Advancing Behavioral Economics with Colin Camerer
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this week on the podcast. Finally, I get common camera in the studio to talk about neuroeconomics behaved, your finance and really all the fascinating things he's been doing a caltech for the past. G and therefore almost thirty years.

Is that about right? He's really an interesting guy, not just because he has the mathematical and behavioral finance background, but because he essentially asked the question, what's going on inside our brains when we make decisions? What's happening before we even have a degree of awareness of our own decisions. I just find what he does fascinating not just F M R eyes but eyes tracking and E G and government amic responses of the skin and just on and on all these different ways to measure um what's going on with your hand within both fascinating and terrifying because you you come to realize what you think is a decision you are making very often is a decision your brain is making with or without you. I found our conversation to be absolutely fascinating and I think you will also with no further, to do my sit down with cow tex talen camera.

Thanks for having me.

So i've been looking forward to having this conversation with you for a long time, not just because of my interest in behavioral finance, but because of the space you occupy in neuroeconomics will talk a little bit about that in a bit. But let's start with your background, which is kind of astonishing. You get a bachelor's and quantitate tive studies from john hopkins at seventeen, and then an MBA in finance and A P.

H. D. In decision theory from the university chicago at twenty one, that's a lot of school really quickly.

What were the career plans? Were you thinking academia? Were you thinking finance?

I was actually kind of not quite sure. So I got in. I went in chicago grads goal for PHD um in the booth now book school of business because I had learned a little bit about finance.

I took an independent study from car Christians of famous econometric john hopkins um when gene farmers book uh foundations of finance had just come out. In fact, I literally worked in the college bookstore part time. I remember unpacking the box that they have this formal book, and so he mely bought one. And, you know, I was going to do this independent study and read through. And by the way, he really is, some books are often called foundations of blank. And I really was, foundation is a right know IT was the IT was a summary in the ninety hundred and eighty six three very early days um and so carl Christian said, well, you should think about chicago that's so a powerhouse place for finance and so I started stunning finance there and past the predicant which is no which is no a small feet that's very selective and then um um I got interested in behavior science because finance was really obsessed with market efficiency and you know there was no behavior science, behavior finance in sight at that time but there are other folks .

at at chicago well um if I recall correctly, dick, there I was there early in behavior finance um or or did he end up there later?

Yeah he came later. He came later. So when I came on the light seventies um uh a lot of nobody is winners for their former Miller shows. I think Fisher black might have just left for MIT and when I came but IT was pre under Rachel fer and rubbish who did a lot of interesting be for finance and then dictates la came I think one hundred and ninety five ninety to six and you were .

called tech by right corner .

pass like ships in the night and um so I regret that sometimes not having just stayed and you been part of a new vanguard um well but you are you actually .

are part of a new vinger because the work do you do in neuroeconomics， which we're going to get into, especially fmr eyes and all the other things you've done more or less created that space. I mean, that's pretty foundational. Behavioral finance has a number of others, including dick on and dane's omy. Um so let's circle back to to the news economics and a little bit but I want to ask what LED you into decision making research? How did you find yourself taking the background you had um in in quantity studies and um your P H D N N B A and and go into decision making.

Um so some of IT was when I was in college john's because I I studied physics and math that was too abstract. A number theory was just too mind blowing, you know for me like I just not going to work at that level and I study psychology and that seemed like just kind of a list of things that happen to people but there is no unifying with. And then economics um which I really only took a little bit of a lot of fewer than my peers i'd later competed with. Grand was kind of in between, like the three little bears.

There was, I love that. And there was people, right? Physics didn't have people. Psychology didn't have math. Economics was kind of the right mix.

exactly. And I think a lot of a lot of social society just may feel that way in the people who like math less, stay in psychology. You're go to society or something where the the mathematical structure isn't really the canon and the foundation .

um so what LED you into game fear you up writing a book, behavioral game theory that was published or three, how does that relate to economics and decision making and investing?

Um so in graduate school, when I pivoted away from finance, there was a couple of psychologist hilly I hone in Robin hogarth, who were interested in judgement decision make. They were doing things very similar economic diversity. IT was sort of somewhat mathematical attempts to understand actually human decision making not really stylized, like the basic rule and optimization.

There are good things to know, but they were interested in deviations from those and what that might tell us and what the practical value. So that's what I ended up doing grade school game theory came a little bit later because um at chicago at that time in the late seventies, there was hardly any interest in game theory for peculiar reasons. They were know the economic world was dominated by Price theory supplying demand like gary becker know there was a lot going on.

Game theory just was not flourishing there. But my first job is as an assistant of the northwestern. And that happened to be, through just historical coincidence, a hot bit of great game theory.

Paul melt, grim is there? Bank hometown was there, Robert webber, who worked on lots of things on auction theory, uh, the barn, who is interesting, political economy and political systems as games. So William and holton went on to win nobel prizes and went to other places. So IT was sort of this incubator place that then, you know like a incubator like um hula packet er and things like that. People then went off to do other stuff ah and so I basically learned a game theory in my in my first shop, IT is a professor um and and that game very similar to behave our economics the the standard theory that everyone teaches in every introducing courses. People are rational and um make the best choice is given what they think others will do and they're correct guessing about others do like a bunch of people who play poker with each other you know every friday night for decades they kind of know what that tells are and but we were interested in what happens before you get to this kind of Edwards called nash ecliptic yum you know where everyone is guessed correctly, what everyone is going to do um and so to me there was a huge room for for understanding the psychology of strategic thinking, uh.

in game there so that really in to me I always found the traditional economic hoo economist of humans as rational, calculating, profit maximizing actors. Just complete contradiction of real life experience. How did you go from your initial interest in and behavior finance into neuroeconomics, where you're looking at the biological underpinning of what happens as people make decisions?

yes. So the newer economics, to me was sort of a natural extension of behavior economics, which was we're going to graph for any interesting data and different ways of thinking about humans outside of standard economics and capability and try to generate a kind of hybrid IT was almost like import export business. I want to import some psychology or dick il, or imported from condemn.

And what is this going to tell us about fairness and reference points and loss aversion? What have you? And new economics seem to me like just another thing to do.

That part of IT is my personality is kind of like intellective entrepreneurship. So I likes in doing different things. Now over the years, i've worked on lots of different methods and with different groups of people and conomo s was just a chance to do something even .

more um dramatic. And and tell us about your pattern on active learning decision engines. What on earth is that?

So active learning is the capture scientists term some LED DNA adaptive learning for basically like if I was going to try to figure out um how much you like risk like you are client financial advisors asking, you know, I might start by saying, well, here's important, is this too risky or not risky enough? And if you say that's not risky, if you know i'd rather go for more and then I would I would give you a Better one that's a little as little more risk in IT and in chemistry is cultivation.

You know you change the mixture of the chemicals. And so for each person, you're asking them a dynamic customize set of questions to get to the best answers as quickly as possible. And that's called active learning. So one of my colleagues at caltech that time Andrea's crowd was studying. He was a great scientists.

So they're always on the frontier of how to get the truth faster and subject to computational constraints like because sometimes it's answers the question of getting there, but can you do IT in real time so you don't have to wait half an hour? You note IT x as the next highly informative question um and so the pattern was just A A method that and race and another guy who networks like google, I believed Daniel alban and me had worked on to apply this in in a particular way and so was basically a software pattern. There was an I was a pattern and algorithm.

So so you're asking people questions um how do you know they're giving you honest answers and and I I asked that question for very specific reasons that will be event in a moment. How do you know the answers are legitimate?

okay. So in different economics, one of the the the main rules like a commandment, is we almost always pay people unless we can't like with children sometimes, or what have you, we almost always pay people money or something we know they value. Based on the decisions they made.

