Episode #337: Professor Richard Thaler, University of Chicago, “When Somebody Would Fire Us, It Was Almost Always At Exactly The Wrong Time”
Guest: Richard Thaler is the Charles R. Walgreen Distinguished Service Professor of Behavioral Science and Economics at the University of Chicago Booth School. Thaler is the 2017 recipient of the Nobel Memorial Prize in Economic Sciences for his contributions to behavioral economics. Thaler studies behavioral economics and finance as well as the psychology of decision-making, which lies in the gap between economics and psychology.
Date Recorded: 7/15/2021 | Run-Time: 54:41
Summary: In today’s episode, we’re talking about Nudge: The Final Edition! We talk about all the ways choice architecture and nudges affects financial services – including how we save for retirement, pay our taxes, and choose an insurance plan. We cover some fintech companies using his ideas to help consumers have better outcomes, and then cover some companies that are nudging consumers in the wrong direct.
As we wind down, Professor Thaler shares the concept of sludge and how it applies to things like cancelling subscriptions or registering for the new child income credit payments.
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Links from the Episode:
- 0:53 – Intro
- 1:45 – Welcome to our guest, Professor Richard Thaler
- 3:29 – Why he chose to update Nudge
- 5:37 – Mental accounting and portfolio upkeep
- 7:46 – Playing with house money
- 11:46 – Nudges to make retailer trading apps better for end users
- 15:53 – Sponsor: NordVPN
- 17:11 – Nudges for retirement plans and savings
- 22:39 – Thoughts on target day funds
- 25:34 – A forever fund and having investing patience
- 29:06 – The lack of financial education in the public school system
- 34:45 – His perspective on the complicated U.S. tax system
- 42:24 – Public versus private adoption of his ideas
- 48:13 – One of the most memorable uses of an idea from his book
- 51:07 – Why you shouldn’t insure the small stuff
Transcript of Episode 337:
Sponsor Message: Today’s episode is sponsored by NordVPN. Go to nordvpn.com/meb or just use the code MEB to get 73% off a two-year plan, plus four months for free. I’ll tell you why later in the episode.
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Disclaimer: Meb Faber is the co-founder and chief investment officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.
Meb: What’s up, everybody? An amazing show today with a Nobel Prize-winning professor, our guest is the co-founder of Fuller and Thaler, Professor of the University of Chicago, an author of multiple best-selling books, including his updated release, this week, “Nudge: The Final Edition” In today’s show, we’re talking nudges. We talk about all the ways choice architecture and nudges affect financial services, including how we save for retirement, pay our taxes, and choose an insurance plan. We cover some FinTech companies using his ideas to help consumers have better outcomes and then cover some companies that are nudging consumers in the wrong direction. As we wind down, I guess, shares the concept of sludge and how it applies to things like cancelling subscriptions or registering for the new child income credit. Please enjoy this episode with University of Chicago Professor, Richard Thaler. Professor Thaler, welcome to the show.
Prof. Thaler: Thank you. Good to be here.
Meb: I’m so excited to have you here. We’re going to be talking about a lot of different things, but first you got the new edition of a book out, “Nudge,” which is probably one of my favorite books of the past decade and it’s called the final edition. I got to kind of give you a hard time because I now have a song stuck in my head because every time I picked up this book, I hear “The Final Countdown” by Europe. Do you know that song?
Prof. Thaler: No, I don’t. But that’s good.
Meb: Why do you call it the final edition? What’s going on?
Prof. Thaler: This book got written because of the pandemic and we were nudged to write it by the fact that our contract with the Paperback publisher had expired. Took somebody 18 months to find that out. But sometime in April, 2020, we had an email saying, “Hey, your Paperback contract is expired and they want to re-up and maybe you want to write a chapter or something like that.” So we started thinking about it. I found a copy and started reading through it. And there were things in there that sounded archaic. Like we were talking about the spiffy iPod, and that just makes you cringe. And there wasn’t that much to do around those times. And so we just started writing and ended up basically writing it over. And I didn’t want to do that again. So this is the final edition.
Meb: We’re going to dig into a lot of the topics. And I spent the better part of the last week talking to my wife about a lot of them. And one of the sort of blue pill, red pill framing that you guys talk about, that it’s hard to look at the world in the same way after is this concept of choice architecture and how little, you call it small insignificant changes can have major impacts. Can you describe what that is for the listeners so we can start to particularly look how this works, the world investing and everything else? What’s that phrase mean?
