Episode #425: Dan Ariely, Irrational Capital – Investing in Human Capital

Episode #425: Dan Ariely, Irrational Capital – Investing in Human Capital


Guest: Dan Ariely is a Founding Partner of Irrational Capital and a leading behavioral economist, author, entrepreneur and a James B. Duke Professor of Psychology and Behavioral Economics at Duke University. He is also a founding member of the Center for Advanced Hindsight.

Date Recorded: 6/8/2022     |     Run-Time: 56:33

Summary: In today’s episode, Dan starts by sharing what some of his research around finance and investing. We touch on how we can encourage people to save more, the mental challenges with hedging, retirement planning, and why he’s a fan of annuities.

Then we dive into his newest project, Irrational Capital, and the launch of an ETF with a killer ticker: HAPY. He shares an overview of the strategy and what research into the Human Capital factor says about what leaders can do to help their employees and company thrive.

Sponsor: Bonner Private Wine Partnership – Founded in 2019 by Will Bonner, the Bonner Private Wine Partnership is a group of wine lovers who come together to import great, small batch wines that might otherwise get overlooked by large importers. Click here to get 4 bottles of wine for almost half off plus free shipping.

Comments or suggestions? Interested in sponsoring an episode? Email us Feedback@TheMebFaberShow.com

Links from the Episode:

  • 0:39 – Sponsor: Bonner Private Wine Partnership
  • 2:44 – Welcome to our guest, Dan Ariely
  • 6:15 – Home country bias
  • 7:56 – Lessons from Dan’s research on insurance products
  • 11:56 – Reframing the nature of saving money
  • 17:46 – Why financial advisors should stop asking their clients about their risk tolerance
  • 21:50 – How Dan would approach fixing the American retirement system
  • 25:44 – An overview of Irrational Capital
    32:30 – JP Morgan report on the Human Capital Factor
  • 35:06 – Levers CEOs can pull to improve their ranking
  • 43:33 – One of Dan’s pet peeves when it comes to work life balance
  • 48:40 – Can this expand to other countries?
  • 49:33 – Dan’s most memorable investment and experiment
  • 53:02 – Learn more about Dan; irrational.capital; danariely.com; ticker symbol HAPY


Transcript of Episode 425:

Welcome Message: Welcome to the “Meb Faber Show,” where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here.

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.

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Meb: What’s up my friends? We got a really fun show for you today. Our guest is Dan Ariely, a founding partner of Irrational Capital, leading behavioral economist and author of six books. Dan’s TED talks have been viewed over 10 million times. And today’s episode, Dan starts by sharing some of his research around finance and investing. We touch on how we can encourage people to save more, the mental challenges with hedging, retirement planning, and why he’s a fan of annuities.

Then we dive into his newest project, Irrational Capital and the launch of an ETF with a killer ticker, H-A-P-Y. He shares an overview of the strategy and what research into the human capital factor says about what leaders can do to help their employees and company thrive. If you enjoy behavioral economics episodes like this, be sure to check out episode 337 with Nobel laureate, Richard Taylor. You can either scroll back in your feed or check the link in the show notes. Please enjoy this episode with Irrational Capital’s, Dan Ariely. Dan, welcome to the show.

Dan: Wonderful to be here.

Meb: And here is where for our listeners?

Dan: I am in Tel Aviv in Israel.

Meb: Never been. On my to-do list.

Dan: It’s a complex country. If you want to see how people fight about stuff, that’s a good place to go and see, even within Christianity and so on. It’s just a marvel.

Meb: It’s a perfect ground for behavioral economists to study human nature. And I figured we’d start there. As I was thinking about intuition, I thought there’s no more behavioral mismatch than someone who has dual degrees from Chapel Hill and Duke. Can we talk about that for a second? For listeners, these are like Arch Rivals as big as you can get. How’s that possible?

Dan: Part of it is that I grew up in Israel and didn’t get educated in the U.S., and I never understood that rivalry. It was just so hard to understand. The Israeli-Palestinian conflict, 2nd World War, they understand. Duke versus UNC, it always looks to me like it was hard to understand the intensity of it. Although I have to say that I love going to the games. I can’t get excited over watching anything on TV, but going to the game, and the fans, and the excitement, and the disappointment is just an incredible emotional roller coaster.

Meb: I remember I went to the Carolina basketball camp as most kids do when they’re young from North Carolina, as an aspiring Carolina basketball player. I had a very traumatic event where I was a kid, you don’t have much clothes, and you don’t have much say so on the clothes you have, but I went to camp, and one morning for the Carolina basketball camp, I had to Duke t-shirt, and the counselor which were like players or whatever, made me take off the shirt for the entire day. They said, “You’re not allowed to wear that here.” And I was, like, laughing. I’m like, “You’re kidding.” And he’s like, “No, seriously take it off. You can put that back on at 7:00 pm tonight or whatever.” So, the rivalry is real, listeners. But yeah, those games are so fun. I ended up being a Virginia Cavalier, and we were always terrible but some redemption later in life.

Dan: There’s a really interesting thing about identity. Think about basketball. Imagine you go to see a basketball game and you just don’t care. You just watch for the mechanics and the beauty of the skill. That would be a tiny amount of the pleasure that comes into it. And it’s kind of a bizarre thing because we have this principle called loss aversion. We hate losing more than we enjoy gaining because the emotional intensity of losing is just much higher, about twice as high as the emotional intensity of winning. And you could say, “Given that, why would you be a fan?” Because let’s say you win half the times and you lose half the times, but losing is much more painful. Why would you ever want it? And the reason you want it is that the engagement matters.

So if you just watch a game and you don’t care about what happened, you can’t get into it. You can’t get that excited. You want the stakes to be high. And for the stakes to be high, you have to root for one side and be happy when they win and terribly sad when they lose. But without that, life loses an incredible spice of feeling belonging and commitment, things being personal. And maybe it’s a good example to think about, it’s not about the payoffs. It’s about the things that make the ride worth it.