So when we do these kind of risk assessments, again, not with clients, but saying a simple experiment for modest to montes some money, twenty box, fifty box, what will do is we say at the end, we're going to pick one of the things you say you want IT, and we're going to actually play that for money. And you know, if you don't tell what you really want on, you're going to get stuck. So great .

incentive for them. To be somewhat honest, the reason I ask, we're recording this about two weeks before the twenty twenty four presidential election. I wrote something a month ago about why polling errors are really a behavioral al problem.

Because when you ask people, uh, who you onna vote for, what you really asking is not just their preference, but hey, you gonna get your lazy butt off the couch and go to library and vote. And I assumes, hey, there's an error of five, six, seven percent build into that. That's why polls are so bad.

Researching your work about hypothetical bias, I was shocked. The data that you came is when you ask people if they are going to vote, about seventy percent say they will. In reality, just forty five percent of them do. That's a massive error of twenty five percent. What value is there in polls when people have no idea what they are really gonna do?

yeah. So I mean, I think the best posters are know that. And so they try to phrase the question or gathered some other data.

But this is often called essence or yes bias. So you say people, are you playing to vote? Or you are playing to vote, you're going, are you onna not vote as is .

to and what happens if IT rains? What happens?

So you can often get the numbers that up to more than one hundred percent. yeah. Like to vote seventy percent.

Uh, I probably won't vote fifty five percent at hundred. Twenty five percent the math doesn't math um and you see IT IT particularly ly. One of things we study was product purchases. So when you show people new products to say, you know you think you be interested in this, you get way too many uses. And that's one reason new products fail is because somebody who is the product champing inside the firm like to get our products company looks at this polling date and says, C, C, you know give me money to roll this out in a test market. Um so one of things we have done is to try to see if didn't t were a few papers on this, but I don't feel like we exactly crack the not was to see if accommodate nation of what people look at, if you measure where their eyes are looking like how often they look back and fourth between a Price and a product and maybe brain signals can help us predict when they say i'm going to vote, are they are really .

going to vote or not. And neuroeconomics um as as as i've learned about IT through you is you're putting people in a function on M R I machine. You're asking them a seriously questions and you're identifying what parts of the brain .

are actually lighting up A T. So and by the way, if I is glamorous and fantastic, but there's lots of other methods that they are used as well. It's unnatural because people are in this tube. I is very loud.

You know if you want to stay phobic, if you want to study close to probe, you cannot you know because the close the robots won't go in there um but he does give you a picture of the whole brain. And in the in the case of the um we that we need some experiments where we show people to consumer good. And in one condition the first part of the experiment we say you don't have actually buy this business.

Tell us know if I was on sale for this Price like yes, no strong, yes, we guess. So we get a four point scale and then we surprised them and say, now we're going to show you some different products and these you're going to actually buy. So if you say yes and we choose that one out of this bin, you get IT, you have to buy IT.

We gave you some money and we're going to take the Price out and give you the the residual money and the product and you're going to leave here with this product or I think some of them we we have mailed to them and amazon and we actually had products there in a box. And so the question is what's going on on the brain when they are seriously thinking about buying something for real versus hypothetical, which is like a survey, right? Um and what we found was the tRicky artists to predict when people say yes, hypothetical, but um the brain is no, you know, can you can you see a brain?

Can you identify .

that a modestly well, right? And IT IT turns out the most. There's two interesting markers. One is there's a very old area in the brain, old evolutionary lizzard brain, yes, called the mid brain, which is actually where all of the dope on different neurons live.

And then and then connect to middle areas of the brain, called based a, gangly a that are kind of computing reward and value and then frontal cortex which is really putting together thinking cap on top of the monkey and um in the middle in there's a stronger signal um when they say yes and they actually do do yes hypothetical and is a yes real. There's a stronger signal then when they say yes hypothetical, no real. So it's almost like way upstream in the brain um if if if in that region they say yes, I want to buy hypothetic ticals. There's enough activity, they're gonna.

So my general sense of this and i'm curious as to how you what reality is my sense of IT is on the one hand, people are social animals and they want to be agreeable and say yes to people on on the other hand, we really don't know what the hell we will on, especially if you're talking about something six months from now.

Um I guess the tRicky part is how do you get people uh in M R I machines when you have a question for them? We can get people to pick up their phone to answer polls. How difficult is IT to get subjects to go through this process or these old mostly graduate and their labat's, you can do with everyone.

Some of them are undergraduates, although at caltech um they're very unusual human beings because they they're actually useful they're very useful laboratory reliable economics because the media math is t is eight hundred the the most mathematically skilled except her. That's the perfect score. Like exactly that's the perfect score.

Like harby mod M I T the other places that have similarly high hybrid local kids. Um so if like if they can't do something like a computation easily, nobody can. So it's very useful as establishing like baLance on rationality. You know that people we often get critics like, well, you ouldn't get bubbles. If people were smart enough, like, well, we have the smartest people and you get bubbles.

it's got less to do with the frontal core, tex and intelligence and everything with that olympic system and the lizer brain.

Yes exactly. So other things in the brain have other skills that critically expressed um but so know a lot of these mr studies we also use. We work pretty hard actually to get regular folks from the community who and who you know our different ages.

We don't really have a represented sample, although you could you could try to get pretty close sense of the california. And then we we we almost always never do a study this just take how to underground because we worry about the robustness across right. IT is true in the case of something like trying to get brain signals to brick when people actually buy products.

Um the other type of study we've used to involves eyestrain and things like that. And IT turns out that when when you ask people hypotheses ticals questions, would you buy there? You don't have to buy this, but would you they just don't look at the Price that much, right? And when they're really shopping, they really look at the Price.

So one way to tell whether people are being serious in expressing a genuine what i'm going to really do IT, is just something like how much time spent looking at the Price and looking back and forth. And there may be other like if if um if I could some our products company was trying to use F, R, I or other methods. There are others that are much more portable like E E G, and you can get a pair of glasses, you walk around and you know what records were your eyes looking so they there are things you can do outside of the confines es of the campus lab.

Um I think we just look for the things that are that are used easily seen biomarkers of this midi brain activity from I because we never been able to do that you know to scale and shopping mall or something quanto. Computers aren't like ordinary machines. They are built from the ground up on the physics of the very small, and by harney, the power of the quantum scale.

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So let's go through each of these. We know what fmri is, right? You're in a an MRI machine. E, E, G, N, S, C, R. Tell us what those do.

So each is elector and photography. And it's basically all .

the little things on you. You pace electrode .

s if you're ball like me, that's good precedence. You know if you're a supermodel with big puppy, texas beauty paging hair, then no good, no good.

So you're measuring electrical activity in the brain and you could really specify where IT is by, you know just trying too late with all the different leads.

You know, you can put sixteen to one hundred, twenty different. Like roads, the signals are very weak, but the advantage of V G is it's really fast. So if you want to study something like thinking fast and slow, like I show you a picture or person, you have a snapp reaction that they're scary. Or there someone you want to then ever ize too slow, because IT measures these blood flow signals that take like one or two seconds to show up.

But you like one, one or two seconds is .

too slow for, you know, a lot is going on in in the first two seconds where people thinking of a decision that's really interesting necessarily in a which mortgage to finance, refinance their .

housing or literally system one thanking fast, fast.

The term psychology social ecologist is also called thin slicing, which is the, and the thing slices on the order of meaning at a very aggregate, somewhat confident judgement is made within you ten seconds, thirty seconds. There's a big literary and in were interviewing about this that you know face to base interviewing, unless surely trained to have a comparable interview for different people. You know the first couple of minutes of the interview you are kind of make me up your mind um at least .

a lot of studies indicate .

that and and S C R is what so S C R skin conducted response um also called goon skin response. And so basically IT turns out when people are aroused uh in any any direction IT doesn't tell you good to bad IT just tells you you arousal. You have this detectable increase in sweating you can measure in the fingers.

