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Judd B. Kessler, "Lucky by Design: The Hidden Economics of Getting More of What You Want" (Little, Brown Spark, 2025)
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- [00:00]
Judd Kessler
Hello everybody.
- [00:01]
Marshall Poe
This is Marshall Po. I'm the founder and editor of the New Books Network. And if you're listening to this, you know that the NBN is the largest academic podcast network in the world. We reach a worldwide audience of 2 million people. You may have a podcast or you may be thinking about starting a podcast. As you probably know, there are challenges basically of two kinds. One is technical. There are things you have to know in order to get your podcast produced and distributed. And the second is, and this is the biggest problem, you need to get an audience. Building an audience in podcasting is the hardest thing to do today. With this in mind, we at the NBM have started a service called NBN Productions. What we do is help you create a podcast, produce your podcast, distribute your podcast, and we host your podcast. Most importantly, what we do is we distribute your podcast to the NBN audience. We've done this many times with many academic podcasts and we would like to help you. If you would be interested in talking to us about how we can help you with your podcast, please contact us. Just go to the front page of the New Books Network and you will see a link to NBN Productions. Click that, fill out the form and we can talk. Welcome to the New Books Network.
- [01:07]
Caleb Zakrin
I'm Caleb Zakrin, Editor of the New Books Network. Today I'm speaking with Judd Kessler, Howard Marks Endowed professor of Business, Economics and Public Policy at the University of Pennsylvania's Wharton School. We're discussing his book, Lucky by the Hidden Economics. You need to get more of what you want. The world is structured by rules, many explicit, like the speed limit on a street or the law to click it or get a ticket. When we learn to drive, we are taught these rules, but we aren't taught the shortcut through the canyon or the best times to drive to avoid traffic. These hidden rules apply to all aspects of life, and having an eye for them can be the difference between landing a coveted job and getting your resume tossed into the trash along with the heap of rejects. No job application tells you that you must send a follow up note thanking the interviewer. But this rule, as many learn the hard way, can be the difference maker. Judd shows us that these hidden rules can be thought of like hidden markets, where people can pay for goods not with money, but with optimal strategies. As Judd puts it, once I better understood what a hidden market was, I started to see them everywhere, hiding in plain sight all around us. To introduce listeners to hidden markets and how our knowledge of them can prove our luck, I'm Thrilled to get the chance to speak with Jud Kessler. Judd, welcome to the New Books Network.
- [02:19]
Judd Kessler
Thanks so much for having me.
- [02:21]
Caleb Zakrin
This is a really funny book. And that was one of the things that immediately jumped out at me. You have all these really great examples that are humorous, that are punny. And I think it really does help to introduce these concepts. And as you explore it, as you explore this notion of hidden markets, it really does, as you put it, it really is something that you start to see everywhere around you. And before talking about hidden markets and the origin of this book and how you understand luck, I was wondering if you'd just briefly introduce yourself to listeners just so that they can get a sense of who you are.
- [02:56]
Judd Kessler
Yeah. So I'm Judd Kessler, as you said. I'm the Howard Marks professor at the Wharton School. I've been at the Wharton School for 15 years, teaching undergrads, MBA students and executives. Economics mostly either kind of basic economic principles or behavioral economics, so integrating some psychology. And I've been doing research, academic research, for the 15 years at Wharton and years prior to that in graduate school. But this is my first book. And as you say, I try to make it approachable. So the humor is in the hopes of folks actually thinking this is economics, but it's actually economics that I can approach and understand and get a benefit from, rather than the economics I might have learned if I did a class in college and found the professor droning on at the front of the room. Boring. I wanted the opposite of that.
- [03:54]
Caleb Zakrin
Yeah, it definitely makes good on that promise. You talk in the book a little bit about how one of the first exposures to this notion of hidden markets. You give this example of a class that you took that was recommended to you when you were a student. And you talk about how this class, and I've seen professors do this, sometimes when the class is really popular, they'll schedule it really early to suede stragglers. So could you talk a little about this experience and how it introduced you to this idea of hidden markets?
- [04:26]
Judd Kessler
Yeah. So this is, this course was pivotal for me in my, you know, academic career, but just in my life because essentially I was an undergrad. No one in my family had ever gotten A, a PhD or, you know, we, we had lawyers and I, I had, you know, I knew of doctors. I knew that there were professional paths. But professors seem like this whole other world to me. And I got advised to take this course. It was a PhD level course taught by a guy named Alvin Roth. And it was, as you say, Both an inconvenient day and time and location. So it was at 9am on Friday on the business school campus at Harvard, where I did my undergrad degree but then later went back to do my PhD. But I was an undergrad at the time, so it meant walking over the Charles river early for a college student on a Friday. And to get to this class where I was kind of out of place because these folks had already decided they were going to be academics. And I just was really interested in the content. But I got exposure to this material and in particular to Alvin Roth, who ended up winning a Nobel Prize a few years after this course. And I kind of smartly identified that he would be a great person to advise me both for my undergrad thesis and then again for my PhD. So I came back to Harvard to do my PhD, just kind of breaking a cardinal rule of you're supposed to go somewhere else for your PhD than you did your undergrad. But this is how great he was as an advisor. And he was studying the subfield of market design, which I was very excited about because it challenged what I had learned in my other courses about what economics was. It was, it made clear that there was more to economics than just, you know, prices adjusting and, you know, markets clearing with supply and demand. And the kind of more complicated, interesting ways that markets worked is what drew me to the topic and eventually ends up in the book.