Prof. Thaler: Choice architecture is just a fancy phrase for the environment in which people make a decision. So if you think about going to a restaurant, the chef or somebody has decided what things will be for sale and somebody has the job of putting that on a menu. And once you do that, then you have a bunch of decisions to make, what order things appeared, how they should be grouped. Are there appetizers, entrees, or there is a special category for salads or pasta if it’s an Italian restaurant and then within category, what the order is. So we’re all choice architects. You’re the choice architect for this interview. You asked the questions and you thought about what questions you want to ask, in what order. People listening, the show they’re getting was altered by your decision as the choice architect. And nobody goes into a restaurant and thinks that what they ordered was influenced by the order in which the items on the menu appear, but they were. And to a first approximation, everything matters. So this is a phrase that we coined and now it’s become a field of study, choice architecture.
Meb: I think a really relevant example thinking about this is we talk a lot about individuals portfolios and in a world of 10,000-plus funds and untold securities around the world, this kind of concept of building a portfolio, you guys, the phrase I loved was it can either be paralyzing or it can be empowering. The challenge is so many people or the way they construct their portfolios, they end up with this just sort of, it’s like their garage, mess they’ve acquired over like two decades. And there’s the phrase in the industry we like to use, is mutual fund salad. They ended up having like 30, 40 funds just kind of…they’ve collected. And if you were to ask them to start from scratch, they would probably never start with that portfolio. There’s like five different of your behavioral reasons what’s going on there. But I think for a lot of people, they feel that sort of paralyzing when it comes to a lot of choice.
Prof. Thaler: Just riffing on that, another concept that I’ve spent most of my life talking about is mental accounting. So emics tells us that money is tangible and it doesn’t matter whether I have money in my right pocket or my left pocket. But in the context you were talking about, one thing you see is people that behave very differently with what you might call old money, a new money. So money that’s been sitting in some retirement account for years, people just don’t think about it. At least most people. There’s lots of inertia in those retirement accounts. But if you get some check that you have to invest, now, all of a sudden, you’re starting to think about, “Oh, is the market high or low? Is this a good time to invest?” Whereas in your retirement money, it just gets invested every month, you don’t think about it. When the market went down in the spring of 2020, most people just weren’t thinking about it.
Meb: Particularly when you look at where we are in 2021, this may trigger you like it did me last year. This year, I just kind of laughed because it got even more extreme, but there are a couple of companies that do expectation surveys, Schroders being one this year and a Texas. And they do an annual survey and they asked investors, what are their expectations on their portfolio. And I imagine you can see where this going, but last year’s…and these are two totally separate surveys, last year, Schroeder’s added it and the U.S. was the highest in the world at 15% and this year, and it takes this, had the U.S. highest in the world at 17%.
Prof. Thaler: This is for the next one year?
Meb: I think it’s the next 5 or 10, just like what’s your portfolio going to return in the future, 5 or 10 years? And so the best part about the new Texas one, and this isn’t fair because most people, I don’t think really understand the difference between real and nominal. That was 17% after inflation. But I read your book and the topic that I thought really nailed it on the head besides overconfidence, besides the reasons bias was this concept of house money where people may be thinking about, “Hey, I’m willing to risk, push this out because I’m up so much.” What do you think the world looks today?
Prof. Thaler: I’m not going to fall into the trap of making a forecast, but it’s interesting, some guys at Duke, Cam Harvey, being one of them, have been doing a survey every six months of Fortune 500 CFOs and asking them to forecast the returns on the S&P 500 for the next year and asking them for confidence intervals. So what do you think the return will be over the next year and give a high and low estimate? So if there’s a 10% chance it’s higher than your highest estimate and a 10% chance that it’s lower than your lowest. So the realization should lie between those 80% of the time. If you look back over the history that they’ve been doing this survey, the realizations lie within their limits about a third of the time and their forecasts are essentially useless. And these are not just random people. These are the CFOs of the world’s largest companies. So I have no idea what the market is going to do and neither do you, but I think we can agree that expecting returns of 17% real going forward is optimistic.
Meb: A study I’ve always wanted to do, and you have more PhDs students or low-cost academic youngsters that would probably be a great PhD project is I always wanted to say, look, let’s take a hundred of the most impactful “Wall Street Journal” headlines over the past century and they can’t be like the market crash today. It’s got to be something like Pearl Harbor or something, just a global event and then say, how do you think this impacts stock returns over the next week, month, year and see how people… Oh, sorry, you had the news event ahead of time. So you see what happens in the future, the next day, we called it like tomorrow’s news today and then see how it works. PhD students who are listening and you want to run this project, let me know. I’ll help fund it, but I’ve always thought this sort of short term forecasting, even if you knew the future, may not prove out to be even helpful as well. But that’s an aside. One day.
