Richard Thaler and The Winner’s Curse

Summary

Podcast Summary: More or Less – Richard Thaler and The Winner’s Curse

Podcast: More or Less
Host: Tim Harford (BBC Radio 4)
Guest: Richard Thaler
Air Date: November 29, 2025

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Episode Overview

In this episode, Tim Harford welcomes Nobel laureate Richard Thaler, one of the founding figures in behavioral economics, to discuss the enduring significance of his influential work, The Winner’s Curse. They delve into noteworthy findings from behavioral economics, explore why humans aren't always rational in their decisions, and examine concepts like the "winner's curse" and mental accounting. Thaler also discusses the updated edition of his book and how experimental results from decades ago still stand up to scrutiny.

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Key Discussion Points and Insights

1. The Birth of Behavioral Economics

• Traditional Economics vs. Real-World Behavior
  • Early economic models depicted humans as entirely rational, akin to “a wealth maximising version of Star Trek's Mr. Spock” ([01:20], Tim Harford).
  • Thaler and other behavioral economists introduced the idea that real human behavior often strays far from rational optimization—humans are “less Spock and more Homer Simpson: Silly, impatient, weak willed and easily confused” ([01:41], Tim Harford).
• Significance for Public Policy
  • Accepting that humans aren't fully rational has “important consequences for how economists did their work and how public policy should be conducted” ([01:56], Tim Harford).

2. Exploring "The Winner’s Curse"

• Classroom Experiment: The Jar of Jelly Beans
  • Thaler explains the winner’s curse using a jar filled with jelly beans, where students bid based on their guesses of the jar's value ([03:04], Richard Thaler).
  • “The average bid will be less than the amount in the jar … but the winning bid almost invariably is more than the value” ([03:39], Richard Thaler).
  • This happens because the highest bidder is likely to overestimate the value, and this effect is amplified as the number of bidders increases ([03:55], Richard Thaler).
• Origin in Real-World Auctions
  • The phenomenon was first documented by engineers at the Atlantic Richfield Oil Company in the context of oil drilling rights ([04:30], Richard Thaler).
  • Accurately assessing value is hard, so the winner often has the most overly optimistic estimate: “The insight … is that the value you should expect if you're the winning bidder is lower than it would be if you had made some other bid. Because the fact that you had the high bid means there's a good chance that you had an overestimate of the value” ([05:31], Richard Thaler).

3. Mental Accounting: Why All Money Isn’t Equal

• Money Isn’t Treated as Fungible
  • In economic theory, “money is fungible” ([06:35], Tim Harford), but Thaler argues real people think otherwise.
  • “People adopted a strategy of putting cash into envelopes or jars with labels as a way of budgeting. Think of it as their early spreadsheet” ([06:58], Richard Thaler).
• Behavioral Evidence
  • Thaler gives examples like “house money” (home equity) and gasoline budgets—people don't mix these funds and will even splurge on unnecessary luxury fuel when petrol prices drop: “...they also oddly treated their cars to occasional fill ups of more expensive gasoline” ([08:21], Richard Thaler).
  • Thaler quips: “I would have gone for better olive oil or better wine, you know, that would be my advice” ([08:58], Richard Thaler).

4. Replicability and Progress in Behavioral Economics

• Revisiting Past Experiments
  • Unlike many fields, seminal behavioral experiments have largely “replicated,” even as research moved from lab experiments to vast real-world datasets ([09:09], Richard Thaler).
  • Thaler’s co-author, Alex O. Imus, set up a website for people to try out these experiments themselves ([09:22], Richard Thaler).

