 Trevor Burrus Welcome to Free Thoughts. I'm Trevor Burrus. Aaron Powell And I'm Aaron Powell. Trevor Burrus Joining us today is Peter, Van, Doran, senior fellow at the Cato Institute, and editor of Regulation Magazine. Welcome back to Free Thoughts. Aaron Powell Thanks for having me. Trevor Burrus Earlier in the fall or about two weeks ago or three weeks ago, Richard Thaler won the Nobel Prize in Economics. And that's what we're going to discuss today, Richard Thaler, and what he did for economics. So I guess the first question is, what do people think of when they think of Richard Thaler and why was he important? Richard Thaler is associated with the development of what is called behavioral economics. And it is, the adjective behavioral is to meant to contrast this brand of economics with what is typically taught to freshmen in Econ 101, which is neoclassical economics. So first let me describe briefly what neoclassical economics is and then describe how behavioral differs from it. Neoclassical economics in its purest theoretical form is an elegant mathematical exercise in which there are preferences of consumers and they're called utility functions and they have a functional form. They have a mathematical shape to them. And consumers also have budgets and therefore a budget constraint. In firms seek inputs in the market at market prices and firms maximize profits. And you throw all this together and you say, how can firms maximize profits and consumers maximize utility at the same time? And what does the result look like? And you can do this all on paper using calculus and you come up with an answer. And that answer is always referred to by traditional economists as elegant. And what they mean by elegant is, it's this pure love of mathematics as an exercise. And then the question, of course, is whether what this has to do with real people in the real world. And that's always been a contentious issue going back to Milton Friedman. Milton Friedman is famous for saying, well, the real world acts as if it knows all of this mathematics even if we ask the people and they don't know it. They actually are compelled by market forces to act as if they know all this math and are maximizing because if they don't, they would lose all their money. This sort of claim that if you're not maximizing profits, you would fail as a firm and if you're not maximizing welfare, your own welfare as a consumer, you would realize it over time through learning and would use your money more carefully so as to have more of it to get the stuff that you want. Behavioral economics is rooted in psychology and it originally started as a critique by social psychologists of economics. And this has as much to do with the sociology of academic conflict as anything else. So economists, to be honest, tend to lord over the social sciences in the university because they have math in part the math. And they argued that other parts of the social sciences didn't have, and I use quotes here, a rigorous theory of behavior, i.e. math. And thus, sociology and psychology talked about people, but economists really modeled behavior. Well, I want to ask about this because you said neoclassical, but is classical economics that way? Because then in Thaler's presidential address, he says that Adam Smith seemed to think this way about people, and it strikes me as kind of odd that anyone ever assumed that people were that robotic, I guess it's for lack of a better term, that that was the way to do economics was to assume essentially perfect utility functions, robotic, predictable behavior, and even before that, before the neoclassical revolution, if that's what I want to call it, Adam Smith and other earlier economists did not think that way about people. I think that's fair to say. I think Thaler's typology of the break of neoclassical economics from something called classical or whatever term you want to apply, I think that's fair. And the real push towards what we call neoclassical economics is actually, it started with Pareto and Marshall, but the real drive occurs after World War II with Samuelson and his famous textbook, and the so-called welfare theorems of economics and things like that. So again, the behavioral critique starts out as a critique coming from social psychology, and Daniel Kahneman won the Nobel Prize earlier for that portion of it. And his colleague, Amos Tversky, was deceased and therefore could not win the award but was also a co-author with Kahneman of all of this stuff. Thaler is later and adds his own arguments to it. And basically the critique is the following, that people make systematic cognitive errors that are not consistent with the maximization and figuring everything out mathematically framework, that is the heart of neoclassical economics. And I'll let me give you, and each of these cognitive defects has a paper associated with it or papers, and they're rooted in experiments done with undergraduates. So people should know that behavioral economics is very related to and developed from what's called experimental economics, where you don't go out and study firms and consumers, but you actually take typically undergraduates, have a control group and experimental group, read them a series of instructions and see if they figure things out in the way that neoclassical economics suggests. And each of these defects has a name to it, and I'll give you three. One is the endowment effect. So on previous discussions we've had, I've mentioned Ronald Coase in the Coase theorem. The Coase theorem says it doesn't matter what the distribution of property rights is to start out the game. As long as you can freely transact and you can trade these things, it doesn't matter where you start out, we'll always end up at an efficient result, but the distribution of wealth will be different because we started out at a different place. The endowment effect says the willingness to pay for something versus the willingness to accept for something, i.e. do you have it and then how much would