Meb: Are you cheering for Duke? Are you an impassioned non-observer at this point? What’s the story?

Dan: I have to say that I like it when both team wins when they play separately, when they play against each other… When I just left UNC and moved to Duke, there was still leftovers of UNC. Right now, I’m a little happier with Duke wins. And this last season was kind of Coach K last season. I wanted for him to have a win. Endings are very important in general and ending career on a high. I just wanted it for him. It didn’t happen. But anyway, I like both teams.

Meb: We use sports analogies a lot when talking about money. One, in particular, as you were talking about the pain of losing and the pleasure of winning. I also grew up earlier in my years in Colorado, the Denver Broncos very famously lost a lot of Super Bowls. And it was like a traumatic experience. You always see these videos on TV, and it’s so sad. They show the kids at the end of a championship game, the kids are always crying. Denver eventually ended up winning a couple of Super Bowls later. But we use the sports analogy of attachment, particularly when talking about one specific behavioral bias, which is the tendency for investors to invest all their money in one country.

We call it the home country bias where Americans put all their money in American stocks, they now just say well look, part of it is because it feels comfortable. You feel like you understand it’s what’s close. And there are some structural reasons. Usually, it usually ends up being a pretty bad decision. We use example this year, Russians have 95% of their money in Russian stocks. But sports so much in life is a constant way to try to make that analogy.

Dan: Your home bias is one interesting thing. Another one is the challenges with hedging. So imagine that there are two teams, Team A and Team B, and you love team A, would you bet on team B to win? The answer is no. Because then you would watch the game and you would be conflicted. What do I want? I want Team A to win and I want team B to win.

So hedging is exactly about that. It’s about being on both sides. But emotionally, it’s really tough. You know, on both sides, we want to be committed, we want to feel one direction. So we have a bias against hedging. We also don’t take into account sufficiently the spread. People still bet too much on the team that is going to win and they don’t take sufficiently into account the spread. So people make lots of mistakes in everything, including sports.

Meb: Yeah, well, costs matter. I want to spend some time on Irrational Capital. But before we get there, you’ve written a bunch of “Wall Street Journal” and other articles and studies about personal finance and money. We’d love to hear about one or two favorite pieces over the years or topics. We’ve touched on a couple already, the pain of losing, which already brings back some memories even more seared into my brain. What are some other topics in the personal finance world that you think are memorable that you look back on?

Dan: I’ll tell you one of my favorites. It taught me a lot throughout the process, a study we did in Kenya, in a slum in Kenya called Kibera. And we’re trying to get very poor people to save a bit of money for a rainy day. If you’re very poor, it’s very hard to put money away. And we created a system where they could save a little bit over six months, a little bit every week. And we incentivized them. We incentivized some people by reminding them… Some people were getting money from their kid, some people were getting 10% match, 20% match before and after.

But we also had this condition when we gave people a coin. And a coin had 24 numbers written on the edge of it and we say, “Put the coin somewhere in your heart. And every week, take a knife and scratch that coin, scratch it like a minus if you didn’t save up and down if you saved.” And that coin almost doubled savings compared to everything else. It was more effective than a 20% match.

Now, the question is why? What was it about the coin? Again, the story that got me to think about the coin. I was in Soweto. Soweto is a very large city in South Africa with a very large, very difficult slum. And on that particular day, I’m sitting in a place that sells funeral insurance. I don’t know if you know but in South Africa, funerals are people’s biggest celebration of their lifetime.

Now, in the U.S., people celebrate weddings. In South Africa, it’s funerals. People spend between a year or two year of income on funerals. They are very expensive. And because nobody can afford it in the slums, people buy funeral insurance. So that particular day, a father comes to buy funeral insurance, and he buys funeral insurance for a week. What does that mean? It would cover 90% of his funeral expense only if he dies in the next seven days.

Meb: Plan on climbing a mountain man, that’s a short roll of the dice.

Dan: It doesn’t cover everything. And he’s not planning to commit suicide. He just wants his family to be able to afford it in case he dies. That place, by the way, head funeral insurance for either a week or a month, they didn’t have a longer period. Remember, these are very poor people. They buy small amounts of soap and small amount of milk. And he just so happened and he made some money today.

But the thing that was curious was that he brought his son, and he got the paper certificate and in a very ceremonious way gave it to his son. And as he does this, I’m thinking, “Why is this person doing it?” And what I realized is he’s a very poor person, has happened to make some money today. And this thing that he could do that his family will say thank you for, buy more water, kerosene, a cookie or fruit, or he could do invisible things, buy insurance, pay debt, save.

And, of course, the temptation is to do the things that are visible over the invisible, but what his father was doing, he made the invisible visible. He told his son, “Look, I’m doing something for you.” The coin in my study is basically the same idea. Here’s a tally at the family level that all the family will know that we’re saving for retirement.

You see that level of poverty, if people are putting money away, they’re taking food and light away from their families, the trade-offs are very tough. And this coin made the invisible visible. If you think about it, this is one of the shortcomings of money. What do you know about what your neighbors are spending? Quite a lot. What do you know about what you’re saving? Very little.

We took activities like saving, paying debt, buying insurance, and we made them invisible. We don’t know, our families don’t know, the neighbors don’t know. And we took other activities like spending, and we made them very visible. It’s an unfair competition. And if we want people to think more about saving, paying debts, and so on, the first step is to make them visible.

Meb: I want to hear the solution to that. We used to write about the opposite is true as well. I said one of the smartest thing “Wall Street” does particularly in my world, for people to charge very high fees, you’re a million dollar family, and you have a financial advisor, God bless him, many are worth their weight in gold, but on average, they charge about a percent. And I said you never see that percent come out. You just quietly get skimmed off day after day, month after month, whatever.

