John List on changing the rules of economy (25-10-2016)

Using field experiments in economy creating a more honest system and equally distributed wealth.

More videos with John List

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00:00:02 Yes. Absolutely. So is a child.
00:00:08 We were twenty four seven plane sports we would play baseball and summer in the football season we would play football.
00:00:18 We would play soccer the family in which I was raised was really all about sports
00:00:24 and I sort of took that passion to a market called the collectibles market so.
00:00:32 When I was a kid I would grass in the summer and then I would take that money and buy baseball cards
00:00:40 and in the winter I was raised in Wisconsin. So I would shovel snow. I would take that money and buy baseball cards.
00:00:49 And from there. I became this kind of this love of the of the sports card market or the baseball card market you.
00:00:58 Are very well that's right. So trading actually gave me an outlet to use sports.
00:01:10 In a market so markets have always fascinated me things like how are prices determined in markets.
00:01:18 You know when I was a little kid we would pay a quarter for a pack of baseball cards
00:01:24 and I wondered why is it a quarter. Why isn't it. Fifty cents why isn't it a dime and those types of questions always.
00:01:34 Peak my curiosity in thinking about how do markets not only price goods but how do they allocate goods
00:01:40 and services to people.
00:01:42 Yes So let's put it this way that I was unusual as a kid I think I had certain quirks that people might. Deny.
00:02:00 It is peculiar or unusual on the one hand I was constantly playing sports
00:02:07 and on the other I had the intellectual curiosity to think deeply about questions like allocations
00:02:16 and markets without calling it that I thought about grocery stores
00:02:21 and trading markets in ways I think that my colleagues when I was Little did not really have the same thoughts.
00:02:33 Yeah I think that's right. I think in the end.
00:02:36 We end up chasing our dreams
00:02:38 and if we're good enough to do the things that we love then we can make that an occupation or a career. That's right.
00:02:59 Is as I grew older through high school and when I was in college.
00:03:04 I began to be a dealer in these markets so what a dealer does is a dealer brings his
00:03:11 or her sports cards to the market in and sells them or trades them to people
00:03:17 and what you could readily see is that not all people were getting the same deal.
00:03:23 Some people would pay a lot more money than another person
00:03:26 and even in those types of markets you could see the inequities that were arise in and I always thought.
00:03:34 What are the factors that are causing those inequities and markets
00:03:40 and what can we do within a free market system to lessen those in equities or make markets more fair.
00:03:49 Well it could be a simple. Women tend to shy away from by.
00:04:00 So what happens in these types of bargaining in markets is that the dealers understand that women shy away from bargain
00:04:08 in so they charge some higher prices and it happens in the used car market it happens in the baseball card market.
00:04:15 It happens in any market where you have bilateral exchange in you have people bargaining over the price that's a severe
00:04:23 inequity that can determine consumption and in concert.
00:04:29 Concerning outcomes of people that are really important like in the labor market. I was pretty good trader.
00:04:46 So just about every weekend.
00:04:48 My girlfriend at the time who became my wife she
00:04:52 and I would go to these large sports car shows we would drive from Madison Wisconsin all the way down to Chicago.
00:05:00 And we would buy sell and trade through time and through experimentation.
00:05:06 I became pretty good at it and I understood kind of what people wanted and how they wanted to bargain
00:05:13 and saw in the long run I think I did pretty well.
00:05:18 I had my experiences so there were some occasions where I was taken advantage of.
00:05:24 I can remember one case where I was trading in a very large trade for me at the time maybe a thousand
00:05:31 or two thousand dollars and I got in return a bunch of counterfeit cards and that that's her bum me out.
00:05:39 I think it's fair to say that I was taken a fool that particular day in the market. They were just fake cards.
00:05:48 That's right. So I've never done that.
00:05:49 Personally I went when I when I buy sell and trade I try to predict what will be good in the future.
00:05:56 So what is a down sports card today.