- [06:34]
Caleb Zakrin
Obviously, markets are essential to economics. And before jumping into hidden markets, I was wondering if you just talk about sort of the general type of market that someone might imagine. You know, the example that you might give to your students on the first day of class.
- [06:50]
Judd Kessler
This is exactly the example I give to them. I talk about supply and demand curves. So say, demand for taxi rides to the airport and supply of potential drivers. And. And in a marketplace like Uber, they're going to try to adjust prices to clear the market so that you don't end up having to wait a very long time for a car. You know, if the price rises, say surge pricing, you might decide, you know what, it's not worth it for me to pay that high price. And the high price might induce other, you know, sellers, in this case drivers, to say, you know what? I was going to cut out for the day, but I'll keep driving. So that's a market that's constructed, but, you know, everyone has experienced needing a taxi ride to the airport at some point, I suspect. So you, you can see there that the price adjusting to clear the market has a bunch of benefits and There are a lot of markets that operate like this. So lots of cases where when we teach it to you, we kind of are trying to model environments where there's demand, there's supply. The market forces, if there's more people who want something than we have available to serve, that the price will rise to, to push out potential buyers and induce in potential sellers. And we explain this as kind of the law of the land. We say supply equals demand. That's an assertion that price is going to be what adjusts to, to make the market work. And that's normally where we stop. I mean, that's what most econ classes will teach you. But of course, that's not the whole story. There are many markets where the seller decides that they don't want to let the price rise. Or we as a society say we have this scarce resource, we'd like to allocate it, but we don't want to just give it to the folks who are willing to pay the most. We have other goals in mind. Or it's a matching market where there are folks on both sides of the market and they're not going to just be happy of saying, okay, price is going to rule all. They're going to care what they get, which jobs they match to which partners they end up getting to date, which academic institutions they get to join. And so these are cases where there's more than price that is deciding who gets what.
- [09:12]
Caleb Zakrin
One of the examples that you use that I think is a great one in part because I feel like whenever I'm reading the news and there is a story about prices and people freaking out about them, it oftentimes has to do with concerts and people, you know, clamoring over the Taylor Swift tickets or the, you know, most more recently with the, you know, Oasis concert reunion and, and issues with, with Ticketmaster and people, you know, getting upset over these hidden fees. There's oftentimes a lot of focus on the issues with pricing around concerts because, you know, people. There's almost like international exuberance sometimes when a band, when a band, you know, reunites, you want to. Some people are. Will spend, you know, gobs amount of money. So could you talk a little bit about this example? And why is it that someone like Taylor Swift isn't just going to, you know, maximize her ticket price? Set them all at $10,000 a piece.
- [10:03]
Judd Kessler
Yeah. So this is one of these classic hidden markets that we often find ourselves playing in or wanting to play in. If we're a fan of one of these performers and the first thing is to recognize exactly as you said, Taylor Swift and these other artists, they don't want to charge the market clearing price, the price that would leave each ticket price such that there's only one buyer who's willing to buy that ticket. That might end up meaning that the cheapest tickets you could get for, say, the Eras tour, Taylor Swift's last tour, I mean, those prices might put the cheapest ticket in the 500 to $1,000 range and the good floor seats in the $2,000, $3,000 range. And Taylor Swift chose not to charge those prices. The cheapest tickets for the tour were $49. The average ticket price was $204. But at those prices, there are many, many people who are going to want to buy every each ticket that is made available for sale. And that's going to start causing problems. It's going to cause problems in part because, you know, there's going to be a lot of people who want each ticket, but then also there's going to be folks who are interested in buying the tickets not because they want to see Taylor Swift perform, perform live, but because they know they can sell them on a secondary market for prices that look more like the hundreds or thousands of dollars we talked about. Now, there's two issues. One is, you know, why does Taylor Swift want to do that? I think it's a little bit complicated, potentially. A lot of times sellers will keep prices kind of below what would clear the market below what economists think makes sense because they have longer term considerations in mind. So the restaurant that lets there be a line around the block for tables, they could raise prices that night and make more money that way. But they might like having the line because people who walk by say, oh, that restaurant must be good. Look at that line. You know, there's bandwagon effects or social proof or social information that we get from observing the line. And lots of sellers might create a hidden market, create what economists call excess demand for their product to drive attention and future demand. So I thought of this a lot this summer when the product that folks that I heard a lot about, of folks trying to get it and couldn't was this weird looking stuffy keychain called Labubus people were wearing on their bags. And, you know, I thought of Beanie Babies, I thought of Cabbage Patch Dolls. And these are cases where, you know, the, the demand is in part driven by the fact that it is hard to get access to the thing. Or I kind of learned that it's trendier than I thought because so many people are going for it now. I don't think Taylor Swift or Oasis, like, they don't need to drive future demand or awareness for their product. So they have other considerations. And I think, you know, for Taylor Swift, some combination of caring a lot about her fans, right? Being famously devoted to her fans, wanting, wanting her fans to only have to pay $49 for the tickets rather than $500, wanting to spread the benefits of getting to see her perform live across the income distribution. And then potentially also, she's a billionaire. Her fans, you know, she has billionaire fans, I'm sure, but most of her fans are not billionaires. And it might not be a good look if she's charging thousands of dollars to folks who make thousands of dollars in a month. Right. To have to use all their money that month to go see her perform is not a great look. And so, you know, it might be that the folks who buy the tickets with the intention of reselling charge that price, but, you know, that may feel and seem different than if Taylor Swift was to charge it directly.
