#830: Nick Kokonas and Richard Thaler, Nobel Prize Laureate — Realistic Economics, Avoiding The Winner’s Curse, Using Temptation Bundling, and Going Against the Establishment

Overview

This episode features Nobel laureate Richard H. Thaler, a pioneer in behavioral economics, alongside entrepreneur Nick Kokonas. The conversation explores the evolution of economic theory, the practical applications of behavioral insights, and how human psychology shapes decision-making in markets, businesses, and personal lives. They also discuss Thaler's new book, The Winner's Curse: Behavioral Economics Anomalies, Then and Now, which revisits and updates foundational ideas in the field.

Notable Quotes

- If you want people to do something, make it easy. — Richard H. Thaler, on the essence of nudging.

- Basically everybody you know, you think is dumb, but the people in your models are all brilliant. — Amos Tversky, as recounted by Thaler, critiquing traditional economic models.

- I built the whole company off that one concept. — Nick Kokonas, on leveraging the sunk cost fallacy to revolutionize restaurant reservations.

🧠 The Evolution of Behavioral Economics

- Richard H. Thaler explains how traditional economics assumes humans are rational, selfish, and optimal decision-makers, but behavioral economics challenges this by incorporating psychological insights.

- Early economic models prioritized mathematical rigor, often ignoring real-world human behavior. Thaler humorously suggests replacing maximize with meh to reflect how people actually make decisions.

- Behavioral economics emerged from questioning these assumptions, with foundational contributions from psychologists Daniel Kahneman and Amos Tversky.

🥜 Cashews, Loss Aversion, and Everyday Irrationality

- Thaler recounts his famous cashew story, where removing a bowl of nuts from a party led to gratitude, illustrating how people sometimes prefer fewer choices.

- Loss aversion—the tendency to value avoiding losses more than acquiring gains—was demonstrated in experiments like the Cornell coffee mug study, where sellers demanded twice as much as buyers were willing to pay.

- This principle explains phenomena like status quo bias and resistance to change, even in contexts like urban development or personal habits.

💡 Nudges and Choice Architecture

- Thaler's concept of nudging involves designing environments to make better decisions easier without restricting freedom. Examples include:

- Automatically enrolling employees in retirement plans, which increased participation rates from 50% to 90%.

- Painting lines on roads to reduce speeding by creating the illusion of acceleration.

- Nudges can be misused, as seen in casinos or gamified apps like Robinhood, which exploit psychological tendencies for profit.

🏆 The Winner's Curse and Decision-Making Biases

- The winner's curse describes how auction winners often overpay due to overestimating value. Thaler applied this to NFL draft picks, showing teams overvalue top picks despite their unpredictability.

- Mental accounting, another key bias, leads people to treat money differently based on its source, such as splurging on premium gas when fuel prices drop.

- Thaler emphasizes using biases to our advantage, like prepaying for commitments (e.g., gym memberships) to ensure follow-through.

🕊️ Danny Kahneman’s Final Decision

- Thaler shares a deeply personal story about Daniel Kahneman's choice to end his life through assisted suicide at 90, valuing control and cognitive clarity over prolonged decline.

- Kahneman’s decision reflects his own research on how people evaluate experiences based on their peak and end moments.