you demand to give it away? In the Coase theorem, that's the same as how much are you willing to pay to get it from someone else. If those two prices differ, if the willingness to pay and the willingness to accept differ, then distribution of rights and where you start out the game affects efficiency where you'll end up. So the endowment effect papers argue that the Coase theorem doesn't work. Is that, on the endowment effect, is that, we can get more into this later. Unless we want to, do we want to go through all of them? Let's stick to the endowment effect here. Is it, would we call that irrational or would we call it just something that makes Coase not work the way that people thought? You're making, you're making, because I mean, maybe people just, is it okay to care more about losing something than gaining it? If loss hurts more. Yeah. I don't want to, I don't want to use, I'm uncomfortable. Just be personally. I don't want to traffic in the terms rational or irrational and rather stick to, for the Coase theorem to work as a theory of outcomes, the willingness to pay and the willingness to accept must be the same. Well, if they're not, then whether the railroad has to pay the farmer to pollute or the farmer has to pay the railroad to stop, then those two initial assignments of property rights will change how much pollution there is in the result, in the equilibrium. So, and whether one wants to label this, so to get neoclassical to work, and I'm using work here in quotes, the willingness to pay and willingness to accept have to be reasonably close to each other. Otherwise, you'll have endless political fights over who has rights, because those rights, everyone knows will in fact go a long way towards determining the outcome. Does work here require mathematical exactness to the out, to the predicted outcome? So, we could say that yes, people might have slightly more loss aversion, and so they're going to take, it's going to hurt them more, they're willing to give up slightly more to prevent a loss than they would be to get an equal gain. But if that slightly is only really slightly, then could we still say that the Coase theorem works even though, like on the tiniest margins, it may be off a little bit, but in the aggregate on the whole, it still is going to come out awfully close to what it predicted? That is an empirical question. So, in the real world, I mean, yes, I mean, that's your Aaron's arguments are all possible. So, once the results are not exact, then we're into utilitarian land where we have to evaluate outside this whether the results differ enough so that they matter for whom. And then that's, i.e., if you're an environmentalist, you might say, this matters enough so that I want the right to have clean air to start with. I think it is, I do not want to have to pay for it. And I think it's, then they would introduce the term morally wrong or something. They would introduce some philosophical adjective to say, by Gali, I think this status quo that I want is a whole lot better than the one you're proposing because, and we can see in neoclassical, you void all those arguments if it doesn't matter at all. But once you introduce the possibility of it mattering, you then are into, let's call it an A scientific world where we have to have a back and forth of how much all of this matters or doesn't matter. Did the Coase theorem, maybe this is a typically ignorant Trevor question about economics, but does the Coase theorem, as I understand it, even as it was formulated and written about, does it ever really work in the real world because you also have to postulate zero transaction costs, which is not a thing in the world. I mean, and Taylor makes this point, and this is one thing about Taylor is always confusing. I couldn't figure how much he's actually adding to the discipline because either neoclassical people were postulating these sort of frictionless universe physics problems, which Taylor makes this point in this presidential address comparing it to like you have a theorem and here it is there no transaction costs. That's a frictionless universe. And you start with a frictionless universe and then you add a noise and then you see how much you can control for the noise and you make a comparative analysis about, well, generally speaking, we want people to be able to trade for, to make property rights or to be able to make themselves better off. And there are going to be some difficulties there, but as Aaron pointed out, it might be on net better. But I guess I'm just trying to ask, why did anyone ever think the Coase theorem described reality? Because it just doesn't. It describes like a computer program about people being able to make transactions instantaneously without transaction costs, but it doesn't describe reality. Good question. We haven't got to this yet, but we're getting to it, which is there's underlying political disagreement lurking in our questions, which is in a neoclassical world, if everything works out the way the theorems say, then the role for government, then the possibility of collective action improving, and I use that in quotes, improving welfare of anyone is zero. So, it would be a perfect well-oiled machine of which all optimal, everything went to their highest and best use and all optimal and be Pareto optimal and everything along those lines and government would have no... Well, then the only role for government is not to make markets more efficient, but simply distributional, i.e., who ought to have rights and why and should we ever tax some people and give it to others, as opposed to claims that if I do this, pass this law or put this tax in or put this regulation in, I can improve welfare or make people better off. That language is much less possible in a neoclassical world or more limited, whereas in a behavioral world where people are making errors all the time, the possibility then for better informed government regulation to improve welfare is very large. Even though I'm trying to keep