Prof. Thaler: There is an old paper that’s not exactly that. One of the authors was none other than Larry Summers. So you might look for that.
Meb: It’s funny because we had Cam on the podcast right before the pandemic. I think it was the summer before the pandemic and he was talking about his famous yield curve. And he says, “Normally this predict something weird is going to happen. Pretty good track record. I don’t know what it’s going to be.” And then fast forward a few months later, the things of last year. All right. I’m going to hop on some different topics. So this may be a little scattered, but there’s a lot I want to squeeze in today. You talk about a lot of different nudges and ideas in this book and talk about policy ideas that would be helpful, beneficial, some that are kind of doing it in the wrong way. While we’re still here in 2021, we have… 2020 was weird. 2021 seems to be getting weirder with the meme stocks, with retail trading going absolutely bananas.
Let’s say that Robinhood calls you up and they say, “Look, we’re about to go public. We’re $50 billion company. We realized in the past, our app is probably not nudging for good that your book, the big takeaway was like, let’s try to help and not inflict harm, and Professor Thaler, we’re going to pay you a consulting fee million dollars a day… Maybe too low for your going rate, whatever may be, help us get better. We actually care about getting better,” which I don’t think they do, but let’s say they say, “We want to actually have a positive impact on our investors,” what would you kind of guide? And it doesn’t have to be Robinhood specific, but a brokerage like that, say how would you consult them or give them some helpful nudges to help people out a little bit?
Prof. Thaler: One thing, and I think this applies to any place that people invest, specifically something that’s catered to people who are trading individual securities which my advice would be don’t do this. And the reason is it’s hard, but a tool that I dare any retail brokerage firm to offer is to supply people with benchmark-adjusted rates of return. I don’t know whether you remember this old…there was this group of little old ladies that wrote a book. They had an investment club and they had great returns and they wrote a book and it turned out they didn’t have great return and they just had computed it wrong. And that’s not surprising. It’s really hard. If you’re buying and selling stocks, unless you have specific software, you’re going to do it wrong and you have to risk-adjust in some way? And it’s not surprising that no one makes it easy for you to see how you’re doing compared to picking stocks at random. Now, it might be that over the last year that Robinhood investors are doing better than the market precisely because they’re heavily invested in these memes stocks that seem to be selling for stratospheric prices, but over the long run, I think that would be very useful feedback.
Meb: The hard part too is as, you and I know, have been through a few different cycles and any investor that’s old enough that has the scars to prove it. So many of these regimes can last a really long time and even stocks versus bonds, foreign versus U.S., value versus growth, we always tell investors when they used to ask me, say, “Meb, invested some of your funds, how long should I give it?” And I used to say 10 years and they would laugh awkwardly. And now I literally say 20. And I say, because if you look at a lot of these…and this isn’t me trying to get out a period of underperformance, but rather that I say, even stocks versus bonds can go decades with one in the lead and one in not. So it’s hard. And I think the challenge of the consumer, once you look through this framework of choice architecture, is you start to notice some of the nudges for better or for worse that are either potentially helping you or hurting you.
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Meb: There’s a topic that we talk about in the book that’s near and dear to my heart, which is the retirement system in the U.S., which is a little bit convoluted. And as we think about nudging, what do you think is the best way to actually either start from scratch or move to a place where we could really help the most people? Because I think it’s great that we’re getting everyone invested, but this whole wealth and income gap could use a little nudging. Who does it particularly well, or what ideas do you think would be particularly helpful?
Prof. Thaler: Well, the most important thing we could do is to create a universal 401K plan. Calling a retirement plan after the provision in some obscure bill is just a weird Americana, but the biggest problem in retirement saving right now is something like 40% of workers don’t have an employer-based retirement saving plan. And it’s been proven that that is the only way that middle-class people save at all. It used to be, there were two ways, it was that and paying off the mortgage. And the ladder has gone out of fashion. In my parents’ generation, the goal of every family was to pay off the mortgage as soon as possible. And sometimes when it became easy to refinance, that kind of went away. And one of the scary things I see on the horizon is lots of people in their 60s have lots of mortgage debt. And here’s one bit of free financial advice.