00:06:00 Hey that will have future value for people in that's the that's the game that I like to play.
00:06:05 I like to play the trading game where I can predict the assets that will increase in value over time I will accumulate
00:06:14 those in then trade them back later.
00:06:18 What I do I see markets fundamentally as a game
00:06:25 but a very important game not a game that is is meant to be nonsensical game
00:06:32 or a trivial game markets tend to be two player games where there is a buyer and there is a seller
00:06:40 or there is an exchange of information and once we understand the rules of this game this market transaction.
00:06:48 Then we can try to optimize what we're trying to do many times people try to optimize their consumption.
00:06:56 According to how much income they have that's a particular consumption game so to speak
00:07:01 and then markets tend to be zero sum games where your gain is my loss
00:07:07 and my gain is your loss in many times markets are set up like that.
00:07:14 It's a very serious game in many cases it's a life or death game markets are
00:07:20 but nevertheless if we think about it in the nomenclature of unknowing men
00:07:24 or mash in many cases it can be modeled is a theory of games
00:07:32 and those theories tell us what our optimal action should be in this market.
00:07:45 A player in only the best sense that there's a negative connotation about a player
00:07:49 but I'm certainly an active market participant and a player in these markets
00:07:55 and I'd like to think of myself as an active participant in.
00:08:00 In the creation of scientific knowledge and we're in a we're in a market constantly you
00:08:07 and I are in a market right now where exchanging information science is also a market.
00:08:12 It's also a game in the sense that there are suppliers and demanders of the scientific knowledge and. In that way.
00:08:19 I consider myself a creator of knowledge and disseminate knowledge. She comes. She. I think that's right.
00:08:37 I think that when markets are poorly constructed. You can think about the financial crisis of the last several years.
00:08:47 There are moments that the market players who have market power tend to change the rules of the game
00:08:57 and we have to be very careful that we don't do that.
00:08:59 Otherwise people become distrustful of the game and distrustful of the market
00:09:07 and that's a first step in the wrong direction because markets are beautiful markets create wealth they create
00:09:15 knowledge they create information
00:09:17 and we have to be careful that people trust market outcomes in people come to markets as active participants who will
00:09:25 be happy about
00:09:27 when someone loses they don't of a sudden change the rules of the game so they become winners I think we have to make
00:09:33 sure as practitioners and as scientists that we don't allow this to happen. This is absolutely.
00:09:44 I think in the end everyone deserves a chance through this market or through this game to succeed. You know as.
00:09:53 As children. We don't choose our parents and if we don't set up the education game.
00:10:00 For the education market in a fair way everyone doesn't have a fair chance to succeed
00:10:06 and I'm fundamentally opposed to people not having a fair chance to succeed in life.
00:10:18 Well
00:10:20 when I first studied economics the very first book that I opened up was written by Paul Samuelson who is one of the most
00:10:31 famous economist of the twentieth century
00:10:34 and Bill Nordhaus who is one of the most famous economists working on Climate Change in
00:10:41 and I was struck by a passage in that book. It said economists cannot run experiments because the world is dirty.
00:10:53 They must therefore sit back like a meteorologist in allow the data to come to them.
00:11:01 In then they can analyze the data using statistical techniques to try to say something causal about the data that's
00:11:11 kind of the way the world was in the late eighty's and early ninety's when I was an undergraduate and graduate student.
00:11:19 And I always thought that was wrong.
00:11:21 Because it's not that I disagreed with them about the world being a very dirty place it is there are multiple markets
00:11:29 there are millions and millions of people millions and millions of firms
00:11:34 and prices in the world is very very Massey So it's not.
00:11:39 It's not like that test tube that the chemist has I think that was their intuition is that the chemist needs a pristine
00:11:48 test tube to run an experiment. So they said look is economist's the world isn't clean.
00:11:55 It's not a sterile test tube so we can't run experiments. I came and I thought much to.