that out of the current discussion, that's actually lurking beneath all this discussion. She said there were three of these cognitive biases that we were going to talk about. So, we had the endowment effect. The second is hyperbolic discounting or translated. This is making errors from a conventional accounting economic point of view between choices in the distant future and choices in the near future and choices in the present. You described in a... When we were hanging out socially, you said that that's what drug addicts do. I mean, that's like the economic term. The economic term for what drug addicts do is hyperbolic discounting. Which means right now, the pleasures of this is what I really need and anything else in the future is a role of it. And not going to worry about the hangover. Yeah, exactly. Hyperbolic discounting is not getting the near future versus the distant future correct. It's not just present versus it's actually caring about next month a whole lot more than caring about five years from now. And that's in the present value of normal econ accounting framework that leads to weird results, odd behavior. And I'll talk about... Well, I'll talk about policy examples. We'll get to that. So, the endowment effect is whether distribution affects efficiency. This discounting affects broadly construed is... There's a lot of policies that are alleged to help consumers save more and do things for the future. A lot of climate change discussion hinges on this distinction as well. The third cognitive error... Well, I just to clarify, so you mean that if people who are trying to get us to change our behavior for climate change are saying that if we prefer a new gas-coding car in the short term without looking at the hundred years in the future, then we're hyperbolic discounting. Yes, we're not getting things right. We're drunk on oil. We're like drug addicts for oil, basically. Okay. The third cognitive error is called optimism bias. It is the belief that bad things happen to other people, but not to you. It's true in my life so far. I'm just running that. I think it will continue to be all good things that happen to me. It's also called young people. Its real-world alleged result is the lack of demand for insurance. Lots of... From a neoclassical point of view, people seem to under-insure. They do not buy products that exist that would allow them to buy the mean of an outcome and reduce the variance that might occur. This is just in terms of... We're trying to figure out why people would buy the right amount of insurance without running actuarial tables on themselves. How much do I need? 16, how much insurance do I need? How does someone feel at the right? Here's the chances you're going to get hit by a bus. The terms economists use is consumption smoothing. That is, our goal, whether you know it or not, is to smooth consumption over our lifetimes. That's like every human being's goal. Yes. In a neoclassical framework, one wants to reduce the variance in consumption over time. I.e., here's an anomaly from that perspective. The income of people in the United States goes down drastically after retirement. How come you're willing to live this way and then suddenly you have this steep cliff, you should consume less when you're younger, save more, and smooth consumption so you don't have to go through this heartbreak of a loss of consumption during retirement, and so on, and so on, and so on. My question with these is you refer to them and the particular economics people refer to them as errors. Then when we get to the … Thaler's partner in a lot of this, Cass Sunstein, the two of them wrote the book Nudge, which is about then how do we engineer policy to, in this case, try to preserve freedom whilst nudging people to not fall prey to these errors. We can get to it. I'm sure we'll talk about that and whether that works and what the problems with it are, but the very notion of them as errors, it seems to me that the thing that makes them errors in the mind of both the neoclassicals and the behavioralists is that they differ from the economist's notion of how a person ought to behave. Not ought to is. Remember, neoclassical is a positive theory and elegant, and then as Trevor says, unrealistic theory of behavior. But the whole unrealistic part, when you're within an economics department of the old school, in the way that I was taught, pretty much fades away. I mean, I was looking at econ lectures online this morning in preparation for this. What are people taught now? I mean, you're taught to understand calculus and math and maximizing, having your taught, the words elegant result. You learn arrow-de-brew theorem, which says if we have complete markets for everything and people do everything right, then welfare is maximized, et cetera, et cetera, et cetera. And then you learn deviations from that later on. But even though it's a positive theory of behavior, there is this underlying ought kind of lurking, but technically, ought isn't part of it. Right. But when we talk about something like hyperbolic discounting, we're looking down our noses at the people who... So you just said, why do people seem to get this cliff when they hit? And what they would prefer is this. Why don't they prefer this? Or they're like, people don't take into account risks in the right way. And so they're not buying the right amount of insurance. These are all things that we're saying like this is incorrect behavior. I don't think... I mean, it's almost possible to talk about it without instilling that value claim into it. And I guess... So the question that I have is why, at the very beginning, why should we accept the economist's notion of human rationality or utility? Like maybe people deviate from this stuff simply because the economists got it wrong. That people actually... They do prefer stuff now over the future and that's perfectly okay. And there's no good argument against it. It just clashes with the economist's view of how people like... Economists aren't like