- [14:02]
Caleb Zakrin
Right. I think this idea of, you know, if, if you, you know, if you jacked up prices to a point where lots of people didn't actually want to come to the, to the concert, you know, then it could, it could cause all sorts of issues in the long run. Of course, as you point out, and you talk about this in terms of how, you know, academic economists think about the design of markets that, you know, when you are designing a market, there's certain things you want to, you want to try and create it for. So could you talk about the three E's of market design?
- [14:38]
Judd Kessler
Yeah. So this is the kind of what makes for a good hidden market and what makes for a bad one. And the three E's are equity, efficiency, and ease for the market participant. How easy is it to participate? And equity and efficiency are terms you may have heard and thought about before in these contexts. But equity is basically a fairness notion. If I want to spread the benefits of this scarce resource, seeing Taylor Swift perform live kind of evenly across people, that might be a reason not to want prices, because prices that are very high to clear the market. Right. It might, might mean that lower income folks are kind of mechanically excluded from being able to participate. Second E is efficiency. So it's about whether we're, we're wasting scarce resources. And wasting could mean like not actually allocating them to anyone. So this happened kind of famously during the London Olympics where they wanted to avoid the kind of resale markets that We've talked about for live event tickets and what that meant for them was not letting tickets be repurposed. And so what ended up happening was people who couldn't attend event, their seats were just empty. So folks were perform or were playing or competing in half empty stadiums. That's massively inefficient if there's folks outside who would be desperate to watch this stuff be performed live. But another notion of efficiency is just are we putting things to their best possible use? So think about the FIFA competition that's going to be happening in the US soon. If you sold those tickets to just the folks who are willing to pay the most, that might be a different group of people than the folks you think of as the die hard fans who really, really desperately want to come, particularly if they're from a country that might have lower average income and they really want to see their team, you know, play in, in the FIFA tournament. So the question of are we allocating things to people who really want them? That's a notion of efficiency. And then something that we often don't think about as economists, but play at play into these hidden markets quite a bit is how easy is it as a market participant to, to try to get what you want from the markets. And we don't think about it that much because when we're using prices, like we might not like to pay high prices, but it's kind of easy to get something in a market where all you have to do is pay a price. Like I go to the website, I click a button, it charges my credit card, I go to the store, I tap, you know, my credit card and I've achieved my goal of getting something in hidden markets. There's no guarantee of that. So I might, it might be that to get something I have to wait in a line in front of the box office for hours until it's my turn to make a purchase. Or I might have to be on my web, on the web at a certain moment in time and kind of quickly navigate through a complicated set of pages and then only learn then that I was not fast enough and didn't get access to what I wanted. And these are ordeals that folks have to go through, often for an uncertain outcome. And those are very costly. So these are the three criteria when we're designing a hidden market. Are we doing it in a way that is equitable, is efficient, and is easy for market participants?
- [18:06]
Caleb Zakrin
So to sort of drive the difference home between explicit markets and hidden markets? In an explicit market, for the most part it's the case that if you are willing and able to pay more, you will get what you want. But in hidden markets, it's not always the case. Just because you can pay 10 times the amount of as the next guy, it doesn't mean that you're necessarily going to be more advantaged if the other guy did something else that advantage them. Maybe they signed up for a raffle three years ago and it put their name in something. Is that, is that a good way to differentiate it?
- [18:38]
Judd Kessler
That's. That's exactly right. In invisible or kind of explicit markets, price is going to do the work of allocating, which means you're willing to pay more, you're going to get the thing. In hidden markets, we have decided the seller or society that we don't want that to be the outcome. And so instead you're going to have to understand what are the specific rules that are being used to allocate this resource. And you're going to have to start thinking about what you can do strategically to get an advantage there. Maybe it is starting to enter a lottery three years ago, you know, and entering it every time you have a chance so that eventually your name will get drawn.
