How To Understand Psychological Incentives - Uri Gneezy

1. 0:00 – 0:25

   Intro

   1. UGUri Gneezy0:00

      We always go to vacations when it's crowded and it costs much more because that's when the kids are off school. So parents took their kids away from school either the week before or the week after. It was much cheaper and much nicer vacation. Schools didn't like it. What did they do? Put a fine of 60 pounds if parents come in late. Bad mistake, because now people, instead of saying, "Look, it's bad to do it," now they said, "60 pounds? I'm going to save 1,000 pound by not going during the crowded time."

   2. CWChris Williamson0:23

      (wind blows)

2. 0:25 – 3:55

   Explaining Incentives

   1. CWChris Williamson0:25

      What are incentives? For the people that are not indoctrinated into understanding what that is.

   2. UGUri Gneezy0:31

      Incentives is something that will make you do a thing that you wouldn't do otherwise. They try to push you in- in this direction. A common mistake is that incentive is only money. It's definitely not. There are many other things that could be. It could be status, it could be playing computer games, not teaching at class. Many other things, but in general, it's something that will make you do a thing that otherwise you wouldn't.

   3. CWChris Williamson0:54

      What do you think that economists get most wrong about incentives?

   4. UGUri Gneezy0:59

      It's, uh, it's a long list. But basically it's, uh, if you read about incentives in economics, it's, you see a formulas as if it's physics, right? As if you're talking about particles or atom- atoms, you know, moving around the- the world. And that's not the case. We're talking about people. Incentives work. That part economists got very much right. But we don't always know how they work. The simplifying assumptions that people just, you know, you give them more money, it's better, you- you give them m- more incentives, you're going to get more of what you want, that's just wrong. The main thing that people in, that economist miss I think is that incentives send a signal. When I give you incentive, when I tell you if you do X I'll pay you ten dollars, then you get the ten dollars plus you get the signal that that's what I want you to do. And then you start thinking, "Why does Uri want me to do this? Is that bad for me? Is that good for me?" What are his motives, right? So you get, you- you start interpreting this. Incentives basically complete a story. You have a story in your mind, you look at the world, and once you get incentives, it helps you to create one sort of- of story.

   5. CWChris Williamson2:05

      And it's kind of like a feedback loop, because for every incentive that I'm given, there is a story about that incentive. What does it mean? What do I know about Uri? What has Uri incentivized me to do previously? What can I infer about his desires for me moving forward?

   6. UGUri Gneezy2:19

      Ongoing story that never ends.

   7. CWChris Williamson2:22

      Okay. So if that's what economists get wrong, what's the missing addition? What- what gets folded into the economic view of this which starts to flesh it out a little bit more?

   8. UGUri Gneezy2:36

      So after trashing my economist friends, now I can trash my psychologist friends. Basically psychologists, when they talk about incentives, so you can take the same class, the same, um, title of class in my business school. One will be taught by economist that will be completely math, completely out of, it's not people, it's about, uh, machinery. And you can take the same class with psychologist and over there they'll say that you- you go to work just because you want fulfillment and all the good stuff that you get from work. That's also m- a mistake, right? So it's also not the case. It's the- the combination of the two is what you should think about. I go to work because I need to make money and I go to work because I want to feel better about myself. And the secret is how you get these signals to work together. Right? So that's the, that's what I'm trying to do in this. So how to get the- the money that they give you, and you need money when you come to work, you- you go because you- you need the money. But how do I make the- the payments that I give you such that you actually feel better about yourself, feel better about going to work or do whatever the activity I'm interested in?

   9. CWChris Williamson3:36

      How common is it to have this more integrated view?

   10. UGUri Gneezy3:43

       Uh, it's not common at all. So like I said, if you take a class in the business school, you'll take either of the- of the versions. There are very few that gives you both versions I think, and that's- that's pity. That's what, that's basically

3. 3:55 – 12:15

   Social Dynamics of Signalling

   1. UGUri Gneezy3:55

      the gap that I'm trying to fill over here.

   2. CWChris Williamson3:57

      Fascinating. Okay. So break down social signaling and self-signaling for me. What's the difference?

   3. UGUri Gneezy4:03

      So when we're talking about signaling, the- the first one is quite clear. It's what, you know, what I want you to think about me. I- I do things, I dress up, I, uh, decide to contribute, I decide to do good things or bad things 'cause I care about the signals that I send to you. I care what you think about me. What you, your listeners, my bosses, my kids, what they think about me. That's the social signaling. And the self-signaling is also surprisingly about myself. So I don't really know how good I am. And when I say good, by the way, I don't mean good in the philosophical version of it. Good could be I could be a mass murderer and good for me would be that I killed 10 people today, right? So what, uh, uh, I don't know how good I am at whatever my goals are, and I look at my actions and I- I learn from it about myself. I can give you a story from the- from the book, an example from the book. Imagine that you live in a cold place. You see your neighbor walks in the morning, on a cold morning to the recycle center with a large bag filled with 100 soda cans. What are you going to think about her?

   4. CWChris Williamson5:06

      She's very altruistic. Oh my God, I can't believe that she's trudging through the snow purely to save the planet.

   5. UGUri Gneezy5:13

      Perfect. That's what she will probably think about herself do- as well, right? Because she's good. Now imagine same story, but you live in a place where she get five cents per soda can that she is recycling. Now you're going to say-

   6. CWChris Williamson5:26

      She's a ruthless capitalist.

   7. UGUri Gneezy5:28

      Exactly. Or just cheap. For five dollars, really?

   8. CWChris Williamson5:31

      (laughs)

   9. UGUri Gneezy5:32

      So that's the social signaling, what you're going to think about her. And there's also self-signaling. Before that, in the first version she was, "I'm a good person. I care about the environment. I'm recycling, I'm- I'm good." The second version, "I'm cheap. Do I really want to do it?"

   10. CWChris Williamson5:46

       So this- this tells us an awful lot more about folding in status and those signals into the pure economics of the situation, and also explains about how incentives can become perturbed.

   11. UGUri Gneezy6:01

       Absolutely. So you, you learn a lot, I think, from just this simple example because first of all, there are a few things. You get a signal by, by the amount, in this case. So because it's only five cents, you, you deduct that. That's not, probably not that important to do. If you would get $5 per soda can, then you'll start buying soda cans and just recycle them, right? So if I pay you enough, you think, "Wow, that's really important. It's, it's good for the world, right? I want to do it." So the size sends you a signal. Uh, many, many of the things are sending you signals, and all this, so imagine that, um, I go to, for a ski vacation and ask my, um, my assistant to stay over and work on something that I need to finish over the weekend. I'll come back on Monday and give him $10 as a thank you gift. He'll be insulted by that, right? That's, if I give him a chocolate that costs $10, that, that's less insulting. If I give him $10,000, he'll be very happy. Right? So it's not just the fact that I'm paying you, it's also how much I'm paying you. If I pay you 10,000... If I pay my assistant $10,000 for staying over the weekend, he'll be extremely happy, right? So the, the, the amount is important. In other cases that you can think about, imagine that I offer to pay you for sex. Then no matter how much I'm going to offer you, it's going to be insulting, right? Because that means that I-

   12. CWChris Williamson7:19

       Well, come on, Uri. You know, everyone's got a price.

   13. UGUri Gneezy7:21

       I didn't say that you wouldn't do it, right. Right.

   14. CWChris Williamson7:23

       (laughs)

   15. UGUri Gneezy7:23

       I didn't say you wouldn't do it, but you might be insulted that it's not just your look that I'm after.

   16. CWChris Williamson7:28

       Tell me what chocolate bar it was and then I'll, I'll reconsider.

   17. UGUri Gneezy7:30

       Right, exactly.

   18. CWChris Williamson7:31

       What's the difference between the $10 and the chocolate bar?

   19. UGUri Gneezy7:35

       The whole world of gifts is really exciting. It's, um... We're wasting huge amounts of times and money on trying to buy gifts that will send the right signal. There is an amazing, um, episode in Seinfeld that shows this when Jerry has to buy Elaine a, a birthday gift. So he and George go to the store and he says, "No, this is too sexual, this is too whatever, too domestic, too..." He really needs to find because it sends signals what, the gift that him sending. At the end, he gives her cash and she screams at him, "What are you, my uncle? Why... What are you doing?" Right? So gifts are really sending signals. And if I give you $10 chocolate bar, it's still I'm sending you a signal that I cared about you. I went to this place, I, I thought about you, I bought you, um, I bought you chocolate. Now, imagine going to a friend's tonight for dinner and you can bring a bottle of wine, it can be nice and buy a $50 bottle of wine and give them, everyone will be happy. Imagine that you go and say, "Well, I got stuck at work, I had this very boring, uh, podcast with Uri and I didn't have time to buy it, but here's $50." That's going to be very awkward, right? So what you give is really signaling something about you.