the rest of us, I guess. And let me add a color on that, which is just, it seems like the neoclassicists all want us to be squares. I mean, basically, that we don't go skydiving or we're going to jump our motorcycle across a ditch or smoke or eat a burger. I mean, evil-caneval is he irrational in the neoclassicist model? Okay. Let me start to respond of... First of all, it's hard to... Well... Did we ask the same question or do we have different questions? Different. Okay. This is part of our confusion. This is why we bring Peter on. Let me get... Let me go to Aaron's for it. I was actually going to deal with this at the end rather than the... Oh, okay. I apologize. Because I wanted to get there, which is, is the goal of either neoclassical or behavioral to actually just implement people's preferences? Allegedly, certainly neoclassical is behavioral says it is because cognitive errors prevent people from implementing what they really want to do because they don't know how to do it. They don't know how to do present value discounting calculations correctly. So we need to educate them about how to do that and or create default conditions so that they're kind of steered into that. Then to change Aaron's question into... Fundamentally, so what if... Nudge, the most famous nudge experiments around are not of what I just described, but rather there is strong empirical evidence that no one disputes that the default conditions in 401K plans in the workplace have a profound effect on whether people save or not during their work time. Neoclassical people originally said, ah, but even if you make people save more in the workplace, they may undo it with credit cards outside the workplace. So net savings behavior might not actually improve or increase. There's a study now of people in Denmark. Denmark because it's Nordic and they keep total records on everyone's life. It's like Gatica. Yeah. The Danish can be... are studied extensively and they did a nudge effect and they made the default that you're involved in workplace savings behavior and then they could study all their other banking and financial records and they showed that savings did increase. So at least for the Danes, the nudge to alter the status quo from being in out of a system to being in a retirement system did increase savings behavior. But then this paper said at the end, well, what if people really don't want to save? Which is what Aaron's asking. In other words, if the world isn't full of Sheldon's and Peters, it's full of different kinds of people. Well, I'm thinking about, especially because when Neoclassical came out with Samuelson, I'm thinking about Leave it to Beaver. I bet they all... I bet Ward and June saved exactly the right amount of money that economists would tell them they should save. Well, there's a very middle-class, middle-brow, middle, middle, middle, everything to this and your cultural critique says, you know, this doesn't know anything about sex, drugs and rock and roll or something to that effect. And I'll... Allegedly, when we teach Neoclassical, it allegedly has at its heart just preferences. And so, thus, it is allegedly accommodating to both your critiques that, in fact, the author that comes to mind, actually, is smoking behavior and Kip Viscusi's work, which we've talked about before, Economist... Well, he was doing the... How much a representative life costs? Is that what we just said? Cost per life saved. Cost per life saved, yeah. But a lot of his work is also on smokers. Do smokers understand risk? Are smokers irrational? Are smokers under or over-informed? Should we regulate their... All these questions that you've sort of asked and we could go right to smoking. Viscusi surveyed smokers and he asked them, how much do you think the life expectancy of the average smoker, and he specified it as I'm remembering sort of a pack a day or something. I mean, some average amount of smoking for smokers. He said, how much is your life expectancy reduced on average given the data we have in the United States? The average answer amongst smokers was like 20 years. And in the data, the actual result is somewhere in the order of four to six years if I'm remembering correctly. A fairly large difference. So we concluded smokers seem to be well-informed and they, if anything, overestimate the risk of premature death and they continue to smoke. Which means smoking must be amazing to you. I mean, that implies if you took their preferences into account, if you think it's more dangerous than it is on average and you're paying, you know, maybe you're paying New York City prices for cigarettes, so $15 a pack, then smoking must be incredible to you. Unless you're mired in like runaway loss aversion. You mean just you don't want to lose them? You don't want to lose them where you think, you know, like it's going to be terrible if I stop this. Not that it's amazing that I do this, but that, you know, the pain of quitting is going to be extraordinary or, you know, I'm all of whatever the effects nicotine has. There's evidence that like, so nicotine is a cognitive enhancer but that that cognitive enhancement wears off pretty quick in the sense that like the cognitive boost you get from it over time, you're really just operating at normal level, but if you don't have the nicotine, you operate at way below normal level, so maybe the awareness of that. So this would be hyperbolic discounting. Peter made a face, by the way. No, I just have to think. They're addicted, right? I mean, what would Richard Thaler say? I mean, do you think about the smoking argument of Viscusi? That's a good question. I don't think. Or what would be the general behavioral critique of that? Jonathan Gruber. We did a two-part series. The American, the ACA, healthcare designer guy. Jonathan Gruber, healthcare economist at MIT and Kip Viscusi debated in the pages of regulation some 10, 11, 12 years ago. I'd have to go look it up. On this issue, Gruber came up with the term internality, not externality. See, Viscusi