However, if you had to walk a briefcase with $10,000 in it down to your financial advisor every year to pay them, would you? There’s no way. The vast majority of people would never do that, because it’s very physically painful, and on the flip side, woo. What are some solutions as someone that we obviously have a big income and wealth gap here, too, around the rest of the world? It’s a difference of relative versus absolute magnitude. But how do we incentivize people? Is there a solution in this real physical world to translation? Are you working on ideas? I know you always have like 10 companies in the works.

Dan: There are solutions. And, you know, none of them is perfect. But for example, imagine the following study. Some people you say you borrow $10,000 for this car loan, you paid already $2,000, this month payment is $500. Do you want to pay any extra and accelerate your car payment? That’s one version. The second version is you say you borrowed $10,000, you already own 20% of your car. With this last payment, you would own another X percentage of your car. Would you like to pay extra and accelerate your car ownership, your full car ownership? People are much more likely to do it.

What does it feel like to pay back a loan? When you finish, you’re at zero compared to what does it feel like you’re building towards owning your car. It’s a very different thing. But going back to the question about making things visible, I think that we need to give people a sense of progress, of pride. When these things are invisible, nobody can say I managed. One of the saddest thing in the world is to fight for three years to get out of debt. And at the end of it, you’re at zero.

Meb: Yeah, it’s true.

Dan: Think about how heartbreaking it is. We need to work hard on giving people a sense of progress, a sense of satisfaction, a sense that you’re doing the right thing by taking care of their families. Because on the spending side, we have all of those. You buy yourself a new iPhone, you think of yourself as a success, your family think about you as a success. You buy a kid anything, they say thank you. It’s a very lopsided incentive structure so we can’t balance it completely. Putting another $1,000 in savings will never be as pleasurable as buying a new phone, but we can make it less non-symmetrical.

Meb: Yeah, Morgan Housel has a great quote where he says something along the lines of everyone wants to be a millionaire but what people really want is they want to spend a million dollars. Like, when they fantasize about being a millionaire, they want to spend a million dollars. And what it takes to become a millionaire is literally the exact opposite of that. It’s like you have to save.

Dave Ramsey, who I give a lot of crap for some of his asset management advice and expectations, somebody whose personal finance advice has behavioral tinge where he says, “Look, probably mathematically best thing to do is to pay down your debt in order of the highest percentage on down.” But he says no, take the smallest accounts or debts you owe, pay those off, so you get a feeling of accomplishment and progress. And I think that’s pretty thoughtful. And then when they get down to zero, he has like a party on his show. And it’s called a debt scream or something. So there is a little bit of a finality to their accomplishment.

Dan: It does give satisfaction to pay small loans first, because people get a reduced number of loans, but it’s actually not economically efficient. He’s saying that people would feel success, and they will pay the rest faster but we haven’t found evidence for that. But we find that people like to pay small loans first, but it’s not helping them. It’s actually a bad strategy. So you asked me two things that I really liked. So the first one I said is this idea of making the invisible visible, taking the things in our economics that are invisible, and try to make them visible for ourselves, for our family, for our spouses, for our kids, somehow.

But another one that I really like is the one that you mentioned, which is called the pain of paying. One of the ways I demonstrated in my class is on the day that I talk about the psychology of money, I bring pizza, and I charge the students 25 cents per bite. And what do you think happens?

Meb: They just take one enormous bite and stuff it in their mouth.

Dan: Very, very large bite, and they don’t enjoy it, and they don’t learn from experience. Because you sit there after the first unbelievably large bite that you didn’t enjoy, and you’re so tempted to push a little bit more inside. And the pain of paying is this really interesting thing that gets us to enjoy things more or less depending on the timing of payment and the way we pay.

So if you think about Apple Pay and Google Pay, less salient, we don’t pay as much, we don’t think about it as much. There’s a study showing that when people pay the electricity bill with a check, they spend less on energy. And when they move to automatic deduction, they start spending more on energy. What happens? One minute when you write the check, you’re pissed off. You pay attention to the number of the money. You write the check, you tell your kids, close the lights, do all these things, look at how much money you wasted. If it’s coming from your checking account, you don’t pay attention. You don’t know what it is.

So this saliency of payment to the society, we’re going away from saliency. Everything is automatic in the background, subscriptions and so on. It’s not necessarily great for us. There are some things where it’s great, but not always. Sometimes it’s terrible. And we need to think about it differently.

By the way, once I tried to get… I teach at Duke University, and they have a very big hospital. I was trying to convince them to have the running bill on one of the television stations in patients’ rooms. Every time you get lunch, it updates. Every time you take Tylenol, it goes up and so on. And I wanted to see whether people would get released out of hospital sooner when they see that. By the way, they wouldn’t let me run that study.

Meb: Your job is such a playground to me in many ways, the infinite amount of experiments and AB tests on everything and behavioral world has demonstrated, particularly in personal finance people act kind of crazy over the past 30 years. The example I was trying to give, I was giving a talk in Ireland to a bunch of students at Trinity College, and I was trying to make the analogy of investing in long-term thinking, and I say, “Look, many of you are getting ready to go on spring break or whatever you call it over here, beach week, whatever, some of you guys are going to go down to Ibiza, whatever, backpack across Europe. And you’re going to spend $1,000 or something, or you could stay home and get some cheap beer from the local pub or store and invest that money. And in 50 years, when you retire, that will be worth $100,000 or something, 10% returns,” which they probably won’t get but the math was easier.

And I said, “Can you have empathy with your future self and think about that, because at 70, you may really want that $100,000. However, you guys should probably go to Ibiza, because the memories of this trip and you may meet your future partner and everything else may be worth it. This concept of connected to payments, as opposed to just, hey, it’s on my credit card, I’m going to spend it and it’s gone versus this time value of money.”

Dan: Compound interest is very tough for people to get. In general, the way we do personal finance is not helping people think about this. So think about something simple. Imagine two people, both of them have rent, and both of them pay $2,000 in rent. They both get paid on the first of the month. One of them has the rent come on the second and one in the 19th. What’s the difference between them? The difference is that the second guy for 18 days thinks that they are rich.

