← New Books Network
New Books Network
Richard H. Thaler and Alex Imas, "The Winner's Curse: Behavioral Economics Anomalies, Then and Now" (Simon and Schuster, 2025)
00:54:22
Loading summary
Transcript54 lines
- [00:02]
Podcast Sponsor/Ad Reader
This episode is brought to you by Netflix from the creator of Homeland. Claire Danes and Matthew Rhys star in the new Netflix series the Beast in Me as ruthless rivals whose shared darkness will set them on a collision course with fatal consequences. The Beast in Me is a riveting psychological cat and mouse story about guilt, justice and doubt. You will not want to miss this. The Beast in Me is now playing only on Netflix.
- [00:28]
We all love a legendary comeback and Degree Original Cool Rush is back and better than ever Cool Rush isn't just a scent. It's a movement, a fan favorite that delivers bold, fresh vibes and all day sweat protection. Whether you have a man that spends hours in the gym, heads into the office early, or is just trying to stay fresh on a long day, Cool Rush has their back. Head to your local Walmart or Target and grab Degree Cool Rush, the fan favorite scent from from the world's number one antiperspirant brand Ford, was built on.
- [00:59]
The belief that the world doesn't get to decide what you're capable of. You do. So ask yourself, can you or can't you? Can you load up a Ford F150 and build your dream with sweat and steel? Can you chase thrills and conquer curves in a Mustang? Can you take a Bronco to where the map ends and adventure begins? Whether you think you can or think you can't, you're right. Ready, Set, Ford welcome to the New Books Network.
- [01:33]
Peter Lorenson
Hello and welcome to New Books in Economics. I'm Peter Lorenson, Associate professor of Economics at the University of San Francisco. Co hosting with me today is my colleague Robizon Kubalashvili, who specializes in behavioral market design for online platforms. Our guest today is Alex Imas. Alex is the Roger L. And Rachel M. Gertz professor of Behavioral Science, Economics and Applied AI and the Vasilieu Faculty Scholar at the University of Chicago's Booth School of Business. His research, which has been widely published across top journals in economics, focuses on the behavioral economics of a variety of topics using lab experiments, field experiments, observational data, and theoretical modeling. Today we'll be talking about his new book called the Winner's Behavioral Economics Anomalies Then and Now. The book is Co authored with 2017 Economics Nobel laureate Richard Thaler and has a bit of a complicated backstory, but I'll let Alex explain that in a minute. Before we get started with Alex, I wanted to let you know that we're currently accepting applications for our Economics Master's programs here at the University of San Francisco. Our program on International and Development Economics, which I'M currently leading teaches students how to evaluate the causal impact of development policies using a rigorous toolkit of econometric methods informed by both classical economic theory and behavioral approaches. It's also distinguished by a major thesis research project closely supervised by full time economics faculty, something you generally can't expect in most master's programs. Our second Master's program is called the Master's in Applied Economics. It focuses on the digital economy with a distinct emphasis on the design of markets and online platforms and other topics that are crucial to understanding the digital economy. Because of this focus on the tech economy, we also complement the standard econometric tools with significant training in Python programming, machine learning, and other tools that are widely used by economists in this sector. Not as an add on at the end of the program, but starting from the very beginning and integrated throughout. Our students in both programs have a strong record of success whether they go on to public policy, work the private sector, or decide to continue their academic studies with a PhD. So if you or someone you know is interested, please check out the University of San Francisco website or feel free to look me up and contact me directly. But enough about us. Alex, welcome.
- [03:43]
Alex Imas
Thank you. Thanks for having me.
- [03:45]
Peter Lorenson
So, first off, let's just establish the basics for any listeners who don't closely follow academic economics. So just tell us, what is behavioral economics? What does that mean? Right, Economics has always been about people doing stuff, which is behavior. So what makes something behavior?
- [03:59]
Alex Imas
It's a funny term. So as you just said, economics is about behavior. So what is behavioral economics? Well, economics, the standard field of economics for a long time has had a standard framework for thinking about how people make decisions. And this framework has been based on principles of rationality, essentially. So these are axioms based on that outline how people should be making their decisions. So some of these axioms are things like continuity independence. Those who are very deep into economics know what I'm talking about. But the gist is essentially, you know, people aren't going to be making mistakes. They're not going to be making systematic errors in their beliefs. They're going to be, on average, correct. They might not have all of the information, but expost are going to say, look, I made the best decision I possibly could have given the information that I have. So this is kind of the rational backbone of economics. What is behavioral economics? Behavioral economics is essentially saying like, look, these principles of rationality are very, very appealing from a normative perspective, as in, this is how people should behave. But the question is, do people actually behave according to these principles and we have decades of psychology that preceded behavioral economics that basically suggested that people don't. They make all sorts of mistakes. They, you know, don't understand the law of small numbers, so they think smaller samples are more informative than larger samples. And beginning in 1979, with a paper by Danny Kahneman and Amos Tversky, the whole agenda of behavioral economics was born. Because that paper basically showed that, look, here are the core principles of rationality of your standard models. We're going to go through those principles and one by one show that they do not hold an actual human behavior. So it turns out that people are, for example, loss averse. When people should look like they are risk neutral, they're like, okay with risk generally in these sorts of contexts, that's the prediction of the standard model. Behavioral economics shows that actually they are way, way more risk averse than they should, which violates one of the axioms. So behavioral economics kind of to sum, is taking the standard model and adding psychology, saying, look, this is how people should behave. We agree everything's great on the should part, but it's not how people actually behave. And let's think about that more closely.