went on to argue that smokers seem to know the risks and still behave the way they do. And thus, and then he went on, is there an externality? Do smokers cost the rest of society money? And he concluded, no, because they do die sooner. They don't collect social security to the extent that healthy people do. And thus, the taxes they pay over their lifetime, net of the benefits they receive, in effects, he argued that smokers subsidize non-smokers in the American political economy, which is most listeners of this may find that incredible, but that's a pretty agreed upon, well-accepted result from Viscusi. So then Gruber went on to say, so Viscusi knocks out the externality discussion. He then invented the term internality for the, a fancy word for, you're messing up, right, in the way that you and Aaron are asking me, which is you can't possibly want to smoke, because if you knew how bad it would be when you were old, you would never do this when you were young, is the nature of his argument. And he came up with a dollar a cigarette, was the true cost to a person, him or herself, of smoking when they're young, given what they'll experience when they're old. So I will put the site on with this podcast. Yeah, we'll put it in the show notes, yeah. Then Tom Fiery, the managing editor of Regulation who has a master's degree in philosophy, wrote, hmm, who's the more valid preference, the younger self or the older self? In other words, if discounting involves cost to you in the future, versus cost benefits to you in the present, what's the appropriate philosophical status of the older self versus the younger self if they could even talk to each other, which I guess is that sort of what you're asking me? I mean, to some extent. Or the older person simply, you know, I mean, if you're smoking during your youth and going to rock and roll shows and having lots of sex and all that, like maybe there are problems later, but you still get to look back on your youthful days and the memories of them. Like a total recall style argument that, you know, you're paying an upfront cost for memories that you're then going to be able to enjoy on going. Well, I mean, it just seems like a, hey, there's a big slippery slope here with young, old people will tell young people all the time and if we could go like Rick and Morty time machine kind of thing and say, okay, 70 year old Trevor, is it a come back and tell me I need to exercise and put sunscreen on and learn to play the cello. This is being recorded, correct? Exactly. So if we're in our whatever, 3,000th episode when we're that old, we'll go back and listen. But I mean, hey, I can learn to play the cello right now. That would probably give me great pleasure in the long way. Parents tell kids, we'll make you learn to piano lessons. Because you're going to love playing piano when you're older. The problem with that is that had 7 year old Trevor done all of those things instead of all of the things that 7 year old Trevor did, then nearly 40 year old Trevor would be totally lame compared to the current. Exactly. He goes back to my leave it to be, for example. I don't want to be lame. I'm fairly lame. No. But does it make sense to make this old young, I mean is that, and that goes to this other question to get back to this subject. Perfect. Yeah, well that's a good, but it goes to the other question is are we just having a war on revealed preference theory basically in this, in the behavioral econ critique? I'm not sure. Let me. Well, like it seems very difficult and this of course a lot of critiques have been offered to. Despite the, I mean when economists do math it's very precise. When we switch to economists using language to describing or me using language to describe what math is or isn't doing. We're switching to a different realm. And as I said earlier, economists in general, economists don't like language or well, traditional economists don't like language. They like math because math is precise, it is clear what is going on. When we try to use words to describe what it is the math means, you know, you ask me these questions and then there's this big long pause and I'm trying to figure out if my colleague, if other economists are listening to this would they agree or disagree with how I'm trying to describe this in language? And I'm worried that they'll disagree because I'm getting a little aspect of it wrong. I wouldn't worry about that because I think that we are trying to smuggle in what you've implied which is the politics of the matter. Any of Peter's errors in this hour of conversation are the fault of Trevor and me. Exactly. We put that disclaimer on but I think we're also trying to bring up these political, inherently political parts of this which if you're doing this sort of mathematical econ, you turn... I think if everyone were honest on both sides, that's lurking and I'll give you some quotes. I mean, Taylor was president of the AEA and had a presidential address in January it was published in the AER and I'll give you some quotes. This is rip roaring defense of behavioral economics. He basically tells neoclassical traditionalist it's over, you've lost get the F out of my way. No, I mean I read this and I talked to my colleague Jeff Myron and I said, wow this is a take note. This is not a professor with a pipe talking about his life's work. This is a we won you lost go away. I'll give you some quotes. So he argues there are critiques of these experiments. Remember I told you these results come out of experiments. The critique within neoclassical is that if you change the instructions in these experiments a little bit and you allow some learning and you don't have undergrads doing this in a one-shot kind of framework the anomalous results all go away. People don't get trapped in these cognitive errors. When asked in this presidential address, Taylor says what do I think of that argument? Answer. Learning takes place for little things but it doesn't for big things. We talked about big things in