   20. CWChris Williamson8:51

       This is why online card sending websites, to me, have always seemed a little bit odd that part of the, part of the purpose of a card... I mean, what's... Even if you get the most insane, pop-up, 3D, sings a pre-recorded message to you card, what are you looking at? 15 bucks? Maybe? 20 bucks? Absolute top, top, top end and it'll, it'll fly itself there. The, the reason that you get a card is because everyone knows how much of a mess on it is to do.

   21. UGUri Gneezy9:21

       Right.

   22. CWChris Williamson9:21

       And, oh, you've had to, you've had to pick up a pen for the first time in six months since somebody else's birthday that you cared about, and I get to see your terrible handwriting and you scri-... And, you know, it... Like, that's part of the process. And, um-

   23. UGUri Gneezy9:32

       Yes.

   24. CWChris Williamson9:33

       Uh, saying that, uh, now I live abroad, I actually do see the value of this because it's an absolute nightmare to ship stuff across the Atlantic. That being said, did you watch the Netflix series, Pepsi Where's My Jet?

   25. UGUri Gneezy9:47

       No, but it's a great title.

   26. CWChris Williamson9:49

       So in the 1980s, 1990s, Pepsi started releasing Pepsi Points, and if you bought a can, maybe you got a sticker of some kind, I think, and you peeled that off, and if you collected enough, you could exchange it for a pair of sunglasses or a leather jacket, and it had a, a sending hierarchy of how many points got you a thing. And in the advert, at the very end, this kid that the advert is about turns up at school outside of his classroom in a Harrier Jump Jet, and it says at the bottom, "Harrier Jump Jet, one million points." No asterisk, no small print, no subjective terms and conditions, no, "This doesn't exist. This is obviously a joke," none of that. And this kid watched it, looked at it a, a hundred times, realized that it wasn't in there, recruited his rich friend, his father's rich friend who was a founder and had way more money than he needed, started working out how he could, can purchase in bulk all of these Pepsi cans, employ people in different warehouses, distribute it around the US. In order to be able to do this, they basically worked out that they were getting a Harrier Jump Jet at 95% discounted, pro rata. Uh, and they then began this massive litigation between this kid and Pepsi. And I thought it's-

   27. UGUri Gneezy11:08

       (laughs)

   28. CWChris Williamson11:08

       It's a really good documentary. If anyone hasn't watched it on Netflix, I, I highly recommend that you watch it.

   29. UGUri Gneezy11:13

       I will.

   30. CWChris Williamson11:15

       Okay, so we've looked at signals, we've looked at what it says about ourself, what it says socially. What's the problem when it comes to mixed signals?
4. 12:15 – 17:34

   The Problem with Mixed Signals

   1. UGUri Gneezy12:15

      to be there on time to pick up people. They start driving before you sit, right? It's really, uh, inconvenient. They are less safe, all of the bad stuff, so the quality really suffers, but they produce more. Now, there, there are lots of, uh, stories like that about small, unimportant thing. But if you think about healthcare in the US, that's a great example where it becomes much sadder. So imagine two doctors. You go to the doctor and you need, uh, you have back pain. Now, the doctor looks at you and there are three options. Either the doctor says lo- she looks at you and she says, "That's fine. Just rest a bit. It's going to be f- okay," or she looks at you and said, "Sorry, you really need the surgery." Those are two extreme cases. You'll get what you, what you deserve, what you need. In the middle, in the gray area, you'll have lots of places where, yeah, you know, one doctor will say that you need a surgery and other not. Now, imagine that you live in a place like most of the world in which the physician is not paid per surgery, per procedure that she's making. She's going to look at it and make a call decision based on science, eh, how she understands science. Now, imagine that on top of that, she's paid few thousand dollars for operating on you. If you think that that's not going to affect her judgment, you are very naive. Like, she might even not know that that's what she's doing, but she is going to look at it and say, "Look, uh, uh, you know, I... You clearly need, uh, a surgery." Where if you compare hospitals in which the physician is or is not paid per surgery, you see a big difference in this, in back surgeries, in C-sections, in many other things. Think about the sad example. Someone goes to the doctor, the doctor tells that person, "Look, I'm sorry, you're not going to see next Christmas. You're, you're dying from cancer. We did the best we can. That's it. I can give you another round of chemo, it will prolong your life by three months, but that's not go- the quality of life is not going to be high. You're going to suffer. Or I can send you on with palliative care and make sure that you die in a, in a nice way," right? That's, that's one way of saying it. Now, imagine that this same physician, this same oncologist is paid $10,000 if you choose to take this round, another round of chemo. Now, without... It's not, it's not that he's, that this doctor is doing something wrong or immoral, but this doctor might not even know, but is going to be much more likely to recommend another round of chemo, right? So that's, all of it is about the quality versus quantity. I- in my example, I'm, uh, I'm judged by publications, how many papers I publish, research papers I publish. My dean can decide to pay me per paper, and then the signal that I, that I hear is that I need to publish as many papers as I can, but then the quality is going to suffer. I'm going to publish a lot of papers, but they are not going to be very good, right? So all of this is the quantity versus quality, which is... I'll always tell you, the hospital will always tell the surgeon, "Look, you care about the patient. That's number one priority." The, the hospital will never tal- will never tell you, "Look, your goal is to maximize the profits per patient." But when they give the incentives, that's a signal that the incentive sends, so that's the mixed signal part of it.

   2. CWChris Williamson15:22

      And it's not, uh, uh, as you said, it's not as if the surgeon is really even capable of removing that signal from their own mind, or that incentive, sorry, from their own mind. So you go, okay, even if you were fully aware, even if it's there's a surgeon who works in America, who's listening to this podcast right now, who gets incentivized to be the oncologist that gets another round of chemo, how on earth are you supposed to do the expected value calculation of, well, I understand that deep down, there is an amount of me that s- will lean toward-

   3. UGUri Gneezy15:54

      Right.

   4. CWChris Williamson15:54

      ... wanting to be paid and I'll have to discount appropriately, and you know, uh, it, it's impossible.

   5. UGUri Gneezy15:59

      It's impossible, and we have research showing this. So we have, it's not with surgeons, we don't play around with, uh, with people's life, but we do play around with money. So we get people to the lab, we tell them, "Here, here's option A, option B. You need to s- to recommend it to someone else." Most of them choose to recommend option A in this case. We bring another group, we tell them, "Here's option A, here's option B. You need to recommend one of them. By the way, if you recommend option B, you'll get a dollar." Now, ma- most of them recommend option B. Now you can say either they're cynical and they just lie, or they convince themsel- like themselves like the surgeon or the oncologist that you just mentioned, that that's actually better for the, for the other person. So we have a third group in which we tell them, "Here's option A, here's option B. Choose one of them. Don't tell me. Which one do you think is better?" After they choose, we tell them, "Oh, by the way, if you recommend option B, we'll give you a dollar." Same incentive as before, but first these people had to make their judgment, and only then they learn about incentives. Now most of them again recommend A, right? Which shows that in the second option, the one in which they learned about the incentives, as they learned about the options, they really changed the way we, they think about it. They self-deceive themselves to think that B is better. I think that very much of that is going on in the mind of physicians or financial advisors. Any people, mechanics maybe.

   6. CWChris Williamson17:17

      (smacks lips) Yeah, that's the, uh, was it fiduciary agreement that a lot of accountants and investment advisors have, that, that fiduciary, uh, whatever it is, consent, uh, forces them to at least try and have the client's issues in mind. Speaking

5. 17:34 – 21:02

   Uber’s Driver Incentive Program

   1. CWChris Williamson17:34

      of, you mentioned, uh, buses and mini buses, didn't you look at something to do with, uh, incentives for Uber drivers?

   2. UGUri Gneezy17:41

      Yes. So the, you mentioned, uh, uh, we, we talked about the buses and mini buses, right? So how do you get incentives that will give you money per passenger so you'll actually have reason not to sit and drink coffee and, but rather to think about, "Where am I going to have more passengers? How am I going to make more money?" while not making you reduce the quality? Drive very fast, dirty car and all this. And I think that the ride-sharing like Uber, Lyft found a very smart way of doing this by, uh, giving the rate... by creating the rating system.... so now after a ride, if you drive too fast, too aggressively, your car will be dirty or something like that, I will give you one star. That's going to be bad for you, so you really care about your ratings. So now on top of the incentive to be fast, I also give you incentives to be good and that actually works, and interestingly, it doesn't cost the company anything to create this incentive scheme, right? So you really, uh, create something that costs you nothing and was really i- important. Now, my experience, I don't know about yours, whenever I still use taxis, which is not a lot, it's always less pleasant than the Uber experience.

   3. CWChris Williamson18:47

      Correct. I would agree.

   4. UGUri Gneezy18:48

      Right? The Uber is, the Uber is always cleaner, the driver is more polite, everything is nicer.

   5. CWChris Williamson18:54

      It's incentivized.

   6. UGUri Gneezy18:56

      Yes.

   7. CWChris Williamson18:57

      Yeah, I am.

   8. UGUri Gneezy18:57

      Without money, without any cost.