- [19:15]
Caleb Zakrin
Right. So this notion of luck, then that's central. You know, I think part of what you're saying is if someone thinks that, well, I just have to, you know, get lucky to get these tickets, it's not necessarily the case. There are things that a person can do if they understand how that market is structured, structured that can give them certain advantages. So I was wondering if you just explain a little bit about how you think of luck, given this notion of hidden markets.
- [19:41]
Judd Kessler
Yeah. I think the way that many of us operate in these hidden markets, when we don't conceptualize them as markets and we don't fully understand their rules, is that we think luck had a bigger impact than it might have. We look around at who gets what, who gets interviewed for a certain job, or who gets their kid into a certain elementary school, you know, who gets into a college given the same or very similar kind of application packages. And we think, oh man, there was some luck involved because they succeeded and I didn't. They got the reservation at that restaurant and I didn't, even though kind of we both wanted it. But the idea behind the book is that a lot of what we might naively perceive as luck is actually the result of some kind of strategic play that was done by folks who better understood the particular rules that were at play in that environment and maybe spent more time Thinking carefully about how to succeed, given those rules in the book.
- [20:47]
Caleb Zakrin
Through the chapters, you go through some of these different, different types of rules. And I was wondering, you know, we could sort of go through them and, you know, you could give a bit of an example of how someone might think about. Okay, if this is a rule that's governing this hidden market, this is how someone could potential, potentially think about it. Like, for example, like you have the, you know, first come first serve. You know, we might see that at a restaurant, you know, it's not the case that there's necessarily not yet at least dynamic pricing at restaurants where just because, you know, you know, just because there's a long, long line, they don't say, okay, you know, you can get the Sandwich, but it's $50 instead of the typical 25. So first come first serve, like, that's obviously a, you know, a pretty common rule that people encounter in hidden markets.
- [21:30]
Judd Kessler
Yeah, so this is great. I mean, this is how the book is organized where I have chapters for different types of rules, many of which are going to be familiar to folks. Because you play in hidden markets all the time, whether you think about them or not. First come first serve is very ubiquitous. I actually had to split first come first serve into two chapters. One to deal with races where whoever clicks first or calls in first gets access to the resource. And then another one where, you know, another chapter on waiting lists and lines where you know, there's still an advantage of coming earlier, but kind of the strategic thing, you know, relates to how long you wait and there's other considerations at play. So to give you a flavor of the types of strategies that work in those markets, I mean, the first thing with first come first serve races is just to recognize that you're in one. If you show up to try to get a reservation at the French Laundry, a restaurant in Napa Valley with three Michelin stars that you know is quite expensive but is very small and very desirable. So folks, you know, many more people want to eat there on any given night than they have seats available. If you show up to try to get a reservation and don't know that all the reservations for this month are going to be given out on the first of the preceding month in a first come first serve race at 10:00am Pacific Time, like, you're just going to be out of luck. So doing some research to understand, okay, when is the, is there going to be a race for this scarce resource? If so, when is it going to be run? If you don't know for Certain, you have to stay vigilant to find out. Okay, when is the race going to happen? So this is for parents out there. Parent teacher conferences that the kids my school attend. We know what day they're going to be on. But the signup sheet for when we get to pick our specific 5 or 10 minute window like those are just emailed out at some moment in time that is not known to us. And if you are ignoring your email that day, you'll find out that the only time that is left to talk to your kid's teacher is potentially a time that requires you to reschedule your entire afternoon. And so you want to stay vigilant about being ready to run the race whenever it begins. And then you have to do things like invest in speed. So if you're going to run in a race, be on good reliable Internet, not on spotty wi fi. And you have to have a plan for what you're going to run for. Because if you're thinking about what it is that you might want, that's a surefire way to lose out on opportunities that other people are scooping up. Particularly if the race is run in the matter of seconds or minutes, which many of these races are. One of the strategies I talk about in that chapter is a strategy I call settle for silver in contrast to go for gold. And this is a strategy that comes up in lots of hidden markets. But it's certainly the case in some of these races, which is that sometimes you're better off acting as if something that is actually your second or third choice, acting as if that is your first choice. And the reason you might want to do that kind of misrepresent your preferences is that often the thing that you really want is highly desirable to other people. So if I really want to eat at the French Laundry at 7:30pm on a Saturday night, that time slot might be very desirable and I might face a lot of competition. There might be a lot less competition for 4:30 dinner reservation on the same night or a different night. And so if that is nearly as desirable to me, like if there isn't too big a drop off and how happy I would be getting 4:30 versus 730. It might make sense to strategically play for 4:30 again. It'll seem like, oh, he got lucky, he was able to get a reservation, they're in really high demand. But actually there's some strategy at play. So for each of the market rules there's strategy with waiting lists. How many lists do you get on? What happens when you get to the top of the waiting list, do you take what's offered to you or do you stick around? Sometimes you can wait to see if something better will come along without. Without a penalty. With lines, you know, first come, first serve lines, like, the strategy involves, when you show up to the line, how do you mitigate your costs of being online? But each of these has some way that you can navigate through the market that improves your chances at getting an outcome that you're happy with.