your life where you only get it to do it once or twice. There's no possibility of learning and for him it's buying houses and financial issues and retirement and savings because you only get to realize you didn't save enough once. So he emphasizes that high stakes once or twice in a lifetime people mess up a lot and that's what he's worried about and let me give you a quote. No one has ever gotten rich convincing people not to take out unwise mortgages. That was in his presidential address i.e. the OA financial crisis and then the mortgage. I mean that's his one sentence discussion of attributing everything that happened not to any of the nuance things that professors are usually famous for but basically people screwed up. With all the evidence we need to stop people from screwing up because firms get rich when people screw up is the That's a very anti-market attitude to say the least. I could get rich off of that. I started to read Schiller and Akerlof's book The Fools, Fishing for Fools which is just completely anti-market in every way. I was going to read it and then I was going to review it for regulation and I realized oh my goodness they are On the warpath. On the warpath. And I thought of kind of sloppy disingenuous way that it wasn't keeping it all with what I thought of Schiller's work other than this and his columns in the New York Times which I always find to be interesting and thoughtful. This book was a kind of left of center rant in the way that some of the stuff is right of center rant. I understand what you mean. Nobody's well served by either of these things in my view but I was again taken aback by how when outside of the journals when allowed to show the colors my goodness they I was sad to see that some of my colleagues' views of left of center economics seemed to be confirmed that they weren't in it for this elegant theory of behavior that I was I've been describing. Rather people mess up firms make them mess up they need help and government's going to give it to them. It's highly paternalistic and their attitude toward people seems to be pretty insulting. Well this makes me think of so I a few months ago attended a Liberty Fund symposium on Sunstein and Thaler and we read Nudge and then a bunch of academic responses to it and one of the story when things we discussed there was this story that Thaler tells of a party in I think it's told in Nudge where he would have students over for dinner and he would set out a bowl of mixed nuts ahead of time and then it was like he would notice people didn't eat much dinner because they filled up on nuts and so he saw this as this is an error these people you know they're here for dinner and they're like irrationally eating the nuts and so he he took away the nuts he just like he put them out for some period of time and then just kind of snatched them back from his dinner guests and then he and Sunstein present this as like and they were so happy they were like I couldn't control myself and so nice of you to take those nuts and the whole time we were in this like I'm thinking they were just being polite like they were all like what the hell is this guy doing why is he being a jerk you know but and then when you were like with them when Thaler answered them they're like well he's our professor and we're going to be nice we're not going to tell him he's being a jerk but you know like just this this notion of the paternalism so baked in like but they were thanking me for taking this food away from them that I had given them because they couldn't control themselves around it and that time is over yeah I mean I could just see him coming in and be like that's it guys this is for your benefit so I want to try to shove that so even though I think and admit that the last five minutes is actually underlying a lot of the discussion of this dispute I actually want to rise above that both their sides and try to stick to a kind of figure out what we can gain from this whether there's I mean should we listen to any of this and if so what and what should we do about it so there are some anomalies that I find troubling and I'll give you one so in Thaler's address he gives the following he said there was a closed end mutual fund with a sticker symbol CUBA it rose dramatically on 1214 14 the day that Obama announced normalization of Cuban relations even though this mutual fund owned no stocks related to Cuba nor could it because there are no Cuban stocks to own this financial anomaly persisted for a year in this in the market and so I mean I take things like that seriously that that it does appear that the prices of things do seem to vary from their fundamentals sometimes in financial markets and that can persist for a long time now I don't come to an easy therefore we should and then fill in the blank do have the SEC make sure something but I think that there are things out there while one is under saving and that I take seriously and to these kind of other financial anomalies where the literature is full of again closed end mutual funds whose components are well known and yet the aggregate that is different than the components and like can that be that makes no sense because again financial markets are priced by professionals that are smart that are etc etc etc but so that does concern me but is there anything different about the Cuba thing than say tulip Omenia no I mean it's just we've known that for a long time right I mean like that's like as we were talking before you started recording I it may be because I'm not really rooted in the neoclassical tradition but I just in more in the classical tradition for the economists that I read that that Thaler seems to be because we come from different intellectual traditions in that part of my libertarianism probably comes from that in my scholarly life and in my studies I have concluded in most circumstances and most times people get it right and therefore they should be left alone whereas you probably come from a tradition that says I don't care whether