   9. CWChris Williamson18:59

      Yes, yes. One thing that I learned that was interesting about Uber is the drivers do not get paid more if the journey ends up being detoured, if it takes longer, if it gets stuck in traffic. Uh, and I thought it's a little bit brutal for the drivers, but it's very good for the rider that if you do hit a unrealized challenge of some kind that it is still... y- y- you're not going to be paid, uh, you're not going to be charged any more, and it's not as if the, you know, the old, we'll take you around the houses, the long route in order to ramp up the-

   10. UGUri Gneezy19:35

       Right, correct, correct, correct, correct, correct, correct.

   11. CWChris Williamson19:36

       ... extra amount of money. It stops that from happening.

   12. UGUri Gneezy19:39

       So this part is clearly great, right? So they really have the incentive to get you from where they pick you up to the drop place as fast as possible. I actually think that they are underpaid.

   13. CWChris Williamson19:50

       I would agree.

   14. UGUri Gneezy19:51

       A- and th- how do I know that? Apart from the fact that I know how much, you know, they tell me how much they make, and I worked a bit with Uber, apart from that, I know that it takes too long to get an Uber where I live. So pre-pandemic, it used to be five minutes, now it's often 15 minutes. 15 minutes means that they are not paid enough. If they would've been paid more, I would prefer, you know, I am privileged, I have the money, so that's true, it's not my daughter, would not prefer it, but, uh, but still I think that, uh, just from, from the quality of service, how long it takes, I would prefer that they will make 20% more and I'll get them within five minutes instead of 15 minutes. Right? So, a- and sometimes, for example, it takes them 10 minutes to get here, so they drive for 10 minutes and then they take me from my home to the university which they get $8. That's kind of, uh, I think that that's bad. We need... I, I, I really, I feel good when I pay a fair wage to the people there.

   15. CWChris Williamson20:43

       Me too.

   16. UGUri Gneezy20:44

       Uh,

   17. NANarrator20:44

       For what it's worth.

   18. CWChris Williamson20:44

       I use Uber. I don't have a car in America, so I've been, since I moved here about a year ago, I've been absolutely hammering Uber. I must have done hundreds, hundreds and hundreds of journeys just in the last year, and, uh, yeah, I, I would agree. Uh, it'll be interesting to see what happens with Uber over the next few years. Okay, so one of the other mixed signals that you talk about

6. 21:02 – 28:06

   The Right Way to Encourage Innovation & Punish Failure

   1. CWChris Williamson21:02

      is encouraging innovation but punishing failure. What would be an example of that?

   2. UGUri Gneezy21:05

      Right. Right, right, right. So I, you always tell people, you, you tell your worker, you then tell them, "Look, ju- do exactly the same, uh, don't innovate, just do small changes." Think about my world, right? I can write lots of papers by changing a small parameter in something that someone else did. Those are going to be really boring, bad papers. Or I can take a risk, I can think about something completely different, and by taking the risk, basically what I'm saying is, is that I'm increasing the variance, right? So there is a chance that it will be much better, but there's also a chance that it will be much worse. Now, if I work for you and you look at me, you see that I tried something and I failed, and as a result, you fire me or don't give me a bonus or whatever way you punish me, why would I take this risk? Right? Why would I go and try something new if I know that it i- that it has risks? So the, the right thing to do it, to, to, to encourage innovation is to tell you, "Look, go ahead, try it. If it doesn't work, tell me fast. Don't drag it, because if I know that you're going to punish me, I'm going to still, you know, throw good money after the bad money and try to make it work, force it to work." No, just whenever, whenever I see that it doesn't work, just kill it, that's fine, and then do this debrief, you know, what happened, why did it happen. Now, if you find out that it happened because I slept until noon and then drank lots of coffee, then fire me, then punish me. But if you say, "Look, it was a good idea, the intuition was solid, you tried it, turns out it didn't work, let's learn from it from the future how not to make the same mistake in the, in the future and move onto the next thing," that's the right, uh, way to do. I run experiments for a living, right? That's my research. Doing incentives for 25, 30 years, very often I have an idea, I go to the experiment, I test it, and the students do something else than what I expect. So I get mad at the students, but I try to learn from it, right? Why didn't it work? Sometimes it's more interesting. If your intuition didn't work, you learn something much more interesting some- and sometimes it's not, but the point is to, to incentivize really, um, failure as well. Because if the failure happened because your intuition was wrong but still was solid, just, uh, don't punish for that.

   3. CWChris Williamson23:17

      Rory Sutherland has a story where he always talks about the fact that, uh, nobody ever got fired for hiring Accenture. And his point being that if you have a, a, a reliable but boring pursuit, no one ever gets in trouble for that. Whereas if you say, "Look, I, th- this is something... we're not gonna use the blueprint, we're going to actually try and go out there and do something that may have a, an upside of 100X but a, a slightly greater downside as opposed to just iterating on what we've done before," and he says that this is one of the reasons why the consultancy model, uh, a lot of advertising is, uh, very safe, very boring, you know, it's handled by accountants, uh, and economists-

   4. UGUri Gneezy23:57

      Correct.

   5. CWChris Williamson23:57

      ... rather than by creatives and artists.

   6. UGUri Gneezy23:59

      Right. Right, right. I think that he's absolutely right. Now, you can think about a world in which you don't, you, you cannot allow for the downside risk, right? So imagine that, you know, I don't want my physician to take risks on my, uh, on me, right? In some cases... but then your message should be, "Look, I want you to play it safe."... creativity is important in other places, be, go and, uh, paint in your garage, uh, after that, after work, but here it's really important. That's fine. That's a message and then we go with it. But what I'm saying is don't tell them, "Be creative," but then like you said, if, if it doesn't work, punish them. That's, that's the mixed signal, right? So if you want creativity, don't punish. If you don't want creativity, which is also fine, tell them that that's not what you're looking for in this job.

   7. CWChris Williamson24:43

      What was that story about the Coke vending machine thermometer?

   8. UGUri Gneezy24:48

      I love this story. So the CEO of Coca-Cola, another probably either engineer or economist, uh, without social skills, uh, he got, he had, uh, he learned that he can put a thermometer, that there is a thermometer at the vending machine that can tell them whether... let's say, let's divide it to hot and cold days. It took probably ECON 101, it talks about price discrimination and said, "Look, on a cold day, we'll charge them a dollar, on a hot day we'll charge them $1.50, because they're willing to pay more." That's what airlines do, that's what hotels do. It's, it's, it's fine, right? So if it's busy, you take more. People of course got pissed at him. They said, "Why are you trying to take advantage of us when it's hot? That's, you know, that's not nice." And the right way to, to do it would have been making the re- regular price $1.50, and on a cold day, we'll give you a discount. It's only a dollar, right? So that, that's really great, right? That, that way, you know, you're nice to me actually, when you can, you're nice to me. AMC, last month, AMC came up with a similar program. They decided that... A- AMC theaters, they decided that they, they're going to charge different prices for different seats, right? If you want to sit in the middle of the theater, you'll pay extra, you'll pay... they'll call it premium seats and you'll pay extra. Again, lots of pushbacks. "It's not enough that we pay so much for the tickets, that we pay so much for the popcorn, now you also want, you want us to pay much more for the middle seats," you know? F you. The way they should have said it is... and then they try to say, "Well, inflation," whatever. They should have started with inflation. "Look, it cost us more, we have to pay more for labor. Everything cost us more, we have to raise prices. We are really sorry for this. That's not what we want. We want everyone to be able to go. And because of that, we're going to give discount for the first row and for the side so everyone can still come over and, and use it." Right? So that's the, exactly the same incentives, but very different story. Think about, uh, coming back from the pandemic. A friend of mine told me a story a couple of days ago. They, they went, they, they worked remotely and then they decided to go back to three days a week in the, in the office, and their employees were really upset with them. They looked at it as punishment. And what you said is that the right thing to do after listening to these two examples, you said the right thing to do was to say, "Look, look, sorry," or not sorry, "the pandemic is over, we are back to five days a week. However, because you were so good and so responsible, we're going to let you work from home for two days." Right? So exactly the same story, but it's not we're punishing you by bringing you o- to, to the office for three days, but we're rewarding you by giving you two days, uh, to work from home, right? So this, th- th- there is a story out there, our brain completes the story, and the incentives can really change the way we, we look at the story.

   9. CWChris Williamson27:31

      This feels like, uh, anchoring bias is, is playing a massive role here. Anchoring bias and expectations are playing, doing a, a lot of the heavy lifting.

   10. UGUri Gneezy27:42

       Anchoring, framing, all of the good stuff that we know from, uh, behavioral economics and behavioral science in general works over here. The, the twist is that now it's done by incentives, right? So it's not just a story, it's also, it's done by the incentive. You give it as an incentive to people, and that's important to understand that incentives tell a story, and if you control it, you're going to do better.

   11. CWChris Williamson28:05

       If that's the case,

7. 28:06 – 32:50

   How Peloton Sold More With a Higher Price

   1. CWChris Williamson28:06

      how is it that Peloton saw an increase in sales when they put the price up?