- [06:25]
Peter Lorenson
Okay, why don't you tell us more about the backstory of the book and how it's structured and kind of who the intended audience is.
- [06:32]
Alex Imas
Yeah, so the book has a really interesting backstory. So Richard Thaler is a great hero of mine. He's the father of behavioral economics, along with Danny Kahneman and Amos Tversky. So in the mid-80s, he got this opportunity to, to start writing columns for a new journal called the Journal of Economic Perspectives, which is still very popular and around today. And the gist, the end of this journal is that these are articles. As economics became more specialized, people in different fields weren't able to read each other's articles anymore because they were so technical. So the Journal of Economic Perspective is meant to say, like, look, a person from trade should write an article summarizing their research in a way that anybody else in economics was a labor economist. An econometrician could take this article and understand what's going on, what is the economics behind this research? So these articles are meant to be more accessible than like a standard sort of article in economics. So when this journal was first starting out, Richard was given the opportunity to write a set of columns called anomalies. This is something he came up with. He said he was given the opportunity to write an article and he said, look, I'm going to write one column per quarter that summarizes a anomaly. That's also part of the title of the book. And the anomaly. What is an anomaly? It is a behavioral fact that violates the standard model. So if people should be patient and not regret their choices, an anomaly shows that they're actually quite myopic and very much focused on the present, and they come up with a plan and deviate it from it in a way that they regret later on. This is an anomaly. So there's a column exactly describing that phenomenon. And so he wrote a series of these columns in Journal of Economic Perspectives, which largely introduced economists and people, social scientists more broadly, to behavioral economics. And in 1992, he basically said, like, look, I have enough for a book. So he took these columns and stapled them together and published a book called the Winner's Curse. And this book called the Winner's Curse has been kind of a standard Rabizan. You probably assign the winner's curse in your class. Many people do. It's a classic book in behavioral economics. In 2020, when I had first started the University of Chicago, Richard called me and he said, hey, actually, the Winner's Curse is going out of print or had gone out of print. The publisher said, hey, do you want to update it, get it back into print, and do you want to work on it together? It sounds pretty fun. We'll, like, spruce it up. It's an opportunity for us to work together. And I said, yeah, that sounds like a great opportunity. And, you know, six months of work and, you know, it'll be. It'll be really fun to work with Richard Thaler. So we did this together, and, you know, five years later, we have a new book. As the project evolved, it became a lot more ambitious. So essentially, we went from kind of just having, like, a little update to the book where we said, like, look, you know, here's. Here's a little chapter called the Update of Where we are Today. Instead, we said, we have a very unique opportunity to say, look, there's been 30 years of research in this field. Where is the field now? What? That required us taking every chapter and basically almost doubling it, sometimes more than doubling it, sometimes adding new chapters to say, here's the anomaly, as we understood in 1992. Where is the anomaly today? After 30 years of research? What. What is the evidence for that anomaly? Like, is there real world evidence on that anomaly? Did it hold up? So part of the book was also replication. We took all of these anomalies and replicated them to make sure they were robust to begin with. Some of the Listeners may be familiar with the replication crisis in the social sciences. This is something that we wanted to address head on in to say, hey, do we have a replication crisis in behavioral economics? That was part of this book as well. So to some it's just basic. The book is about two thirds of it is brand new, essentially saying, look, where is it behavioral economics now? Where did it originate? All of the original anomalies are still in there. But on top of those anomalies, each chapter comes with an update of where the research has been in the last 30 years. And kind of in the epilogue, in the prologue, we discuss kind of future directions and things like that.
- [11:08]
Peter Lorenson
Okay, so next, why don't you make this concrete and talk us through a little bit more detail. One of the anomalies, you can pick your favorite or do Winner's Curse, since that's the title of whichever.
- [11:19]
Alex Imas
Winner's curse is great. So Winner's Curse looks at kind of one of the most important results in economics, which is an auction theory, which is the idea of how people should be bidding in first price auctions. So this is super simple for people to understand. Look, here's an object. Say it's a mug. The person who bids the most gets the mug, right? And there's an optimal, in standard economics, given rationality, which means people preferences are they behave according to the axioms of expected utility theory and given correct beliefs about who they're facing, essentially what that means is that they should bid in a specific way, in a way where they have a value for the object. And given how many other people that they're bidding against, they should shade down to some extent. So if, if the cup is worth, you know, $20 to me, I should say like, look, 15 or 16 or something like that. So that's kind of like the, the gist of, of, of bidding. So what is the winner's curse? The winner's curse is the following. Let's say I take a jar of coins, I bring it into a bar or something like that and say, look, the person who wins this jar of coins gets the money in the coins, and I'll venmo you the money, you don't have to carry the pennies there. Everybody bids. And what you see consistently is the following, that the average bid is going to be lower than the amount of money that's in the coins. Which is kind of the standard sort of idea that values are bid down due to a number of factors. But what the winner's curse is the fact that the person who actually ends up winning will end up paying more than what's in the jar. And that's the winner's curse, because the money is money. They pay $25 for $15 of coins, they're losing $10. And that behavioral anomaly is called the winner's curse. And the interesting thing about the winner's curse is it wasn't discovered by, you know, experimentalists in the lab or people auctioning off coins. It was actually discovered by oil executives originally in the 70s. They started writing a series of articles about this phenomenon where they found that, look, these engineers that they pay a lot of money to go out there and say, like, look, we think that there's this much oil in these wells and now let's bid on those wells. What they found is that if they ended up winning a well, there was systematically less oil in there than they thought. And then they thought, well, this is pretty weird. What's behind this? And, and what behavioral economists have shown is a very simple intuition. So let's say there's this jar of coins, there's $15 of coins in there. People will look at it and some people are going to be too optimistic. They're going to think like, look, there's 16, 17, 25, $30. There's another group of people who think there's less. There's going to be 13, 12, 10, 9. The people who win the jar, it's not randomly deterrent. The winners are the ones who are most optimistic, who are wrong in a specific direction. So they're going to be consistently the people who overvalue the jar of coins. And that's why, hence the winner's curse, they're going to be losing money.