If you went to a company and you ask the CFO, “How much money do you have?” They will never look at their checking accounts. They will look at all their liabilities and payment and so on. But in personal finance, we don’t help people figure out how much money you really have. Like, when you get a salary… And a lot of that money is being spoken for you. It’s not yours. You’ve given it away already, at least once. Maybe some of it you’ve given twice. We just don’t help people on that.

But I’ll tell you the one I hate the most. The thing that I think the financial industry is messing up the most is about trying to help people figure out how much they need for retirement. And they mess it in two ways. The first one is to say what percentage of your final salary do you need in retirement? And when you ask people this question, they say 70% or 80%, or some of them 75%. And then you say, “How did you get to that number?”

Nobody knows how they got through it. And eventually, they admit that somebody told them, I did the opposite, a different exercise, I said to people, “Describe to me how you want to live at retirement, not how much money you want, how you want to live. And now that you’ve told me all these things that you want to do, help me price those things out. And now let’s get to a number that you really want.” And now the number was 140%. Because we spend more money on the weekend. Work is really cheap.

You go somewhere for eight hours a day, somebody pays for coffee, you have eight hours free a day, you want to do expensive stuff. You don’t want to fish. That’s the first thing that people get very wrong is what percentage? The second one is this ridiculous approach to what’s your risk tolerance? People have no way of giving you a reasonable answer for this. How would you feel if the stock market went down 10%?

First of all, cognition is not a good predictor of emotion. And also, I think that financial advisors need to tell people what their financial tolerance for risk is. They shouldn’t ask them for it. I’ll say this, and I’ll stop because it’s a long topic. But imagine I was your doctor, and you came to me and I say, “How do you feel about pain?” You say, “I really don’t like pain so much.” I say, “Okay, so let’s not treat you.” Of course not. If somebody has pain, give them a painkiller.

If I’m a financial advisors and two people come to me, and one of them hates risk, and one of them loves risk, but they have the same income and the same preference, should I tell the person who don’t like risk to be poor for life? What kind of fiduciary responsibility is this? Take Xanax, learn yoga, meditate, don’t look at your portfolio. I mean, there are all kinds of other things to do. The idea that if you don’t like risk, you should be poor, that’s kind of a fiduciary responsibility.

Meb: I like that take. That’s interesting. And we’re going to hop over to human capital in a second. But one more question. The President calls you, and he says, “I read books, watched your TED talks, then finally heard you on the ‘Meb Faber Show.’ We’re going to pay you a big $10 million consulting fee, and you get to fix the American Retirement System, gold standard in the world. I want to help try to narrow the wealth income gap. I want to make every American an investor, what do we do? What are your ideas?”

Dan: I’ll take one step back. There’s a concept in developmental psychology called secure detachment. The metaphor for secure detachment is imagine two kids, four years old, you go with them to the playground, you tell the first one, “Go to the swing,” and they go to the swing, they swing, 20 minutes later, they come back. You have a kid with secure attachment. The second one, you say, “Go to the swing,” they go but every minute they look behind to see if you’re still there, you failed in creating secure attachment.

What is secure attachment? Secure attachment is resilience, is walking around the world knowing that you have a security blanket. And when we have a security blanket, we can take risks. We can try things. It basically liberates us. The reality is this, if you’re very poor, and you have no security blanket, you can’t take risks. You open a new business, you’re successful, great. But if you fail, you’re gone. You’re not going to try it. Governments need to provide a security blanket. They need to give people the sense of secure detachment.

I know that life would be okay, now I can flourish. I can try all kinds of things. And that means a very different payment mechanism. It means that the moment people are worried, whether they’re going to finish the next month… By the way, I did the study with AARP retirees, and they were doing terrible things. They were cutting their pills into half. They were not going to see movies. And those are people who had enough money, but they were constantly anxious whether their 401(k) are going to run out before they end their lives. That’s not a good setup.

Meb: They need to buy the Airlie Faber Tylenol placebo at half the cost.

Dan: So I think that annuities are incredibly important. And we saw it a lot in the research with AARP. The moment people are occupied with is my money going to outlast me, or will I outlast the money, and how will I manage and so on? You basically don’t allow people to prosper for all kinds of reasons. But we need to create a system where people… Because longevity is so hard to predict, it’s not a risk that everybody should take on themselves. So I think we need to move retirement into annuities.

Now, I know it’s expensive, but I think the payoff is people are now healthy at retirement, people have quite a few more years to go and it can do all kinds of wonderful things to society and be productive and so on. But if people are destined to live for financial worry, we’re not maximizing human capital.

Meb: Do you think this is a public sector or private sector solution to this?

Dan: I think it needs to be public. And I’ll tell you why. It’s very hard to predict longevity. Things look kind of crazy in terms of longevity. On one hand, you have diabetes that is pushing things down, you have all kinds of health acknowledges and they’re pushing it up but because of the uncertainty, there’s no single insurance company that could take on that risk. Or if they take it, they price it so expensively that it doesn’t make sense. So I think we need to do it as a society. Now, it doesn’t have to be everything. You don’t have to take everybody’s full wealth and create an annuity. But if you think about this insurance policy, if you need it, we’ll be here to catch you. And there are lots of versions of how to do it. I think that’s really important.

Meb: I like the idea. We marinate a lot about that topic. President, team, if you’re listening, contact Dan. He’s got a really wonderful email address that’s about 400 letters long from Douglas Adams, will post in the show notes, links, and you can get to him from there. Don’t contact me.

All right. So let’s get into like I said, you’re involved in a lot of companies and ideas as fountain of creativity, but you’ve waded into the asset management world with a cool and different idea, Give us a little overview of a Irrational Capital, great name, what was the origin story with starting this company?

Dan: So I started doing research on human motivation a long time ago, I started as a lab person. So I’d bring people to the lab. And I would get them to work for small amounts of money, and large amounts of money, and small amounts of tax, and high amounts of tax. And I did all kinds of things in the lab, then I moved to the outside world. And then we go to companies and I would change incentives, and motivation, and structures, and they would change how companies were functioning.