   2. UGUri Gneezy28:12

      So, uh, Peloton is a great example. So the CEO wrote that when they started, they charged $1,000 pr- for the bike and no one wanted to buy it because they decided that it's probably not a good... they concluded it is probably not a great bike if it cost so little. Again, tells you something about the people that think that $1,000 per bike is little, but that's what he said. Doubled the price, $2,000, a bit more than that, if I remember correctly. Everyone said, "Wow, that must be a great bike," and moved in, right? Imagine, uh, back to, to the wine example. You go to... usually you buy a $20 wine. Now you're celebrating something, you're celebrating birthday tonight. You're going to the store and say, "Tonight I'm going to, today I'm going to buy a $50 bottle of wine." Why? Because we have this price equals quality in our brain, which is true in many cases. If you want to buy a laptop with more memory, it's going to cost you more. You want to buy a Tesla with longer range, you're going to pay more. But in some cases, this is just, uh, in your brain and you need to know where to just control it.

   3. CWChris Williamson29:17

      I'll never forget one of the first, first ever times that I sat down at AS level business when I was 16 or 17 and they were explaining about the fact that, uh, Nike's shoe range and you have the lowest one, which is 30 pounds and then 50 pounds and then 70 pounds and all the way up to, you know, 250 pounds and this is, this has got all of the fanciest pieces of kit but if you look at the difference in terms of the tech that goes into 250 and goes into 150, which might be the next closest, you're not looking at very much. It's... apart from signaling I've got the most expensive pair of shoes, they're always going to look different. You're always going to be able to tell-

   4. UGUri Gneezy29:55

      Right.

   5. CWChris Williamson29:55

      ... that they'll look different, especially at the bottom end and at the top end.

   6. UGUri Gneezy29:58

      M- Maybe you'll be able to tell. I won't, right? So you have, you have your people that you really care about them being able to tell, right? So there is a group of people that look at the shoe and say, "Look, this is..." so my wife-

   7. CWChris Williamson30:08

      That's a 250 pound pair.

   8. UGUri Gneezy30:09

      Right. I, I wear $50 sneakers, right? And, but my wife sometimes tells me, "Look, look at these, uh, white tennis shoes. Those are 250, sometimes $1,000 shoes, right?" So absolutely.

   9. CWChris Williamson30:23

      Yeah, and the reason for that-

   10. UGUri Gneezy30:24

       You signal to the right people.

   11. CWChris Williamson30:26

       Precisely. So that's the first part, but the second part... And I, I remember thinking, "Well, look, if we just take a, uh, utilitarian amount-of-shoe-per-pound-spent equation, uh, and-

   12. UGUri Gneezy30:38

       Right.

   13. CWChris Williamson30:38

       ... and try and, and try and equate that back, why, why does anybody, including myself, why am I seduced by the shoes at the top?" And there is this sort of signaling thing that goes on. But the other reason is that if you look at the area under the curve, under the price curve, there are people out there who either simply want the absolute best because that's what they want or have $250 or $300 or $500 or a thousand bucks to spend on a pair of shoes, and if there is one that is within that bracket, that's the pair of shoes that they're going to get. Now, if the best pair of shoes happens to be $150, they're going to buy that pair. So why not just continue ratcheting up the-

   14. UGUri Gneezy31:15

       Right.

   15. CWChris Williamson31:15

       ... scene, features. "These shoes are Bluetooth-enabled. These shoes will correct your gluten intolerance. These shoes will do whatever." Like... (laughs) Um-

   16. UGUri Gneezy31:24

       Will write your papers.

   17. CWChris Williamson31:25

       Precisely correct. Well, that would be great for you. Um-

   18. UGUri Gneezy31:28

       Yes.

   19. CWChris Williamson31:28

       Yeah, the, you just might as well continue to ratchet it up, capture as much area under the curve of-

   20. UGUri Gneezy31:32

       Right.

   21. CWChris Williamson31:32

       ... of that demand.

   22. UGUri Gneezy31:33

       So, so think about wine. You go to a wine store, you can buy wine from $5 a bottle up to $50,000 a bottle, right? And, you know, I drank some of the more expensive wines because someone else was buying it. I, I couldn't tell the difference. I love wine. I drink a lot. Give me the 20... a good $20 bottle of wine, I'm extremely happy with that. Very... But what you said about having very expensive ones, in many restaurants you have, you know, you go to a restaurant, not a very fancy restaurant, and you look at the wine menu, there is a $5,000 bottle of wine over there. And then you ask the, the, the waiter, "Did anyone ever ordered it?" Nah, they probably don't even have the wine. But that gives you, th- that sends you a signal, "Look, this is, this is a serious restaurant because they have this very expensive wine." Probably the same goes with the sneakers, right? So if this company can actually manufacture a thousand dollar pair of shoes, they must be doing something really good. They must be really high quality. Even if no one buys them, that sends a signal that they're really good, and some people will actually buy them for the reasons that you mentioned.

   23. CWChris Williamson32:37

       Also, by pushing the top end price further up, what you're doing is relatively making the mid-range products seem cheaper, right?

   24. UGUri Gneezy32:47

       Right.

   25. CWChris Williamson32:47

       We're looking at anchoring, anchoring again-

   26. UGUri Gneezy32:49

       Right.

   27. CWChris Williamson32:49

       ... off the top. Okay,

8. 32:50 – 38:31

   The Mixed Signal of Long-Term Goals & Short-Term Results

   1. CWChris Williamson32:50

      okay, so you've got, um, long-term goals and short-term results as another mixed signal that often happens. What's going on there?

   2. UGUri Gneezy32:57

      So there is this saying that, uh, we all know... by a politician, "We all know what's the right thing to do. We just kno- don't know how to get elected with it." Right? So think about politicians. Think about... I live in California, think about, uh, my, uh, governor that understands that building a train from San Diego to San Francisco, a fast train is really important. So if I want to go from San Diego to even to LA, it's like a three-hour trip. It's, it's just impossible. It's not, it's not a viable option. And say that, uh, our governor will decide, "Yes, I'm going to invest in this. It's going to cost, I don't know, $50 billion, but we're going to put the money in it, and we're going to do it." He'll have to invest a lot now, and the benefit will be 20 years in the future. He'll be long gone. He will probably not get reelected because he diverted funds from roads so they can fix the bridge next to my house, I will say, "Wow, he's a good governor." If he invests in something that I don't see, I will not understand it, right? So why would they invest in the long run if the short run is so, um, so much more rewarding in terms of getting reelected? Think about the CEO that the board tells them, "Look, we care about the long run. We want to be successful in the long run of this company, please." You know, but then judge the CEO based on the quarterly earnings, quarterly performance. What is the CEO going to do? Imagine that the computer system, whatever, the network really needs upgrading, so the CEO can decide to invest a lot in it in the coming two quarters, and then it's going to get huge benefits in the future, but the next o- two quarters are going to look really bad, really poorly in terms of profits. And that CEO will probably be fired or be... will not get the bonus or whatever, right? So we tell them... we, we tell the people that work for us, like the governor or the CEO that, "Look, we really want you to think about the long run," but then we, we give them incentives to do the short run, and that's, that's a big problem. Now, there's not always a good solution. So the solution for, uh, the governor, uh, would be dictatorship, right? But I don't want to live in a dictatorship, right? So I kind of like the, the democratic system in which, uh, they need to report back to us. So you don't a- always have a solution for that, but we try to... we should try at least. For a CEO-

   3. CWChris Williamson35:15

      What is it-

   4. UGUri Gneezy35:16

      If I had a company and they needed to elect a CEO, I would tell that person, "Look, I really care about the long run. I'm going to let you do this for two years and just run with it. I'm going to, to sit and watch you. Hopefully you'll do well." I'll try to find a person that I can really trust and just let them run with it. I would not look at the short run performance.

   5. CWChris Williamson35:38

      I wonder whether, uh, tenured professors have the same sort of sense. Now, one of the problems that you have, obviously, if you lock somebody in and you guarantee them, uh, uh, an amount of time that they're going to stay employed or supported by you, uh, that means that they can drag their feet. That then creates another challenge that you have, which is-

   6. UGUri Gneezy35:58

      I completely disagree. Tenure is the best thing that, uh, God ever created and I-

   7. CWChris Williamson36:02

      You sounds like you might have some-

   8. UGUri Gneezy36:04

      Yes, maybe-

   9. CWChris Williamson36:05

      ... perverse incentives here, Uri.

   10. UGUri Gneezy36:06

       Maybe, maybe, maybe. So it's, uh... Look, we... first of all, we are tortured for, for many years until we get tenure, right? So that's, uh, that part is, is there. And you try to... Really when we decide whether to give someone a tenure, we really try to figure out, did we get this person addicted to, to doing research, to doing his or her job, right? If we didn't get them addicted, then the second we'll tenure them...They can just go, "I need to teach three weekends a year. I can be in the Caribbean for the rest of the time. No one can do anything. Unless I'll do, you know, something horrible, like say the, you know, racist things or something like that, I will, I will keep my job." Yet I'm, I'm working very hard, right? Because I really enjoy it. And so that's part of what I said at the beginning that I'm, I'm doing it because I'm getting paid, but I could've worked much less and still got the same amount of money. I enjoy it, right? I want to convince people to buy my book. I'm, I'm here, uh, trying to, to do that, right? So we are, uh, intrinsically motivated. So that's the... but that's not always working, right? Sometimes you tenure people and they just quit. See lots of demic all them, deadwood in the, in the, in the, in our faculty, and you see this, and it's very hard to do. Now, I think that the main reason for tenuring with, you know, academic faculty was the freedom of speech, 'cause now I can really say whatever I think. Uh, again, within reason. I cannot say racist things. I cannot say some other stuff, but I can, I can say, uh, radical opinions that maybe my university doesn't like it, but... and the many other people will not like it, but I can still express it, and that, that seems to be really important.