- [14:29]
Peter Lorenson
So the one, the sort of classic challenge to that, which you kind of undercut by having the oil example, is that you take a bunch of undergrads for some small stakes thing, put them in a room, they're like half awake anyway and then they bid some number then sure. Or, you know, you get a bunch of drunks at the bar, right? You're going to get kind of random stuff. But you're saying this is actually coming from a case where actually the stakes are very, very high. Right? Oil wells, there's a lot of money at stake. You'd think they would have figured this out. How, what's the, what's the story about? Like how does this kind of anomaly persist even when there's high financial stakes around it?
- [15:09]
Alex Imas
So with the winner's curse, and this is actually part of the reason we wrote the book in first place is, you're exactly right. The original anomalies in 92, there were some examples like the winner's curse, which started out in the field. But the majority of the anomalies, they were from the lab with half asleep college students making decisions either for no money or for very little money. And the pushback from economists was like, who the hell cares about these results? Right? We agree that this violates our principles of expected utility theory or whatever model, but we don't care because the people who we care about are in markets, they're professionals, they get exposure to information, they're making decisions at very high stakes, though the invisible hand of the market will make sure that the people who actually are determining prices are actually transacting for long periods of time. They're not going to have these biases, otherwise they'd go bankrupt or they just don't survive. And so what's happened to behavioral economics in the last 30 years is to say, look, we're getting better and better data. Let's take this data from professionals and see if they're making similar mistakes. And most of the papers that are coming out in behavioral economics now, I would say are coming from data sets from professionals making consequential decisions, showing that they're still making those mistakes. And so the big question is, why are they making these mistakes? Like why aren't they learning? And that's kind of like the, the million dollar question. I would say it depends on the context. So with the winner's curse, I think there some people are learning to some extent. But then for the most part, if you look at the data sets on the winner's curse, like from the NFL or something like that, you replicate the winner's curse year after year after year after year by the same teams. I mean, it's getting a little bit smaller. There's some, there's some learning, but it's very small. And the winner's curse is very significant still.
- [17:13]
Podcast Sponsor/Ad Reader
This episode is brought to you by Rakuten. The holidays are here, and that means it's the most wonderful time of the year. To save with Rakuten, use Rakuten to stack cash back at your favorite stores on top of of holiday sales. That's savings on savings. With Rakuten, you can get cash back on gifts for everyone on your list. From toys for the kids to kitchen gear for the person who loves to cook to electronics for everyone. You can even save on something for yourself. Cash back is automatically added to your account as you shop and you can get paid with gift cards, PayPal or check or eligible American Express card members can choose to earn Membership Rewards points, join for free today and get a new member bonus after minimum qualifying purchases. Just go to rakuten.com, download the app or install the browser extension. Terms and conditions apply.
- [18:01]
This episode is brought to you by Nespresso Gift Magical Mornings with Nespresso Vertuo Pop Compact and stylish, Vertuo Pop is made to meet every morning coffee craving, from espresso to coffee, hot or iced, at the click of a button. And celebrate the season with Nespresso's limited edition coffee flavors Sweet almond and hibiscus, cinnamon and candy tamarind and festive double espresso. Magic in the making. Shop the Holiday Gift collection exclusively@nespresso.com.
- [18:33]
Hello friends. Guess who? That's right, it is I, the replacer. Once again, I've been called on so you can play the new Call of Duty Black Ops 7 with three expansive modes, 18 multiplayer maps, and the tastiest zombie gameplay you've ever freaking seen. Call of Duty Black Ops 7 available now. Rated M for mature.
- [19:01]
Robizon Kubalashvili
And one follow up seems like you said, like this is all deviations from rational choice theory. What part of what axiom of rational choice theory is violated when people fall into this winner's course trap?