So in in, in all these things, you're actually taking measurements, not asking people things in. And one of the quotes that caught my attention, since most of our brain activity goes on without our awareness of consciously, we cannot solely rely on individual accounts when analyzing their behavior. How important is the concept of the subconscious to to neuroeconomics um it's .

pretty important. So the saying we use sometimes you wanted ask the brain rather ask the person um and there's some there's some extreme ways in which that works. For example, if I show a face of somebody whose expressing fear, but only for a thirty eight seconds, which which just one movie frame, right? right? And then I show a mask.

When you mean another face right on top, that's neutral h or in another condition, I show a happy face, very enthusiastic. And then neutral mask, if you ask people, did you see a happy are fearful face? They say, like, I have no idea.

I didn't. I didn't see either one. But if you look at a mida activity, which is a region that's known to be rapidly detecting potential threats, including fear, uh, the immediate activity will respond to fear. Not um in thirty million seconds not um not happiness in the same way so the the brain knows IT just that IT doesn't get to the like the publish desk good consciousness .

so i'm so like that so don't ask the person as the brain how do you think of the different parts of the brain so obviously the amy della and in any of the is IT fair to say that part of the limbic system yes um so when you're talking about the publicist, what portion of the .

brain and we discussing um well in terms of sheer territory is probably not .

very much four brain, hind brain.

prefrontal cortex would be and and and um there's a lot of sensory projects and there's going on you know preconditions ous or like before we could say you know motion to something or use words to explain what's going on. I think it's it's it's genuine. Hard to pin down a number like is you know if I read for example, it's ninety percent subconscious and ten percent ranges.

I don't know that's right and a may vary across life cycle. Um so know we usually were looked into pin down a number. I think it's fair say that there's a lot of things are going on. We usually say implicitly, that or not, people aren't explicit aware of engh enough to make IT very interesting.

So whenever I hear people talk about know things happening within the brain that you're not aware of, I always think of the split brain experiments and tell us a little bit what is that reveal about our decision .

making process? Brain was a first explore by Roger sPerry. Caltech action in his student like asana, ga um you know made a big chunk of career uh over out of IT. And so this split brain patients means they don't have .

much communication between left and right hemisphere. The one I remember was uh IT was some seizure epilepsy. They found cutting that stop the seizures. But then your left brain, your right brain don't really communicate .

anymore exactly. So for example, so if you have a break down of corpus callosum, the right and left aren't communicating the despite the right brain, left brain. Most modern nursing just don't think there's that much specialization. There are some interesting kinds, but one kind that's pretty rugged is languages mostly in the left brain and regions called brokers area, verney's area. And we know that because, you know, when you have specialized damage in the area, you can see people start to talk differently like they can remember, they can't .

remember words. But the failure I remember reading about people who can speak, could write, but couldn't read, just all sorts of wanky things happen when when those two areas are down.

correct? exactly. So there, this is very localized, pretty well understood of phase as that have to do with local damage. So there's there's often out what we call plasticity, where another part of brain will take over.

And so you had some damage as a Young child, that might be that the haze is, you know another another part of the brain that takes over that function. But if this happens later in life, not so anyway. So languages, someone specialized the left region. So for example, if someone other and um the century systems are control atter, so the right side of the brain sees the left side of a pincher. Left sides.

He's the right side so suppose I show you on the left of a picture um a picture for friend of years and I asked the person, um if you see this friend of years, what my what just you might you do like you if you see a friend here as a was to a house or a shovel, what would you do and the person waves their hand and then you ask them, why did you wave your hand? Now the left side of the brain has to answer the question because that's the language area. But the left side doesn't know that the right side saw a friend and that's where they waved. So the left side make stuff .

up confabulated an an explanation for why their .

way exactly it's like the publishers very, very guilty, uh, person and are my goggles at the interpreter so the interpreter says, I don't really know why so i'll kind of make give a flaught ble answer and they'll say something like, oh, I saw somebody I knew walking by out the window outside um so that's an example of where we know what the brain saw and why the wave occurred. But the left part, the brain doesn't know that's .

that's really that's really fascinating. Let's stay with the idea of tracking eye movement. So you could do this with glasses, as you can do with this, this the computer, when you're tracking eye movement, asking people about, hey, would you purchase this product? How big of a tell is that when they look at the Price? And is this something they just kind of gLanced? Or is IT repeated an obvious?

They're focusing on the cause there. There are two interesting markers for. Number one, it's not that big of a tale. So if we try to predict whether you're going to actually buy somebody, we might get safe.

Forty two percent, right? And with the the eyebrows king data IT might get up to like fifty four, you know. So as academy s we think that kind of a modest effect size.

You're running a business and you wanted a two percent lift and purchase maybe a billion dollars, right? So but someone is where a little cautious as academics about, is this a big deal or not, whether some of these things the same in the world nudges and so, and sometimes a small, know what, a half percent increase, and get out the vote, if we could do that, you know, scientifically, may well decide in election, right? anyway.

So the lift is not that big, but the two tells are basically looking at the Price. And the other is refixed, which basically means not just looking once but going back and forth. You know it's it's the it's the rapid brain equivalent on a one or two second basis of, say, a couple who's shopping for a house, going to look at a second time. And I know the repeat .

of looking usually.

na, that's really .

interesting. Give you some examples of what the studies or the experiments look like when you're doing I tracking, what are you trying to what parts of the brain are you looking at as IT? Just the eye tracking is IT, is h by itself? Or can you combine this with other types of a of neuroeconomics?

yeah. So actually the eyes trackers we use, which are commercially made for science basically and sometimes for clinically a use, they use cameras to to look at the where the eyes looking, they sink that up with where on the computer screen you're looking um and so besides the location where the eyes are looking, you also measure pupil dilatation. And pupil dilatation turns out to be the eyes the winter to the soul.

So the the people's actually generate a lot of information, although it's it's crude. What the people dilation is telling you is about cogent difficulty. And I have a hard time thinking about this and arousal which again may be negative or positive.

It's like, so White pupil is your rose type pupil is your having time.

And so um I think if you train yourself and maybe depending on the the color of the eyes you might be able to tell like a poker player might be able to train themselves with a to notice people dilute tion. But just in case, that's why poker player is often wear glasses. Yeah, this on glasses, right?

Because the ideas, if you look at your charge, you have to asis you people dialed like and IT might be hard to see the naked eye, but the machines we use can definitely see that. That would be a big jump in a big tale. And so we're able to use people, data lation and I tracking to judge things like kind of difficulty.

A lot of the early studies actually were used in game theory because in game theory, the assumption is if I might want to see what my opponents pay off is in order to decide what they're going to do. And if you ask people, what are you looking at on this computer screen, there's a four by four matrix of numbers. And i'm trying to think of what you're going to do.

There's a lot to look at. And if you ask people for yourself for port, they're not going to tell you exactly what their eyes are during the whole time. They're probably looking at forty two different things, sometimes very quickly, sometimes they are going back and looking again and again and again. They just don't have conscious access to that process the way that the I tracking does.

So so that's really fascinating that speaking to the brain but not the person gives you a whole lot more insight into the decision making process. Speaking generally, what does this tell us about people as you know, rational profit um seeking actors in in the world of of finance and investing?

Well, I think it's useful to think about, say, Young native investors or they might beyond, but people who have less knowledge about the markets and people who have spent a lot more time thinking about best of many fundamental raining ten case um you know having years of trading experience because another important fact which we try to um keep track of and the economics is that a lot of decisions and structures people have to make are not things that were necessary evolved to be particular good at, but people are also extremely good at learning and able you know able to like collect memories and still things into um into knowledge. So let me turn to the concept Price bubbles, I think so useful.

And so we have a couple of one F M I study on prize bubbles, and we have some new stuff that includes skin conductor's measured to see if you know, can you to predict when I crash is coming from people's hands? We're reflecting nerves and IT looks like we can practically a little, but not great if you know that's a high mountain to climb. What we found in our first ever I study about bubbles was um people trade artificial asset.

So we know the value, the fundamental value, the asset which we never know in you know in natural markets and the Prices is completely what they agree upon. So typically what happens is the the fundamental value is a number that we control, uh, which happens to be be fourteen. And to the value acid comes from the fact that if you hold the end of a period of trading, you get a divided or you can invest currency in a risk free bonds.