But this last chapter, which has been about six years has been the most exciting. And the question that we started with was, is the data out there that would allow us not to go to one company at a time and try to fix it? But is the data out there that would allow us to figure out how companies are treating their employees, how employees feel about the company, and how does that relate to the stock performance of that company? Then it was a data question.

So we searched and searched and searched for lots of data. And we have data from all kinds of sources. We have satisfaction surveys and engagement surveys. And we have LinkedIn and Glassdoor, as you can imagine all kinds of sources. And the first exercise we did was kind of mindless. We said, “Let’s take one thing.” For example, we talked about coffee before the show started, imagine, and we said let’s talk about quality of coffee. And let’s take all the measures we have about quality of coffee. And let’s sort companies from the company who treat their employees best and coffee quality to the company who treats the employees worse.

And I have this data yearly starting in 2006. So I said, okay, based on that, let’s pretend we bought the top 20% companies who treat their employees best in terms of quality of coffee, and let’s move with this portfolio. And in 2007, we have some movements. Some companies went up, some went down. So we have a portfolio that every year owns the top 20% companies who treat their employees based on quality of coffee. Of course, it’s not just quality of coffee, almost 80 dimensions. One of them is salary, one of them is health benefits, retirement benefits. Do people feel that, you know, what’s the bureaucracy? All kinds of things like that. And now we have 80 factors, 80 portfolios, all stupid. I’m not saying we should invest this way. But this is the building blocks of what we’re doing. How many of those do you think outperform the S&P 500?

Meb: Oh, man, that’s a great question.

Dan: Majority, minority, half.

Meb: Majority?

Dan: Yeah. Almost all of them, aside from two. These were not things I was planning. But now, there’s a question of some of them outperforming by a little bit, some outperforming by a lot. So which ones are the big winners and which ones are the little winners? So it turns out coffee is the little winner. It’s not the big winner.

Meb: You know why. It should have been volume of coffee, not quality. Like, it’s unlimited giant vats of coffee.

Dan: That’s what people do. We have a theory when we have data against it, we just slightly revised the theory. And lots of things didn’t matter. Salary doesn’t matter. Health benefits don’t matter. Retirement benefits don’t matter, chairs, tables, coffee, all of these stuff. The things that really mattered were the deep psychological elements, for example, feeling valued, feeling appreciated, psychological safety. The thing that companies do best to kill motivation, bureaucracy. Bureaucracy is just a killer, because it tells people we don’t care about your productivity and we don’t trust you. It’s an amazing thing.

And by the way, COVID was run on bureaucracy. The amount of bureaucracy has increased so much, people are talking about the greater resignation. I think it’s the great bureaucracy that is really getting people to be demotivated. Anyway, going back to our topic, feeling appreciated, connected with the company, think honest mistakes are valued. Companies tell people, “Innovate, innovate, but if you make a mistake, we’ll punish you.” That doesn’t work. But if people feel that if they do things with the right intention, they will be rewarded, and not punished by the outcome, they do much benefit. So when we take all the things that matter and we put them together, we have a portfolio that dramatically outperforms the S&P 500.

J.P. Morgan, by the way, did two papers on our data. Basically, the same as us, they found two things. One, it’s a real source of alpha. And the second thing is uncorrelated with other things. I want to make two more points. Do you know this thing called the SHE Index?

Meb: Mm-hmm.

Dan: SHE index is an index that basically starts the way that I describe things. We take companies, we sort them from the companies have the highest proportion of women on the board and on top management to the lowest, and then we buy the companies who are more equal in terms of percentage of women, and so on. And you also probably know how this index performs. It’s terrible. People think it will perform wonderful but it performs terribly.

It’s not because treating women is not a good idea. It’s because measuring percentage is a stupid way to measure equality. You can have 90% of women on the board and treat all of them badly. It’s not about percentage. And the SHE Index does two bad assumptions. The first assumption is equal numbers equal treatment, not true. And the second one is if you treat women at the top of the organization well, it will trickle down. Also not true. But I have data about how people feel in the company. And if you take questions like I feel that in this place, honest mistakes are valued, and you look at the companies where men and women rate things similarly, or I feel appreciated, if there’s a gap, not so good, if they’re equal, it’s much better.

The companies that are equal and how people feel within the company matters a great deal. By the way, the same thing is true about salary. I told you that salary doesn’t matter. Perception of fairness of salary matters a great deal. The same thing is true about gender. It’s about the fairness. And fairness is not equal number. Now, why am I saying it? For two reasons. One is, I think that the SHE Index is doing a disservice to the equality agenda. I don’t think they did it on purpose. They thought it’s a good idea but they really didn’t think about what does it mean equal number and what assumption that we’ll make? And I worry that people would look at the SHE Index and say, “Hey, clearly, let’s not promote equality.” But, of course, equality is incredibly important. That’s the first point.

The second point is that what’s easy to measure is not always what rights to measure, much harder to measure how women feel about opportunities of promotions, because you have to ask them. There’s no outside data that you can measure, like, what percentage of women are on the board? But even though it’s hard, that’s what we need to measure. We need to measure the correct things, and not to give ourselves discounts and just measure something because it’s easy.

Meb: I’ve read both the J.P. Morgan reports and they’re awesome, to the extent they’re public. I don’t know if they are we’ll add them to the show note links, but particularly for the asset managers, it does a very deep dive quantitatively, and statistically. How often are these surveys getting refreshed? Is it just kind of a constant process? Is it once a year? Once every couple of years? How does the process actually work?

Dan: The process is that companies are refreshed every year and rebalance between them quarterly. So, once a year, we decide what’s in and what’s out. And then every quarter, we rebalance. But there’s something else I think is also important. So, during COVID, all of this is research data going back to 2006. But during COVID, we kind of doubled down to try to get more companies and more data and so on because it was such an important bizarre period. And what we found was that everything that we knew from before COVID became even more important. Now why is that?