- [25:59]
Caleb Zakrin
I recently read the book Apple in China, which. Which talks about how Apple became, you know, extremely dominant in China in terms of the. Or rather how China became dominant in Apple's manufacturing might be a better way to frame it. And there was a, you know, really interesting discussion of, you know, when the first iPhone came out, people essentially waiting in line all across the world waiting in lines for the iPhone and, you know, to try and be the first person in line. Maybe there's something exciting to be that first person you get interviewed on the news, but it's probably better to be the 50th person in line. You know, you have to get there way earlier to be the first person line. So the settle for silver. I think it also applies in this frame as.
- [26:39]
Judd Kessler
As well. Oh, yeah. If you, you know, if what matters to you is you get an iPhone, you know, the early iPhone, but you don't care, you know, if it's in exactly the right color or, you know, the right, you know, number of gigabytes of storage, then, yeah, you're better off not waking up at 1 in the morning, but, you know, waking up at 5 in the morning and you get four extra hours of sleep and you still end up, you know, quite happy with what you get.
- [27:02]
Caleb Zakrin
Yeah. Another place where I feel this, you see this a bit, and this is, you know, maybe jumping a little bit ahead also to, you know, I don't know if exactly this would qualify as preferential ranking, but basically, you know, when. When kids are applying for colleges, you know, there's this. You can apply early decision, and sometimes there's the strategy. You might, you might really want to go to Harvard, but you might have a better chance of getting into another great school by applying early decision there instead of Harvard. Is this another example of a hidden market? Obviously the university system, as you give examples throughout the book, but the university is, like, filled with hidden markets.
- [27:40]
Judd Kessler
Oh, my God, there's so many hidden. I mean, I talk about them a lot because I've experienced many of them on both sides of the market. Right. As a student and an applicant to schools, but then also as somebody who works at universities. But this is definitely one, and it's one that I often will reference when thinking through the settle for silver strategy in particular, because just as you mentioned, there are opportunities for folks to apply early. So, you know, Harvard, when I, when I applied early to Harvard, when I was trying to get into college, I applied early action. That limits the places that you can apply early. If you apply early action to a particular school, you're basically limiting yourself to only that one school for your early action application. There's an even more extreme version which folks may be familiar with, early decision, where it's not just that you're applying to one school, but you're committing to go there if they admit you. And the kind of key issue here is that the schools really like when you apply early, in part because they want to have kids on campus who are really motivated to be there, and in part because schools care about their yield, the fraction of folks who are admitted who end up matriculating. Now, when I was applying to college, the yield number was in the US News and World Report ranking for best colleges and universities. So they had a direct reason to care about it. It's not used that way anymore, but it's still a matter of pride and reputation because it's hard to say you're one of the best schools in the country if three quarters of the people who you admit go somewhere else. It's hard to maintain that perception, either for yourself or for others, that you're.
- [29:25]
Caleb Zakrin
One of the best.
- [29:26]
Judd Kessler
So schools care about yield, and the research shows that they give preferential treatment in admissions to the folks who apply early. They often won't say this, but you look at the data and researchers have estimated that applying early is equivalent to about 100 SAT points on your application. So real, real difference. And so, as you point out, if you only have one shot at applying early, if you apply to a place where even with that bump you're not going to get in, that is a waste of your early decision application, you might be better off looking at your second or third choice school, where if you applied early, you would get in. But if you didn't apply early, if you apply regular decision, you might not get in. That's a case where settling for silver might make a lot of sense because there you are applying to your second choice school, acting like it was your first choice. It's the one place you're applying early, but now you're into your second choice school. Whereas if you go for gold and shoot for Harvard or a place that's out of reach, then you might not get in there and then not get into your second choice and then end up much further down. And so that's a higher stakes decision where that same strategy comes into play. And it actually is a very common thing that you need to think about in hidden markets that you don't have to think about in regular markets. You always, when you're paying a price, you just look at what the options are, look at the price, buy the product you like the best. It's only in these markets where you're competing with lots of other people and the rules are not that straightforward where the settling for silver strategy might, might be the right one for you.
- [31:08]
Caleb Zakrin
I'm also thinking too that in a way there's almost a hidden explicit market when it comes to college applications where of course you can apply early decision and many schools are need blind so they're not going to look at how much money you actually have to be able to pay to pay them. But at the same time too, you can also, if your parents are willing to shell out the money, you can also, you know, buy, buy, you know, give $100 million to the sports.