- [19:16]
Alex Imas
So the winner's curse trap is not actually a violation of the axioms of expected utility. There's so what Jet. So a lot of the papers coming out of behavioral economics, on top of documenting anomalies, also are looking at the psychological mechanism for it. So I would say the mechanism for the winner's curse. There's still work coming out this year trying to understand what's going on, why it's happening. So one of the most famous papers to try to think about the winner's curse was a paper by Matthew Rabin and Eric Eister at Matthew Rabin's not at Harvard. Eric is at UC Santa Barbara. And essentially they came up with the idea of cursed equilibrium going off the idea of winner's curse. And it's essentially you the idea that when I'm interacting in a market, I don't think that other people are bidding strategically against me in the fact that when I see somebody, you know, bid five, I don't take into account that they should probably think it's worth eight and shaded down. I think that they're, you know, they, they actually got a signal of five. And the fact that I don't think that I'm interacting with strategic players means that I'm going to be engaging in a way where I overvalue the good. And this idea is actually much broader than the winner's curse. So there's a very famous game in behavioral economics called the beauty contest. And the beauty contest that's named after this passage in an article by Keynes where he called the stock market is a beauty contest in the sense that, you know, back in the day there were these contests by, by newspapers where they have a full page of, of people's faces. And the people would sign, would, would submit through email saying, like, look, this is the face that I think is going to win. And the winner is the one who picked the face that everybody else also picked the most faces that other people picked. So what this requires is for you not to think, hey, what is the most beautiful face? The winner has the best theory of mind of what everybody else thinks everybody else thinks everybody else thinks. And he said the stock market acts the same the way you earn money on the stock market. And not to say this is the most valuable company, the way you earn money is to say everybody thinks that this is the most valuable company. Right. So you could come up with a game that represents this. And essentially the game is super simple. Everybody in a room submits a number between 1 and 100, and the winner is the person who submits a number that's 2/3 of the average. Right. So what does that mean? You can think, what would be the winner in a room? Okay, what is the game theoretic solution to this idea? Game theory is kind of the standard model that we have. And if you have a hundred numbers, you could think, well, people are kind of stupid. They're going to guess randomly. The average is going to be fifty in between one and a hundred. I'm going to multiply fifty by two thirds and I'm going to get to two thirds times fifty. And that's my answer. Right? But then you might think, wait, well, maybe they're not guessing randomly. Maybe they're doing the exact same thing I just did. So what I'm going to do is multiply 2/3 times 50 by 2/3. That's going to be my guess. Well, why stop there? You can say, well, I'm going to do 2/3, 2/3, so on and so on. So the game, the strategy that survives the elimination of dominated choices is saying one going all the way down. But if you run that game, guess what, you don't get one. That's not the result. The result is a distribution, but with very clear spikes. So there's A spike of people doing 2/3 times 50. Those are called K equals 1. Reasoners. They're like in the cognitive hierarchy of reasoning, they go one step saying, I think everybody is much stupider than I am. They're guessing randomly. I'm going to be the smart guy. I'm going to get 2/3 of that. And then there's another group which is the most. Usually this is the largest group to say there's going to be a. I'm playing against a bunch of people who are going to do 2/3 times 50. I'm going to be the smart guy and say 2/3 times that. And that's the biggest group. There's another group that says 2/3 times that, so on and so forth. But you get like three or four spikes that are 2/3 times 2/3 of 50, essentially. And that's the same mechanism that for a long time people have thought about the winner's curse as saying, like, look, people are not taking into account that they're actually bidding against other people who are also acting strategically.
- [23:59]
Peter Lorenson
But then in the. In practice, that's. Well, they kind of. Yeah, they're. They're not taking. Well, it's tricky. It's not. It's not that the other people are completely unstrategic, but that just not all fully strategic. We're sort of. We're in this difficult in between spot.
- [24:10]
Robizon Kubalashvili
Right.
- [24:10]
Peter Lorenson
If everyone were fully strategic, then it would be down at one, because you'd realize that whatever your strategy is, someone else should be having the same thought. And therefore, you know, if you have that sufficiently sophisticated theory of mind, you know, as many levels deep as it needs, then you end up at 1. That's not what happens. But like you said, it's also. Most people kind of make that first step, but not further steps.
- [24:33]
Alex Imas
Yeah. This is called the cognitive hierarchy framework.
- [24:37]
Peter Lorenson
So, so you teach at Booth, So you teach MBAs. So, like, how do you incorporate. This is a broader question. You sort of raise it. At the end of your book, you talk about how do we teach economics? And you correctly note that economics still basically teaches all the purely rational models as the bulk of the book. And then there's maybe one chapter or a few little side boxes kind of carefully separated from everything else that says, oh, but actually, in experiments, maybe something else entirely will happen. Behavioral economics, Nobel Prize. Here's a profile of failure or something like that. But then we go back to just assuming that everything's perfectly rational. And then people like you and Robizon teach whole courses on behavioral economics as Again, still a little bit firewalled from the rest of everything else. How do you think we should go forward? How do you try for MBAs, they don't care about our academic stuff, so they don't care what, whether something's fully coherent or something. They just want to know the news they can use or something. So how do you try to integrate both the useful when you're teaching a topic, I guess, do you teach topics where you're trying to teach how to do something? And the rational part gives you some insights, but then the behavioral part helps you moderate that for the real world. How do you sort of work all that stuff together?
- [26:01]
Alex Imas
So I'm going to preface to say I don't teach MBAs.
- [26:04]
Peter Lorenson
Okay.