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Notable Quotes and Memorable Moments

• On Rationality:
  “What if humans are less Spock and more Homer Simpson? Silly, impatient, weak willed and easily confused.” — Tim Harford ([01:41])
• On the Winner’s Curse:
  “The mathematics of this is that the value you should expect if you're the winning bidder is lower than it would be if you had made some other bid.” — Richard Thaler ([05:31])
• On Mental Accounting:
  “So real people don't think all money is the same. You know, for centuries people adopted a strategy of putting cash into envelopes or jars with labels as a way of budgeting. Think of it as their early spreadsheet.” — Richard Thaler ([06:58])
• On Experiment Replication:
  “The lab experiments I reported 30 years ago all replicate. And in fact my co author has provided a website where anybody can replicate any of the experiments at home for fun. If that's your idea of fun.” — Richard Thaler ([09:09])

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Timestamps for Key Segments

• [01:09] – Introduction to the episode and topic
• [02:54] – Tim welcomes Richard Thaler; first mentions the Winner’s Curse
• [03:04] – Thaler explains the Winner’s Curse with the jelly bean auction
• [04:30] – Real-world origin of the winner’s curse in oil auctions
• [06:35] – Discussion of mental accounting, fungibility of money
• [08:21] – Example: Gasoline price drop and behavioral spending
• [09:09] – Behavioral experiments' enduring accuracy, opportunity to replicate at home
• [09:48] – Conclusion and goodbye

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Tone and Style

The episode is conversational, combining Tim Harford’s clear, gently skeptical narration with Thaler’s patient, witty explanations. They use vivid, relatable examples—like Homer Simpson, jelly bean jars, and family fuel budgets—to make complex economic ideas accessible to all listeners.

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Summary

This episode is a lively, insightful tour through the quirky realities of human decision-making, as revealed by one of behavioral economics' leading lights. Whether you're curious about auctions, budgeting, or why your brain plays funny games with money, this conversation demystifies the hidden habits driving our economic lives while affirming that, three decades on, the evidence for human irrationality remains surprisingly robust.

Transcript

[Tim Harford]

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[Richard Thaler]

First.

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[Tim Harford]

Hello and thanks for downloading the More or Less podcast with a programme that looks at the numbers in the news and in life and speaks to legends of behavioral economics. I'm Tim Harford. Once upon a time, economics was a simpler kind of game. Human beings were said to be rational, rational beings optimising their way through life, a wealth maximising version of Star Trek's Mr. Spock that made them much easier to describe in mathematical models. And who knows, maybe it was basically true. But what if humans are less Spock and more Homer Simpson? Silly, impatient, weak willed and easily confused. That was the argument of a few iconoclastic economists who in the 1980s made this argument based on results from experimental psychology, along with a big old dose of looking around at real people. And if these rebel thinkers, the behavioral economists, were right, wasn't that kind of important for how economists did their work and how public policy should be conducted? One of those pioneers was Richard Thaler, who noted down some of these anomalies in in a column in the 1980s which was turned into a book, the Winner's Curse, first published in 1992. His work also won him the Nobel Memorial Prize in economics in 2017. More than 30 years on, he's returned to that book, publishing a new, updated version with co author Alex O. Imus, which looks at whether those anomalies in rational thinking have stood the test of time. I'm joined in the studio by Richard Thaler. Hello Richard.

[Richard Thaler]

Hello Tim. It's so nice to see you.

[Tim Harford]

It's good to see you as well. We should start by exploring some of these ideas. Maybe the book title, the Winner's Curse. What is the Winner's Curse?

[Richard Thaler]

The Winner's Curse is the following. Suppose you have an auction. Imagine. Here's the way we do this in a classroom experiment. We fill up a jar of jelly beans. We say the jelly beans are worth 10 pence each, and then we auction off the jar.

[Tim Harford]

Yeah.

[Richard Thaler]

You don't get the jar, you get the value.

[Tim Harford]

Yeah. And we don't know the value because we don't know how many beans.

[Richard Thaler]

Right. So we all make a guess. And what happens if a professor is low on cash? This is a good demonstration to run. The average bid will be less than the amount in the jar per. But the winning bid almost invariably is more than the value.

[Tim Harford]

Yeah. Because by construction, the winning bid is the highest bid, right?

[Richard Thaler]

Well, by construction, the winning bid is the highest bid. That's correct. And the highest bid is likely to be above. And the more bidders there are, the more likely it is that the winning bid is too high.