- [31:33]
Judd Kessler
Yes.
- [31:33]
Caleb Zakrin
For a new sports facility. So you know, even within there are these almost explicit markets that exist even more submerged beneath the hidden markets.
- [31:42]
Judd Kessler
This is, you've tapped into something which is something that, that I observe throughout, you know, basically in every chapter thinking about these examples. And there almost always is some way that money tries to, to push back in. And we talked a little bit about it with bots buying up the tickets and then reselling them on the secondary market for higher prices. You made a joke about, you know, there isn't surge pricing or dynamic pricing for restaurant reservations, but there is in fact, you know, stuff that's happening where there are brokers buying or in this case maybe claiming reservations and then reselling them. So kind of chang the name on the reservation to a paying customer for the desirable restaurants. And then there's kind of more subtle things that happen where, you know, the most recent one that came to my attention in this space is American Express bought Resi, which manages a lot of reservations for desirable restaurants. And now if you are a platinum cardholder, you get early access to some of the reservation drops. And so again, it's a way of monetizing the hidden market so that folks who are willing to pay more, in this case the, you know, hundreds of dollars to get the, the Amex Platinum Card can now, you know, get.
- [32:58]
Caleb Zakrin
Get.
- [32:58]
Judd Kessler
First dibs to a certain extent on some of these scarce resources. And so it is a very kind of common thing that you see happening where money works its way back in one way or another. And there are economists out there who will say, oh, that's great, like prices are so great. We, we really want our models of prices to explain the world. And so isn't it great that price is coming back in? And if you can afford to pay for stuff, you might love it also. But if the goal is to spread the benefits more widely, or if the goal is to not give access only to the most well off folks, then these financial workarounds are a problem that the market needs to address rather than a solution we should be very excited about. And so that's a tension because there is very often a way to kind of buy your way out of the hidden markets. And I don't begrudge anyone using that if it's something they want and they can afford it. But it often is at the detriment of the system as a whole.
- [34:05]
Caleb Zakrin
Right. Another thing that you look at in terms of hidden markets, and this is something that I have been thinking about a lot actually is randomization and lottery systems. I think I've been thinking about lottery systems a lot in the context of politics, you know, where we have a system where the more, you know, money you have, the easier or the richer your friends are, the easier it is to almost essentially buy political office. You know, almost imagining a world where, where, you know, what if our congressional leader, you know, people in Congress were just some, you know, your neighbor that gets randomly selected to serve for a cycle. I don't know if that would necessarily be the best solution in the world. But you know, there is, there is a degree of equity or fairness that can come from randomization. You know, how can someone though, you know, oftentimes you think of rent, you know, lotteries as things that you can't really game them. Obviously you can, you know, maybe if you're in a raffle you can buy more, more tickets. But, but, you know, how do you think about randomization or lottery in terms of hidden markets?
- [35:02]
Judd Kessler
Yeah. So two things. One, let me tell you about how I approached it when I was thinking about, you know, giving advice for folks to navigate through hidden markets. Then I'll talk about lottery as a policy solution in other cases. But yeah, I started researching the chapter on lotteries and I had this framework in mind of I'm going to explain the market rules and then I'm going to give folks ideas for strategies to do better. And I started researching this chapter with the fear that maybe there wouldn't be any way to do better in these markets, because as you point out, the whole idea is that we're going to treat everybody equally. But it turns out that depending on the market rules, the specific lottery rules, there often is a way to kind of do a little bit better. And sometimes that involves what you get when you win. So there are lotteries where if, if you win, your whole family gets access to some benefits. So the US has historically had a diversity visa lottery program where if you want to come to the US and get a green card, if you win the lottery, you're eligible, but so is the rest of your family. So now all of a sudden, it makes sense for every kind of family member who's eligible to apply. And then you're kind of getting more, more bites at the apple. Same if you wanted to go to the theater, and if you won the lottery for theater tickets, you get to buy two tickets. Well, you should apply, but so should the person you're going to the theater with. And then sometimes the rules do not prohibit repeated entry. Like, I could, you know, if I have different email accounts, I can enter multiple times, or I can have my friends enter. And if they win, you know, they show up and give, get the prize with it handed over to me. Like, that may also be allowed. And I think of these as like a gray area of kind of bending the rules. But again, if you really value something and these are opportunities that you can take advantage of, I say go for it. And then there's lottery rules that are kind of more interesting and often more complex. Like, if you win entry into the London Marathon, you can defer it for a year because maybe you can't run that year. Well, all of a sudden, it becomes sensible to apply to the lottery this year, even if you can't run this year, even if your hope is to run next year, you can kind of win this year for next year, or you can apply lottery in again next year in the hopes of winning next year. And if you're pregnant or expecting to be, they let you defer for multiple years. So then you can start entering the lottery much earlier. There are some lotteries where they reward prior losers with extra chance of winning later on. So this is true for a lot of big game hunting tags in states across the US where if you want to shoot a mule deer, then you're going to need a tag that will allow you to do that. Lots of recreational hunters want these and they often are allocated by lottery. But because it's a, you know, annual hunting season, if you've lost the lottery for this tag in multiple years, many states will reward you with a higher chance of winning in a subsequent year. And so then all of a sudden there's a strategy of you should start entering the lottery kind of as early as possible because you know before you even think it might make sense to do so. Because that way by the time you're, you know, you've been in it for a while, your chances of winning have skyrocketed. So depending on the specific rules, there is often strategy that can help you to succeed. Even when the lottery is a random allocation.