they get it right or not I just want people to be left alone regardless of the outcomes and libertarians are of both strains and those of us that are more utilitarian in our nature are get squeamish when there's evidence presented to us that ooh people mess up in certain circumstances and then we need to enter a utilitarian discussion of would fixing the problem if I can use that term for those people so mess up with the rights of everyone else who do fine without help I mean we can even talk about gun control as an aspect of we need to do things for a small set of people that kill a lot of other people for no reason but to actually implement that would so interfere in the lives of everybody who gets it right and if I use that term loosely that liberals may be for that calculus whereas we might not be and so the beauty of neoclassical I know you earlier said you said well we all know that it doesn't work and Coase isn't right but again as Aaron said the closer that the reality is to that the less scope there is for discussion of all these tradeoffs that put us in utilitarian land where who knows well we know where we'll come out and we know where they'll come out and then it's just a political fight over and over and over again rather than oh I can say the beauty of scientifically stating you don't need to worry at all ever is that it just stops utilitarian stops utilitarian discussion from even having to engage in that so then is behavioral economics as a school basically the practice of identifying through experiments or however else these cognitive biases or errors in thinking and then applying like figuring out how to address them within an economic framework or what's the is it simply an identification of problem school or is there like another half of it that's then it does something with those problems or revises theories to better address those problems it's not a revision of theory because you can't do calculate I mean all the elegant mathematics that I just described which is the heart of traditional neoclassical that goes out the window once people don't don't do these things in a mathematically elegant way but does the not doing those things is that something that you can bake back in like you just you're changing like your utility function curves because now we know that people discount in a different way then you have the possibility of many maximizing out I mean if the functions wiggle if I could use that word rather than having one peak then where then we're in multiple equilibria land and then the role for regulation or taxes or other human agency comes in so I guess let me let me ask the question different way then is these these inconsistencies from the neoclassical model are people consistent in their inconsistencies so is there a typical amount of hyperbolic discounting that we see or is there a typical and measurable amount that we could plug into the function of loss aversion or do people vary a lot in how far off of the neoclassical mainline they go they vary and as I said the results seem very fragile to the specific way the specific research design so the way the questions are asked and the choices that the experimental the experimental subjects are given lead to quite a very set of outcomes so mostly so far this research agenda has been bashing away at neoclassical with usually some policy therefore stuck on the end rather than in effect building up a new economics it's been so far bashing away at the old one because the old one was so entrenched and still is actually for purposes of most undergraduate teaching you're no one teaches behavioral to freshmen you're taught it as something you learn after the fact or it might be included as a little addendum but first you got to learn all the way we did it forever and then all of this is added on afterwards and depending on the department it might be added on earlier or later depending on the ethos of the place but but in some of those situations when the policy comes up when the policy prescriptions come out of this which is a lot what nudge is about I think some of it is trying to utilize and one of Aaron's questions which was you know if people are systematically not saving enough you had some I know you have some things in your notes about things that do you maybe on the policy side so if everyone's kind of generally not saving enough then we should and this is like we don't cast on scene and we should have the default that they're saving for example is some of the prescriptions that come out of this so the default architecture is the term of art and it is pitched at us I mean the good news is many many people now take Kato very seriously as an intellectually sincere place and thus Thaler and Sunstein and many other behavioral economists say even libertarians should not object to altering default as long as the choice to change is free and not transaction cost filled all you have to do is go down to human resources or you know whatever it is we're talking about you have an easy clear right that will be articulated to you that you can sign here and sign here and then be exempt from whatever it is we're nudging you into the quote even libertarians should find that unobjectionable and we so I could talk about interesting but I find it interesting that they think it's not objectionable because and this goes back to this political point when you're and just general human behavior point when you're asking what should people be doing you know saving not saving should they be for you know ensuring themselves for the planning for injury they should not be doing that you can have if you had a government that was into nudging people into socially beneficial relationships let me give you an example we recently had this big hub of I think it was a pin when someone wrote a paper that said that you know getting married having kids you know not early and later it is is all so all social indication so that that's a lot that's that's a that's a good thing to do in your life so