   11. CWChris Williamson37:44

       And you can pursue innovation, you can focus on the long-term, et cetera, et cetera. Yeah, I don't, uh, I don't disagree. I, it's, um, it's very interesting. I didn't really know what tenure was until I started this show. I haven't, um, involved myself in the inner workings of how employment of professors at universities actually, uh, goes on all that much.

   12. UGUri Gneezy38:02

       Right.

   13. CWChris Williamson38:02

       Uh, so given that, w- what we're trying to do there is, um, incentivize, uh, good behavior, why is it that fines are so ineffective at incentivizing against unwanted behavior?

   14. UGUri Gneezy38:16

       Just to finish the previous one, exactly what you said. The longer I can invest... So in the book I talk about a female genital mutilation, uh, project that we're trying to do. We're working on it for six years. It's going to take many years until it's ready. I can do it because I don't have to worry about the short-term.

9. 38:31 – 46:24

   How Incentives Are Helping Prevent Female Genital Mutilation

   1. UGUri Gneezy38:31

      That's-

   2. CWChris Williamson38:31

      Let's talk more-

   3. UGUri Gneezy38:32

      So that's exactly-

   4. CWChris Williamson38:32

      Let's talk more about that. I wanna, I, I wanna talk about this female genital mutilation thing. How are you, how are you trying to, uh, change the incentives of these places where it's a common practice?

   5. UGUri Gneezy38:42

      When you go to Africa, there are many places, so tens of millions if not more than that of, uh, young women that go through this female genital, gen- genital mutilation, which is a horrible, horrible procedure. We focus on the Maasai tribe because over there, as far as we know, the data is not clear, but the vast majority of girls around the age of 10 to 12, uh, go through this procedure. Now, we might say that, "Oh, again, these Americans come and try to change the behavior of, uh, the culture of a..." No, we're talking-

   6. CWChris Williamson39:11

      Indigenous people, et cetera, et cetera.

   7. UGUri Gneezy39:13

      All the good stuff that was done way too often in the past. This case is not the same because people who understand what they're talking about say that it's worse than rape, what happens over there, right? So it's not something that if it was raping 10-year-old girls, no one would say, "Well, it's part of the culture. We should allow it," right? FGM is worse than that, uh, by many cases. So, uh, the question is why does it happen? So we looked at it and tried to understand why does it happen, and turns out that to a great extent, it happens for economic reasons, 'cause the girl, after she wa- she goes through this FGM, her value in the marriage market is much higher, and that's, you know, it's a very patriarchal society. Basically, the value of a woman is measured in the number of cows. How many cows you're going to get for her? Is it 10 cows or 15 cows or whatever? And the value of the girl for the, for her family is going to be higher if she's going through this, through this procedure, and she'll be able to find a better husband.

   8. CWChris Williamson40:08

      Why?

   9. UGUri Gneezy40:08

      So that's why it happens. Uh, why? Because, uh, she can be part of this, of the, of her, the group of women over there. If she's not cut and everyone, all the other girls are, then women later on, they still treat her like a, a baby. They... she'll be outcast to a great extent.

   10. CWChris Williamson40:26

       Ha- Have you considered the motives, the, uh, culturally adaptive reasons why this would've first come about? I'm gonna throw my bro-science evolutionary psychologist hat on here and guess that maybe one of the reasons why... c- you know, speaking as a Westerner who quite enjoys it when the girls that you have sex with, most of my friends want the other, their partner to enjoy it. I'm going to guess that this is because if the incentive for individual women to have sex gets dropped through the floor, chastity is something that you can expect much more highly. Is that what it seems to be?

   11. UGUri Gneezy41:03

       Every- everything you said, it has few layers, but first of all, according to people who understand... I'm not an anthropologist, I'm not an historian, but apparently the men used to go for a year to, to fight or something like that, come back, find their wife pregnant. They wanted to prevent this. Now, interestingly, what you said about sex, you ask the young men that needs to decide who they're going to marry, "Do you want your wife to enjoy sex?" They all say, "Yes, we want it," exactly like you said. "We want her to enjoy sex as much as we do." But then what are, "Who are you going to marry?" "Well, I'm going to marry, uh, a woman that went through this procedure because then she'll be a better wife," in a sense. Her value as a wife, right? So it's, it's really complicated, right?

   12. CWChris Williamson41:42

       Mm-hmm.

   13. UGUri Gneezy41:42

       But it, but it's all about the economics of it. Now, what we came up with is how can we create an, uh, an alternative economic institution that will compensate for this, for the loss of, of value of the woman in the, in the marriage market? What we found is that they really want the girls to go to high school. High school is, um, is far away, costs a lot of money. Think about college for us. It's really, it's a boarding school that costs lots of money. If the girl goes there for high school, comes back when she is 18, then her value is much, much higher already. She doesn't need to go through FGM. She is already an independent woman. She can be a teacher or nurse or whatever. She's really going to do well, but the parents don't have money to send her out. But we said, "Look, we're going to, to have nurses check, validate that they are not, uh, they did, they didn't perform this horrible procedure on them. If you didn't, we're going to pay for high school. As long as she's uncut, we're going to pay for high school."... and we think that that's going to be a very strong motivation for the parents, again, because of the economic aspects of this. And hopefully, you won't have to do it forever because once you'll have enough women that will not be cut, the peer pressure will switch from, "Oh, you're not cut. You're a baby. Y- we don't have to consider it at all," to, "Oh, you're cut. That's unfortunate." Right? And-

   14. CWChris Williamson42:59

       Yes, this is a, uh, uh-

   15. UGUri Gneezy43:00

       ... hopefully this will change that.

   16. CWChris Williamson43:02

       ... uh, also, that would mean that the women who are cut are also most likely to be uneducated, which is a signal that women would not want to be associated with. This is something, it's a, again, neither of us, uh, uh, educated, uh, fully-educated anthropologists or evolutionary psychologists, but the knife edge that different cultural technologies, uh, the way that s- uh, th- the status of different types of, uh, behavior, um, are viewed in society to me seems, it's so... I mean, you know, we're talking about here a relatively small intervention to stop an incredibly heavily ingrained piece of, of culture, and it's just, I find it so interesting how fine the line is between those two things.

   17. UGUri Gneezy43:54

       And, and they have lots of other problems that over there I, I can see the problem of people with us changing the culture because they have... Uh, so a girl is getting married at 14 with a 30-year-old man, they start having kids and they have lots and lots of kids. Now, pre-antibiotics, about half of the kids died, so it was manageable. Now they have too many kids in the sense that the resources that they have cannot support them. Right? So in terms of, uh, planning, it's much harder to do and they, they, they have, uh, serious problems with that as well, right? So like you said, very simple thing, very simple incentive, very simple change in what you do can really have a, a huge impact on the society.

   18. CWChris Williamson44:35

       Given that you're, uh, not quite the, uh, fully robotic behavioral economics professor, but probably are not used to having such a fundamentally benevolent impact on a culture with the work that you do, how, um, how does it feel personally crossing into a, you know, pretty much in- a universal good, being able to utilize what you've learned in your theory to really make a, a, a, a pretty important change to the world here? How does that feel for you?

   19. UGUri Gneezy45:09

       So that's what happens with age, you think, right? So as a young, uh, man, I wanted to publish as many papers, become famous, be successful, whatever. Now, when you get older, you start to think about, "Okay, how can I use it to, to really impact the world?" So I work with companies, but that's usually not doing good to the world, right? So I help companies make more money. That's not... Come on, that's, that's not creating value to the world. That's creating value to the company and, and to me. And then you can think about few things that are like this that, you know, "If I can help these girls," right? "If I can help, if I can save one girl from going through this, that's already... I'll, I'll die much happier," right? And clearly if we can have more. And, and you can think about other, um, other things that we try to do. So I mentioned the oncologist. We're trying to do end of life kind of, um, planning, to help people plan better to the end of life and, and these kind of things. And, uh, I find it much more exciting than running another lab experiment about some negotiation game that I still find interesting, but that's less exciting, like you said.

   20. CWChris Williamson46:11

       You've become an ascended individual, a patriarch who is trying to bestow his-

   21. UGUri Gneezy46:17

       Right.

   22. CWChris Williamson46:17

       ... insights on the world. Um-

   23. UGUri Gneezy46:19

       (laughs) I just need a white beard, a long white beard.