If you’re over 40, get a 15-year mortgage and pay it off, rates are low right now. Just get it refinanced. Don’t take any more money out, put it into a 15-year mortgage and then forget about it. You’ll thank me in 15 years. I won’t be here, but send a check to my grandchildren. So getting a way for people in small firms to save. This is something that the Obama administration wanted to pass, couldn’t get it through Congress. And now some states have implemented this, including Illinois, where I played a tiny role in helping Oregon, California. There are a few others, but this ought to be federal. The UK does this quite well. And they have essentially a national defined contribution plan. It was automatic enrollment, about 90% of the people are in it. Started out very low and they’ve gradually increased the percentages. This isn’t hard and it should be available to everybody.
Meb: And the funny thing is that if you talk to people in other countries, so Sweden as example, you’ve given your book, but also Australia. And Australia has, it’s essentially a 10% automatic contribution. Every Aussie I know absolutely loves it. And they have, I mean, an enormous pension since of now where people have a ton of assets in retirement. And it’s so crazy to me that you have…every single person I’ve ever talked to is in favor of this idea. Now, that may just be my universe and I don’t hang out with too many politicians, but it’s bananas to me that we couldn’t get something like this figured out and put into policy because having an automated retirement nudge where you contribute, it works in the background seems like the most obvious way to narrow part of this wealth gap in the U.S. and who could possibly be against this?
Prof. Thaler: At one point, we managed to get a tiny little provision into a bill that revised pensions. It encouraged firms to adopt automatic enrollment say more tomorrow. And the encouragement was if they had those two things and a match, then they didn’t have to fill out an annoying form proving that they weren’t giving too many of the benefits to the high pay brokers. And this was a bipartisan bill and it had the support of moderate Republicans and those have become extinct. So now in the U.S., if the Democrats wanted, the Republicans are against it and vice versa. It’s a completely dysfunctional system.
Meb: Here’s what we do, we nudge. On both sides, we let them think it’s their idea and we say, “Here, you can outwork each other” because this checks every single box. It gives people with low income… So it’s no longer tied necessarily to employment. So you have the option, if you’re not an employer, there’s a government option. And you said there are some states that do it, but anyway. Listeners, you want to make it happen, hit me up. I’m open to some ideas. You had an interesting take on the Sweden part where, and this is sort of unrelated, but about the challenge of like choice at this point where there’s the default which for a lot of firms is like Vanguard target date, but they give you a certain amount of choice. And this reminds me, by the way, the old Joel Greenblatt back when he had his magic formula stocks, they could do two things. They could either select the ones that just the computer ran or pick and choose the ones they wanted. And when they pick and chose, they always did worse. But the Sweden one, it showed so many biases, the home country bias, they pick the tech fund that had done well. So you’re going to design the U.S. one. They say, “Professor, we’re going to let you help choice architect this,” how would you kind of put it together? What would it be the basics of the way you would set it up?
Prof. Thaler: I think that the target date funds are pretty good. Another thing, it was crazy back in the George W. Bush administration. People forget this, but he was trying to get a partially privatized part of social security. And at the very time he was doing that, his labor department refused to say there was a prudent investment as a default other than a money market. So part of his administration is saying, “We want everybody to invest in stocks” and another part is saying, “No, if you default people into some fund, it has to be money market.” So finally, they got these qualified default investment vehicles and targeted funds are now the most popular choice and I think they vary in terms of glide paths and so forth and so on. And obviously, the fees vary, but that structure makes a great deal of sense and it prevents people from doing things that are stupid like buying high and selling low, which people have a habit of doing.
Meb: That’s interesting. On the money market side, if you actually look at cash returns, money market, or short short-term bonds, even ten-year bonds after inflation for the past 100 years in the U.S. and then you compare it to sort of a global market portfolio, stocks, bonds, real assets with a combination of cash or bonds, you can actually get a less volatile, lower drawdown portfolio after inflation if you include some of those because of some of the periods where inflation was problematic. So even on a cash level, treasury corporate level, you can make an argument, and we’ve tried this, no one agrees with me, but there’s where we stand, is if you actually invest some of it, you end up with a lower vol portfolio. That’s for another podcast. What you just mentioned about the target date funds, buying high, selling low, I’m going to pitch you an idea. This is like “Shark Tank.” You’re going to give me your behavioral hat on. And this was an idea I floated a few years ago and the conclusion was I should never launch it because I’ll get sued. That was Jason’s wags input to me.
Prof. Thaler: Jason is wise.