[Tim Harford]

Yeah. So you have, let's say, $10 worth of coins in the jar, and you've got 50 students and they're all bidding away. And the average bid is whatever, $7. But there's one or two people, and you only need one. You only need one who bids $20, $30. Yeah. And you've made your profit.

[Richard Thaler]

So this is a unique example in the book because it was not discovered by psychologists or economists. It was discovered by engineers working for the Atlantic Richfield Oil Company. So the government would divide up the land into various plots and auction off the right to drill right there. And they had scientists say how much oil they thought there would be, which.

[Tim Harford]

Is a bit like the beans. Right. Because nobody really knows how much oil there is. Everyone takes a look and has a guess, and then later you find out.

[Richard Thaler]

And like the jar of beans, it's in principle worth the same to everybody.

[Tim Harford]

Yeah.

[Richard Thaler]

So if Exxon or Royal Dutch or whatever gets the rights, there's going to be the same amount of oil down there. So what they found was that on the leases, they won, there was less oil than they expected.

[Tim Harford]

Yeah.

[Richard Thaler]

And they thought, gee, we thought we had great geologists. What's wrong here? And the insight they had was the insight you mentioned earlier, which is, well, it's not a coincidence that we won this. We won this because we made the highest bid. And the highest bid is not a random bid. So the mathematics of this is that the value you should expect if you're the winning bidder is lower than it would be if you had made some other bid. Because the fact that you had the high bid means there's a good chance that you had an overestimate of the value.

[Tim Harford]

Let's Talk about a more everyday example. There are loads of examples in the book, but one that really fascinates me, always fascinates me, is this idea of mental accounting. So tell us about mental accounting.

[Richard Thaler]

Economists have many simplifying assumptions. One is that money is fungible. It's a fun word. Fungible means that it doesn't come with any labels. Yeah, dollar's a dollar, a dollar is a dollar.

[Tim Harford]

It seems like not an unreasonable assumption, but okay, but you're going to tell me it's wrong.

[Richard Thaler]

So real people don't think all money is the same. You know, for centuries people adopted a strategy of putting cash into envelopes or jars with labels as a way of budgeting. Think of it as their early spreadsheet.

[Tim Harford]

Yeah. This is that, this is rent money, this is food money, this is the electricity bill.

[Richard Thaler]

Right. And if you look at the way real people behave, they treat money differently depending on how they got it and where it's stored. Yeah. So for example, money in your house is house money.

[Tim Harford]

This is like the equity in your home. You own your home and it's worth a certain amount of money.

[Richard Thaler]

And even when people get old and retire and maybe move, they still don't draw down the money in their home. Yeah. If they move to Florida or Spain, they buy a house with the money, the equity in the existing house. Yeah. During the financial crisis, the price of gasoline fell by 50%.

[Tim Harford]

Yeah.

[Richard Thaler]

All of a sudden people have extra money in their gasoline budget. So economic theory says, well, there's an income effect and a substitution effect. So you're a little richer, so you spend a little bit more on everything. And gasoline is cheaper, so maybe you take a bit more road trips. What did people do? They did those two things, but they also oddly treated their cars to occasional fill ups of more expensive gasoline.

[Tim Harford]

Yeah. Because you got all the money in the gasoline account. Yeah.

[Richard Thaler]

What are we going to do with that? You know, how many times can we go visit grandma? I would have gone for better olive oil or better wine, you know, that would be my advice. The field of behavioral economics now is mostly done with millions of people shopping in real places, not relying on lab experiments. But the good news is that the lab experiments I reported 30 years ago all replicate. And in fact my co author has provided a website where anybody can replicate any of the experiments at home for fun. If that's your idea of fun. Yeah. No.

[Tim Harford]

Well, why not?

[Richard Thaler]

It would be. You try it.

[Tim Harford]

Yeah, exactly. Thank you so much, Richard.

[Richard Thaler]

It's been a pleasure as always.

[Ryan Seacrest]

Tim.

[Tim Harford]

I've been talking to Richard Thaler, the co author of the Winner's Curse. And that's all we have time for. But please keep your questions and your comments coming in to more or [e-mail] until next week. Goodbye.

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