And so the the trade off between the risk free earnings and the value the dividend establish, eclipsing Price is a very simple equation, sure. And typically, the Price starts around fourteen and goes up to maybe twenty or thirty and then crashes. And then and then in order to bring the experiments to a close, we have the trade for fifty periods or thirty periods. And at the end, they're able to cash the assets .

out at fourteen. So what would you pay for an asset that you'll get fourteen, four, correct, after a series of dividends.

thirty or fifty trading period and and put yourself in mind somebody who thirty one, the Price is sixty. And you you kind of know that in period fifty ninety periods notes going to be fourteen. So well, unless you think it's gonna up to seventy five, right? right? So it's too it's true fact.

That's very help for me. So what we found from the brain was that there is two interesting signals. So were the more interesting one. The other one is little more obvious. The interesting signal is people who sold uh, before the bubble crash, which is the smart thing to do and again, the bubka is not announced and something you only see a stout and your mirror.

right? Same in natural market is also just like in mature markets.

right? Bubbles are only shown in handset gene formers. A lot about this is one reason you skeptical that that we should even talk about bubbles. You as a scientific okay.

I I think he goes too far with that, but anyway .

but yeah I mean, so IT turns out the people who are more like going to sell when the Prices is sixty and we know it's gonna crash, but we're not sure when um have heightened activity and insular cortex um which is another region this involved in emotion and into reception. So into reception means knowing .

what's going on on the inside of your own body, like I self awareness less actually.

So perception is the outside world. Into reception is the brains, like the bodies ambassador to the brain. You are knowing of a nervous or and it's often um activated by particular by negative emotions.

So if you have see something disgusting insula, if you if you choker person a little bit or you know you cut off the active, do not it's dangerous, but just to make them comfortable insula financial certainty insula. And so we think of this is insula is the early warning signal that there is going to be a crash. And the other interesting brain region is, is nuclear. A commons, which is basically a reward center, was called straight part of bazo ganglia in the very center of the brain. And that's active in the people who are fueling the bubble, like when the bubbles, you know, forming, the people have the highest nuclear to come as activity by the most.

So you you have a run of traders participating in this. And you could tell by the brain activity who's contributing to the bubble and who's saying, this is getting crazy. I want to take my chips off the tax.

now. Number one, we can tell with exquisite precision, you can sort of see these groups, and we're only looking at this exposed. So I think it's it's conceivable by chAllenging to do this in real time, you know.

So there's you watching the market and fold. You're doing real time for my measure that can be done. And and it's like, okay, trader, seven, nine and eleven, you know, we think they're probably going to sell.

There are the skeptics there, the balls and fourteen, fifteen and twenty one, their nucleic comment activity seems they're really all in. They're going to be forming the bubble and soon. And one, I mean, were a few steps away from me going to do IT. But we see this is what we call proof of concept, like IT can be done IT may take a few million dollars.

ten donors are listening. But IT makes perfect sense that that is possible. Different parts of the brain responding to different inputs. And it's consistent with what we've observed amongst just various investors and traders. There are people with, as the you know, in the latter stages of a bull market, they think it's just gona keep going forever and they pile in. And the flip side of that, there are people, uh, the famous a rational zob speech by alon Green span in nineteen and ninety six, you still had a ton of of gains until the march two thousand top. So some people, I am just curious what what drives that now that you know what to look for and how to measure IT in traders in real time, what do you think is the underlying drivers of whether a person is gonna be participant ing in one tribe or the other?

Uh that's a great question. I i'll say a little tiny bit more about that. You mention the terminate rational humans, which means coin as I recall by bob shiller .

in his book about I think IT was from the rational zuberi speech. Shiller may have helped Greenspan with that speech, if i'm remembering, because I ve been I ve .

seen both whether .

with chillers .

free Green, you know, wouldn't not sure exactly who said at first, but still a there was a kind of meeting of the minds that this was a useful. And in fact, when we didn't, we use the phrase in our paper, but we didn't put IT in the title, would just seemed a little too unscientific. It's OK for U.

S. A. Today or something, right? This is the proceedings of the national economy of sciences you and but we think of this nuclear incomes activity is that that's the measure of irrational exclusion and the irrational part is, you know what it's too high. You're going to have paying a high Price uh, for something that crashes fast. So the rational was really in there literally but ah and and also we when I present this in academy summer and later today and reading some caltech people, we talk about this famous um saying from more in buff and I believe when people afraid be greedy, when people grey be afraid and the this brain areas like inside is similar to fear and greed and nuclear comments and it's about us clues you're gonna to brain area is matching what warn of IT had to say which was such .

wise thought so so you really kind answer the question I was about to ask which is why has behavior economics been so successful describing decision making where traditional economics seems to have faltered? But what you're really saying is we don't know what's going on in our brain when we're making decisions as individuals. And when you look underneath the hood IT turns out there is a lot more things happening. Then at least .

classical economics seems to imply this isn't somebody carefull research. But but I think it's a good speculation periodists, which is like when I was going in chicago on the late seventies, all of my graduates friends were also kind of critics of no be like they have economics at that time. Oh really oh yeah, I was you know, people say things like, I think you know where you might be ruining your career because you switched out of finance.

And well, when you know was was there was a series of of critical questions, which were, but if people make all these mistakes, couldn't someone profit from you know orbital or selling them crappy goods like, well, simply that may happen, you know or if people make these mistakes, don't think you learn over time not to make mistakes, that may also happen. And maybe that there's a sucker orna every minute, but there's A A generational process. And markets are always filled with some combination of new investors or you know sovereign uns of people who aren't very savy about markets or something like that.

So early in the history behave economics there was really a lot of uh hostility about IT. Um and then we gradually one thing about chicago and and the economic profession in general is data doing arguments. So ideology will often persist, like for a gene pharma for example. He's he'll always be sceptical about behave for finance um for his own reasons and and you know the ideas but um but eventually data with arguments and you know there were just so many anomalies in ways in which investors were making mistakes and and IT wasn't just small investors you know who are. Refinancing their mortgage mistakenly was some of these implicit things may be very big like a venture capitalist joked about how well, you know, when I I think of Marks october in a hoody and that kind of my template for a good founder to tens of millions of dollars. That's not a sophisticated that's some omics omics.

I recall reading one of the papers, bob shell route was looking at diving and yield and saying, if if markets are fully pricing in all data, why does this division yield swing around so much? That should be much more consistent than this, but apparently it's not. I I was very used by summer and suller being awarded the novell together. It's almost as if the committee said, look, markets are kind of efficient and except when they go crazy.

youtube guys work IT out. Yes, yeah yeah was quite a um IT was kind of a charming and and I think sensible award for that reason and the you the journalist said like well but is there you know one person says a is true and says a is not always true. Like how could you give that award? The answers they both made made a lot of progress, you know, in in different ways.

Quanta computers aren't like ordinary machines. They are built from the ground up on the physics of the very small. And by harnessing the power of the quantum scale, we can now see and understand the world down at the level of individual items and molecules.

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Behind the bright lights and a gentleman of prosper is an equally exciting world of negotiations and deal making. That's what we cover each week podcast the deal i'm alica reads, former baseball player turned business executive, and i'm jacon Kelly, chief correspondent for blub originals. Over the next couple months, we will hear from all stars like Billy James king.

What should I learn? What should I do? I said, learn the business. Gay Williams, you're to ask IT, but how do you become the principal?

All rebel. We're gonna the league of digital. That's why you're going to invest dinner. Freeman, I definitely am competitive. David rubinstein, people don't come up to be in the street and say, let's talk about this private deal you did recently.

I have the team and so many more listen to the deal on apple podcast, spotify or wherever you get your podcast. You can also tune into the video campaign on bloomberg original als and on bloomberg TV. Let's talk about some of the other ways that we can look inside. We looking at things like a journey or doped or any of the sort of hormones that seem to affect our behavior when when we're trying to analyze decision making.