Meb: Yeah. So I said, “Look, we run 12 ETFs. And I struggle because they’re publicly traded with watching people wash in and out based on the performance and how they’re doing.” And I said, “Look, I want to build a fund and this would have to be a mutual fund because of the way that we’re talking about it and say it’s going to invest. It doesn’t matter what’s going to invest in, global portfolio, stocks, multi-factor, whatever. However, it’s going to have both the penalty and the reward. So it’s going to have a 10-year lockup. And if you sell the fund in year one… And the fund will be super low fee, 25 basis points or something. Maybe even less. You sell the fund in year one, you’re going to pay a 10% fee, maybe 5%, okay? But a toll. And it goes down over 10 years. So once you get to 10 years, it’s nothing. So there’s the penalty. However, here’s the carrot. That penalty doesn’t go to the manager, it goes to the shareholders as a dividend. So reward for sticking around.” What do you think about the idea? I call it the forever fund. Good, terrible?
Prof. Thaler: I like it. I’ll invest. Like I said, it’ll depend a little on how you’re going to invest, but I like that structure. And as you know, I am a partner in a money management firm and we have institutional investors and also mutual funds.
But with the institutions, I always find that when somebody would fire us, it was almost always at exactly the wrong time.
Meb: The academic literature supports you.
Prof. Thaler: That’s right. The research shows that that’s common and wasn’t just Fuller and Thaler clients.
And I would always tell clients, “Look, we need patient investors. And if you’re not patient, give your money to somebody else.”
Meb: The analogy I love to give people, particularly when they’re giving us a hard time, and usually it’s that two to three-year horizon. They’ll give you a year because they like you. Year two, they’re starting to sweat, again, pressure from their boss. Year three, if you’re even there, you’re gone. But we used to say, people will call you up or not even call you and fire you because of, “Hey, look, you’ve been underperforming the last three years. We have to sell.” Zero people, and we have almost 100,000 investors have ever called me and say, “You know what, Meb, you’ve been outperforming by so much over the past three years, we have to sell because this is just not relative to expectations.” Zero. That framing on both sides, theoretically, they should, should be equal amount saying, “This is too good relative to…”
Prof. Thaler: So we have had smart institutional investors who have taken money off the table because the returns were so high. I respect that.
Meb: I mean, well, the common-sense way to do that is the simple rebalancing back to target, which automatically gets you there or what some prior podcast guests would call like calibrating or over-rebalancing, but still having the plan ahead of time. All right. So you guys are…feel free to take the forever fund and launch it. I just want to see somebody do it. Jason actually said there was somebody in the ’90s that tried it. And I think he said they got sued into oblivion because investors wanted out probably to go buy some tech stocks, but it’s on the to-do list. All right. One of the things that people would say, myself included, and you touched on it a bit in the book is, and I love to tease publicly the politicians on Twitter when they say the crazy things they love to do on both sides of the aisle, about personal finance. I say one of the reasons that this is so hard and complicated is we don’t teach it in school at all. I think it’s like 12% of high schools teach any form of personal finance. What’s your take on that? Is it a worthwhile endeavor? Is it impossible? How do you think we should go about it? Are there any best practices?
Prof. Thaler: I would say yes, it’s worthwhile and yes it’s impossible. So I think math education in high school is hopeless. And why in the world are we spending a year teaching people trigonometry? When is the last time you use trigonometry?
Meb: I’m an engineer, and never.
Prof. Thaler: So I think we can certainly replace trigonometry with other things. Statistics and teaching people how to use a spreadsheet would be more useful. And I think teaching people some basic things like about compound interest and so forth would be good. However, it is not going to create sophisticated consumers. The reason for that is that whatever it is you learned in high school, 99% of it you forgot. And just think about how much you remember about your high school biology class or chemistry or whatever. The evidence is that the education needs to be just in time. So what I would put in the financial literacy or whatever we want to call it in high school would be stuff that is going to be relevant right away, keeping a budget, living within a budget, using a credit card, opening a bank account, avoiding overdraft fees, really basic stuff. Fixed versus variable-rate mortgages, no need.
Now, 10 years later, maybe they might be ready to buy a house. Now it would be really good to have a free course at the local community college for first-time homebuyers. Here’s how to think about the biggest investment you’re ever going to make. Here’s a scary fact. When people buy a house, they do almost no shopping for mortgages. It’s very common for them to say to the real estate agent, “You know a mortgage broker?” and then to do whatever that mortgage broker says. That decision…obviously, the size of the mortgage will determine how costly that is, but it certainly can be thousands of dollars. It could be tens of thousands both in terms of fees and interest rates. We can’t solve the problem through education that’s why we have to solve it with choice architecture.
So one of the things we talk about in the book is what we call smart disclosure.
Right now we have dumb disclosure.