- [38:29]
Caleb Zakrin
Do you ever play like the Powerball or lottery or buy scratchers? And if so, I always find it funny that they oftentimes donate the. There's a certain degree of proceeds that go to the Department of Education.
- [38:39]
Judd Kessler
Yeah, this is, I mean, I will do it when the Powerball jackpot goes over a billion because then it's like it's expected value is getting closer to even. And yeah, sure, some of the money is going to, to fund state education, but no, I mean it's fun to play the lottery, but it is not even after writing a book on how to design your own luck. It is not a good strategy if you're in it for the money to play the lottery.
- [39:10]
Caleb Zakrin
You also look at preferential ranking and I think preferential ranking is an interesting system in part because we're seeing it more and more in our political systems as well, where there's this notion that the outcomes can are potentially better with, with certain types of preferential ranking. I also feel like the preferential ranking system, there's a sort of a settle for silver outcome as well. How do you think about preferential ranking?
- [39:34]
Judd Kessler
Yeah, I like. So I like mechanisms that are designed, well, I should say that have the opportunity to provide kind of preferences over lots of objects. So as a parent with kids in the New York City public school system, I, when my kids are entering elementary school, I had the experience of ranking the elementary school programs that we were interested in. This is a mechanism that I knew a lot about in part because that professor I mentioned at the very start of our chat, Alvin Roth, was instrumental in helping design the mechanism for New York City and designed it in such a way that the best thing you can do is be honest about your preferences to start with the school you like the most and then list all of the schools that you would be happy to send your kid to, kind of in order of your preference. So there's not the same kind of settle for silver logic where you have to kind of misrepresent what it is that you want, because at some point on the list you can put your silver and bronze and all of the options that you are interested in. And I like these mechanisms because I actually think that they're quite easy for market participants relative to the other options. So people will often say, oh, it's complicated because I have to, you know, I have to think about all these different schools that I might want. But. But you have to do that in, in every mechanism that you play in. Like, you have to think, what is my favorite school? What is my second favorite school? What is my third favorite school? You know, where would I be okay with my kid going versus not. And the benefit of these systems is like, that's all you have to do, then you just have to report it. But you could imagine alternatives where you have to wait in line outside of the school on the day registration opens so you can sign your kid up for a slot and then you have to be there at three in the morning to get your slot. Or you have some kind of complicated process where you have to apply to schools, wait to find out what happens. Which was one of the. I described this in the book, but this was before a centralized clearinghouse where you ranked preferences for high school admissions. There were these rounds where you applied and then found out what happened and then applied again. But lots of people didn't get matched from those mechanisms because they kind of took too long. And so I like mechanisms where you rank your preferences. I like them for voting we had in New York City, for our primaries for city races, we had ranked choice voting. And again, it's a case where, you know, sure, it's a little bit more thinking than just, you know, picking one candidate that you're going to vote for. It's, you have to decide who I like the best, who I like second best. But it actually frees you from strategizing about, you know, okay, this is my real favorite candidate, but maybe he or she's not going to get enough votes to be competitive if I, if I only get one vote and it's, you know, whoever has the most votes wins. Right. So now I have to think about whether it's worth following my heart or following my head. With ranked choice voting, you can do both. You can rank the candidate you really love the most, but also kind of rank, your second or third choice, including somebody who you think has a higher chance of winning. And so I'm hopeful that we will see more of these mechanisms that take our preferences and use a kind of full list of them, rather than just having us pick one, one thing that we might want.
- [43:02]
Caleb Zakrin
Right. I think, too, also, like, I don't know if there's data to support this, but, like, my, my assumption would be that when it comes to preferential ranking, people are more likely to participate because they do feel like their voice can be heard. If they feel that, that, you know, their candidate or their choice or what they want has no shot at all, then they might not participate. And in general, I feel like participation is a good thing.
- [43:24]
Judd Kessler
I think that's great. I don't. I'd have to. I often hear the opposite argument, that it's, oh, it's more complicated and that'll scare people away. But I think your hypothesis makes a lot of sense to me also. It's like, if I'm really going to have a say, get to vote for the candidate I really want, but also have a say in who gets to win among the two front runners, that's a pretty compelling value proposition for going to the polls once. And so I do hope that indeed it pulls more people in and hears more voices than the other systems.