Meb: Is it because people, all of a sudden, are remote and feel detached? And so if you don’t have that connection to the company or mission that you are even worse, severed? That’s my guess.

Dan: Exactly. Yep. Exactly. So think about the kid in school, when the kid is physically in school, the teacher can say, “Sit straight. Put your phone down. Don’t talk to Joey.” There’s a source of external motivation that can come to play. Now, the kid is studying at home, the balance has changed, the kid can just turn the teacher off. So what happened is that during COVID, intrinsic motivation became more important. And adults, we’re not kids but we’re not also very different. When we go to the workplace, there are all kinds of things that are designed to keep us motivated. We go to meetings, and we see people, and we can’t be on their phone all the time. We have cubicles and glass doors and coffee together.

We have all kinds of mechanisms that do things to our motivation. You know, the development of the workplace has been an evolutionary process, not for nothing. Now, you have somebody working from home, they’re, in my case, not too far from the refrigerator. What’s the balance of extrinsic and intrinsic motivation? So companies that could get people to be intrinsically motivated and excited and so on, have been doing amazingly well. And companies that are not, are not getting to that.

Even though COVID is, hopefully, over, work from home to some degree is with us to stay, and the knowledge component of work is becoming higher as well. And because of that, I think that human capital is going to be even more important. We’re going to see an increase in that. And also people now are noticing, a lot of companies have been mistreating employees for a long time. But now, people are paying attention, which is wonderful. It’s about time.

Meb: For the CEOs listening to this, I’m in that category, my company is a little smaller but as you guys pull out of these companies, you get the ones that are obviously going into the portfolio. and you guys have a new ETF, by the way, partnered with another shop called ticker symbol HAPY, H-A-P-Y. That’s a killer ticker. Well done.

Dan: Thank you. That’s right, Harbor Capital, I went to hit the open and then closed the New York Stock Exchange, it was very magical. We talked about symbolism, and what do we enjoy? That piece of woods that people hit is from the first time the stock exchange was open. They have so many ceremonies and things around that. It’s an unbelievable experience.

Meb: We did it many years ago. And there’s also the largest boardroom table anyone has ever seen. It’s like the table you always see Putin sitting at. It must be like 100 feet long. It feels like it’s 100 yards long there. Anyway, really cool, listeners, very good chance to check it out. You do these rankings, the good companies end up in the portfolio of the stocks, you say a lot of companies mistreat, but let’s say a CEO is actually earnest or founder and saying, “You know what? I want to do a good job today. And we’re going to pay you a million-dollar consulting fee. What can I be doing?”

I love the story of you trying to motivate your team on some different ideas on bonus, or vacations, or scratch-offs or whatnot. But let’s say just in general, as a CEO, what are some of the biggest muscle movement levers that the not great CEOs don’t do or do that could help push them in the top decile?

Dan: The biggest mover is do people feel appreciated? And the thing about feeling appreciated, it’s really not that difficult to do. You just have to decide to do it. It’s about saying thank you. It’s about seeing people. It’s about commenting. It’s about allowing people to put their names in presentations. There are lots of things, they just get people to feel appreciated. Equality, gender equality, fairness, in general. And then we have bureaucracy. How do you decrease bureaucracy? And the thing about honest mistakes valued is also interesting. There’s a company that I love that the CEO at some point told me that they don’t think that their people are innovative enough.

I suggest that they do a competition where he gives the big failure of the year an award. And the idea is not to give an award for something stupid. The idea is to say, “In this company, we want people to try.” You can’t guarantee the answer, but you want people to try. And that company is thriving on that people submitting ideas. By the way, it’s so important to share bad ideas, ideas that didn’t work out. It’s an incredible part of knowledge. So I would say feeling appreciated, connected, I would say reduce bureaucracy, psychological safety, get people to feel free to say their mind, and what they think, and have ideas, and also create an environment where people can propose ideas. And if they fail, they don’t feel like they’re suffering.

Meb: What you described, and this plays out a little bit in the rankings currently, when you think about companies in the U.S. The U.S. already, in general, has a culture of companies failure being okay. There are thousands of experiments in companies. Many fail on a macro level. But as Silicon Valley has started to spread everywhere, and the concept of it, you have a little bit of, correct me if I’m wrong, cultural, origin of failure being okay. It seems like you guys ended up having more tech companies than non-tech companies in the portfolio.

Dan: So I think that people have the ethos that’s failing is Marquet. But on the individual level, people don’t feel like this. I actually talked to the head lawyer for a big tech company. He has 200 lawyers on his team. They go and do deals with lots of companies. Every one of them sees their deal as if it’s the only deal that they’re doing. So they’re being extra cautious with every deal. He has a terrible risk profile, because he’s dealing. Yes, it’s a more positive approach but we’re still far away from having a good relationship with failure.

Meb: On the appreciation side, since I’m getting this free psychology consulting session with you, I want to motivate my employees. I love them. I want them to feel safe, but also appreciated. Of the experiments you’ve tried, what’s something that really stands out as being particularly thoughtful approach? What would be something that really moves the needle it’s been meaningful?

Dan: My best experience one year with my team, it’s a nice approach, what is a good gift? And a good gift is not about going backward. Because backward, it’s like we’re closing the book. You did X, I’m paying you, we close the book backward. No, it’s about looking forward. It’s about telling people I care about you as a person, giving them something they couldn’t and they wouldn’t do themselves in something they would remember. And it sounds manipulative, but it’s not. The purpose is to show a true feeling of caring and longevity and so on.

So I asked everybody to write a third to a half a page about something that they want to learn as individuals, not in terms of work, and where they want to do it in the world, up to two weeks, and I said, “I’ll pay for you to do that coach, cheap hotels.” It ended up being slightly more than $3,000 per person. But it was an amazing year because people kept on going, and coming back, and getting excited then sharing back.