   24. CWChris Williamson46:21

       I think that you could grow it out. I think it would look well.

   25. UGUri Gneezy46:23

       Yeah, yeah,

10. 46:24 – 52:41

    Why Fines Are So Bad at Incentivising Behaviour

    1. UGUri Gneezy46:24

       yeah.

    2. CWChris Williamson46:25

       What about the, uh, fines, um, in terms of stopping unwanted behavior? What's the problems there?

    3. UGUri Gneezy46:31

       Uh, the problem is with your perception. I think you are wrong. So fines, all we know about fines comes from really silly experiments in which, you know, they... First of all, you cannot come to my lab and leave with less money than you came in. So I can't really give you a fine in my lab. And much of what we say, exactly what you said is the perception in psychology, and I think that it's wrong, that small f- that fines are, don't work. Well, small fine don't work. So I have this, uh, this study about, uh, day cares. So our girls used to go to a day care in, um... my wife and I lived in a suburb of Tel Aviv and we needed to pick them up by 4:00 PM in the, in the afternoon. We used to go to Tel Aviv to have lunch then one day there was traffic. I drove like crazy in order to be there by 4:00 PM because you don't pick up your kids too late. Then the principal decided that she'll put a $3 fine if you come more than 10 minutes late. Again, we were in Tel Aviv. Again, traffic. This time I didn't drive like crazy because I'm not going to risk my life for $3. It doesn't make any sense. Right? So the small fine over here did change the perception. And by the way, we found wha- when we ran the experiment, we found that indeed many people came late, more people came late, and it's not because they thought about it as a babysitting system, uh, way, you know, "I'm paying for babysitter," 'cause when we removed the fine after a while, they kept coming late. So what happens, what we think happened, it's altruistic and die. What we think is that before that you didn't know how bad it is to come late. Now we told you that it's $3 bad, right? If it's only... if it's that, it's- m- it cannot be important. Now-

    4. CWChris Williamson48:06

       And you can never remove that anchor.

    5. UGUri Gneezy48:08

       Exactly. This knowledge, once I, once I learned it, you can't take it. Now, if in some places in the US it's $10 per minute, then, then you'll think about it.

    6. CWChris Williamson48:17

       (laughs) Yeah.

    7. UGUri Gneezy48:18

       A friend of mine told me that in Paris there is a place where if you're late, they take your kid to the police station and you have to pick up your kid from the police station. That's, that's big.

    8. CWChris Williamson48:27

       Wow.

    9. UGUri Gneezy48:28

       Right.

    10. CWChris Williamson48:28

        Yeah, and you've got the social impact of ya- that. You've got increased inconvenience. So I remember-

    11. UGUri Gneezy48:34

        So it, so it's not that fines don't work, it's small fines that don't work.

    12. CWChris Williamson48:37

        Interesting. Okay. Now, I remember learning about Estonian speed traps. Have you heard of these?

    13. UGUri Gneezy48:45

        Nope.

    14. CWChris Williamson48:46

        So in Estonia-... they have, um, police by the side of the road, and what they do is they'll ping you. If you're going over the speed limit, they'll catch up. They'll take you to the side of the road, and you'll have the choice between, I think it's a really, really high fine. I think it's €350 maybe, or you can stay by the side of the road for 30 minutes.

    15. UGUri Gneezy49:10

        Ah, nice.

    16. CWChris Williamson49:11

        And I thought that that was a really interesting way, uh, you know, most people that are gonna be pulled over by the Estonian police are not making €700 an hour, right?

    17. UGUri Gneezy49:22

        Right.

    18. CWChris Williamson49:23

        But there are people for whom, "I'm on my way to pick my kids up from nursery. We have a wedding we're getting to. We're making a flight. We're doing whatever." Uh, and it just really makes people, I think, question the time and the m- the money element, uh, in a m- it's, it's much more interlinked. I thought that was a very smart way to, to do it.

    19. UGUri Gneezy49:44

        I would put both. So why not pay €350 and wait 30 minutes?

    20. CWChris Williamson49:48

        Ah.

    21. UGUri Gneezy49:49

        Right? 'Cause some people-

    22. CWChris Williamson49:49

        Really?

    23. UGUri Gneezy49:49

        ... some people are rich enough, some people are rich enough that they don't care about the money. Some peo-

    24. CWChris Williamson49:55

        Let's, let's-

    25. UGUri Gneezy49:55

        ... and they do care about being, right?

    26. CWChris Williamson49:57

        Well, let's think about it this way. If you do do that, what you are optimizing for are people who are both time rich and money rich.

    27. UGUri Gneezy50:03

        Exactly, exactly. So that's equalizing, you know, everyone is going to suffer. One way that they did it in many places is this preventive driving. So if you, if you, they catch you, you get a ticket, you have to go to this school, right? That's just, that's pure punishment. You'll, you don't really learn anything over there, but it's, it's very effective punishment. So now I think you can do it online, but in the past, you really had to go there. I was fortunate enough not to go there, but my friends who did said that it was, like, three afternoons real punishment, so.

    28. CWChris Williamson50:35

        There is a, uh, everybody in the UK will be aware of the Speed Awareness course, which is what you're talking about. So, uh, in the UK, you're allowed a 10% over the speed limit. Uh, that was originally introduced because analog speedometers had a 10% tolerance where the car may be sufficiently inaccurate.

    29. UGUri Gneezy50:56

        Correct.

    30. CWChris Williamson50:56

        The fact that that's been legacy grandfathered in, uh, in a world with digital speedometers that are probably accurate to, you know, 0.1% of a mile-
11. 52:41 – 1:02:18

    How an LA Car Company Used Incentives to Drive Sales

    1. CWChris Williamson52:41

       cars, what was that online car shop? Edmunds.

    2. UGUri Gneezy52:46

       Right. Edmunds, yes. So that's actually interesting. Edmunds is a great company. I worked with them. They're from LA, and what they do is give you information about cars. So you want to buy a car, you go there, you check it out, Toyota Corolla from, you know, a new Toyota Corolla and you, you learn about it, and then when you want to buy, when you're ready to buy, they have ads from local dealerships. You put in your ZIP code and they know where you are, they, they offer you deals. Now, if you buy through them, so if you click on, on the link over there and you end up buying the car, uh, they, th- that's of course good for them because then the dealerships are going to pay them more for, uh, for advertising. Now, what they did is gave you, say, say that you bought a $20,000 car. They gave you $500 discount if you, if you clicked on Edmunds and went over there. Now, $500 is a lot of money, but not when you compare it to $20,000. So we know from previous research, old research from the '70s and '80s that imagine that you're going to buy a mouse for your computer, right? You go to the, to the store and the, the guy will tell you it's $50, but if you walk 10 minutes, there is another store, they have it 50% off, you get $25 off. Most of us will go. Many of us will go. Now, imagine that you buy a computer and then you also buy this l- this, you pay $2,000 for the, for the computer, and you also want as one of the accessories, a mouse. And now the, the guy will tell you, "You can either pay $2,050 over here, or you can go and buy it over there and pay $2,025 over there." You say, "Well, it's not..." Right? So you compare it to the deal itself. So $500 in itself didn't r- it worked, but not as good as you would imagine. What we thought is something that is called mental accounting. Mental accounting is basically what you care about, what, what is it that you really care? Not all money is created equal, and what we thought about is gas money, right? So if I give you a credit card for $500 that you can spend on buying gas, now you can imagine yourself standing in the gas station and, you know, fueling your car, and $500 is a lot of money. You can fl- fuel it for a long time. This is something that you really don't like to do, and now you get it for free.... that has much stronger impact. The same amount of money, actually we found in our experiment that we did with them that $200 in gas money were more effective than $500 cash. Now, if I'll ask you, "What do you prefer, that I give you $500 in cash or $200 gas money?" Of course, you'll choose the $500. But because it was separate, it was different, people did not look at it as part of the deal. They said, "Oh, I'm going to get this, that's great." And that was more effective.

    3. CWChris Williamson55:22

       And that's again about the story that you tell yourself.

    4. UGUri Gneezy55:25

       Right.

    5. CWChris Williamson55:26

       What it means in order to get this money.

    6. UGUri Gneezy55:28

       Right.

    7. CWChris Williamson55:28

       Another car that you looked at, the Toyota Prius.

    8. UGUri Gneezy55:31

       Yes.

    9. CWChris Williamson55:31

       What was interesting about that?