Yeah so actually um that's a very good question, barry. The um economics uses a lot of different methods. The f mari is sort of like you know the movie star in a family with four sisters, the glamorous one that even pays attention to but is actually hymnals and then but all the other siblings are you kind of contributing in some interesting way? So farmer .

ology is something people really interesting .

specifically for logy drugs. But but some of those, for example, l dopa will actually um rap up dopa mean levels. And you can see if some interesting things.

L dopa is a drug you can consume order .

to raise your dopa minister. So parkinson's patients have a um degradation of dopamine and so he kind of ramp them up to Normal levels. Although was often used in treatment.

Pharmacology is one. What are some of the other four systems?

So we do look at newer transmittals like oxytocin. Gani vesle present is one that we've studied.

Actos sounds a lot like xi cotton any up? no.

okay. So xy is um is sometimes called us like an affiliated ation hormone. So for example, if you get a really pleasure assays, you might feel a surgeon um when my wife was um giving birth, they often to induce labor, they often give somebody in theory oxygen.

And oxygen is also produced after birth. And when the mom is first killing the baby and probably the dad, although maybe less, you know, it's this very pleasant thing that makes you want to like hug somebody and feel feel affiloir affiliated as the sarabia term. So there's a bunch of studies on oxytocin, the western, that improve trust.

But there's a cautionary tale, which is, wait me in. Some colleagues went back and look to those carefully in um IT is seems that giving people artificial, giving people oxidation for a modest dose and then seeing what happens in an hour later, IT improves trust a little bit but it's it's scientific ally. Very, very tRicky. And some of the standard results, if you do the same exact experiment over again, you just don't know to get the same result. So we don't know how dirty oxides is.

What are some of the other chemicals you mention?

Neuro when we studied, i'll say a little bits organic Operation. So that's another hormone um which is similar toxic tom, and that when when animals are our bonding and groups this organic so present sort of of you will get a surge IT chose that.

So when you say bonding in group, i'm thinking of a wolf pack or a ha pack where yes, they are CoOperative species that work together and there are chemicals that contribute to that. Is that is that always suggesting so? So part of me wants to say we're just meat sex Operating a obliviously to whats going on underneath our skin where we think it's free will. But IT sounds like there's a lot of things happening below the surface that's really .

influencing our decision making. So you breathing, breathing is so automatic. And when we stop and do sort of breath work and try to think about IT like the maybe seals might have a reading exercise to calm down before a terrifying thing they have to take, IT actually takes a lot of executive function to think about breathing because we never .

have to because it's automated.

because it's so automated. So the fact is actually grabs a lot of attention is because the automation is is we've completely flip back in the option situation. Let me tell you, organize va press and study media. So there's a game, similar prison lama, but not the same, called the staht game. And the idea is two people decide to shop in the morning and hunt for a stag is a very old fashion name from the john jack usual in the sixteen hundred.

Talking about .

a small, the point of the tag is, is so big that no one person can catch themselves. One person has the spot and the other shoot, or something like that, or they they can not show up in the morning at the appointed spot and just hunt for rabbits on their own. And so this structure of the game, when we do IT with money or reward with with animals, is you get one point, if you just go for rabbit, if you both hunt for stag, you get two.

If you hand for stag, but if you shop by yourself, prepare down for stag, you can't catch and you get zero. And so that choosing a rabbit is choosing one and not helping your friend both showing a prostate is Better for the both them, but they have to somehow coordinate that activity. And so what we found was when you give people this A V P, and it's a cross of a design, which means some time as they get A V P and some time as they get a processor, because there's A A well implacable effect, weare if they think maybe they got the A D P, IT might subconsciously affect the behavior.

So we always control for the, we ve actually like a drug trials on the same thing, very routine. When you give them A V P, there are more like you to choose stag, which is the socially risky and beneficial thing. It's like IT generates this willingness to join the group in a way that's going to help everybody if another people join um and the other thing that was really nice in this paper was um we we also used def M I.

So we had two groups of people with administrative p one group but scan and one was not scan which is just to see like to replicate do you get the same behavioral thing if they are not a bump on bump in the? And in this scanner, you see activity global palus, which is known to be is a small region. It's not one of the more familiar areas know that show up a lots over over economics like bazo, gangmasters, la, P, F, C. But you do the activity global palus when people um under A V P are choosing stag. So IT looks like the the A V P is sort of promoting the stand choice.

But when we see people working CoOperatively, you see a similar neurotransmitter as you do in .

the past and it's caught, right? So these are a group of people and sometimes they just get this drug um and he makes them want to CoOperate and IT makes them want to co Operate in a in a way that with this risk p of benefits to the group. But we sometimes think of IT IT overcomes the inhibition to be well, I don't know if you're going to choose stag and I don't if you going to show up well.

the prison of cilette a is you're always Better off from the other person under the bus.

This is not that because here's .

the other person .

helps out you want to help about to is the best response. So it's different structurally then the Price.

So I keep coming back of every time I read I knew anything about behaving finance neuk anything about this. I can help but come back to the conclusion that all of our evolutionary biology has LED us to a state where we're so well adapted to um adJusting to changes in the natural world. And all of those things that have developed over the millennia really don't help us in the modern world of anything.

It's problem. Certainly in investing. IT seems to be pretty problematic.

Yeah, exactly. In fact, that's called the evolutionary .

y mismatch.

I bothers. Oh, really, I didn't know I had a name. Yes.

exactly. So tell us about so. So this mismatch is simply we evolve to adapt on the savana, and that doesn't help us figure out which bonds .

to buy is that that people another way to think of IT is, is institutions, sometimes its families, as political advertisement and might be fine print about is in, in, in a financial advertisement. Those are all things that are kind of tricking or or exploiting vulnerabilities in our basic ancestor biology. Now again, people are smart too.

So there is adaptation and kind of plasticity. So over a lifetime you might or or maybe in one N, B A course, or right, even possibly a high school course, you might learn some principles of basic finance that will really help you avoid the mistakes. You know, like compound interest really compounds quickly. The cave man brain thinks compound and quickly. If I have no idea what that means, my brain can't imagine that if I invested in the S N P.

A thousand dollars years ago. T the brain is mostly .

linearized things, the thermal er, or they are dramatically non the year like pandemic, a compound interests. We can learn to overcome IT, but we need these kind of external tools, almost like exoskeleton, you know, whether it's education, advisers and someone.

So let's talk a bit about risk aversion, which has been this behavioral al finance concept. People dislike losses twice as much as they enjoy gains. What is the world of neues conomo say about loss aversion? I've seen a few mathematicians claim, oh, it's just day's statistical lono, aly. I remain unconvinced that that's the case.

yes. So actually I know a lot about lots of person. We publish a man analysts last year about there's .

a reason i'm asking the question.

It's not out of that feel you get the right place. So the men analysis, we looted hundreds of study basic, every study we could find, you know, using informatics. And nowadays you can really do this like a industrial fishing.

You know, you throw this net out and you get four thousand studies, and you went away down to the ones that are really just all trying to measure the same thing. So you can add them up. There were something like three hundred and seven estimates of lambda, which is the greek assemble. That means the racial of the director of lost again.

And as you mention, two is sort of we think it's a little bit smaller like one point seven, but you is capable yeah comparable and it's not one which which would be the case in which you're not stingy shing a loss and again at all, you know they're just like one scale. Um so the evidence is pretty good. Um some other fun facts about loss version which is you might think the loss aversion is is some kind of handicap, but actually we publish a paper with two people who have brain damage in bilateral and mcdowell A H which means neither party mcdowell can composition for the other. There's a very usual disease that comes from a 2 bag veto disease and they basically the immediate is kind of like calcified so it's is there but it's like deep .

is so you work you these people lose the ability to have these emotional responses stimulus .

um and a lot has been known about because they've been studied。 One of my colleagues for our fit ops studied um several of them for years. And they you know they come back every so often into a different kind of task.