00:12:00 Certainly than that I thought that the sports card markets where I see Konami accent work and I go in
00:12:09 and test economic theory in those markets even though those markets are very dirty they're not clean test tubes.
00:12:17 If I could use randomization Now what I mean by that is I put some people in a treatment group say they get the
00:12:24 cholesterol pill and some people in the control group say they get the sugar pill.
00:12:30 Now all of that dirt is balanced across the treatment of control groups I'm not getting rid of it
00:12:36 but I'm balancing it across treatment control and that allows me to say something causal about the cholesterol pill.
00:12:44 So in a way when I was a graduate student. Absolutely.
00:12:48 I wanted to change the rules of the game I wanted to change the way.
00:12:52 Economists to their empirical work instead of being passive observers have the data come to us and then beat it up
00:13:02 and try to say something cause all I wanted to be an active participant in a market and go in generate my own data.
00:13:11 In generate my own data for a reason to test economic theory and then to change the world about a specific policy
00:13:18 and why do people discriminate Why do people give to charitable causes. Why do inner city schools continue to fail.
00:13:26 These big scientific and social questions are what I want to go after and I want to change the rules of the game
00:13:33 and collect my own data and generate my own data to answer these questions. Thinking. Absolutely.
00:13:47 I mean the the traditional way in which economist
00:13:49 and social scientists more generally think about doing empirical work is they have an idea.
00:14:00 Might be ways in which we can increase people's effort in labor markets.
00:14:08 Then they raced back to their office and they write down a theoretical model and it's a beautiful theoretical model.
00:14:15 In then they say to themselves. How can I test that model many times they don't even test it.
00:14:20 They just write it down and send it out to the world. It's beautiful.
00:14:24 Sometimes they say I want to test the implications of that model.
00:14:28 So what they do is they download mounds and mounds of dad say from the Internet
00:14:34 and then they beat that data up until the Submit since says here's what I say
00:14:41 but they have to impose a lot of statistical assumptions on those data.
00:14:48 To go from a correlation to something that's causal that's the typical way in which scientists have traditionally done
00:14:56 research it down a model go get mounds and mounds of data that somebody else has collected
00:15:02 or the world gives to them beat it up say something about the model. No I do things a little bit differently.
00:15:10 I write down a theory but then I go out in generate data that are meant to test set theory.
00:15:18 So it's a very good fit with the theory itself rather than a misfit rather than put in a square peg where around
00:15:26 when should be which is many times what you're doing when you go out and get the data that the world has given you.
00:15:31 It sounds like science. I think that field experiments have the promise to make.
00:15:42 Economics into what some people would say is a proper science I think for years.
00:15:49 Not only myself but other social scientists have been deemed as soft as a not doing real science.
00:16:00 I think it's fair to say that with field experiments economists now have their full fledged scientific cards.
00:16:08 There are absolutely. Absolutely.
00:16:23 Yeah I think on the one hand behavioral economics might be thought of as a great marketing tool because for decades.
00:16:35 Economists have been interested in behavioral economics you can go all the way back to Adam Smith who talked about.
00:16:45 The moral Hector on the shoulder and doing the right thing.
00:16:50 People don't get that from his most popular book but he has a second book that is very behavioral.
00:16:56 You can go all the way through the twentieth century you had John Maynard Keynes who's very behavioral you had Gary
00:17:02 Becker one of my heroes at the University of Chicago who was very behavioral he was talking about why people
00:17:10 discriminate.
00:17:11 Why do people have Ultra Stick preferences
00:17:15 but then there was this explosion with the work of Danny condom in in Amos Tversky in the seventy's in Dick Thaler in
00:17:24 the eighty's in economics where. We didn't need to invent behavioral economics again because after these pioneers.
00:17:32 Everyone knew what behavioral economics was what which essentially is now to add in psychology
00:17:39 or insights from another discipline into the economic model.