then it becomes a question yeah that was a huge explosion that she was being racist and all these other things and and classist but let's say the government decided to do that to us and say well you know really you're making bad decisions by waiting so long to get married or you're making bad it so we're going to have a default of an opt you into a mate lottery exactly opt you in a mate lottery and this is good for social welfare we have all the numbers it's good for social welfare and then in all the or it's bad to have kids early so we're going to give everyone a pill that sterilizes you from the ages of 15 to 25 and you can opt out but it's opt in the beginning maximize the social welfare we have all the data is that the same argument and now it's really not libertarian it's it's analogous I would argue that remember I told you that we should suspend the extreme right and left fear versions of this discussion you have just put so I have thrown some things up there but eugenics did exist in this country so it has things like things where we controlling child rearing I'm not I tend to be calm and not worried about things and I guess if a big big avalanche were headed towards me I might not see it so it intellectually I can't ever see is going to what you describe but is it a version of this and the answer is I guess yes but it's a long way from 401k defaults at the workplace to unless you sign this form and have your parents and grandparents sign it you are married at 18 in an Amish ceremony or something I don't see that coming but some people on the traditional right would want that so what can we learn I think the concern to take it to less of an extreme than Trevor has is that so at its core the policy prescriptions of Sunstein and Thaler are people are behaving in ways that we don't think are good for them and we can bracket the question of whether that simply is imposing Sunstein and Thaler's tastes on other people who might not share those tastes so let's say they generally or they have evidence but there so what we're going to do is and Libertarians ought to accept this is simply raise the cost of doing the wrong thing by some amount so it used to be that doing the wrong thing was free because you were you had to take you had to pay a cost opt into the 401k in terms of the time it took to do that but now we're going to make it to the doing the wrong thing has the cost of opting out that first off that conceptually is simply exactly the same thing as any other prohibition like if I want to speed we have it's against the law to speed but but that simply means that they've raised the cost of speeding because on top you know my the default is not to pay the speeding not to have speeding tickets so now we've got speeding tickets and so I can kind of pay in and at the extreme end you know like they've raised the cost of murder by locking me in a cell is the is the potential cost I might have to pay for it but I think the other concern at the policymaking level is simply that once you are thinking that way so there might not be anything immediately wrong with saying hey HR departments you ought to be opt out instead of opt in but once you start thinking that way if people don't then respond in the right way or enough you're like well you know let's raise the cost a little more let's raise the cost a little more let's make it more burdensome to do the wrong thing and so you end up with a slippery slope soft paternalism becomes hard paternalism and it's certainly easier to go there if the behavior in question is engaged in by a minority of people and smoking in my adult lifetime has gone from more over 50% of adults to now in the 20% range depending on the state and I read in the Times today that New York City and New York State sorry New York State as past legislation that include e-cigarettes in all existing legislation about banning where cigarettes can be used so wherever traditional cigarettes could not be used that New York State law also now applies to e-cigarettes and it's like hmm how could so whereas and now in middle class discussions that I have in suburban dinner parties the kind of Kato answer of workplaces and whatever just to announce whatever they are and then you could choose to dine in places that do or don't you know allow whatever oh no we can't we have to have this has to be gone everywhere it's disgusting habit it's like okay I get that once 80% of the country believes one way and 20% does another then the 80% loses perspective and so your arguments are are it's look I mean the example against me which where I said don't worry is in my lifetime we've gone from smoking being what my parents did to smoking being the most reprehensible thing that any middle class family could ever do and if they went to a parent teacher conference and lit up the teachers would call the social workers and have their kids taken away I mean it's I can conceive of that so with Taylor and the Nobel Prize in economics what we've criticized a lot in this episode but what should we learn from it well libertarians believe choice is important and don't be lulled into thinking that slight alterations of the freedom of choice are slight that you got to be careful and slight can turn into a lot and the smoking example that we discussed at the end seems to be an example of that and probably I don't think of defending that right to be different enough because personally I don't smoke and haven't and I've watched as it's gone away in my lifetime and I'm glad it has because I used to go to collegiate basketball games and you couldn't see the court because of the smoke and now you can actually watch the game so that's a good thing but for the people who do like to smoke their life is now hell and I don't fully appreciate that enough and what they have to endure and scorn from the rest of us and the state thanks for listening this episode of free thoughts was produced by test terrible and Evan Banks to learn more visit us on the web at www.libertarianism.org