- [26:06]
Alex Imas
At the University of Chicago, my colleague Devin Pope does teach behavioral economics to MBAs. So that is a class that is taught. But I think if I was to teach, and I think in future years I'm going to the behavioral economics to MBAs, I don't think I would change it much. Essentially, the way that I teach it is to say, look, you've learned in other classes the should part of economics, depending on your role in the world, that is still very important. But if your role in the world, your job is like something like marketing or consulting or something applied where you have to deal with people, the important thing is, is that you need to understand how people actually behave because that's how you're going to be creating policy. That's how you're going to be advising corporations. That's how you're going to be, you know, formulating advertisement campaigns. And the thing that I really stress, like, so, you know, I go through the anomalies, I go through behavioral economics. Here's the standard model. I always present the standard model. You can't do behavioral economics without standard economics. Here's the standard model. Usually that's review. Here's behavioral economics. But the thing that I really stress, and we stress it in the book as well, is the role of experimentation. So part of the class, I teach them from the ground up on how to run their own experiments, because I think that is a key skill for almost any job that requires you to figure something out about the other party, about other human beings, be it your customers, be it employees in a firm that you're advising. I think you really need to know how to collect data before making statements or before being confident about making statements. A lot of the time you're kind of flying blind and you're using the standard model to say like this is how I think people should behave. But why did behavioral economics become a field in the first place? Is because standard economics didn't collect any data. And so if you know, we were the field of economics, you know, Adam Smith wrote his wealth of nations in 2010. It might have looked very different. Well, not, maybe not wealth of nations actually Adam Smith was a behavioral economist in you know, Theory of Moral Sentiments. It's essentially a behavioral economics book. But you know, people who followed who had, they had better data, maybe the models will look quite different. They wouldn't say like look, you know, people should obey the independence axiom. They would say do people independent sexy and then work. Start the models from that, you know.
- [28:49]
Robizon Kubalashvili
One follow up question about running experiments. So here at USF we are very proud that we have only like 10, 15 students in each class. But at Berkeley, I'm going to be teaching Berkeley the next semester, I'm going to have 250 students. So have you done any experiment during like class to motivate some findings? And what would you recommend me to do? Like do you want to get up three hour classes? Like I'm worried that it's going to be too much so I'll just spend all this time running experiment the class.
- [29:19]
Alex Imas
The way that I incorporate experiments in two ways. One, I run the experiments in the class. So depending on the experiment, there's different interfaces that I use. I usually build my own through a mix of Google forms and Google sheets and stuff like that. So I have things, I run things like the beauty contest. I call it the guessing game. I do things like, you know, I run ultimatum games. I run ultimatum games with competition without competition, competitions with proposers, competitions with receivers. I run the market game where you like run. You basically have a pit market. You show, hey, this is like the standard Vernon Smith result. If you induce values, if you induce preferences, the economics works like absolute magic. Like the demand. Theoretically your demand and supply curves cross at a certain price. Equilibrium price. That is exactly what you see in the class. People's jaws are on the floor thinking, oh my God, economics is this magical thing. And then you tell them, all right, let's do this. But introduce asymmetric information. All of a sudden things break down, okay, let's do this. But I'm going to give you goods with a public posted price. But it's your good now sellers don't want to give it up. Demand supply and demand curves don't cross. Cosis theorem is violated. So things like that. So I run all of that in class like Basically every single anomaly. I run a lot of informational experiments, like how people learn from information. Like, I run a case called Speed Ventures, for example, which is about like conditioning on the deep end and variable. It's like, basically that takes all class because they have to like, solve a case and, you know, present what data they're going to collect and like, make a decision based on it. And then at the end of the class, I say, hey, you guys are all wrong. You guys all selected on the dependent variable and didn't ask for this very obvious piece of information that completely even invalidates your decisions. So, yeah, so I do that on. In addition to that, I have them design their own experiments to run on crowdsourcing platforms. Basically, they submit proposals, they all vote on the proposals. The winning proposal, I design with the student. Then on the day we have two or three of these days, we go through the design, I launch it in the beginning of the class. By the end of the class, the data is already in. We analyze the data and we answer the question.
- [31:53]
Robizon Kubalashvili
Short question. I remember a few months ago I talked to Reynolds Mead and he said when he. When he ran his first experiment in 65, 69, I don't remember, he could not believe that what he saw in the data. So he went back and he thought, like, I must be wrong. Like, there is something wrong. So have you had this kind of moment in your research or is there anything similar in the book that we.
- [32:16]
Alex Imas
I mean, I think. I think the consistency of the endowment effect is always fascinating, right? Just because it's like you just give a person a good. And you say the endowment effect is basically, you randomly assign half the room, a mug, half the room. You give them some cash and you say, look, how much are you willing to pay for a mug? How much would you need to be paid to give up the mug? Coase theorem, which is like, basically underlies a lot of economic analysis, says that it doesn't matter who gets assigned ownership rights. The people who value the thing most could. Basically, you could arrange a series of transfers where the people who value the goods most end up with the goods at the end. So ownership doesn't matter. Turns out that when you do the behavioral economics of this, once you essentially get something to own, your value for it somehow doubles. And there's a conversation for why it happens. But the fact that, you know, sellers, all of a sudden, their minimum willingness to accept doubles the valuations that buyers submit to pay for the same good, which basically leads to a market breakdown where nobody trades almost. I Mean the consistency of that result is just, it's almost as good as the original Vernon Smith result. You like literally have the original Vernon Smith result. Prices crossing, market clearing. And then you see these things just shift all the way through once, you know, tokens become mugs.
- [33:44]
Peter Lorenson
So getting back to the other earlier question about sort of how behavioral should integrate into both the practically and teaching into regular economics. You know, you set it up as, oh, well, you could. You learn the standard model, which is how you should behave. And then when you get to behavioral economics, you learn how other people behave. But a lot of our classes are not about just, you know, personal optimization. They're about, you know, monetary policy, international trade, you know, industrial industrial organizations, you know, business strategy. And we teach people saying, okay, this is what'll happen because the other firm is perfectly rational and optimizing, and you're perfectly rational on optimizing and this is how you guys will interact. So I feel like it's not the right mix to just say, okay, we're going to teach you that as an imaginary thing which never really happens. And then we'll teach you some exceptions in another class. But I'm not quite sure how they should be integrated either. Have you given that any thoughts?
