Richard Robb on Willful – Econlib


0:33Intro. [Recording date: January 8, 2020.]Russ Roberts: Today is January 8th, 2020 and my guest is economist, author, and investor Richard Robb. He is CEO of Christofferson, Robb & Company in New York, and London-based fund management company that invests in risk-sharing transactions with European banks. He is also a professor of professional practice at Columbia School of International and Public Affairs, and he holds a Ph.D. in economics–as do I–from the University of Chicago. He’s the author of Willful: How We Choose What We Do, which is the topic of today’s conversation. Richard, welcome to EconTalk.Richard Robb: Great to be here, Russ.Russ Roberts: How do we choose what to do? Your book is a really beautiful, fascinating, deep dive into what motivates us, what explains our behavior. And you contrast what you call purposeful behavior with behavior that’s for itself. Talk about that distinction.Richard Robb: Yeah. Purposeful behavior encompasses what we learned back at University of Chicago, what we believed, and what we both believe to varying degrees still to this day. And purposeful choice, as I define it, are the types of choices we make when we can compare one thing to another, decide which we like more. We know enough about the world that, we, maybe not have perfect certainty, but we know enough to know which options we would rank higher than the others.We have resources at our disposal. And then we seek to choose what’s best. We act with a purpose in that sense.So, life is a big project to try to satisfy our desires the best we can with the information and resources we can.I divide purposeful choice into two pieces. One is good old-fashioned rational choice where we basically do the best we can with what we’ve got. And the other is Behavioral Economics, where we fall victim to some sort of cognitive bias, and systematically choose in ways that fail to gratify us, and fail to satisfy our desires.So, I put those two together in one branch where rational choice–in both cases we act in a–we have desires, we are a bit robotic. And in the case of behavioral bias, the robots are just poorly programmed. And maybe–Russ Roberts: [crosstalk 00:03:06] distinction.Richard Robb: Yeah, and maybe we can learn about it. The Behavioral Economist will tell us not to overvalue things we already own. Not to be overconfident in our information because that won’t get us what we want, which is more. Everything can be compared to everything in the purposeful choice realm. You can always trade this for that at some rate of exchange.So, if you fall victim to a bias, you’re not getting what’s best. And if you can, you should change your ways.The–I don’t–I believe, maybe not as strongly as I used to believe, but that’s a powerful way to understand human behavior, in markets and individuals.But I don’t think it’s the whole story.Sometimes we act just because that it’s not because. It’s better than this or that; we’re not behaving irrationally. We’re not making mistake. But neither can we say this is best.I argue in the book that life is two-fold: that, sometimes it’s purposeful, sometimes it’s for itself, and sometimes actions are self-justifying.4:17Russ Roberts: So, in the self-justifying category, listeners are familiar with some of the examples I’ve used in the past. Maybe you and I have talked about them off the air in this program. But I use the example often of the dance floor where, yes, you could understand my behavior on a dance floor with a dance partner as: I’m going to show off and I want to maximize how good I look on the dance floor.And I would argue that’s not what most people actually do. They might have an impulse to do that. But often we act with what Adam Smith called propriety–prudence–with the norms of our society. Which is that when you’re on the dance floor, the thing you’re really trying to do is maybe enhance how your partner looks, or you might be trying to make sure you don’t bump into other people. There’s a set of norms and rules.And when you’re out there, you’re not thinking, ‘How can I look even better?’ You’re just focused on doing what we might call the right thing, the satisfying thing, the thing you think you’re supposed to do, the proper thing. But you’re also–so that’s in your idea. But there’s more to it than that.Richard Robb: Yeah. You know: Dance is a good metaphor for itself. Realm of behavior where at moments you’re lost in the dance. I’m not a professional dancer; I gather you’re not, either. And so, at the moment, the occasional moment where I can be lost in dancing with my wife, it’s not this much better than other dance, and I’m not trying, ‘Should I stop dancing so I could get some other thing that might better?’Russ Roberts: And the model says you should stop just when the next second of dancing isn’t as good as the first second of something else. That’s the way economists are trained.Richard Robb: Exactly. But you’re not in a state where you reevaluate. Time doesn’t stop and then decide what’s going to be best. And then, ‘Well, should I keep dancing? Okay. Well I’m already doing it. I’m already on the floor.’ It’s giving you a certain amount of enjoyment–Russ Roberts: [?crosstalk 00:06:19].Richard Robb: So, yeah, I’ll keep doing it another moment, and then we’ll start time back up again, and I’ll do it for another little bit. And, and who knows, maybe I’ll stay out here for a long time because it’s the best marginal use of my time.So for certain sphere of our behavior, sport or dance is a better analogy. I use sport. I contrast homo economist to Homo Ludens, which was an anthropologist before I did the sporting human–Russ Roberts: Play.Richard Robb: At play. But I could have used dancing just as easily.6:59Russ Roberts: Well, I like your example, and if you could tell us a little about it, for the listeners of the–you’re playing a pickup football game, a touch football game. And in many ways you’re not acting like an economist. Why not? Or the way an economist might think of you.Richard Robb: It’s a true story as all the stories of the book are. I was walking through Central Park on my way home and people were playing football, American football for your international dealers[?]. And I joined the game. And, during the game I really wanted to win. And I was never going to see these people again. There no prize for winning. Still, caught up–I use that example in the book because it’s a pure example of playing a game where there’s no status because I’ll never see them again.Russ Roberts: No monetary stakes, like poker–Richard Robb: No monetary stakes. Yeah; look, there is a price for everything. I mean, I imagine if some strange, top-hatted benefactor wandered up and offered me a million dollars to stop playing, I would take a million dollars. I would take a lot less. So, I am not completely lost in the moment, but for all practical purposes I am, because people like that don’t exist in the real world. So, the fact that some thought experiment could disrupt me from my sport or play, I don’t think overturns the observation that much of everyday life, sporting is a better analogy to optimizing, particularly when it comes to how we allocate ourselves through time.Russ Roberts: It’s just a–it’s a great point. Obviously economists could wax poetic about how much money it might take to get you to quit, and etc.But I think it’s fascinating to me that particular example, because I’m a sports fan. I’m thinking about Tom Brady this year, who is 42. And he ended the season with a Pick-Six, which is a bad outcome–for non-football fans. And he’s got a lot of money, and he could make a lot of money outside of football. And football is really dangerous. You can hurt yourself really badly. He has once, I’m sure he hurts every week, but once he ripped up his knee and was out for a year.And you could argue it’s irrational that he wants to keep playing. And then you could subtly say, ‘Oh no, it’s not for the money. It’s for the rush and the thrill of–he’ll miss that.’ And so, it is still optimizing and rational. But, I don’t think that’s capturing fully what’s going on, as you point out.Richard Robb: No, and I think when this dawned on me in my own life–I don’t want to compare myself to Tom Brady–Russ Roberts: Oh, I like Tom Brady. You’re 6’5, right?Richard Robb: Okay. Yeah, there’s no camera here. So, yeah.When I–I tell the story in the book–when I worked for a Japanese bank for a decade, I loved the bank. I loved working there. And then it merged with two other Japanese banks, and I had to leave. And there was no place for me in the merged bank. So, I was still more caught up in the Chicago School at that time, although, I was starting to wonder, around the edges, about a lot of things we had been taught and I believed in, and still do.So, when the bank came to an end, I was unemployed. So, I thought, ‘Oh okay, I’ve been working as a banker for a while. I don’t have to get another job right away. And I’ll enjoy leisure.’ Because those are the inputs into the utility function–goods and leisure, consumption and leisure–into the household. ‘And I’ll be able to’–Russ Roberts: That’s the way we were taught.Richard Robb:–The way we were taught. Yeah. And–Russ Roberts: And you want to maximize, trading off leisure versus work, and the work you need for the goods. And do you have a constraint of income? Blah, blah, blah.Richard Robb: Yeah. So I have goods, and I have leisure. So, this should be ecstasy. And it wasn’t. I say in the book that I would get up in the morning, make breakfast for my children, send them off to school, go run around the reservoir in Manhattan, read the New York Times. Now it’s nine o’clock.Russ Roberts: It’s a perfect day so far.Richard Robb: Yeah. Well, but what happens next is the day stretches out.Now what? So, maybe I lacked imagination. Maybe I should have filled this full of all sorts of creative activities. But there weren’t enough. Then the weekdays start blending in with the weekends; and then you’re out of the game when you talk to other people. And I was 40 years old at the time. And I was going nuts. And that lasted for about six months.And then I went to teach at Columbia, and that turned into a full time job, and started up the fund with my partners, and that’s a full time job. They’re both still full-time jobs. I’m much happier having two jobs than I was when I had none.Russ Roberts: You’re really lucky because if it had happened more recently, you have spent all day watching YouTube, and you’d have been satisfied with that perhaps, and the world would have missed out on your teaching and your investing.But to take the point more seriously, one of the themes of your book is that a lot of what we crave is not more stuff. It’s subtler values. We talk about it a lot on the program in terms of Adam Smith’s The Theory of Moral Sentiments. We want to be loved. We want to be respected. We want to be praised, we want to matter. We want people to care about us. We want people to think about us when we walk in the room and say, ‘I wonder what that person’s about.’Richard Robb: And we also want to overcome challenges–Russ Roberts: That was the thing I was going to add. Yeah.Richard Robb:–That are authentic.13:16Russ Roberts: So, talk about the challenges, and bring in some Nietzsche into that because I know that you’re reading Nietzsche, that Friedrich Nietzsche is part of what helped you think about these issues.Richard Robb: Yeah, that we want to find out about ourselves, see, test our skills, pit them against authentic challenges that come up in the course of our lives.And a big part of our meeting–and I think that, on the job, that what people derive from work is a team sport. Even though, as you point out my strong physical resemblance to Tom Brady, I’m past the day where I can be an NFL [National Football League] quarterback. So, all I’ve got for a team sport is work.So, our colleagues, fighting against rival firms, trying out our ideas in the market to see if, if this is going to work in practice as it works in theory, failing sometimes and dusting ourselves off and trying again.All that is–it’s what we do. And, you know, I’m privileged to be able to do this as an investor with–but I think all sorts of jobs, in all different levels, present challenges that: people getting to work, and being organized, and working in the factory, and working in agriculture. I think all of that, that people experience it as authentic contributions to society, and obstacles that come up, and people take pride in it. And to say that one is better than another I think is a big mistake.And I think it applies–and I think that work has two characters, and confusing, and they’re blended together: that it’s partly the goods that we need to sustain ourselves, but it’s partly a sport.Russ Roberts: I think that sport part is really interesting. Obviously, I think mistakenly, a lot of people think that the sport of business is “keeping score with money.” There is some of that, obviously; and in certain circles that’s important. There’s status issues in terms of what your apartment’s like, and your car, and your watch, and all that.But it’s so much more than that. It’s that overcoming a challenge is–and it’s the competitive part, not who racks up the most necessarily monetary points, but prestige points, style points. There’s a whole bunch of different scorecards out there that matter.Richard Robb: Yeah, and just–there are even moments when you just don’t keep score. Where there’s no way to keep score. There are no points that you can assign yourself about that. ‘I just wore myself out today, and what I did worked or maybe it will work: we’ll find out in time, but I did what I could.’Russ Roberts: Yeah. My dad’s been in the hospital, recently, and I went down to visit him, and I was just blown away by the nurses in that hospital. And listeners know that I’ve got some issues with hospital pricing–and we’re going to be talking about that going forward more and more, I think, on this program, at least from time to time.But what was powerful about that is that nursing, it’s an incredibly difficult job. And it’s full of surprises. It’s full of challenges. And I think that makes it “fun.” They’re not the challenges of Tetris or Fortnite. But there are challenges.And I asked one of the nurses, I said, ‘How do you do this?’ This is at 3:00 in the morning when he’s taking my dad’s–who knows what he was doing, some vital sign or just giving him insulin or whatever it was. And he looked at me as if it was matter-of-fact, and he just said, ‘Well, it’s really rewarding.’And obviously that’s a cliche that people went into certain things because they’re rewarding, in what we might call the helping professions. But it’s more than what I think people think about, which is they usually think, ‘Well, it’s rewarding to help people stay alive, get out of the hospital, get better.’ It’s also rewarding just to face that daily challenge.Richard Robb: For sure. Nursing is a noble profession, on its face. But I think it’s important to realize–my students are often directed towards impact-investing and the like. And they want–Russ Roberts: Social responsibility–Richard Robb: Social responsibility and that kind of thing. And I try to calm them down–to try to divide up the world into good and evil, the phrase of ‘giving back’ is something that really irritates me every time I hear it.Because, when you’re doing your work and you’re producing for our common good, you’re not taking and then doing good acts to restore it, somehow, to benefit humankind. But that: We’re sitting in these chairs; somebody had to make the chairs, somebody had to deliver the chairs up to your office so we can talk about nurses; and, you know, they all have their place.And I find it can be confusing, particularly to students, to try to line up professions in order of virtue. I mean, there are some things that are explicitly parasitic that I don’t think they should do, and they’re not going to do anyway. But I think the sharp distinction that’s become fashionable in recent years is an error.Russ Roberts: But I do have to add one point about that nurse story because I think you’ll appreciate it. It’s really where your two different contrasting views of the world come together–as, of course, you point out they often do. That it’s not just one thing: it’s a couple of things are going on there.I was talking to this nurse about the challenges of doing a good job because it can be a very boring job, and then all of a sudden it’s unbelievably intense. And at one point he said to me–and at this point, my brother and sister, our mom had all been in the room for hours over a course of three or four days.He said, he conceded, that–he said, ‘It really helps to have family here with the patient.’And I thought he was going to say, you know, ‘Because it helps them sustain their morale.’He said, ‘I think it makes us do a better job.’And I thought, of course, of Adam Smith’s impartial spectator. It’s like we’re the actual spectator, watching him, and he said–this was a great thing–he said, ‘It shouldn’t be that way.’ And he’s right, of course. It should be that you’re equally motivated whether no one’s watching. But as human beings we sometimes fall short. He said, ‘It shouldn’t be that way, but sometimes it is.’Richard Robb: Yeah. And the Internet didn’t destroy offices. People don’t all work from their bedrooms. They want to come together, and, in a social environment, and solve problems, together.20:19Russ Roberts: Yeah. I love to say that there are three things we do together. We do things through government. I don’t really think of that as together, but I know many of my listeners do. And you’re entitled to that viewpoint. I’m skeptical about it, but okay. We do things through the voting process certainly. And through the democratic process. We do things for profit, for money, where we work in teams to create new products, services, hire, invest, etc. But we also do things for love, for caring, for meaning, for the sport of it, where we voluntarily–what is called ‘civil society’–work together to achieve something that doesn’t have a bottom line necessarily.And so, I hate this ‘business versus government’ as the two ways to solve problems. Or government, which is supposedly, you know, altruistic versus business, which is grasping. Business is often not grasping. Government is not always altruistic. And there’s this third thing called philanthropy, or charity, or foundation work that is different.Richard Robb: Yeah, I mean, my dichotomy is different. Sometimes we do things because they’re better than other things. It’s best to satisfy our preference. Sometimes it’s not and–Russ Roberts: Heh, heh, heh, heh. Meaning? Sometimes?–Richard Robb: Sometimes it’s just for itself. Sometimes it’s an altruistic gesture that isn’t better than the other gestures that we might have engaged in at this moment.The way that we organize ourselves through time, I argue is not the thing that lends itself to preferences. That, some of the argument for that is a bit technical. But not every choice has to be intermediated through the notion that it is better than other things. It can be just again, at each moment we encounter a challenge, we engage with it; then when that one’s over, we find a new one, that may or may not necessarily the best one, but just the one that we latch onto in a human way at that moment.And then the third is our commitment to our beliefs. That, evidence may come to confront our beliefs. And there are moments where we could change our beliefs and become a new person.But, why should I change my beliefs to gratify the new person that I might become after I alter them? And, of course, a reasonable responsible person is open to the data. But they’re not always changing: they keep a consistent identity as time passes.So, we don’t–Keynes said that, ‘When the data changes, I changed my beliefs. What do you do, sir?’ He actually did say that. Because, I referred to it in the book, and I had to do a lot of research to see if there’s evidence. He didn’t say it in print, but there are two people who have knowledge of him saying that. One was Paul Samuelson. But he was no different than anybody else. That was just a rhetorical device to try to beat people into submission.Everybody keeps their–we modify our beliefs. The data comes some–every once in a while, we’ll have a revelation and we’ll change radically.But our beliefs are not always for sale at some price, if it turns out that some new idea or some new belief might be more useful. They’re not just instruments to help us get ahead.So, in those three areas, belief, an identity, altruistic gestures, not to say that all altruism is for itself, but some of it is, I argue. And then the third is the way we engage with time. It’s not always imagining current self and future incarnations of ourself that are all stretched out across a utility function. And then we’re trading off on all those different future selves, one for the other in the optimizing way, and then trying to stick on a path that will be time-consistent; or then, if the path isn’t time-consistent, worrying that we have a pathological relationship with time, and we’d better get ourselves sorted out because we’re not optimizing on behalf of our current and all future incarnations of ourselves. That is the standard economic model, and why we’ve gravitated to this. Well, it’s the only one that fits with rational choice, but I don’t think it’s what we do.Russ Roberts: Yeah, it’s mathematically attractive. Which I think is one of the reasons it gets play. I think there’s–Richard Robb: I think it’s the only reason.Russ Roberts: Yeah, could be, I’m trying to be generous.24:55Russ Roberts: It raises an interesting question, I think, for–I feel that people are much more–what’s the right word? ‘Analytical’ is not the right word, but I’ll try it. People are much–young people, especially, are much more analytical about their future than I feel than they have been in the past. Let’s say, certainly, than, say, the 16th century. A young person today has a, is often encouraged to have, you know, a career arc. And they get–they are bombarded through websites, and teaching, and other things that say, ‘Get a mentor, have a plan, don’t just flit about.’And, I think that’s–it’s not horrible advice, but I think the source of that advice is this imagined rational path that you want to find yourself on. ‘You just need to get on that yellow brick road.’ And, ‘If you do enough reading and take some exams about yourself, and learn about yourself, you’ll figure out what the right yellow brick road is for you.’And I think it’s an attempt to graft, say, analytical physics–which talks about where a projectile’s going to land–with human action, which is just not the same. In other words, we should tell young people, ‘Figure out where you want to be in 25 years, and then figure out the steps it takes to get there.’ And I think that’s really bad advice.Richard Robb: I give them the opposite advice.I have students who come to me for advice quite often. And they come with that same view. And they say, ‘Would I be better off as doing renewable development in the developing world or should I be a, go to an investment bank?’ I said, ‘Well, are these two options in front of you right now?’ They say, ‘No.’ I said, ‘Well, come back to me when you’ve got both jobs.’I’ve had a satisfying career in business and finance, and I never plotted more than one step ahead. And I have lots of friends, some of them were classmates of ours who, the same way, and I planned to be an academic full time, and it didn’t turn out that way. But none of it was planned more than a very short period of time they had.And then, they–so I said, ‘If I were you, I wouldn’t worry too much about it.’And then they’ll also talk about wanting to engage in networking. And I’ll say, ‘You know, when I was your age, if you called somebody a networker, it was an insult. And now you talk about this–‘ I said, ‘I would also advise you not to go around trying to use all your human relations as instruments to try to help you get ahead because I think you’ll actually be happier, and more satisfied that way.’And then when–should really–when they talk about their desire to want to be a good person–I end the conversation with my own children, particularly my daughter when she graduated from school, and was concerned about these issues. I used an example from a Woody Allen movie when you could still invoke Woody Allen, and I forget which one it is. But he encounters these super-smart aliens who would have I think 1600 IQ in human terms. And he–Russ Roberts: Sounds like Sleeper, but it might not be.Richard Robb: Yeah, I don’t think it is. And it might be Radio Days. But he says to them, ‘Maybe I’ve wasted my life. Maybe I should have been a missionary. Maybe I should have worked with the blind.’ And they say to him, ‘I don’t think you’re the missionary type. You’re a comedian. You want to help people tell funnier jokes.’ And if I can just put–I think my job in these sessions–when students come to me, first I try to put them at ease not to make these plans because the plans are not going to work out anyway. They should just calm down. Then the other thing I always do is I ask them, ‘What your parents think you should do?’ and then I basically echo what the parents said, because I figure if my kids went to see somebody else, I’d want them–and the parents know them best and the parents sent them there to Columbia. Those are my two contributions–Russ Roberts: That–I’m a little skeptical of that. I think one of the challenges I think some parents have is that what they want for their kids is often what they want for themselves to have their kids do, and it’s not always–Richard Robb: I at least want to respect that–Russ Roberts: Yeah. Fair enough. Fair enough.Richard Robb:–Because I wouldn’t want some random professor giving strong advice to my kids without at least thinking about it.Russ Roberts: Fair enough.29:36Russ Roberts: But, I want to go back to one thing you just said, which is I think it’s the thing that resonates the most with me. And I think it’s one of the hardest things for, not just young people, but every human being is–and it again highlights the difference between this, what I would call the economics view of the world, which is that in the economics view of the world, everything is an instrument for your satisfaction. Everything. The goods you buy, the work you do, etc., et c. It’s all about: it goes into this black box called the utility function, and it outputs happiness. Utils, as it’s called.And I think that’s a fundamental misunderstanding, not just of how people actually behave–because I don’t think they behave that way, which is part of what your point is–but I also think it’s not a good way to behave. And I think the economists’ conflation of rational with good is a terrible mistake.Richard Robb: Well, I think it’s depr aved way for us to conceive of ourselves–Russ Roberts: Exactly–Richard Robb: and to think–because economists call the representative individual in their model an ‘agent,’ but in fact they have no agency whatsoever. They’re just a passive conduit for optimizing these desires which they inherit.And there’s this so called pseudo-rational view of human behavior–leads to as Keynes said, a superficiality of judgment and a feeling.And I find this two-fold notion to be somewhat therapeutic. So, I can experience the human side of things, as we’ve discussed, without giving up the power of rational choice to understand markets and behavior.31:18Russ Roberts: Before we go on, I don’t think–did you talk about Nietzsche? I mean, I don’t get to talk about Nietzsche much on this program.Russ Roberts: So, I like to hear–which is related to this issue of challenges.Richard Robb: Yeah. First the overcoming: I ended up deemphasizing Nietzsche a bit in the book. I wrote a paper called “Nietzsche and the Economics of Becoming” in–Russ Roberts: Becoming–Richard Robb:–Becoming, in 2009, 2008. And then my editor, who’s now at Yale, found out about it. Actually, Reihan Salam, read the article, and he was writing for the National Review at the time. And kept writing about my article and seeing[?] everything through the lens of overcoming authentic obstacles. And then–Russ Roberts: Which is Nietzschean.Richard Robb: Yeah. And then this notion of not constantly reevaluating through time is Nietzschean.And then, another contribution that I got this from Nietzsche but it turns out it was in Schopenhauer and Hume before Nietzsche, so, I don’t attribute it to him in the book; but that this is often obscure to us. We think we act with a purpose, but we invent one after the fact. We rationalize. ‘Rationalize’ is actually a beautiful word for this purpose. So, both, when actions are just because we can invent something to say why it was good.You know, and rational choice gives you license to do that.If my wife tells me to pick up some milk on the way home and I say, ‘Well, it was optimal. It’s better for me to go out later, and then I’ll get the milk, and I’ll have in time.’ And she’ll say, ‘Well, did you think of that at the time? Dear, did you just forget?’ But because in rational choice, you don’t have to always bring everything to your consciousness. You can say, ‘Well, this was the reason I didn’t go to the store to get the milk because it was better to go out later and get several other things at the same time.’And, you know, gestures: you can just do something that’s altruistic that isn’t better in any sense. And maybe you can tell yourself, ‘Ah, I’ll get karma.’ Some Western notion of karma will come out of this, or what goes around comes around–is a way of justifying an action that doesn’t require a justification. It doesn’t have one. Or, you know, if you come up with some evidence that doesn’t fit with any of your beliefs, and you want to dismiss the expert out there on the tech, or the expert doesn’t see something that’s obvious to me, even though they know so much more than I do. We’re very good at dismissing beliefs that don’t fit with the constellation of our preexisting beliefs.Nietzsche was quite clear on that: that we act spontaneously, and then tell ourselves a story afterwards. You know, and he used the metaphor of dance as you did to describe, and music.Russ Roberts: Tell me, what does he say?Richard Robb: Ooo. If that’s [crosstalk 00:34:29].Russ Roberts: It’s too hard a question.Richard Robb: It’s too hard a question on the spot, Russ.Russ Roberts: Okay, sorry, about that. But he does talk about dance.Richard Robb: He does. And, you know, I wanted to call the book for a long time, “Economics of Becoming,” and I was told by everybody that that’s, ‘Becoming, becoming what? That’s a terrible title.’ And then Michelle Obama calls her book Becoming, and everybody loves it. So well, it’s her idea: Becoming is great, and that I thought of it–Russ Roberts: Yeah, maybe a different kind of base there.Richard Robb: Yeah, but the notion of becoming is that you never get there. That, it’s always action that takes place through time without necessarily a destination.Russ Roberts: Yeah.35:13Russ Roberts: In the book you talk about an example of the so-called Chicago School of thinking about the world. And, we’re both raised in that language and that style. And it was a great deal of fun, by the way–that learning how to apply the rationality principle and the way markets have feedback loops. And you have a really example in there of green beans. So, talk about how a Chicago economist looks at green beans.Richard Robb: Yeah, we went–in the A&P [Great Atlantic & Pacific Tea Company, supermarket], in Hyde Park, there were a–Russ Roberts: A grocery store.Richard Robb: Grocery store. Yes. It was suggested that I change it to Kroger’s in the book, that it would be easier for people to understand. But it wasn’t a Kroger’s. It was an A&P, and if I changed it to Kroger’s, then I would be a liar. And I want everything in the book to be true. So, yes, it was an old fashioned grocery store. Thank you for pointing that out.Green beans were sold in cartons, in these cardboard cartons with cellophane on the top and a rubber band around them. And question is: Why don’t they just put them in a big bin, and let you grab them and put them in your own plastic bag? That would be more economical, be easier for them. And we’d think about these things, and assume that they have to be rational–that everything has to be there for a purpose that we can understand if we work hard enough.And then, well, if they’re in a big bin, people will pick out the best ones, and they’ll use time to do that.And then everyone will search for beans up to the point where the marginal benefit of finding a better bean equals their wage. So, low wage people will come away with better beans, presumably. But everybody who spends their time collecting the best beans will search, and waste their time doing that. So, they put them in cartons; but they’re randomly selected beans in the cartons. Why don’t they put the best beans on the top?Well, there the answer is: rational consumers will notice that they’ve tried to flatter their bean quality by putting the best ones on the top and they’ll start to discount that knowledge. So, the benefit of putting the better beans on the top would be very low, and the store will have to pay the workers to sort the beans, and to try to make them look better than they are.So, yeah: we would tell stories like that all day long. You remember it. And, the notion is if you just keep at it, the world will reveal its unseen order to us. And we–Russ Roberts: It’s important because a lot of it is true.So, even though we’re picking on the rational, optimizing, maximizing–what Deirdre McCloskey calls Max U–view of humanity, it is that there is a lot of that going on. And it doesn’t come naturally to most people to think that way.So, my example of that is I always ask–when I used to drive carpool, or drive kids home from the soccer game or the baseball game, when my kids were in high school, I’d ask them, ‘Why aren’t potato chip bags filled to the top?’ And the average human being says, ‘Because they’re taking advantage of you. It looks like it’s full, and then of course they’re making more money that way.’And I said, ‘Well, if that were true, shouldn’t they just have like a crumb at the bottom?’ And an enormous bag, by the way, a huge bag, not a little small bag–a huge bag.And what’s beautiful about these sort of Chicago-style price theory problems is that you can learn something.Now, what you learn may not always be true, but it gives you an insight that you wouldn’t have otherwise had.In this case, as listeners know who have listened for a long time, one of the reasons they don’t fill to the top is that the air itself in the bag forms a form of cushion that protects potato chips and allows them to be shipped over long distances. People aren’t stupid. They realize how much air. After they’ve eaten the first bag, they start to realize they’re not filled to the top. They know what they’re getting, and there’s competition among potato chip companies to provide, etc., etc., etc.So, that–I think there’s an incredible power of that Chicago style of thinking because it lets you see the unseen often, and it lets you sleep better at night because you don’t think you’re always a victim. A lot of things that look like you’re being taken advantage of, actually, it’s good for you. You don’t realize it.Richard Robb: Yeah. And things like, people talk about ‘planned obsolescence.’ What is that? I mean, they could always make more money by giving you something that would last longer, that wouldn’t go obsolete, and charge you more for it. When we are saying that the Chicago economics isn’t the whole thing, I think neither of us would say that it doesn’t explain a tremendous amount, and keep you from going astray in many areas.40:10Russ Roberts: Well, let me ask you another question about incentives, which we have implicitly been talking about along the way. I mentioned the nurse who conceded that sometimes he might do a better job or maybe he’s not talking about his colleagues–I don’t want to put him on the spot–but he was saying that when there is the, someone in the room who is potentially censuring you or can judge you, you rise to a different level than if you’re only doing it on your own.And I want to ask you about what we might call unseen incentives. So, again, going back to our Chicago days or something we’ve talked about on the program called the Peltzman effect–the idea that you make something safer, people will be a little more reckless.Now, a lot of people when they’re told that–so, for example, you introduce antilock brakes, or seat belts, or airbags–people will drive a little less carefully.I’ve talked on the program before about helmets and football: as helmets get better and better, people are more comfortable using their body as a weapon. Their head as a weapon, in particular. And that actually can lead to worse outcomes: Even though any one outcome might be better, they are going to be more of them; occasionally, they will be bad.What are your thoughts on how people respond to those, sort of, hidden incentives?Because non-economists, when we talk like this, they go, ‘Oh, that’s ridiculous! People won’t sit around and calculate the percentages or the probabilities. They just drive.’ Because, that could be a way of, your response is, that just it’s action for itself.’Richard Robb: Sure. My answer would be straight down the rational choice line. And there was a suggestion by an economist that to max for highway safety, you should put a spike in the steering wheel–Russ Roberts: Yeah, Gordon Tullock.Richard Robb: Gordon Tullock. Exactly right. Yeah.Russ Roberts: Drive really carefully.Richard Robb: Yeah.I think there were some ski mountains that had banned helmets because they felt that it made, particularly children, be more reckless. I’m pretty sure that’s true. And that’s one example of the Gordon Tullock effect. But, so yes, if you add helmets, people will be more reckless; but that could mean that everybody is still more safe simply because there’s feedback.But it’s natural to us, because we’re used to people trained in economics because we see the mathematics of it: that you can have feedback, and you can have a countervailing effect that limits the initial effect because people are more reckless. But still in the end, yeah–Russ Roberts: It can still be beneficial.Richard Robb: It’s still beneficial for everyone.42:43Russ Roberts: I want to ask you about application of this to the investment world.You know, I’ve argued that some piece, at least I think it’s underestimated the importance of it, some piece of the Financial Crisis of 2008 are the bailouts of the past that encouraged people to think as creditors that they would get their money back, if they lent it to reckless investments.So, that’d be one, sort of, rational view, Peltzmanish view, of that crisis.A lot of people in that world would say, ‘Oh, we never thought about that. We never paid attention to it.’ They were just in it for the game. And when the part, when the music’s playing, you have to dance. It had nothing to do with the idea that I’d be bailed out. What are your thoughts on that?Richard Robb: Well, my–and I was there. And at the time, and I wasn’t engaged in subprime lending or the sorts of things. But I mean, I did have one misadventure which I described with great candor in the book building an offshore wind farm, at the time. Well, yeah.But, I think that the Crisis was very complicated, and that there’s a lot of blame to go around. Some of which is still very poorly misunderstood to this day.You know, let’s suppose that you had bought the most toxic AAA tranche of subprime mortgages originated off of Lehman Brothers shelf[?] in mid-2006. So, let’s take sale 2000–I happen to know this data–so, 2006-dash four, which is still going on today. And it was over 50% low doc. Low documentation mortgages–Russ Roberts: And they didn’t have full information about the people filling out the form–Richard Robb: People are doing it. It was–everything about it was bad.And it was about the–and still in the end, because investors are going to get about 90% of their principal back, over 90%. In the end, you would say, because someone can say, ‘Well, they got bailed out–government,’ and that’s why they didn’t see the full sting of their reckless behavior.You know, I believe that a lot of people who are involved in this thought that house prices could not go down–Russ Roberts: Never had–Richard Robb:–Because they hadn’t gone down in the past; and they genuinely believe that.And then that would bail out a lot of poor underwriting. There was kinds of maturity transformation and structured investment vehicles that looking back on it was just terribly reckless. But, you had the rating agencies promoting all of this with their very impressive track records outside of structured finance. And then they believe their models. It was an overstep of financial engineering. It was a belief in this abstraction that was–you know, I watched it happen in my career when we could start–when we first started being able to price complex derivatives and value them on models, I felt like we’re really getting away with something, here. This is really–it felt like we can get used to it.And then judgment starts to become deemphasized in large financial institutions because it can’t be passed easily up and down the chain. It’s not best practices all the time. There’s so many things that went on there.And it’s not just subprime mortgages. There were subprime mortgages in the United Kingdom, Netherlands, that performed. And they were securitized, too. So, the simple folk narrative that, because they were selling these mortgages to securitizations, and therefore, they would never be responsible for them, it’s just wrong.Mortgages the banks kept for themselves performed more poorly than the ones that they sold into asset backed securities because at least there was some level of scrutiny by investors and rating agencies.So, the banks themselves were hanging onto mortgages that were quite poor.And so, I think securitization had a role in this, but not the central role that people give it.I don’t know anybody who–I didn’t encounter anybody at the time who would say cynical things about, ‘All this is going to blow up, but the government will bail us out.’ And maybe that’s not what you’re suggesting.Russ Roberts: Not what I’m suggesting. Because although there is a story of the–in my book on this, in England when the Bank of England asked some bankers why their risk models only went so far, why they didn’t look at more riskier opportunities or riskier scenarios. He said, ‘People looked down at their shoes, and didn’t really want to answer. And he said, ‘Well, what’s going on?’ He said, ‘Well, we figure if it gets like that, we don’t have to worry about because you’ll bail us out.’Now my point, which I’m pressing you on a little bit is the reason I brought up the Peltzman Effect, we would not argue that a football player makes a rational calculation of how fast to run, and how much to put his head down.And yet we believe, I believe, and I think you believe, that they are affected by some of these incentives like the seatbelt in the driver’s case, etc . So, I’m asking, even though the people in the Bank might not have said it after decades of not having to worry about spending their own money, and being in a world where the worst case scenario wasn’t so bad because things did get bailed out, it may have affected behavior.Richard Robb: I just want to make two points about that.First, you know, the government probably made close to a trillion dollars on the so-called bailout. I don’t think–I think people should keep that in mind.Russ Roberts: I’m not so sure, I don’t agree with that, but go ahead. Some estimates say that they made money, others say it’s not so–in fact, there’s a new paper out on, I’ll try to [?] there’s a new paper on that–Richard Robb: The auto, the GM [General Motors] bailout lost money. But every, the TARP [Troubled Asset Relief Program], the Tell[?], certainly the Fed has made a fortune. The bail out of the government-sponsored entities or I should say the conservatorship of those.Russ Roberts: [?] Yeah.Richard Robb: Yeah, that’s been hugely lucrative.And then all the fines. I’m adding the fines into my estimate. Something more like it–last time I tallied it up–I don’t care one way or the other. I would just wanted to know what’s true. It was over $700 billion that the government has made. So, I think it’s real money. It’s certainly a mistake to say that the government, that the public has suffered in the end from bailout, from the cost of the bail out.Russ Roberts: Oh, I don’t think that’s the right calculus. Right? You don’t want to look at the tax cuts. It’s the incentive effect on prudent investing is disastrous.Richard Robb: No, I understand. Which is why banks submit themselves to regulation. Because there always has to be–I mean, look at the bailout of the money market funds. Okay? In September 16th–that was when Primary Reserves was prepared to break the buck because there was very little Lehman commercial paper but they happened to have it.Russ Roberts: Breaking the buck, meaning?Richard Robb: They they were going to pay back 98 cents on the dollar instead of 100–Russ Roberts: Instead of 100. Yeah, that makes sense, yeah.Richard Robb: So, the Treasury did the only thing they could do: They gave an emergency–they dropped everything else and they gave an–a–an emergency voluntary guarantee to all money market funds for one or two bucks. It was one basis point at the time. But each fund was made an offer they couldn’t refuse; and they paid one basis point for a blanket guarantee from the Treasury. This was about a three trillion dollar industry at the time that would have imploded. And it shouldn’t have been. These were like banks with no capital, that–money market funds. And so, gradually they’d been, as of last year, the regular, the regulation has been phased in. So, this won’t happen again.Russ Roberts: Well, I’m going to push back on this a little bit, just to go one more level down into the weeds. Then we’ll come back to your book. Which is, because I’ve thought a lot about that Primary Reserve story. My question at the time was, not at the time because I didn’t understand it, but a couple of years later when I started looking at it, it was: What was a money market fund doing holding Lehman paper, especially, after Bear Stearns, which had a very similar balance sheet to Lehman had imploded? And after Bear Stearns got rescued, and all their creditors were made whole? So, it made sense the whole Lehman, you should make a good return.Richard Robb: Yeah. And also the SEC [Securities and Exchange Commission] allowed it, which it wouldn’t allow today.Russ Roberts: Yeah. That’s interesting.Richard Robb: There are strict limits on–concentration limits and limits based on ratings.51:54Russ Roberts: So, let’s shift gears. I want to talk about the paradox of choice, which is something that’s always bothered me. Barry Schwartz’s thesis. What’s your take? Explain what that thesis is and your take on it.Richard Robb: Yeah. The argument, as I understand it, is that people are overwhelmed by an abundance of choice. The prototypical experiment is to go into–they sent researchers disguised as merchants into a store, and they would offer 24 different types of jam. And then, people didn’t buy them. And then they would offer them a smaller number, four or something like that, and then they would buy them. Which proves that if you give people a dizzying array of choice, that somehow you confuse them, you upset them–Russ Roberts: They’re paralyzed.Richard Robb: Yeah. And you shouldn’t do it. That’s the lesson.I think there are several things wrong with us.First of all, this is a contrived experiment. And I think that real–real stores with real money on the line–know what choice their customers would like. And I think if you offered only one type of toothpaste, people would–even I think probably all types of toothpaste are basically the same as far as I’m concerned–Russ Roberts: Very similar–Richard Robb: Wouldn’t bother me. But a lot of people would be concerned about it. They’d be distressed about it. It’d be like the Soviet Union.Russ Roberts: And they would prefer going to a store that had–ten.Richard Robb: Yeah, even though they took the one that the other store had.Russ Roberts: Not a thousand. A Toothpaste-R-U that had 1,000 choices probably wouldn’t attract too many customers, but maybe. Who knows?Richard Robb: If it did. No, I think there wouldn’t be. Because if there were, if people wanted it, it would exist.Russ Roberts: It would exist! Such a Chicago idea, Richard.Richard Robb: And, engaging, I would, give an example in the book of menus from the late 19th century that had huge arrays of choice–much more than anybody could need or they do–smaller numbers. You don’t have to choose between 24 vegetables every time you go out to eat. And a smaller number would span the space of what people want, any dietary restrictions, any momentary preferences.But somehow people, the act of–in our view of neoclassical economics choice is passive.But, taking the choice itself matters to people, and they want to be able to take the menu and to pick and to say, ‘Yes, this and not that.’And, you know, I–I also–you know, the theory Herbert Simon had of satisficing–that people will maybe not pick the same thing every time, that their choices are not perfectly consistent because they don’t have enough brain power to be able to sort through all the different options. I think on the contrary, maybe they rationally serve up the different choices that would be good enough, approximately as good. And then they want to exercise their will. They want to make a choice. They want to act on the world and have a bit of agency and say, ‘I’ll pick this one.’I just remembered–I was reading a paper coming down on the train to see you, from the Journal Political Economy that was dealing with–that was trying to explain a related paradox. That you ask people preferences, questions over which of three different lotteries they prefer, where you can get this amount of money with this probability, and this amount with that probability. And, they asked lots of different–they present them, ‘Do you want this one or that one? Okay. You want this one or that one?’ And then they find, it’s in the literature that people will change their minds: that if you ask them the same question three times, they’ll give different answers.And one theory is that they don’t have a bounded rationality. And another is some exotic notion of them wanting to create a portfolio of choices. But, maybe people just want–that there’s very little money involved, a few cents, and maybe they’re not paying close attention. It’s not a theory but they just want to choose, and they just want to say, ‘I’m picking this one and that’s who I am and that’s what I’m going to do.’ And, I think to judge that is irrational. Or if we find that we make choices–sometimes make one choice, and sometimes make a different one–to beat ourselves up over it, I don’t think we have to do that.Russ Roberts: And how about the paradox of choice? One other thing that, to give it its due, Barry Schwartz’s story, is in our models that we were taught as neoclassical economics, nobody has anguish over a decision. You might if you didn’t have full information. But, the real anguish of a decision is that future-you may not be happy with the decision. And that weighs on a human being. And that doesn’t fit in our world. So–Richard Robb: Yeah. But people want to have that experience nonetheless, or we wouldn’t offer it. I mean, if you want to have a store that offers only kind of thing, you can try that. I mean there are–Russ Roberts: 7-Eleven is such a store, for convenience. You have retailing options for when you don’t want to make a big choice or when you’re in a hurry or for when you’re on the road or whatever it is–don’t have good information. Rely on a brand name. We understand.Richard Robb: Yeah, I think because the stores, if you have a offer too much choice, the store will be bigger and–Russ Roberts: Yeah. Rents are high.57:54Russ Roberts: I had Gerd Gigerenzer on the show recently talking about the power of intuition and hunches. And, when he talks about heuristic rules of thumb, contrasting with more analytical, say, regression-based decision tools, or, you know, tools like Value at Risk for dealing with uncertainty. And he argues that, somewhat convincingly to me because that’s my nature to be skeptical–there’s other models–that sometimes intuition can outperform these more analytical methods.And it raises the question, which of course is that: you can also fool yourself, thinking you have too much intuition. You’re really good at hunches. You forget all the times your intuition led you astray, got you to invest in bad things.In investing in particular, what are your thoughts on the role of hunches and intuition? You talk a lot about it in the book: that there comes a time when you just have to make a leap, and that a lot of the best decisions are not analytical.Richard Robb: Right. I like to use the term judgment. Hunches sounds a little–Russ Roberts: That’s good. I like that.Richard Robb:–careless with other people’s money.I think that if you could boil down a set of decisions that are going to produce profits into rules, somebody would have arbitraged it away already; and that the opportunity to make money comes from things that are unique–where their essential qualities haven’t happened before. A Hayekian personal knowledge that can’t be easily abstracted and transmitted to a central authority. He used it to talk about forms of government. My interest is in making specific investments. He talked about the kind of knowledge of the man on the spot, of time and place, and specifics that may look like something else but differs in some way that he notices.And if he could fully articulate it and explain why he deviates from the rule this time, and not other times, well then it’s just another rule. And that there is a moment where one has to apply–well, we can, we use Adam Smith’s term, which I love, of ‘anxious vigilance.’ Yeah. And I love the anticipation of anxiety–the anticipation, the way philosophers or Kierkegaard would use anxiety, and existentialists. Because anxiety comes from the isolation that you feel when you can’t draw on any set of fixed rules. Or there are several sets of fixed rules and there’s equally good reason for choosing between them.A manager can’t delegate anxious vigilance all the way down the line because he has to confront it. It’s the same thing for an investor. There are moments where anxious vigilance has to take over. It should be informed by experience, and judgment, and analysis. I’m not suggesting that we just scratch our chin and decide what to do. But there comes a moment where I think in any investment that’s dealing with things that are inherently new, that only happened once, where it’s going to be hard to argue that it’s necessarily better than something else–but just to say, ‘Well, I’m going to do it, and I’ve been entrusted with this responsibility, and I’m going to do this, and not that. And here are my various reasons, but the reasons are not–I could also give you reasons for doing something else.’And, I think a really important challenge in institutional investing is how to harness roles of judgment, and then do this inside of an organization that has corporate governance. We’re not–each person can’t have the same wisdom and judgment that the ultimate decision-maker is invoking.Russ Roberts: So, we both publish books. An editor’s intuition about whether a book is going to be successful, an editor who’s got her own line of books, is different than an editor within a large, modern, accountant-driven, bottom-line, affected corporate company where you’ve got to get approval up the line. In which case, if you’re not careful, you start thinking about, ‘I don’t want to publish the best books. I want to publish the books that I know that the committee will sign off on.’And that phenomenon, I also think about it in sports. If I come back to the Patriots for many, you know, Bill Belichick at a famous moment in a Super Bowl decided not to call a timeout. Everyone else thought it was a horrible mistake in that moment. I was screaming at the TV [television], the clock was ticking down. The Patriots were about to fall behind. We were going to need the time to get back ahead. And when asked later why he didn’t call a timeout, he claimed to have a reason. He said, ‘I looked over at the other side, and they looked a little confused. I thought I wasn’t going to help them.’ By the way, he’s got a headset on. His assistant coaches are yelling, ‘Do you want a time out? Don’t you want to–‘ And he just said–and you can see him on camera because we’ve got the video of him just calmly doing nothing. And, you know, one possibility in that situation is: He just got lucky. He easily could have lost the game.And I’m curious how you think about that, in that investment context. Do you think there are people with great judgment or are they just lucky?Richard Robb: Well, I think luck has oh-so-much to do with it. In my own–I can point to moments where the dice would roll the wrong way. It would have pushed us over, as a business–not the investments themselves, but as an investment manager, we wouldn’t have been able to survive.And, you know, I look at people who did survive, and shake my head, and wonder why. Now I know. It’s because they were lucky. And this notion that you make your own luck–I mean, yeah. I, I, I–I think anybody with, who has been around at all, and then has some self-awareness knows that you should just be very fortunate of the luck that you have because there’s a heavy–Russ Roberts: You weren’t in the back room manufacturing that luck. So, that when it–Richard Robb: Yeah. And this is not some false humility, I know that it’s true.In terms of football calls, I say one thing on behalf of rational choice. When I was at Chicago, the people used to always say they ought to go for it on fourth down more often instead of punting. It would be like–Russ Roberts: And proven by the way in many formal studies.Richard Robb: In formal studies. And it was frustrating.Russ Roberts: ‘It was irrational,’ obviously. [More to come, 1:04:38]


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