    10. UGUri Gneezy55:33

        So in the late '90s, early 2000, both Honda and Toyota came out with the hybrid cars, and fortunately for them, those were really bad cars. Why, why fortunately? So today, if you buy a Prius, it's a competitive car. It's- it's a very good car. Back then, they were bad, and that was great because if you wanted to say, "Now look, I'm- I'm a good guy, I care about the environment," you should buy a hybrid car because for the same amount of money, you could have bought a much better car. The only reason that you would buy some- the Prius or the, whatever the alternative, we'll get to it in a second, by Honda is because you care about the environment. That's why you buy hybrid cars. So that's great, right? And that's- that's very good and that's why people were actually attracted to it, I think, to a great extent. But then Honda made a decision that was probably dictated by the engineers who said, "Look, do it based on the Honda Civic. The parts are going to be the same. Everything is going to be much easier." Toyota took a very different approach. They said, "Let's redesign the car completely." Now when you see a Prius, you know that you see a hybrid car. Now imagine that you drive into the parking lot with your not so great car. In one case, there is a small plant- uh, plaque at the back saying hybrid car, that's the Honda example. In the other case, everyone sees it from distance, "Look, oh, you're a great guy. You're driving this, uh, this, uh, hybrid car." And according to every people- uh, all the people that understand, that's why Toyota won the- the market because they produced a better car and it was clear to everyone that you're driving a better car, so you're a good guy.

    11. CWChris Williamson57:09

        Mm-hmm.

    12. UGUri Gneezy57:09

        Right?

    13. CWChris Williamson57:09

        Costly signals.

    14. UGUri Gneezy57:10

        That's... Exactly. And something important to- to- to note over here is the- the importance that not all incentives are good for everyone. Right? So in this case, we're talking about people who care about the environment. If you think about the guys that drive, uh, pickup trucks, those incentives will mean nothing to them. In fact, you really have to target... When I tell- when I say that you send a signal and you- you complete the story, you need to think about the people that you care about. It might be if- if you want to sell a hybrid car, don't create signals that talk to the- to the pickup, uh, drivers.

    15. CWChris Williamson57:45

        Mm, you're talking about-

    16. UGUri Gneezy57:46

        Those are- those are not going to make it.

    17. CWChris Williamson57:47

        ... freedom of the open road and loud country music.

    18. UGUri Gneezy57:49

        Whatever, right. Exactly, exactly. What- whatever they care about, give them, and whatever incentives these people care about. So... And that's true about in general when I think w- will... When you design incentives, you really think about the signal that you send and you really think- need to think about it within the culture that you're talking about. So it could be a culture like, uh, we- we use. You know, maybe the US even make it more competitive. In Japan, competitive incentives are not good. But even within San Diego, it could be taxi drivers versus teachers versus lawyers versus doctors. Everyone will have a different culture and they'll care about different things, and you need to- to adjust your story. And very often, I- I wouldn't know it. The people that are there, they should know what- what is it that people like that care about.

    19. CWChris Williamson58:32

        It's very culturally dependent in that case.

    20. UGUri Gneezy58:34

        Exactly, exactly, I-

    21. CWChris Williamson58:34

        Which also means that the, uh, the advertising company, the behavioral economists-

    22. UGUri Gneezy58:41

        Yes.

    23. CWChris Williamson58:41

        ... that are working, whoever it is, there is still an inc- incredibly important role for you to couch whatever the deal is, whatever the incentives are-

    24. UGUri Gneezy58:50

        Right.

    25. CWChris Williamson58:50

        ... within understanding the incredibly inter-complex played structure of all of the different ways that status and stories and framing and anchoring and so on and so forth happens not only within the country, not only within this particular demographic, but within this region, within that cohort, et cetera.

    26. UGUri Gneezy59:09

        You mentioned the shoes. Don't ask me about shoes. I really have the same shoe. I buy five of them every year. $50, great shoes. Don't ask me about the sneakers that cost $1,000. Well, you can ask me. I can- I can guide you through what you need to learn in order to- in order to understand it. There are some rules that I can tell you, but the- the details of this, you really need to figure out yourself. You need to find people that care about it. Don't ask me about TikTok. I- I heard about it. I- I don't know exactly what it is, right? So it's really, uh, you need to find the people that understand what you're talking about.

    27. CWChris Williamson59:42

        Is a bad incentive worse than no incentive at all then?

    28. UGUri Gneezy59:47

        Yes. No question about that because bad incentives will... Like w- you asked me at the beginning, the first question was what's incentive. Incentive will take you in the direction that I want you to go. Bad incentives will take you away from the direction I want you to go. So think about the daycare example. Instead of getting parents to come late less time, we got parents coming late more times, right? And you wanted the- maybe a UK example, so in Wales they had something similar. Uh, they... Parents will really identify with this example. We always go to vacations during spring break, say, i- when it's crowded and it costs much more because that's when the kids are off school. So parents took their kids away from school either the week before or the week after. It was much cheaper and much nicer vacation. Schools didn't like it. What did they do? Put a fine of 60 pounds if parents coming late, right? Bad mistake because now people, instead of saying, "Look, it's better to do it," now they said, "60 pounds? I'm going to save 1,000 pound by not going during the crowded timing." So...

    29. CWChris Williamson1:00:46

        What was that, uh, there's that story about... is it cobras in India?

    30. UGUri Gneezy1:00:51

        Yes, so that story is a bit fishy, but there is a similar story that I think is more grounded in- in reality. And that's, by the way, my- one of my favorite pastime is to look at the incentives gone bad. I call it stakes and mistakes.So the French came to, to Hanoi, Vietnam today and they wanted to have sewage because that's what French people, uh, wanted to do. With sewage came, you know, they wanted toilets. With sewage came rats. Rats are not nice and they decided to kill them. And someone really smart came up with a, with an incentive scheme. Instead of sending my own people, hiring people to do that, let's give the people, power to the people. So they decided give, say, one cent per rat tail per person, right? So if you bring a rat tail to the city, you'll get 10 cents or one cent, whatever, whatever it was. We had this poor guy at the city hall that counted rat tails. Great, great example. What can go wrong, right? That's, that's, that's a good, uh, "We want you to get rid of them." Well, turns out first of all, that you started seeing, uh, tail-less rats running around the city because why would they kill the rat if ... Th- we want to have more of them, we want to have more babies. People started to farm them, so you had rat farms. People started bringing rats from other places, right? So you need to be careful. Uh, the idea was good, the implementation was less good. You ask me, are bad incentives worse than no incentive? Yes.
12. 1:02:18 – 1:08:14

    Using Incentives to Find Problems

    1. CWChris Williamson1:02:18

       about using incentives to identify problems? That seems like a, a, a, a pretty big opportunity.

    2. UGUri Gneezy1:02:25

       Right. So in many cases, we think that we know what's going on, but we don't. I have this, uh, paper with my friends in which we, we looked at, uh, PISA testing. PISA is something that is done by OECD. They, in Brussels, they look at many places, many countries and try to have the same test to everyone and try to evaluate who's best in math, for example. It turns out that the US invest lots of money per student and is ranked somewhere in the mid-30s, not doing very well. And China, for example, Shanghai was number one. Now, the question why, and th- the interpretation by everyone is, "Look, it's because th- because of the ability. We need to learn from the Chinese. So Finland, for example, is ranked very high. We need to go there and try to understand what they're doing better than us." So the assumption is always that the kids are doing better, that basically what you measure is the ability in the, in doing math, for example. Now, the way the test is done is they take a bunch of 15-year-old kids, put them in the room for three hours, tell them, "Look, answer these questions as best as you can. You'll never know the outcome. Your parents will never know, your teachers, the school, no one will know. Some accountant in Brussels will know, but it's really important that you work on it." I don't know if you can relate to your 15-year-old self. Uh, you know, I, I can think about myself that I would've told them, you know, "I, I wouldn't work that hard," right? So basically, what, what they're measuring is your ability to do math and your willingness to invest effort in the test, right? We wanted to test how important is this second ingredient, your willingness to actually, your intrinsic motivation to do well, if you like. So what we did, we took kids. We didn't tell them what, what we're going to have. Kids in, uh, in the US, kids in Shanghai, like I said, number 35 versus number one. In one case, we just gave them a test. We saw similar differences as in the PISA. Then we, we paid them for success, so for every question that they got right, they got paid. Now we saw that the Chinese student didn't do better because they were probably already at the top. No matter how much you'll pay me to, to do well in the SAT, I have a limit that I cannot do better than that. Probably that's what happened. The American kids, on the other hand, really improved. They really, they did significantly better when you paid them, which showed that it wasn't just ability. If you don't know, if you sit down and I tell you, "I'll pay you more if you'll be successful," if you don't know the math, you can't do better. If I'll take you and, uh, ask you to fill out, uh, some test in Hebrew, no matter how much I'll pay you, you, you, you're going to fail, right? Apparently, they knew the material well enough that when we paid them, they improved drastically. So the US kids, for some reason, if you just ask them to do it, didn't invest. You can think about culture. Maybe in China, it's more of a collective culture in which if I ask you to, to work hard on this, you'll work hard on it even if you don't get individually rewarded for it, whereas in the US, it's not like that. So the, the diagnostic aspect of this is we thought that it's just ability or people thought that it's just ability. We showed no, it's ability plus your willingness to invest effort in this and-

    3. CWChris Williamson1:05:30

       Plus ruthless American capitalism.

    4. UGUri Gneezy1:05:33

       Yes.

    5. CWChris Williamson1:05:33

       That's, that's what it was.

    6. UGUri Gneezy1:05:35

       Yes. "You want me to work? Pay me."

    7. CWChris Williamson1:05:36

       Precisely. What's the pay-to-quit strategy?