And let me guess, they are pretty good traders.

Generally there in disability because the immediate damages enough to make they basically take too much risk in a lot of areas of life.

Um so so they're risk embracing.

not risk averse. So the idea that that risk and fear they are to kind of protect you IT applies to them like when you remove that, like one of the patients, sm makes a lot of poor choices.

Give us examples.

Well, this example I recall, I hope i'm not getting that my memory is not managing too bad is SHE went on some kind of a date and the person was very sexually aggressive and he ended up, okay. And then somebody said, what would you want to go out with that person again? He said, yeah, yeah.

Was he was fine. You know, he just didn't have this trauma. The immigrant was not processing.

This is really bad. Run away. Run away. Avoid, avoid.

So so how does this manifest itself amongst investors making risk decisions if their ability to process threats, process fear is in present? What happens with those sort of decision?

Well, so for these two patients with a meal damage, they have no lower version.

none whatsoever. So aggressive traders and investors. Well.

so the way we measures, we give them these financial simple financial risks. Like you could win most people if you say you could win ten um but you might lose eight or might lose seven, there are kind of just in different because .

a loss of seven on a billion dollars i'd love to do ah yeah .

but um but these two so damaged they make no morosely. Sm so that's partly reminder that um be careful what you wish for right um like .

you don't want to react emotionally to everything, right? The reason it's so hard to do IT work, and buffett says, is when everybody's clAmbering to buy, you get most people get caught up in that enthusiasm where where social primates and when the group is screaming bye, bye, bye is very hard to go to the other direction. And then at the bottom, when everybody is selling, the fear .

is possible .

very much. You lose that risk aversion. Do you have the ability to just go opposite the crowd because .

you don't care? IT IT could be, I know um I have a feeling successful traders is it's not that they're not loss of verse, but they manage to inhibited somehow or uh, we we did study in this, but I don't think the details are all the interesting for your readers but or they're able to do what we call bracketing or kind of portfolio of you, which is to say you have bad days and good days. And at the end, it's my you know it's my P N.

L. At the end of month or at the end of the year, at the of the quarter and managed to cut a shrug off a loss. Now I don't think that's that easy to do if you have intact to make, right? So it's it's almost IT leads to another interesting topic, which we've studied a little bit called emotion regulation, which is the fact that a lot of our emotions are sort of involuntary.

You know, if there's a loud boom, uni are both gonna this fear reaction, you know hair stand up with freeze um but you can also learn to to regulate emotions. I mean, kids are learning that when they learn to, you know not be too afraid on the first day of school um as people get older, they learn to regulate emotions. Um it's a pretty important skill.

And so I think successful trading is probably some kind of cocktail of either a little less natural loss aversion but not too little, right? Because you don't want to like going crazy, you do not want them to be immune loss just like you don't want your hand to be in in depine, right because you going to lean on a on a hot um stopped one day and I notice that your hand is on fire, right? Uh so you you a good trade or probably has a little less natural oso version and then a really good ability to emotionally regulate, you know when too much losses is acceptable or getting you into trouble.

So so the emotional regulation um aspect is really interesting. I'm going to push you a little outside of your your Normal, I think of your Normal research area. One of the interesting comments that have come up when discussing who's a great fun manager, who's a great trader, who who these folks that have put together these really impressive track records, a surprising number of neurotypical al folks. So yeah, reason I ask you this is IT seems like not only is there a little bit of ability to manage the emotions, but there's that ability to step outside of the crowd and say, I don't care with the rest of the prime mates are doing here on in march two thousand and nine stocks look at really attractive and I want to be a buyer even though everybody else is selling. Is there an aspect of that to those .

sorts of A A fantastic topic, in fact, that is close to something? Oh, that is all right, we're been thinking about. So one thing is I I was going to mention from before. So one of the striking things, I was working on an economics book, and I was reading a lot of papers on social conformity, IT, turns out that almost every study finds the typical parallel is something very stylized and simple.

Like, you know, you see a face, and three other people see the same face, and you asked to say, is this person friendly or unfriendly? And in the conformity case, the other three people say friendly and some other subject, the other three say unfriendly. And people, people there seems to be reward activity when you conform to the group, right? And these are not we're not super stress testing.

So we're not quite to something like, you know, you're the depth of a crash, two thousand eight crash and everyone's selling. And you know especially it's hard for us to generate that dramatic and event in the lab. But but even for these mild effects and a lot of these people, if you asked them, do you follow the crowd there was in, not, not, I gonna go my own way, like of a bunch of people said somewhere as friendly. And you weren't sure if you think there and friendly, would you disagree? Yeah, yeah, I wouldn't ther me but study after study, the study shows there's generally reward value from conformity, which is is actually just the the modern evidence for what you're talking about, which is the part of .

being a social al evolution CoOperation has been very successful for us. I start to fight the crowd.

IT did his job a exactly. So I thought that was quite strike and again, if you if you wanted to study anti thora arian personality IT might be a way to get into that the people who almost pathologically but let's get back to your point about um neurotypical people. So um we're actually working on beginning the a study on autism.

So its autism is called a spector disorder, which basically means it's not like you have that you don't like schizophrenia. A so statistically, IT doesn't look like two humps. You have a little.

you can have some, you can have more, you can have a lot.

Correct correct. And there's often differences of symptoms. Extreme autism often involves katona, severe language deficits and heavy.

And so when people often think about aspergers syndrome, which is something has got high functioning artis right, which is basically you just socially awkward and hard to understand what people do. But um a lot of these pathologies or disorders, I should say pathologies not the right word. A lot of these disorders are accompanying by some enhancement.

So for example, aspergers patients have already have perfect pitch for a sound. They are Better ignoring some costs, which is a classic bare economics, right? You I spent so much on this dessert, know I came in new york, is eighteen dollars for some flower generalist page. I have to finish IT the artist.

the money spent.

whether you get the out, the idea and there .

is a slight, i'm going to get you a of the people who I know in this fields who have put up impressive numbers and have either stated there on the spectrum or it's kind of obvious.

Hey, yeah, yeah, yeah. You look at film, video or written statements, and you machine, learn them and say, this person talks or looks.

I'll ask on twitter, yeah who's on the autism spectrum in the world defined and and has a good track record. But I have like two dozen names in .

my head i'll give you name I unfortunate just died not too longer charger so truly a few times, right? And doesn't .

strike me as a very spectra well.

But what one marker of autism is like poor conversational turn taking, you know. And so when I the times I met really just twice, and if you see him at the the birch athor, I mean his mazing, I think he was like the mark twin of finance for sure, you know, because he was really with and but also there's always like a really deep psychological inside in there.

You know, I wasn't just funny, but like funny and true and often something other people didn't want to say. But when I met him, he was just like a free train. And so you have interacted, and I realized the goals to not have a conversation. You just gna move the train and different.

just nudge him .

in different reactions reoffered. Sn.

I never realized that about him.

so you're saying that's my non clinical. I am not a transition, but this car part of IT is reflected in why he was successfully. You know, he he saw himself as an average person who wasn't making the dumb mistakes other people make. But some of those domestic people make you know he may have not made them because he doesn't get caught up social conform or because because he is very focused on he is good metal cognition, like if I don't I don't buy a company or understand, right, you know that's probably .

a good rag. So i'm working on a new book. Among most done and monger is a one of the two people I dedicate the book to.

And the quote of is that very much informs the the theme of the book is someone once asked him, was berk sher successful because human and warn are so much smarter than everybody else? And his response was, it's not that was smarter than everybody else. We were just less stupid, which is such an insightful observation.

Hey, just fewer, charlie s make less on for terrors and you'll do Better in tennis or investing. Then the guy trying to slam the most people are not going to get IT in um hima monger had the the two charleys had the same belief system. Just be less stupid. It's really fascinating. And so when you ve interviewed monger, what the takeaway is you've had from your conversations with him?

Um one thing I remember was so we went and looked at our image center.