00:17:43 I think you could view it is
00:17:47 and in some humanity to the economics man which I think is right in the moment that you add behavioral economics
00:17:56 or psychology or or let's just say.
00:18:00 Common sense to the economics man we can understand her a little bit more than we could with with the straight sterile
00:18:08 model of neoclassical economics because you know that's right.
00:18:17 I think that was a mistake for many years and in which many people did separate the model from the person and.
00:18:26 People became not very interested in questions about why people did things I think the moment you start to economic
00:18:38 science many times people simply want to measure.
00:18:41 So they measure how much discrimination there is on a market where they measure. What is what is the.
00:18:50 Gender pay gap or the difference between men and women in markets
00:18:55 and then they stop where I think behavioral economics and field experiments allows you to go to the next level
00:19:03 and say why do people discriminate.
00:19:06 Why do women earn less money than men in markets
00:19:10 and it's only after we answer the why's can we first of all know what model is at work and secondly.
00:19:19 We can then put forward public policies to combat the injustices that are done in the world. Only after we know why.
00:19:28 I think by doing field experiments it's the best possible way to not only measure.
00:19:42 For example does discrimination exist in a market but also to distinguish wide as discrimination occur in the market.
00:19:52 I can think of no other tool. That is better than running a field experiment to figure out why.
00:20:00 People are doing what they're doing. You know well let's talk a little bit about that.
00:20:08 So let's let's use the example of discrimination. So in the late one nine hundred fifty S.
00:20:15 An economist named Gary Bakker at the University of Chicago did a dissertation on the economics of discrimination
00:20:22 and his model was based on the simple premise that some people have a preference for discrimination
00:20:30 and what that means is they derive satisfaction of harming another group.
00:20:37 So for example they might not like women or they might not like man
00:20:41 or they might not like old gray haired people like me
00:20:44 or they might not like people of certain races so they treat them poorly they don't hire them for jobs they give them
00:20:54 higher price quotes in used car markets for example
00:20:57 and his model was basically one of people had a taste for discrimination.
00:21:02 So that's one kind of discrimination that's of course abysmal we don't want that another kind of discrimination is what
00:21:11 put goo in all the economist called Third Degree price discrimination in what that was.
00:21:19 Was People discriminate in markets. Not because they dislike the other person but because they want to make more money.
00:21:28 So for example. I might charge women more money in a market because I know they don't like to bargain.
00:21:36 It's not that I dislike women. I just like money and I want to make money for myself.
00:21:41 So now these two theories are very different on the one hand you have backer who says.
00:21:47 People discriminate because they want to cater their prejudice in fact they will give up money to harm another group
00:21:55 and you have another theory that says whoa whoa whoa. Wait a moment people discriminate been effort to make more money.
00:22:06 Very different very different implications in the public policy is to take on these two are very different.
00:22:14 You can think of quotas and the like over here to take on better type discrimination.
00:22:19 Now with poor good type discrimination can take of education and giving people the right tools and bargaining in or
00:22:28 or in information or education to take on that two very different types of discrimination in till we know.
00:22:35 What is happening in markets we cannot even begin to put forward a public policy to take on those bits of
00:22:42 discrimination and that's why field experiments are so important because they tell us the whys whos right back
00:22:49 or most of my data would suggest be good is right. But.
00:22:55 Nevertheless now we know and we can take that on with public policies. Yeah. Let me ask you have salute Lisa this this.
00:23:23 This research we should kind of back ourselves up and ask.
00:23:29 Let's look at the data from labor markets and compare men and women in when we do that all around the globe.
00:23:39 You have men making in say between ten and forty percent more than women.
00:23:46 And then you start to control for things like occupation. Human capital.
00:23:54 Time out of the labor force and you still have a significant difference say now.
00:24:00 It's five to fifteen percent and then we must ask ourselves what is causing that difference.
00:24:07 And what can we do to get rid of that difference. Now.