- [44:02]
Caleb Zakrin
One of the things that I like about this book is you have so many different examples, especially examples incorporating your children. And I think oftentimes economics is this subject where for some people, it can feel like this dry subject that they don't want to touch. But I think, as you show in the book, and there are other authors that other economists that have shown this as economics is something that is constantly appearing in all aspects of our life. And it can be extremely fascinating, especially when, you know, we take into account all the different behavioral choices that are involved. And I was wondering, you know, when you're sort of telling your kids about your interests, you know, how you go about economics, you know, what are some of the ways that you really go about, you know, instructing them, getting them to understand how a knowledge of economics can actually, you know, improve their life, improve their choices.
- [44:55]
Judd Kessler
Oh, that's great. I mean, so my kids are pretty young, so they're 11, 8 and 6 at the moment when I wrote the book, you know, because of the lag in publication, I talk about them as being 9, 6 and 4. But. But I, you know, I think a lot of economics is about kind of thinking through not just what it is that you want, but also what other people want and how those preferences play out in tandem. And so that is central to the ideas of the book, but it's also central to how I explain to my kids what it is that they're experiencing in their life. My older daughter, who's the 8 year old, is auditioning for theater production. And again, it's one of these settle for silver, go for gold things. She's one of the youngest people auditioning. So should she be auditioning for the lead? Well, it depends, right? Like if they're gonna see her that she's great for the lead but not gonna get it, maybe they'll put her in a kind of smaller role. That might be a sensible strategy. But if you only get the lead or get the ensemble, which she would rather be in a kind of speaking role, then maybe she should be going for something that she actually could get that where there's less competition, kind of smaller part. So these same kind of logic that I talk about in the book, right. I try to give my kids a sense of what the trade offs are, but it really is. When I was, I had a lot of trouble initially trying to, I guess, writer's block when I started trying to write the book because I wanted it to be approachable. I wanted folks to realize that it was, you know, we were going to be talking essentially about game theory, although I'm very proud of the fact they don't use the term game theory in the book at all. But I wanted it to be something that folks could kind of recognize that applied to them even if they didn't think like an economist typically. And I cracked it when I realized that I had to use my kids to explain the concepts. And so the opening of the book is me teaching my 4 year old daughter how to play rock, paper, scissors. And it's kind of an allegory for what the book is promising, which is she sees her older siblings play rock, paper, scissor, but doesn't understand what's going on. So can't figure out why they make these incomprehensible hand gestures at each other. And then one gets the television remote and one doesn't. So the allocations are happening and it looks like total randomness to her. So I teach her how to play rock, paper, scissors. I teach her rock beats scissors, scissors beats paper, paper beats rock. But then she plays for the first time against her older sister and she just plays scissors every turn. She really likes scissors, it turns out. And so of course her sister, even though she's only 6. Her older sister figures out she should be playing rock to beat scissors. And it dawns on me that it's not enough to kind of explain what the rules are. You have to understand what the strategies are to get what you want to achieve the goals in the market. And that once I figured out that that was an allegory for what was happening in the book and that talking about my kids and my family would hopefully let people kind of see it in a more approachable way, I was like, all right, great, I'm off to the races. And that kind of stuck with me throughout the book.
- [48:24]
Caleb Zakrin
Yeah, I think that approach is really effective because when people are also going about their day to day life, they're not going to sit there and try and chart out some equation. They're not going to actually sit down and be like, okay, this is how much, I mean sometimes do depending, depending on how big the decision is. But oftentimes when we're just going about our day to day life and we're trying to decide, you know, it's like, okay, if I leave now, you know, I might hit traffic here, but if I, if I leave 10 minutes earlier, then I'll have an extra 20 minutes so that, you know, like these, this sort of reasoning that people are doing all the time, like really is, you know, a form of economic thinking. And I think it's really a fun book that a lot of people would, you know, could really get a lot of value of, you know, if not just, just to be entertained. If they, even if they know the ideas, it'll, it'll remind them, you know, of some, some great ways to think so. You know, Judd, it was really wonderful to have you on the, the program and talk to you about your book Lucky by Design. It's just a, a fun book and I think you know a lot of the, the ideas, you know, like, I think you're right. Once you start to see hidden markets, you know, you start to see them everywhere and they, it really does, you know, they are just as important as, as explicit, you know, cash based markets. So than Guest thanks so much for having me.
- [49:40]
Judd Kessler
This was a lot of fun.
- [49:53]
Caleb Zakrin
Well, the holidays have come and gone once again. But if you've forgotten to get that.
- [49:57]
Judd Kessler
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Caleb Zakrin
Offer of half off unlimited wireless. So, so here's the idea. You get it now, you call it.
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Judd Kessler
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Caleb Zakrin
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Judd Kessler
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