So there are all kinds of laws of what you have to disclose. And most of it is like the terms of use on a website. The Facebook terms are something like 250 pages, single-spaced. My guess is there is no one on earth, no one person who has read all of those 250 pages, including no lawyer at Facebook because there’ll be 50 lawyers, each writing a certain part. That’s just stupid. What is smart disclosure? Smart disclosure would be making everything machine-readable. So suppose when you were shopping for a mortgage, every aspect of every mortgage was available in a machine-readable format. Then you could go to an online mortgage supplier who could shop for you in an intelligent way just the same way you shop for airline tickets. Any eighth-grader can find the cheapest flight between Chicago and New York, but even a Chicago MBA will have trouble finding the best mortgage. There’s no reason why we can’t make shopping for a mortgage as easy as shopping for a plaintiff. We just have to make the data that will.
Meb: And that kind of leads into a little bit about this topic of the derivative of nudge, which you guys, talking about the book and I thought it was so accurate called sludge and probably in no more relevant area for most listeners of this podcast, I absolutely lose my mind about it. I’d say normally about this time of year because they’ve been extended and extended as is the world of taxes in the U.S., which is quite possibly the most complicated. I literally do this for a living, investing and finance, and it probably takes me three days to even put things together in a reasonable way. Tell us a little bit about taxes, your solution, your ideas, how we should go about it.
Prof. Thaler: Here’s a fact. If you’re in Sweden, you get a text message saying, “We believe that your taxes this year, we owe you 2000 kroners. If you agree, press 1 and the money appears in your bank account.” That’s it. Now, in the U.S., we can do that for 90% of us taxpayers. Not for you and me, but anybody who files a standard deduction, which is now 90% and doesn’t have outside income, they’ve got all the numbers, even the investment stuff, Vanguard is sending them information. Why should I have to… I mean, I don’t do my own taxes, but I probably spend in a day just getting all the stuff ready to give to my account. So here’s how bad our system is.
One of my colleagues, Austin Goolsby, had the idea that we should just send people the equivalent of this, text message, send people a pre-populated tax return. They could send it February 1st. Here’s what we think your tax return should look like and go online click yes. If you agree, done. Instead, that bill never got passed. Austin served for a while as chairman of Obama’s council advisors, but he could not get this anywhere. Why? Because into it, an H&R block got in the way, instead Congress passed a law for bending the IRS for sending people pre-populated returns. And in return, the tax prep firms promised free returns for anybody who is eligible, but good luck getting one of those. And then what are they going to charge you to do? The state return, which showed their software, the cost of them doing that is like clicking one box.
Meb: There’s no company I despise more than TurboTax and Intuit. Listeners, you can find a lot of my rants on Twitter about this over the years. And it seems like, again, one of these strange unintentional or intentional…and I’m sure Intuit’s part in HR block, but where it would benefit literally hundreds of millions of people and the government, not just with money, but in time and there’s only a couple tiny, special interests that are in the way and there’s just kind of like… I don’t think anyone agrees with the way that it is, but have you heard of the company called Main Street?
Prof. Thaler: No.
Meb: You’ll love this. We’ve had the founder on the podcast a few times. They’ve been one of the big Silicon Valley rocket ships over the last two years. What they do is…that’s on the corporate side. So if you’re a company with probably usually up to 500 employees, over 500. You probably have a CFO or a team of them, but some of them don’t. They say, “Look, you’re probably not taking advantage of…” There are about five main ones, but they’ve now expanded it to 50 or 100 tax credits that you could be. And so they say, “We’ll audit your returns for free and then we’ll apply and get these tax credits for you.” And I think the average company saves like 50 or 70 grand per year. They’ve saved in the last two years. It’s well over $100 million for companies. So…
Prof. Thaler: I’ll give you an example of that. It’s in the news today. There’s a new child tax credit. Now, for most people, if they’re eligible, a check will just start appearing in their checking account as long as they file a return and do it electronically and have a bank account. Now, suppose that you don’t make enough money to file a tax return but you have kids, well, you’re not getting a check unless you go to some website and fill out a form that’s only in English and you better have a bank account or they’ll start sending checks. So we’re making it difficult for the people who need this money most. That’s a crazy system. And one thing we need in this country is everybody should have the right to a free checking account and bare-bones, no overdraft, just a debit card and a permanent electronic place that you can have money sent. And the people who don’t have that have missed out on all kinds of stimulus payments because the government doesn’t know where to send them the money.
Meb: Yeah. And so like the design, whether intentional or not ends up with an end solution that’s sub-optimal for the people that arguably need it the most, which is really frustrating.
