to get Tom Brady or Lionel Messi if he had played American football. Now, that's in spite of the fact that Tom Brady was taken with the 199th pick.

Shankar Vedantam:

So teams are not very good at knowing who's going to be the great player down the road.

Richard Thaler:

Yes. So here's one fact that illustrates that. We called this... Cade and I used to call this the better-than-the-next-guy analysis. We took all the players at a given position, say quarterback, and we put them in the order in which they were picked... ranked from first to last. And then we said, "What's the probability that the player chosen earlier is better than the player chosen next?" Now, notice if teams are perfect, that'll be 100%. If it's random, it'll be 50%. In our sample, it was 53%.

Shankar Vedantam:

Wow. Wow. So basically they're throwing darts at this point.

Richard Thaler:

Yes. It's a little higher in the first round. It might be 55%, but they're acting like it's 80%. And actually we've recently been going through and re-analyzing this data, asking the question, have teams learned anything in the 20 years since we wrote this paper? And the answer is no, nothing has changed.

Shankar Vedantam:

Yeah. It's also worth mentioning here that teams have a cap in the amount of money that they can spend. So it's not like they have an infinite pool of money they can spend and waste. In fact, money that you waste on player A is money that you could have spent better getting players B, C, and D. And so, in fact, if you misprice players, you are paying a very large cost as an organization.

Richard Thaler:

Yeah, so this is a very important point, and especially for the non-US listeners. The National Football League has a salary cap. It's really an economic budgeting problem. How can I get the best team without spending more than X? And so if you get a player that turns out to be very good and very cheap, then that's worth a lot.

Shankar Vedantam:

Richard Thaler helped to develop the foundation of what is today known as behavioral economics. His work has transformed the way many companies and nations construct models of human behavior. Richard was awarded the Nobel Prize for Economics in 2017. You can read more about these ideas in his book, Misbehaving: The Making of Behavioral Economics. Richard Thaler, thank you for joining me today on Hidden Brain.

Richard Thaler:

Thank you very much, Shankar.

Shankar Vedantam:

If you enjoy today's episode, we have a special treat for you. Richard Thaler did not merely create a compendium of ways that human beings failed to act like the rational economic actors in mathematical models. Much of his research that eventually led to his Nobel Prize came after the work described in this episode.

We explore the complexities of that research in a special bonus episode for listeners to our subscription feed, Hidden Brain Plus. It explores ways. Richard's ideas have revolutionized everything from tax collection to retirement planning to the aim of men at urinals and airport bathrooms.

Richard Thaler:

Some men failed to aim properly, and the solution was to etch the image of a house fly near the drain. And if you give a man a target, he will aim. So the report was that spillage went down considerably, although I've not been able to check those data, but the house flies have appeared in other airports around the world.

Shankar Vedantam:

If you are signed up already, you can listen to that episode right now. If not, try Hidden Brain Plus for free for seven days on the Apple Podcasts app or by going to apple.co/hiddenbrain. Hidden Brain is produced by Hidden Brain Media. Our audio production team includes Brigid McCarthy, Annie Murphy Paul, Kristin Wong, Laura Kwerel, Ryan Katz, Autumn Barnes, and Andrew Chadwick.

Tara Boyle is our executive producer. I'm Hidden Brain's executive editor. Our unsung hero today is Paul Karabush. Paul is the audio engineer at the Audio Studio at the University of Chicago's Booth School of Business. He helped set up the studio and ensured a high-quality recording of our conversation with Richard Thaler. Thank you so much, Paul. I'm Shankar Vedantam. See you soon.