Um did you ever get .

him in the machine? No, I wish. I wish we had. He may have gone for two you know is a pretty interesting person and I think .

very open minds .

and took crazy stuff right typically curious well in um financial if he had gone to cultured for a while. So he was um we're got to run in every so well of course always people like that always run to them to give money and right at least .

show up and give a speak .

something yeah talk and so um so we showed in the brain scanner he had a really interesting thought which I didn't quite appreciate to later. What was um he said what you guys should be doing is if you're trying to change behavior, like to say you're trying to get somebody to vote or to um wear mask or you quit smoking obo it's the really hard stuff you know wait he said what you should really do is rather than doing one little thing, you should go for a lot of a user you know like basically try to add in six different things to get the biggest ability to get people to quit smoking that say sense and so he was thinking as a practitioner, like I want, I wanted know what's what's going to work as scientists were often thinking peace meal. Like if we put six different things and and IT works, we don't know which of the six is the active ingredient.

but this could be a different combination .

for each different. Exactly, exactly. But and so the reason was thinking about that was nowadays of one of the fall us, or one of the products, I should say, from follows different in the wrong word.

One of the products from the economics was this idea of a nudge that often, because people are often sensitive to very subbed things like opt in versus up. Now, right? You know, there may be a low cost, light touch way to change behavior a little bit.

Well, just look at the four one k making the fault. Go to h just uh some specific investment as opposed to IT just sits there in cash uh for for god knows how long um seems to have really had a big imp.

Yes, and that was definitely the poster child for this simplest nudge and we can to understand the psychology of IT. Anyway, so so now what a lot of people are thinking about, not just as a got this lot of bluster idea of mongers, which is if we want to get people to get out the vote, rather than tries six different things, we should be trying like six combinations of three things. Statistically, it's messy because you you're never really end up knowing which of those is the active ingredient, but to just get results, that's useful information, this useful map. So the nudge enterprise, which i've been connected to a little bit, is moving some in that direction that monger mentioned many years ago.

Uh, really interesting. Are right? I only have you for a limit out of time. So let me jump to my favorite questions that I ask all of my guest, starting with, what are you watching or listening to these days? Is what's keeping you entertained.

So Kitty mulkey s podcast choice ology is one that i've been on that I think is quite good. It's basically the the economics podcast. They're quite a few other the poaches a real expert on this and is a great interviewer and has had good guests choice ology choice ology .

tell us about your mentors who help to shape your fascinating career.

Um so two people who are on my these these committees, Robin hogarth's hillton n were two and there's an interesting story. So Robin was Scottish um very verbal.

Every thing started with um how soever therefore not withstanding hilly was a very blunt due from and IT was the exact opposite right so hilly would mark up my thesis and put in all these fancy a hilly rather would take out the whatsoever s and the however is in the their force and he was like putting more like mom, like short sentences, no semicolons, but like one punctuation or period that's IT right like thought a million periods at a store and I come ugly. Use those and Robert was anywhere on, oh, this really is this semicolon you know, let's pup this in. And at one point I was going back and forth.

Now, near the completion of myths is with the two of them were co advisors. And I got so first, and I said, how should I write this? And we had this, this kind of like grass hopper moment of, it's your thesis, you figure out how you want to write IT.

And I realize they we're kind of waiting for me to find my voice like they say, and writing like, and one of the love tables and in the other of love graphs. So the draft, my thesis was the table on the graph, or exactly the same thing. And I had to decide, was raft person or a table person? Or was I kind of like bingo? So I basically became kind of bingo, al, in terms of the how I was thinking it's sight that was very helpful.

The other person probably is dick tailor because he he is a very good writer. He did exactly what so many academics aspire to. And we always ask for more of which is to write a small number of extremely high quality papers.

It's it's very unusual because for career reasons and the stuff you have to get ten years and now and dick just couldn't really write a bad paper. I don't write as many great papers of him and I as a result, I write too many okay papers. But that something I think is using for everyone.

He's one of my favorite people in the world. I got to interview her, I know half a dozen times only once since he won the nobel prize, but I always find him so informing of an entertaining, and I just loved his response to winning the prize. What what you going to do with the money? His answer is i'm going to spend IT as irrationally as I so show him .

he just he .

very much does he's just also a fascine, fascinating, charming guy. Um let's talk about books. What are some of your favorites? What are you reading right now?

I am reading i'm a clin will call the guest, especially for new yorkers in your audience. It's about a very drifty sketchy woman who goes to the hamptons and kind of concern around the hamptons. It's really it's almost like a very didn't .

we have kind of a real life thing like that .

happening here? Yes, exactly. IT may be loosely inspired by anadolu I in manhattan or or some similar cases. It's basically almost like a one hundred hundred century novel about class um because she's very conscious of not belonging in the happiness but she's very beautiful and kind of charming. And this sort of manager themes away and i'm almost done with that, is really delicious.

The other thing I love movies and books about cappers and heights and gifts which includes emlin the guests so i'm reading these books by jim swain is not known. I gone on to the slee child. My wife .

reads all of his cloud clash for all of exactly. And did that include the richer series?

The richer series? That's what is most famous child. But so jim swine was blurred by lee child, saying, jim swings the best of what he does. And what he does is he writes about a very sophisticated cheater and most veggies who cheats casinos. And, you know, I want to use, recycle this year very shortly for you, but basically their procedurals about how to cheat, casino.

And but in the end, if you get caught, there's also this sort of social psycho political thing of, you know, if I make up a story about why something happened, I, if there's a murder and casino, and I make a story about IT that helps them act like the murder was freakish, won't driveway? I'm actually delivering a gift to them. They're going to trade off.

Then I going to see me to jail because if I give them this gift, so there's a lot of layers of, this is not tuesday. F, G, not right. bring. This is not summer .

beach reading sounds.

But for me there's a lot of like psychology and you know, in a way, it's a game theory. What if there's an arms race between the vegas gaming commission and each of the individual is who are very sophisticated. They had a lot of extreme right to tell me what to look for and then these cheaters who know you know so truly this arms series of who's going to win, I ve found that was really interesting.

Um if you like books on griffin and cheats and um corruption, i'm going to recommend pretty much anything he's written. I've been to find his for years carty asm was a water for the miami hair, a crime reporter and then just one after another this series of novels and and his one of his more recent boxes now uh A T V series on apple plus. Um bad monkey.

all his box is .

bad monkey in the I think that was called razor girl. But all his books take place in floria. Everybody's corrupt. The police are corrupt, the building inspectors are corrupt, the politicians are corrupt.

And there's always one or two good people in the heart of the story and it's how do they navigate this just endless of treaty and corruption. And he's just a delightful, entertaining writer. If you could Randy pick any of his book in and then just all there are great beach .

reads um the mail to mentioned the wire because I group and bolt mr. County and series yes and David Simon's book the corner is a kind of a precursor even isn't a very interesting person.

He was a reporter and I think .

in yeah and the corner is like this beautiful, I think of what is a precursor of wire. But it's it's basically about a corner in west bonton or everyone by drugs. And it's about drug addiction.

And all the things is around IT. So as somebody who know, one of things we studied in the behave economics as habits and addictions, and, you know, neuroscience, of course, is fascinating along the way. And that one is great.

And the wire, having grown up in bolt mer colony, which is not boltin a city, the wire, almost like a documentary, and IT has all this bottom of stuff, as well as bolero sense, where you can have people to talking about you like this. And IT has Tommy. Our city is this political character who sort of inspired by Tommy yellow sandro, whose daughter is Nancy policy?

Oh, really, that's amazing. I found the series of wire. It's a tough watch. It's a great show. It's brutal mile that I mean some of the stuff that goes on and the show is just .

yeah there's a famous seam of the nail gun yeah which if you listers have the stomach that's .

pretty class similar uh, in the jack reacher series there is a um something that that far off they turned the down for television, but the book is really brutal. Alright, we're up to our final two questions. What sort of advice would you give to a college grad interested in a career in filling the blank? Newer economics, behavioral finance or even just investing .

for somebody who would say um IT does not want to get A P H D, that's a different track and probably a less interest. And you can get a lot of guess a advice on how to do that.