Prof. Thaler: The thing about choice architecture is it’s really important, but it’s an afterthought. So whoever designed this tax credit thought about, I mean, it was intentional that people who don’t have to file a tax return are still eligible. That didn’t use to be true. So you weren’t allowed to have negative tax. Okay? So that’s a good thing. We’re going to give parents money to help them deal with their kids. It shouldn’t be that you don’t get it if you don’t make enough money. That’s a crazy way of running the world. So that’s good. Hooray. I’m glad that they got rid of that. But then, all right, now let’s think about how are we going to get that money to those people. And you’re going to love this, Meb. Somebody built a portal for the IRS to administer this. You know it was? Intuit.
Meb: Oh, God. You’re making my palms sweat over here. Oh, my Lord. Man. I can’t even right now. In my head I was like Western Union. I was like, “What is the pony express? Like what is the worst possible?” And then you just went up to me. I get a little depressed sometimes with our government or just like institutions in general that have a lot of this sludge or the incentives are kind of messed up. I can’t think of anywhere more than that than the lottery where you have states and politicians that say, “This is amazing because we get a ton of revenue.” But arguably, look, it’s a challenge because, look, it’s a free choice world. You got the scratchers. I loved them as a kid, but it ends up being, arguably, and if you look at the advertising and everything else, kind of predatory. So I get hopeful on sometimes that there’s private market solutions, there’s some companies in the U.S. now targeting this savings-based lottery that’s been popular in other countries around the world. How do you think about…and feel free to comment on the lottery side, but this sort of public versus private adoption of your ideas? I know a lot of countries, including the U.S. have started sort of behavioral and nudge-style organizations. Is one side or the other, you think, been more open or receptive to sort of what you all been proposing?
Prof. Thaler: I think there’s good and bad in the public sector and the private sector. And I was just talking about how everybody should have access to a free checking account, bare-bones. Now, some people on the left think that that should be administered by the post office. I think that’s terrible. Now, there are worse things. It could be administered by the DMV.
Meb: If you’ve ever been to California, California, oh, my God.
Prof. Thaler: So there are worse ideas than having the post office go into banking, but there’s lots of misbehavior in the private sector. One of my pet peeves is that you can subscribe with one click, but to unsubscribe, you have to go through torture. And I recently experienced this, we switched our way of getting TV signals from one provider to another and signing up for the new one was easy, ditching the old one was torture. You could not do it online. You had to call. And we had been with this other provider for 20 years. So the first thing they want to know is the answer to some security question. And the question was, what’s my favorite restaurant. Now, I’m thinking, “All right, what was my favorite restaurant 20 years ago?” My wife later guests, it was probably Charlie Trotter, which was a famous restaurant that’s been closed for 15 years because Charlie sadly died. But how am I supposed to remember the answer I gave to that question 20 years ago? And I was able to tell them what my account number was, and they’re happy to take my money without confirming that I know what restaurant was my favorite 20 years ago. Here’s a tip. I finally got out of this. It took me an hour and a half. I finally got out of it by asking to speak to a supervisor and telling them truthfully, as it turns out, that I was planning to write an op-ed about the difficulty of getting out of such contract and miraculously… They didn’t know who I was, but miraculously… Obviously, they didn’t know who I was because I didn’t know what my favorite restaurant was, but things got better after that. Now, nobody needs to know whether or not you’re writing an op-ed. So feel free to use that trick if you get into one of these endless… The worst case of this, a lot of gyms have this trap. I heard about a gym that was, during COVID, requiring people to show up at the gym in order to quit. Throw them in jail.
Meb: This is a good example of like, look, you still need protections on the free markets and capitalism and having something like…it’s like the automatic unsubscribed button on emails, be like, “Look, you need to mandate for a product or service.” If the consumer doesn’t want it, like gone. And on occasion, you see some fun private market solutions. So there’s a company called Do Not Pay. Do you know this one?
Prof. Thaler: No.
Meb: Professor, I’m giving you all sorts of great nudge companies now. This company, because you mentioned this in the book… There’s like 10 different things they do, but one of my favorites is there’s a credit card they have that will sign up for free trials and automatically cancel so you never get charged for actually the full thing. And there are like 10 other things they have that are consumer-friendly. It’s called donotpay.com and they got an app too. So it’s a good one. I think the takeaway from this whole episode is we just all need to move to Sweden, amazing retirement system and everyone’s happy there, by the way, even though they pay some of the most taxes in the world, I think. I’ve never been.
Prof. Thaler: Sweden is great, but you might want like the winter place in Meioca or something because it’s a little dismal there in the winter.