    8. UGUri Gneezy1:05:40

       I love this one. So I teach negotiation and I tell my students that no matter what, they shouldn't lie in negotiation. It's bad for ethical reasons, it's bad for your reputation. Just don't lie. With one exception. The one exception is that when you apply for a job, even if you're not excited, you should pretend that you're excited. So imagine that I would come to your podcast and I said, "Ugh, I really want to, to take a nap now. Okay, ask me your questions." No, I need, I need to pretend that I'm excited. I'm really excited, but I need to pretend if not, right? 'Cause otherwise, the podcast is going to be much more boring. And the same is true for the job. If you are going to, if you're looking for a job and you say, "Well, I didn't... I'm really disappointed that that's where I landed, but you know, I have no other options. I'll come over," then I don't want you. I want only people that are excited because otherwise, they're not going to do the job well, right? So if I'll just ask you, say that you work for me and I ask you, "Are you happy?" You'll say yes because otherwise, I will fire you or something. But I can devise a way that will be what we call incentive compatible for you to tell the truth. So I can find a way to use incentives to get the truth out of you and the way is by offering you this pay-to-quit. Say that I offer you, "You know what? If you quit, I'll pay you $10,000." No screaming. I'm not going to be upset with you. I want you to stay, but if you want to leave, here's $10,000. Let's depart as friends and you can go. Now, if you are, you know, on the margin, you want to leave, but you're waiting, you'll take this $10,000, you leave us, you're not going to badmouth us, I don't have to suffer through firing you. Everyone is going to be happy. I lost $10,000, but I gained something that a person who didn't want to work here is not working here, and-... the people that stay, first of all, I know that they are really motivated, otherwise they wouldn't be here. And second, they'll have to convince themself now that they're not stupid, that what they did was not a mistake. If it was a mistake, if, if, if they would have taken the $10,000, they would be better off. If they decide to stay, they really need to justify why it wasn't a mistake to take the $10,000, right? So they are going to work harder to, to convince themself that that was a good idea. Otherwise, why would they stay?

    9. CWChris Williamson1:07:56

       Hmm. There's a little bit of-

    10. UGUri Gneezy1:07:57

        So, so-

    11. CWChris Williamson1:07:58

        ... sort of continuity bias of sub-cost fallacy, of opportunity cost, all pushing people forward once, "Okay, we've passed this threshold. I need to make sure..." Oh, yeah, so y- you mentioned there that you do, uh, you teach negotiation.

    12. UGUri Gneezy1:08:13

        Yes.

13. 1:08:14 – 1:13:30

    What Most People Get Wrong About Negotiation

    1. UGUri Gneezy1:08:14

    2. CWChris Williamson1:08:14

       What, what do most people who've never studied negotiation get wrong about negotiation?

    3. UGUri Gneezy1:08:23

       There are many things. One of them, so we have a large group of people who just don't negotiate, and it's surprising what is negotiable, right? As long as you do it in a, in a sensible way, eh, many things are negotiable. So it could be when you check into the hotel, you can start in, you, you can try and negotiate a better room. You might be surprised if, you know, what, what you can get. Or when you rent a car, and it's true later on. So many people just accept what is offered to them, or not accept, decide not to take it, instead of trying to negotiate it. So if there's one thing that my students take out of the class, if the one thing that they take out to the class is it's now they enjoy how to negotiate, that's already a lot. The second thing is like we said about, uh, mist- about, uh, creativity and failing. Debrief what happened. So think about what happened? Why did it happen? How can I do better in the future? So after each negotiation, try to debrief with yourself. Try to learn from your own experience. That's also something really useful that you can take out that people don't do.

    4. CWChris Williamson1:09:22

       What is your favorite strategy from negotiating that, uh, seems to convert incredibly well? Whether it's a framing of how you say something, whether it's a way to broach a particular topic. Is there something that you think is a long lever when it comes to negotiating?

    5. UGUri Gneezy1:09:42

       So one, one that pops to mind is imagine that we both, we, we are gonna negotiate something. You're trying to sell me a car. You are working in a dealership, you're trying to sell me a car, but you're stuck with only yellow cars, right? Or you need to get rid of as many yellow cars as you can. And I'm coming to buy a car from you. Now, in one case, you can tell me, "You know what? If you buy a yellow car, I'll give you a discount." Now, I might say, "No way, I don't want a yellow car," or I might say, "Sure, I'll do this," or I might say, "Actually, oh, great, I also want a yellow car." That would be a mistake by me. So if you're telling me, "I'll give you a discount if you have a yellow car," I, I should tell you... I shouldn't lie to you, but I should tell you, "Okay, you want this yellow, to sell me a yellow car. Let's see what else you can give me in order for me to, to take it," right? So in many cases, we go into this that either we... that likely we want something different, and we'll need to compromise somehow. In many cases, we want the same, and if we want the same, I should let you speak first to tell me about your preferences, and then I shouldn't say, "Oh, great. That's exactly what I want." But I should say, "Look, okay, if that's what you want, we can, we can... I can work with this. Let's see how," right? So try and get something out of you by doing this without lying, but without revealing the information that we want the same thing.

    6. CWChris Williamson1:10:59

       One of my friends that I spent last weekend with in Las Vegas has a method of negotiating that he uses on his wife when he wants to go to a particular restaurant. So le- give me, give me your thoughts on how effective this is. So let's say that he wants to go to a Cheesecake Factory. Uh, so he, that's his desire. He doesn't know what she wants to do for the evening. As opposed to saying, "I would like to go to Cheesecake Factory this evening," or, "Where do you want to go for dinner tonight?" What he'll say is, "Would you be opposed to going to Cheesecake Factory?" And she's not gonna say, like, "I'm l- look, I'm not, I'm not, I'm not opposed to going to Cheesecake Factory. Maybe there are places that I would prefer to go ahead of that." And he said, "Well, look, I would quite like to go to Cheesecake Factory. And if you are not opposed to going to Cheesecake Factory, that seems like we've got a pretty good setup here." Uh, unfortunately, now that he's talked about it on a podcast, she's become wise to the trick that he was playing on her. So I think that he has sacrificed his restaurant choice for the good of everybody else. But, uh, yeah, that's his, that's his negotiation tactic.

    7. UGUri Gneezy1:12:08

       So a few thoughts about this. First of all, you need to find friends that don't want to go to the Cheesecake Factory. Come on. You're, you're not-

    8. CWChris Williamson1:12:14

       I'm a fan of Cheesecake Factory. Uri, look-

    9. UGUri Gneezy1:12:15

       You're not 22 anymore, you know.

    10. CWChris Williamson1:12:16

        I had such a great podcast.

    11. UGUri Gneezy1:12:19

        It's quality. Quality.

    12. CWChris Williamson1:12:19

        And d- at the last moment, we had to fall out about Cheesecake Factory. It's an elite establishment.

    13. UGUri Gneezy1:12:24

        Um, okay. I... (laughs)

    14. CWChris Williamson1:12:28

        Okay.

    15. UGUri Gneezy1:12:29

        But, and so, so a serious one and a joking one. So, uh, the serious, uh, thing about this, imagine that you go with, uh, that I go with my wife to a restaurant and a movie. So one way is to find a compromise that we'll go, "I want the Cheesecake Factory." She wants, say, a sushi place, and we end up in Italian place. And with the movie, I want a movie with lots of blood, people killing each other. She wants lots of romantic, and we end up in the middle. That's a mistake. The right thing to do is to find what she cares about more and what I care about more. So it might be that I really care about the restaurant, and she really cares about the movie. So compromising is not necessarily... You shouldn't compromise on each one of the items that you have, right? So, uh, find what, who cares more about what, and then try to compromise this way. And, uh, and the real answer is, you know, I'm with my wife for 34 years now, just do whatever she wants. That's the, that's the easiest thing to, to do.

    16. CWChris Williamson1:13:26

        When you're talking about worldly wisdom, I think that that is absolutely perfect.

14. 1:13:30 – 1:14:27

    Where to Find Uri

    1. CWChris Williamson1:13:30

       Uri Gneezy, ladies and gentlemen. If people want to check out the work that you do, where should they go?

    2. UGUri Gneezy1:13:36

       So my website has all the, all the academic, uh, work that I have. And if people want, I'm always happy to, to get emails from readers that are interested in some other things and start a conversation, getting feedback.

    3. CWChris Williamson1:13:48

       Fantastic. Mixed Signals will be linked in the show notes below. I very much appreciate it. It's super, super easy and accessible to read, I think. I love the fact that you integrated flowcharts. You put drawings in there and illustrations and stuff. It's really, really good. And, uh, today is the day that the book launches, so congratulations. I know that you've been working hard on it.

    4. UGUri Gneezy1:14:06

       Thank you. It was lots of fun.

    5. CWChris Williamson1:14:08

       (instrumental music) What's happening, people? Thank you very much for tuning in. If you enjoyed that episode, then press here for a selection of the best clips from the podcast over the last few weeks. And don't forget to subscribe. Peace.

Episode duration: 1:14:27