And you can say our $3,000 is not such a big amount but it’s very hard to decide to pay for yourself for a $3,000 course on cartooning or something like that. We talked about the pain of paying earlier. There are things that people feel guilty about spending on themselves. And a good gift is something like that. And that was an amazing year in their life, and people felt correctly appreciated, and seen, and that I care about their personal development. And it was just fantastic.

Meb: Not only that, it checks all the behavioral boxes. You don’t have the pain of paying. You get to fantasize about it. You get to share the experience once it happens. And then afterwards, you get to recall it and talk to everyone about how awesome. It’s like every single behavioral hack into one. I love it. We’ll try it. To the Cambria listeners, to the two of you guys that listen to the podcast, don’t spoil it for everyone else. We’ll try it this summer.

Dan: I want to say something else about human capital. Every CEO says, “My people are my best asset.” You haven’t heard any CEO say, “People are not so important.”

Meb: We got a bunch of average employees, whatever.

Dan: But the reality is that very few people act this way. Think about HR. In most companies, HR is kind of at the bottom of the totem pole. It’s like one above compliance. They do the training modules and make sure the payment goes but they’re not an R&D facility. They don’t have a budget to try and improve motivation. It’s a really strange thing if you think about how did we get to that function that HR is instead of, like, being at the top saying people are our best asset, let’s figure out how to get their life better and enjoy and motivate them? Instead, we say, “Oh, it’s HR. It’s the bottom. We just deal with the ethics module.”

And then the second thing is that when a company buys a warehouse investment, and when they invest in people, it’s a cost. From the CFO perspective, there’s no human capital. And I think we need to start having human capital. Like, imagine your asset sheet, and you thought about what’s your human capital? What does it mean. Until we have that, people are not going to try and manage human capital, but we need to get there.

Meb: This podcast is going to generate an endless list of thoughts as someone who not only is an investor, but also manages a company because it causes you to reflect. And I look at ways already that I’m cringing a little bit at the way we do things.

Dan: One of my goals with human capital, and with HAPY is that people would not just invest in it. It’s nice to invest in… People are treating their employees well, everybody benefits. It’s a good thing. It’s both moral and financially the right thing to do. I hope that people will do exactly what you’re doing now, which is to also start thinking about their own human capital and their own organization, so we can invest. And that’s one thing, but let’s also start thinking about how are we managing our human capital that we’re maximizing our company in there?

And the answer is, most people when they start thinking about this, there’s a lot of things I don’t know, and we can try to do better, but we’re also not paying enough attention to that incredible resource. When people come to work happy, everybody benefits. People come happy, management is happy, shareholders are happy. When people come in miserable, everybody’s suffering. It’s like free energy out there in the world when people are motivated. Everybody’s better off. Why don’t we spend more time on that?

Meb: And the converse true, you got a bunch of grumpy, angry people. It can be toxic. Good, when you start the online course, or put out the new template workbook, we’ll be the first subscribers.

Dan: Thank you. So I’ll give you one more pet peeve I have about work.

Meb: My pet peeve is people to chew with their mouth open. If you want to get someone animated, ask them what their pet peeve is. And they’re like, “Oh my God, the person that walks into the elevator before everyone gets out.” Anyway, okay, pet peeve, go.

Dan: I think we have it wrong when we talk about work-life balance. Work-life balance means that there’s a work and there’s life, and we need to balance. And I think there’s a continuum. There’s a thing we hate to do at work, bureaucracy, there are things that we hate to do at home, dishes. I think our goal is to have as many things in the middle that are both pleasurable, but we don’t know if they’re work or life. Work-life balance means that something is one or the other. So when I think about the people working with me, there’s a lot of books they can read. I prefer for them to read books that do both. If they go running, if they’re tired, they should go running and get energized. It’s not work or…

If the category of annoying things at work is too large, then we’re not doing the right thing. The workplace should try and minimize the annoyance things at work. But the right thing is that you can’t distinguish if you’re doing things for work or for life. I don’t want somebody to say, “Oh, it’s 5:00 p.m., let me read a different book now.” Why? I don’t want this thought at all to be that. I want to maximize everything.

Meb: And minimize all the headache and all the things you really don’t want to be doing. There’s an old piece of advice from Theo Epstein, the baseball guy, who was talking about how to get a job somewhere. And this is a fun way to think about it, go up to the person whose job you eventually want to send to, or the job you’re applying to, or whatever and say, “Look, what’s the 20% of the job that you hate. And I’ll take it over. I’ll do it.”

So not only am I endearing myself to you, but I’m learning the job or parts of it, and clearing your plate of all the things you hate doing. Most people when they apply for jobs, and we get emails almost every day from people, it’s all about them. “Here’s my resume. Here’s what I want to do in life. Here is how much I want to get paid.” And I say, “No, you need to flip that.” You need to say, “Hey, look, here’s what I can do for you.” But I agree, a lot of people talk about how they figured it out.

Warren Buffett pretty famously talks about when he goes to work reads whatever he wants during the day, and a schedule is famously pretty free work. And our buddy, Brian Portnoy, he’s got a good concept when thinking about the personal work-life balance, whatever you want to call it, calls it funded contentment, get to a place where you can design your own Valhalla.

Dan: I mean, there are lots of things that people who have the means can do. But I think this approach of maximizing both, basically says that the workplace, in my mind, has a responsibility to minimize the annoying things that people have to do at work. If people hate work, we’ve done something wrong. We the employer, have done something wrong. It should be up to us to try and minimize that part. And then the rest of it is about giving people enough freedom, that what they do is for them indistinguishable, whether it’s work or play. If we don’t get that some of the time, we have failed people. The modern workplace is this amazing place with amazing flexibility. And we need to grow into it and take advantage of this flexibility.

Meb: You can’t see this, listeners, but to my right is a very comfy plush couch. This has been very hard for me, actually, because you read all the literature about how taking naps can improve productivity. Because I drink a lot of coffee in the morning, I’m usually tired after lunch and 20-minute nap for me, I may as well be sleeping for eight hours. But the amount of psychological nap guilt that I’ve had to overcome, I think I’m there. Now that I can phrase it, it also is like meditation, like, I’m going to meditate. That sounds a lot less guilty to me. That’s my behavioral mindset versus just napping and sleeping on the job.