Meb: I’m a skier, so it’d be conflicted. But I agree with you. Let’s wind down with a few more. Man, I could spend all day chatting about some of these ideas. You look back since the first time publication of the book, has there been a sort of reader or institution implementation of some of your nudge ideas that really stood out, for good or for worse, about how they applied, some of the thoughts, impactful or just quirky that you guys talk about in the book?
Prof. Thaler: One thing we mentioned in the book, this makes me happy, a former student of mine has started one of the companies of the stock we’ve been just talking about. His company is called Tally. And what it does is it helps people who have a lot of credit card debt. And here’s the business model. You take somebody who has $20,000 in credit card debt, spread out on four cards, Tally will loan them the 20 grand. And let’s say they’re paying 20% on average on these cards, loan them the 20 grand, that 16%, he can borrow at 13%. I’m making all these numbers up. And then they give him permission to pay all the credit card bills on time and help them start winding down. Because the people who are running up all this credit card debt, not only are they living beyond their means, which is their first problem, but they’re not dealing intelligently. They don’t pay off the highest interest one first, they tend to pay off proportional to how much they owe. So I love that company and the fact that it was a guy who took my class makes me happy. Even better, he was an auditor. So he arbitrage the system, the students at University of Chicago Business School booth school of business, there’s a bidding system for classes and my class was too expensive. So he just came and sat in the back. Some professors don’t allow that. I figure if they’re willing to come and listen and they’re not disruptive, let them in. So more credit to him. He might be good guest on your show. You can find his name in the book.
Meb: I appreciate that. The sort of… I say this lovingly to our followers because I’m a value investor at heart. Anytime one of our followers, and particularly even applied to our business where they say do something and I say, “Look, I’m a cheap bastard at heart. When you do something like that, the auditing, I appreciate it. Not the reverse. So that’s awesome. We’ll check it out.
Prof. Thaler: Some of my best students have been auditors.
Meb: Look, when I first started learning about sort of behavioral quirks and went through many of the textbooks and books over the past 20 years, the names that we would all recognize and identifying a lot of the behavioral roadblocks and just wiring that we have, my number one is probably overconfidence. But as you look back in your own personal life, as you think about implementing nudges and becoming aware of them, are there any on a personal level for you that you think really stand out as far as things you’ve done? I love you joking that your, who was it? The man was describing you as the lazy emist. Was that right? Did I get the right person?
Prof. Thaler: Yeah. It is man. And he says that laziness is my best quality.
Meb: There you go.
Prof. Thaler: And he claims to be my best friend. So your best friend says that your laziness is your best quality. So there you go. Just think what my enemies say.
Meb: We have a constant battle between my wife and I. I’m a notorious last-minute plane flight booker and she likes to do it six months ahead of time. And I’m fully aware of the research that shows, “Hey, you pay now, you enjoy the certainty, the vacation in the future,” but I’m just hardwired to and she goes absolutely nuts. But on the rare occasion that plans change and we hadn’t booked, I say, “See, look sometimes my procrastination or laziness, whatever you want to say, sometimes it works out.” She doesn’t like that. She doesn’t listen to the podcast.
Prof. Thaler: One of the things that we talk about in this edition of the book is the general advice that you shouldn’t insure small stuff. We call it don’t insure the small stuff. And take big deductibles. Don’t buy trip insurance. Trip insurance is a complete ripoff. They still sell trip insurance even for flights that are completely refundable. What are you insuring? We suggest creating a mental account, maybe an actual account, savings account where every time you don’t buy the extended warranty, you take that money and put it into an on my own account. There’ll be a lot of money in there.
Meb: You’re insuring the airline profit margin because they adapt…say they are at the checkout screen and it’s on every single one now where you can’t even check out until you make sure that you don’t want to buy some miles. That’s the big one because they’re being the miles cost. You actually have to act half check no, I don’t want trip insurance on every single booking, which, predatory, but I like your idea because I would rack up a ton of savings on those flights alone. Professor, you’ve been extremely gracious with your time today. This has been so much fun. Listeners, check out the book, “Nudge: The Final Edition.” Thanks so much for joining us today.
Prof. Thaler: Thanks, Meb. Good to talk to you.
Meb: Podcast listeners, we’ll post show notes to today’s conversation at mebfaber.com/podcast. If you love the show, if you hate it, shoot us feedback at feedback@themebfabershow.com. We love to read the reviews. Please review us on iTunes and subscribe the show anywhere good podcasts are found. Thanks for listening, friends, and good investing.