- [34:41]
Alex Imas
I have given that thought and that's something that Richard and I think about a lot. Like, what does behavioral macro look like? What does behavioral trade look like? What does behavioral, you know, international economics look like? And I think the issue is there is that, you know, the behavioral side hasn't really developed to a, you know, there's people who are working in that space. Certainly, you know, the heterogeneous agent models folks. Ben Moll is doing work on this, like thinking about, like incorporating behavioral frictions into macro models. But this literature is so much newer than everything else we know about economics, sorry, behavioral economics. I think, you know, in 30 years we may look back and say, like, look, we really could be teaching all of economics as a behavioral economics course right now. I'd say most of what we would teach as behavioral economics is consumer theory. You know, I would say that there's something to say about producer theory that's interesting. There's something to say about IO that's interesting for behavioral finance. Easily you could teach a whole class. Finance has been the most successful subfield, I would say, of behavioral, both on the asset pricing side, on the corporate side, individual investor side. Like there's just rich literatures thinking about these things that are, you know, have been developed for 25 years. So just like really feel Dependent on like how much behavioral economics can say. So, like, no, I would not say like we need to teach trade from a behavioral lens. I would say we could have, we could, you could sit down and think about how to carefully redesign Econ 1, Econ 101 consumer theory. You could carefully redesign an elective finance class to incorporate behavioral finance, but I don't think you could. It's. We're at a point where we can say like, let's scrap macro and start from first principles.
- [36:42]
Peter Lorenson
Well, I guess I'm glad that you haven't solved it either. I definitely struggle with that sometimes. You know, even like I teach, I've been teaching game theory for a long time and I've kind of torn about whether to do like, obviously it seems fun to play the games in class and very engaging. But then, you know, yeah, you introduce the games and then people behave in behavioral ways and also they haven't really thought about the games that much and I don't have a whole bunch of money to give them real prizes. So then they do things like they're very altruistic and ultimate endgames. They're much more cooperative in prisoner's dilemmas and all this kind of thing. And then they try to use them. Okay, but let me now tell you about this math that says you should behave totally differently. Except, yeah, it's that kind of thing. Like, okay, I should behave differently in a prisoner's dilemma if that's my payoff structure. But then I'm doing one thing and then the whole point of game theory is to actually have a theory of mind about the other person. But it's a theory of mind that has them be highly rational. And so it gets, gets kind of a muddle trying to bring in the practical thing in with the kind of crisp, crisp but mathematically challenging theory. You're tuned into Auto Intelligence live from Autotrader where data, tools and your preferences sync to make your car shopping and smooth. They're searching inventory. Oh yeah. They find what you need, they gonna find it. You can make a budget for your wallet to help you succeed.
- [38:01]
Alex Imas
Pricing's precise and true. So true it's smarter car shopping.
- [38:05]
Peter Lorenson
Oh, just for you. Oh, it's just for you. Find your next ride@autotrader.com powered by auto.
- [38:14]
Podcast Sponsor/Ad Reader
Intelligence this episode is brought to you by Peloton. Break through the busiest time of year with the brand new Peloton Cross training Tread plus powered by Peloton iq. With real time guidance and endless ways to move, you can personalize your workouts and train with confidence, helping you reach your goals in less time. Let yourself run, lift, sculpt, push, and go explore the new Peloton Cross Training Tread plus@1peloton.com what I bought a new.
- [38:43]
Blink Mini 2K smart security camera. What I got 2K clarity, sharp enough to see every detail of home when I'm away. Plus audio like I'm in the room, not with my bestie traveling to another city. Plus easy plugins set up to install faster than skipping through podcast ads. But you'd never Skip ads, right? Plus I got all of this for just $49.99. Blink Mini 2K+ mini camera, max performance shop now at Amazon.com Blink Game Theory is the whole.
- [39:13]
Alex Imas
The model of game theory is not the preferences, right? It's the, it's the strategic interaction part. So it's almost like the original kind of way that game theory is taught is almost like a placeholder for whatever preferences you might want to say. So, like, not cooperating in Prisoner's Dilemma is not. Is the equilibrium prediction of a specific model of preferences, Right. But let's say you observe operation in Prisoner's Dilemma. Does that mean game theory is wrong? Like, absolutely not. People are still acting strategically. You just have misspecified numbers in that. In that. In the, in the game, right? So, like, I could, I could write down, like, altruistic preferences which people have which will get you cooperation. And that's still game theory. That's still Nash equilibrium, right?
- [40:00]
Peter Lorenson
Yeah, it gets, just gets trickier to. Yeah, that's, that's definitely one. One way I focus on it is to say just these are the payoffs that incorporate everything you care about, right? So maybe you have, you know, some compassion for the other person, but there's a bazillion, you know, a billion dollars at stake. So there's your compassion. Is $1,000 knocked off the billion dollars, but it's still a billion do. Then what would you do? But yeah, it does make a little bit harder to convey.
- [40:24]
Alex Imas
Yeah. The tricky part about game theory, I would say, like, is teaching, like, cognitive hierarchy, which is a model that breaks down the idea of Nash equilibrium, right. So that, that is a more challenging thing for game theory rather than social preferences. I think social preference is cooperation. What happens in the public goods game, what happens in the ultimatum game. These are not things that violate the principles of game theory. These are things that violate the way that you write down the numbers that go into the game form, which is not game theory. This is not a concept of Equilibrium cognitive hierarchy violates the concept that people will play in the first round. The Nash equilibrium.