I would study not just find IT it's like street asset pricing and derivatives but also um behave our economics game theory I think because even though game theory is usually like two players or small numbers of players, IT really sharpen s the logic of you know, when do I know something another person doesn't know and do I know that they don't know IT know. You have to really relentlessly think about the math underlying that. And then there's a lot of experimental and real world data.

One of my I just got a text from art students determine there's a lot of different sports about whether sports activities are like equally bring responses to other players. So you can actually there's on a source of data besides just say, the lab experiments. I talk about my book for two thousand, three sneak in the plug in coding of science to something I would study to. So cut out of science is a modern brand of cut out of psych that has more math in IT.

And a lot of IT actually goes back to somebody we spoke about, like, everything show you mismatch, but they are quite interested in what they call resource rationality, which means a lot of the mistakes people might make, like anchoring on one number and being influenced by that of famous anker adjustments, hurst tic, may actually be rational if you if you only have so much working memory or you're under time pressure or you're tired. It's also glassy related to the way economists would think about um mistakes, which is they may be optimistic ven some constraints like what is that constraint and can we test that experimentally? So I think there's a lot of stuff you can learn there that will help you think about markets.

The other thing I would say is get experience thinking about markets, whether in turning or now tell this story about what IT worked for me, which was when I was twelve years old in, uh, caucus for maryland. Every August, there was a one month racing program at a small ray tackle, timonium, maryland. And IT was a five minutes of a mile.

Tracks is like, you know, small. I would go with my dad and a friend of his who is a socker broker. And we would also go to the big tracks like pim ico with the print mistakes is, but if you go to timonium, you get to see all the horses. There is so much interest you, so much about markets. Number one, that gives you, I think, a respect for market efficiency .

because the odds are actually not that bad. You mely prety actually .

eight horses pretty similar. You know, the jackies are all, you know, the same size, and they're all pretty good. There's a lot of statistics you can see. But somehow the crowd is decided that number three is even money favourite, which is a fifty, fifty chance to win.

A number six who looks pretty good to is like seventy to one and they're most see, right? So you know, part of why I got into economics and psychology was thinking about episode is like that. How does the the market put this information together? And are the mistakes like how do you beat the market?

So forma turns out to be less .

so the if you go with like around the third race, I was I was a kids. I was broke um and my poor mom, my irish mommy is where I was going to know lose too much money um I kept doing its tuition mom it's tuition. Um but if you go on the third race, there are these people who sell tip sheet for like five dollars. I know because he .

goes they know it's gonna en. They're selling the tip sheet.

not making the bets exactly the customers yet exactly. But if you go like the third or fourth race, they would quit selling and they would just give them deal well like a lost leader. Maybe maybe next time you'll buy IT.

And so i'm sitting here, here's my little cynical twelve thirty old brain thinking, why are you giving away for free tips that you claim can make me money like this is not the math, is not math. And I think got a good lesson and they would like for markets right? Yeah um is that you know just to clear away like the most I immune yourself to the most nave schemes. You know you you .

would think if the tips were valuable, rather than waste your time printing IT up and selling them, you would just bet on the and writing horses.

especially in a parameter al system, right? Because you know, the the more year tipsy buyers are betting on your horse .

the low actly.

then you're betting of .

productive. Our final question, our final question, what do you know about the world of neuroeconomics? Today might have been helpful. Well, when you were first getting started back in the nineteen eighties.

you know, all answer that like a politician. Answer question, have a Better answer for, which is about .

behavior, finance, be fire or sure, got IT.

So in new economics, I don't think we made too many mistakes. I think I wish we had you. We got a lot of grand support.

Caltech was very supportive. I got to know a lot of interesting people who are generous with their time, who were account my tudes on your science. I I never took any formal, of course, work on IT IT was can wait wait way after my original right training.

So thank you, everyone. Um I wish we had we have not had much impact in academic economics particularly. And I said something we're not working on may be we can do Better behavioral finance.

I think I started graduate school in the late seventies. In one thousand nine hundred and seventy eight, mike jenson published a very influential paper. IT was an interact to a special issue.

And one of the first sentences is the market efficiency. Apology is is one of the most well established empirical regularity and economics. But and but that was like the high watermark, right? And the special issue was about the some things that are Normal st like earnings drift.

He got a weird earnings announcement. The market reacts, but then the market reaction drifts up for IT takes a couple weeks, almost like food for the market. So so absorb, you should not take a couple of week, right right? There are other things where we see you know like one within one hour. Markets are repricing ing really well. But despite this jenson article, the um hostility to behave about finance was ferocious for .

what that's a big word is that so late seven.

early eight, late seven, early age. And so that's when I was kind of deciding to I want to stay in finance or mixed and I remember having a discussion I don't know. Gene remembers at the same way with, I had write a paper for u gene farm's course, who was also kind of a mentor in the same.

I even though, and doing work that was close, you know, he he was really relentless and very empire cally driven. And he had a really good idea when he started. People thought he was crazy, right? Because there was all the stuff, you know, there was even he wrote some paper.

S on dividends like, well, optimal dividend payment policy. And of course, Miller. And he looks like what patients in a holiday, just like take money from one pocket and put in the other.

Um well, back in the early days of windows s and orphans stocks.

you people lived .

on their different .

the is enough to live on.

Now the theory has shifted towards it's more efficient return of capital to shareholders doing byo x than dividends, but that only total return if you're looking for that income stream, buybacks don't necessarily help you.

So that's and that's also where the bear economic comes in with, you know why can't you just like create whatever incomes from me you want by borrowing and selling, right? That's right. And if you know if really liquidity constrained or credit string, you can't, but for most people, uh, that's not a big deal anyway. So so if I had known behavior, finance would IT didn't take off quickly. So from one thousand nine and seventy eight, which Johnson and eight one I graduated nineteen eighty five, was the failure and demand paper about january effects. And even that was published as a IT was in the proceedings issue, which meant the the president of the of the a fa could pen pick papers so the proceedings issue had the most radical papers that were the foundation of a of economics Fisher black road to paper called um noise traders attack I might i've just been called noise and then dick road road to paper got r squared and said, you know, if only news moves the market right then the r square on days with no news. You know you shouldn't have any volatility and of course days with big news and small news similar to the story uh um you are telling the beginning days with big news, big obvious news and harley I news move about the same um the assumption .

being by the time it's in the front page of the new york times, it's already .

reflected also there maybe things that are not new y at all like an octopus ty seven crash you know the bonders bank moved raise by a core of a point or something. Who are .

was that? You never know when that last straw breaks the camel.

But but to all those ideas, now that that we feel like we have an understanding and examples, there was a lot of hostility to that. So I I remember asking je um I would like to studying market psychology, like what do you know about market psychology and he said, what's death I can psychology this boston accent know I think get just a word they use on the news like a bloomberg is is the where they use on the news when the market moved. They don't know why.

right? Well, no one wants to admitted fairly random day to day with humans are very I know that humans are very uncomfortable and attn.

Since making make up patterns.

we come up with a narrative to explain IT um I recall dc sailor quoting maybe he was max plank um who's talking about physics, sciences one funeral of time sailor said the same thing about behavior finance and he also said i'm bypassing the current generation going right to the kids so they adapted wholesale and literally he said, i'm teaching grads and undergrads this so we don't even have to wait for the funeral and IT seems to .

have worked oh, absolutely.

Colin. Thank you so much for being so generous with your time. This has been absolutely fast, and i'm glad we finally managed to do this.

We have been speaking with professor colon, camera of california, a institute of technology. If you enjoy this conversation, will check out any the five hundred previous interviews we've done over the past. Ten and a half years, you can find those at itunes, spotify, youtube, bloomberg, wherever you find your favorite podcast.

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