Dan: It is interesting. There are some things, like, if you went running, you probably wouldn’t feel as guilty. If you watch a movie, it would be terrible. I helped a very large tech company, and people used to go running for hours in the middle of the day, and it was perfectly fine. It was respected. On the other hand, if they sat and drank coffee and just stared at the window, it will be frowned upon.

Going back to this issue. One of the amazing things about the workplace is we want people to keep on developing themselves. Where is innovation coming from? We don’t really know. We want people to keep on looking around, what can I improve? Where can I go? What can I contribute to my company? If I think myself as a university professor, university would wants me to keep on thinking all the time, but where can I contribute? Should I spend more time with the students? Should I do more research? Should I do a lecture for the alumni? And continuously think about where can I contribute the most?

And we want people to have these agile view of here’s the utility of the organization, and my utility, and where do I fit in the most? But to get there, we need to give people a lot of photography. People need to get out of this definition of here’s my job and my role, and I have these seven things I need to do, and that’s the most important one. We need to give people trust and to give them a genuine direction and autonomy.

Meb: Couple of more quick questions. We already held you too long. Where do you stand? Presumably, this is something that could be applied around the world, too. Is data harder to come across?

Dan: Yeah, I don’t have the data for other parts in the world. When we look at the data in the U.S., we don’t find that our motivation equation is different by sector. When we started this, I stupidly thought that the manufacturing sector would look different. It’s the same. And by the way, since then, I’ve talked to lots of people in manufacturing. You drew for autonomy and finding problems and so on. All the sectors basically behave the same way. The same thing is true about ages. We don’t find the generation Z is very different.

Deep down human motivations are the same. And that gives me comfort to assume that in other places in the world, it would look very similar, maybe not identical, but it would look very similar as well. I just don’t have the data yet. But certainly, this is an important direction.

Meb: We normally ask investors on the show, what’s been your most memorable investment? You can answer that if you want to. However, given your background and history, I could also reframe it as, what has been your most memorable experiment? And it can be good, and it can be bad, and it can be anything in between, but usually, there’s something that’s seared into your brain. So for you, it can be, what’s your most memorable investment or experiment?

Dan: My most memorable investment is my Ph.D.

Meb: Which one? You got a couple of them. Don’t you?

Dan: True, I have a couple. But the second one, the second one was a surprise, because there wasn’t the first one, and then I think another one was a surprise. But the reason I’m saying it is that if you think about the asset class, it is going to give us the most value over a lifetime is ourselves. Stock bonds versus me, there’s a big difference. And I think we don’t invest enough in that asset class. And that connect, of course, to human capital, and companies need to do it as well. It’s not exactly answering your question the way you thought about it but I do think that we need to invest more in ourselves.

Meb: I laugh because my brother who did a bunch of various degrees took him I don’t even know how long to finish his Ph.D. But his advice to me when I was in grad school, and considering Ph.D., he’s like, “Meb, go make some money first. Go work a few years. This may be a long slog for you if it was for me.” So funny, different perspective where he’s sent me down a different path. I wonder where I would be today, had I gone that route. This is right after the internet bubble. So…

Dan: So it’s a good time for that. In terms of experiment, I’ll describe to you something that is not a real experiment, but it’s more of an experience. So as you’ve noticed, I have half a beard. It didn’t start half a beard, but I was very badly burned many years ago. Most of my body is covered with scars, including the right side of my face. And for a long time, I shaved. So I looked less nonsymmetrical. There are still scars on this side, and from close and without zooming, it’s very noticeable. It also used to be more red when I was younger, but I was less non-symmetrical. I never planned on half of it.

Five years ago, I went on a hike. A month-long hike, and in the end, I had half a beard a little longer than this. I didn’t like it and I didn’t plan on keeping it. I said, “Okay, I’ll keep it for three weeks, just for fun to remember the trip and so on, and then I’ll shave.” Surprisingly, I started getting emails from people who thanked me for my half a beard. What they said in their emails was that the fact that I was so out with my injury gave them comfort to be a bit more out with their injury. And, of course, I admitted to them it was not planned.

So then I thought to myself, “Okay, maybe I should keep the half a beard as a public service announcement.” You know, it’s not always fun, kids laugh, people point, but I thought okay, if I help people be a bit more courageous about their own scars, maybe I’ll keep it. But the real surprising thing happened a few months later. This half a beard helped me accept my own injury, my injury happened a long time ago. I have lots of scars and lots of deformities, and all of a sudden, it was a change that I didn’t anticipate but it was kind of a self-acceptance. I am non-symmetrical and here I am, and I’m out with it.

I reduced wearing long sleeve shirts. All kinds of things came with it. It’s not a real experiment. There’s no control group before and after. But the thing about it is that, obviously, I had bad intuition about it. I didn’t think half a beard will be a good thing. Even when I had it, I thought I would take it down, and I completely didn’t anticipate the notion of self-acceptance but it did really change me.

Meb: Beautiful way to wind down the podcast. Lots of lessons there. Go spend time in nature. Go on long hikes and be kind to yourself. I love all those. This has been a blast. I would love to detain you for hours but it is late into the evening where you are. I know irrational.capital investors can email you at dan@far out in the uncharted backwaters at the unfashionable end of the western.com. But if people want to read your research, find out what’s on your brain, which is usually a lot, what are the best places to go?

Dan: My website is probably the best www.danariely.com. And, of course, check our ticker, HAPY.

Meb: Listeners, we’ll add these all to the show notes, a million of Dan’s talks, books, everything we dived into today. Dan, it was a blessing. Thanks so much for joining us today.

Dan: Thank you. It was lovely.

Meb: Podcast listeners. We’ll post show notes to today’s conversation at mebfavor.com/podcast. If you love the show, if you hate it, shoot us feedback at the mebfabershow.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.