- [41:06]
Peter Lorenson
Yeah. So takes a lot more practice. Or maybe they'll never fully get it, as you said, like in that, in the, in the Keynesian beauty contest guessing game, they may never get to that point where they all just pick one. Let me shift gears and ask another question. So you mentioned the replication crisis in the social sciences and I think especially in sort of experimental psychology, which is very closely akin to behavioral economics. And you said you guys went through and redid all these classic experiments as well as reviewing subsequent literature to make sure that they're all robust. Do you feel like has, has behavioral economics, at least as performed by economists, kind of missed this replication crisis? And if so, is there something different about the structure of how research is performed and evaluated in economics? It's different from other social science disciplines? Or is it just. Or is it is about the same? Like what's. How would you characterize that?
- [42:02]
Alex Imas
So, you know, just looking at the data on replicability there, there was a Science article in 2011, I think that looked at the, There were, and there was a few science articles. One looked at the replicability of social, social psychology and found like, you know, I think 22, 25% of the experiments replicated. And then another group looked at economics, it's an experimental economics. And the replication rate was, you know, not perfect, but it was like three times as high. At least it was like 70 something percent, which again, not perfect. There's room for improvement. It. But it is markedly higher. And the thing that I've been thinking about for a while, which is what we discuss in the epilogue of the book, is why is behavioral experimental economics? Because if you think about it, the experiments we run aren't that different from psychology experiments. There's incentives, you care more about markets, but you're still doing experiments with people with instructions and all of that type of stuff. And I think it really, you know, you mentioned Robizon, you mentioned Varnan Smith and I think he like really did he. I just, I want to give him credit for this. I think he is the reason for us having a different way of doing experimental work. When you look at the original Vernon Smith papers, they not only have the instructions in the back, they have the data in the back. Like literally each data point is in the back of the paper. So there was a culture of openness from the beginning. On top of that, there was a culture of cumulative science in the sense that if I'm interested in how people behave in markets, I will be rewarded in terms of publication. And if I take a design that somebody else had run and build on it directly by adding in a new condition to explore something else, what that means is that as part of my new paper that gets into a good journal, I am replicating somebody else's work. So it's not like I am replicating for the sake of replication. I'm replicating as part of science. And if something doesn't replicate, that kind of comes out naturally through the process. And because you, you know, so you think like, oh, maybe have we found a bunch of stuff that doesn't replicate? And like, have they been discredited? I think people understand that, like, when you're writing, when you're, when you're trying to write a behavioral economics, experimental economics paper, people are going to replicate it because that's just how the science works. So the way that they conduct science in the first place changes. And that requires, you know, bigger samples in some ways, again, this openness and things like that. So, like, I think the cumulative part of the science has allowed experimental, behavioral to have a higher replication rate. Again, not perfect by any means. I don't want to claim it's perfect. You know, there's a big distance between 100% and like 66, 70%. But given, well, it's substantially higher than other social sciences and our replications of the original anomalies. I think we, we, we replicated everything except for one result of prospect theory, which we already know doesn't replicate, which is the convexity in the loss domain where people chase their losses even when there's no possibility of getting back to zero. So there is more risk seeking after a loss, but only if that lottery allows you to break even. So this is the 1991 Thaler and Johnson paper, which again showed, given this cumulative science, we already know what those in replicate by the time we do the replication.
- [45:53]
Robizon Kubalashvili
Another thing like, do you think part of this was due to the fact that behavioral economics was not perceived as good science? And they had to be like, whatever they did, they had to be done really well because all the neoclassical economics.
- [46:08]
Peter Lorenson
Yeah, yeah.
- [46:09]
Robizon Kubalashvili
After you.
- [46:10]
Alex Imas
Yeah, exactly. So like, the culture of replication was there from the beginning because everybody was trying to replicate these things. So, you know, the ultimatum game, for example, which is like really kind of a crazy thing to be discredulous about. So the ultimatum game, I mentioned it before. Let me just say what it is. You know, Peter and I, let's say we're playing the ultimatum game. I have $10. I decide how much to give to Peter. Peter can say I'll accept the offer and then we get the split that I've decided. Or he says no and we both get zero. Sub game. Perfect equilibrium is essentially to say to go backwards to Peter's decision. Does Peter take $5? Yes. Does Peter take $4? Yes. Does Peter take any amount that's positive? Yes. Because something's better than nothing. Now let's go back around now. What's my decision? I'm a wealth maximizer in this model and I want to keep as much as possible and I know Peter is rational. So then I will give Peter the smallest possible amount, which is, you know, a penny. If I can give a penny. That's the prediction. What is the ultimatum? Gain data with this is a Vernor Guth paper from the early 80s basically showed that low offers were rejected. So Peter would reject anything under $2. That's the average profit maximizing offers were around $34. So a little less than half and the modal offer is just half split the difference. And that is the, that that game was, you know, that published in 1981. If you're a human being, you'd say, of course people get pissed off at getting offered a cent. Why would they accept it? Economists reaction was that's crazy. A penny is better than nothing. These people are crazy. We're going to replicate the hell out of this. So this guy, Ken Bidmore in the uk, you know, he went to town on this thing. We write about it in the book. He, he basically in one of the experiments, he told explicitly to the subject, you would do us a favor as experimentalists to just take whatever you can get. You know, just madness. But you know, this is what behavioral economics was, was, was exposed to and like, you know, trial by fire. You, you if you know you're going to, you're going to face an adversary that's going to try to replicate your experiments. You make sure you're publishing stuff that replicates.
- [48:28]
Peter Lorenson
So I guess the difference between like, so you probably know this intellectual history better than me, but like with the, say the results on priming, I guess from that Kahneman I think wrote up in his book, I heard that he kind of felt like he had to acknowledge that those didn't hold up. So there were lots of studies, I guess lots of studies showing priming in a lot of different contexts. But I guess no one was, is the key that no one was really repeating the exact same study and then just adding one increment onto it, they were kind of each. I'm going to do priming with this thing, I'll do priming with that thing. And then.
- [49:03]
Alex Imas
Exactly. It was like. It wasn't. Like, it wasn't cumulative. It was to just say, like, look, there's a concept of priming. And by the way, I just want to draw this distinction. Priming is an extremely robust phenomenon in cognitive psychology. It. Priming is a very basic part of the human brain. It's to say, look, if I trigger memories of a certain sort with a Q, you're going to generate outputs that are associated with it, right? So if I give you a sheet with a bunch of L's on it and ask you what words come to mind, you're going to think of words that start with L. You're going to replicate this. This is a basic phionic. So when people say priming is not robust, that's not. Priming is extremely robust. What wasn't robust is, was this. A few researchers took this like very, very far is to say, look, this association works. So I would say robustly is not the right word. It's so prevalent that you could get associations on any level. So like, the classic study that failed to replicate is this. You know, you had this sheet word, you had people do a word search. And some of the words, in one condition, the words were just random. In the other condition, there were like words like orange and palm trees and stuff like that. And the idea was that was supposed to prime Florida and that was supposed to prime old people. And then the result was that people walked out of the room slower because they were old people. That it's a real result. And this did not replicate. This was one of the first project. This was one of the first papers that kind of started the whole thing. And so that's not really. That's a very specific way of priming. So like, if, if this was behavioral economics, somebody would say, oh, old people, let me dig into the mechanism and let me use their exact design and publish a paper in a top journal taking that exact design and doing. Doing something like adding another condition. But that doesn't happen because the reward system was that you need to come up with an even cleverer way to demonstrate priming. That has nothing to do with that. In fact, it has to do the. You need to move as far away as possible from that result in order to get a good publication. So that's once one part that didn't replicate. But I will say that cognitive psychology works exactly like behavioral economics. It's A cumulative science where people use established paradigms to dig deeper and deeper into the question. So when you look at the replication rates of cognitive psychology, they actually look very similar to behavioral experimental economics.
- [51:53]
Peter Lorenson
So the key is, I guess, that whether there's a real underlying kind of. Well, I guess econ we have the benefit of having. Even if it's the enemy in some sense, the rational model is the thing we're constantly pressing against, and we're looking at exactly how people depart under what conditions and kind of building out in a consistent way. And then cognitive psychology, they have their own frameworks of how brains work, but they're really trying to get an understanding of how brains work. Whereas social psychology kind of maybe went more into a kind of bestiary of like, here's one other cool thing. Okay, I found it. It's done, it's been found. Now someone else can find something else. Cool. There's no point in verifying whether this animal actually exists that you claim exists. It's just, you know, semi did.
- [52:34]
Alex Imas
I also don't want to throw social psychology under the bus either. I mean, there's like the minimal group paradigm research in social psychology, which is super robust, and many people build on this paradigm and. And replicate it and. And work with it. So it's like, it's not really about a field necessarily. It's about there. There's a way of doing cumulative science, and then there's a way of not doing cumulative science. And if you're doing cumulative science, it tends to be more replicable. Great.
- [53:01]
Peter Lorenson
Well, we're just about out of time, so really appreciate you taking this hour with us and learned a lot. Had a great conversation about the book and also about behavioral economics in general. Just last thing, actually, do you want to take a couple minutes to tell us about. What are you working on now on your own research?
- [53:21]
Alex Imas
I'm working a lot on the intersection between behavioral economics and firms and like, how actually Rebizon, you're working on, like, digital marketplaces and things like that. That's kind of where my research is going as well. So thinking about, like, how attention is captured by social media platforms, how does the structure of social media lead to, you know, behavioral biases to be exploited or not exploited and like, essentially like market design with behavioral economics. So I'm kind of thinking a lot more about the firm side. So a lot of my research had to do with kind of individual decision making, kind of like how people respond to losses, how people mentally represent a given problem. And now I'm thinking about the other side about like how do biases interact with the marketplace, which is nothing new. Of course. You know there's papers from 2005, one of the most famous papers by Stefano Delavigne and Enrique Malmendier and kind of doing IO with present biased consumers. And my research is kind of moving into that space as well. Great.
- [54:29]
Peter Lorenson
Well, thanks again for joining us and thanks to everyone who's listened through the podcast all the way. If you're listening and you like the show, please consider leaving a rating or review on your favorite podcast app in order to help other people who might enjoy it find it as well. I'm also happy to receive feedback by email. I'm easy to Google or you can find my contact info in the show notes to keep the conversation going. But again, thanks again to Alex Imas and the title of the book is the Winner's Curse, so make sure to get yourself an actual copy and read it. There's a lot of insight in there.
- [55:07]
Alex Imas
Thank you, Sam.