00:24:12 There were some researchers called early Guinea's E N L though Rusty Keeney and Marian need early
00:24:18 and Lisa Vester the one who started to do lab experiments to explore what could underlie these differences
00:24:26 and they were beginning to find that men were more competitive than women. So this is where I step in ask.
00:24:37 And we generalize those insights into the field and explore what are the implications.
00:24:45 In the field in real markets for this difference in preferences.
00:24:51 OK so where I started was I said why do men and women have different preferences for being competitive.
00:25:03 So I looked all around the globe and this is where the early going.
00:25:07 Izzie and cannot in my two co-authors
00:25:09 and we said can we find two societies that are diametrically opposed in terms of the power that the woman has in the
00:25:19 household and in the society. And we came pretty close.
00:25:23 We found one very patriarchal society in Tanzania called the Messiah tribe.
00:25:30 And under close to the other end of the spectrum was a major lineal society called the Cassy society
00:25:36 and what we did is we simply went out to those two societies and took the simple experiments from the lab
00:25:44 and tried to replicate those in the field and our first result is.
00:25:51 The differences across the societies were really enormous when you talk to people in the Messiah tribe in Tanzania.
00:26:00 In you ask a messiah man. What is your wealth.
00:26:04 What he'll tell you is I have fourteen head of cattle three donkey two sheep and four wives.
00:26:11 And he says if I want another wife I have to trade seven head of cattle because that's a current price.
00:26:19 While only right that women have as their husband has to visit them for fifteen minutes every morning in their tent.
00:26:28 That's the rights that women have really really a terrible society for with no one near the other end of the spectrum
00:26:36 are the Cassie's who.
00:26:39 When you when you jump in a cab from the airport and go out to the villages in in red outside a show long.
00:26:48 You see these billboards that they keep saying the same thing in the taxi cab driver after you ask the taxi cab driver
00:26:56 what. What do these billboards say he says of. It's those men again they're asking for equal rights.
00:27:04 So you have close to the other side of society where if you knock on the door of a Cassie a met the man will answer
00:27:11 and he will take you back to the woman of the house.
00:27:15 And then you will talk to the woman about the issues of the day the woman who will make market decisions
00:27:22 and will make decisions for the family.
00:27:25 You know it's gotten to the point where many Cassy men will say something like we're sick of playing the role of
00:27:32 breeding bulls and babysitters.
00:27:35 So these are these are very different societies
00:27:38 and what we do is we run the simple experiments in these two societies in what we find is that the Tanzanians are a lot
00:27:46 like us in the U.S. and In Western Europe the men compete a lot more than the women compete.
00:27:54 Now when we go to the Cassie's what happens is that reverses the Cassy women compete.
00:28:00 Eat like our man and the Cassie man compete roughly about like our women.
00:28:07 So this gives you a sense it's a beginning first step.
00:28:11 It's certainly not the final word
00:28:13 but it's a beginning first step to get to the point of what causes these differences and preferences
00:28:21 and I think this literature in our study is point to the power of socialization.
00:28:27 And when we raise our little boys
00:28:31 and girls what subtle words that we say to them subtle gifts that we give them have lasting impacts into the future.
00:28:40 I can still remember. When I was in second or third grade.
00:28:44 I was feeling ill one day
00:28:46 and I wasn't performing in my physical education class in my gym class I wasn't doing as well is what I usually do.
00:28:53 Do you know what the teacher yells out to me Hey John. Hey John.
00:29:00 Quit playing like a sissy you're playing like a girl today.
00:29:04 He had in his mind that girl should play a certain way in boys should play a certain way
00:29:10 and that's exactly how we're typically socialized and I think that importantly determines our long run outcomes.
00:29:16 Now our next step in this research agenda was to create a firm and hire workers
00:29:23 and actually put out ads across United States to hire IT Ministry of assistance this is work with Andres labor and
00:29:32 and what we explored is if we change the incentive scheme.
00:29:38 From one where we tell people wages are negotiable to another one where we have the exact same ad.
00:29:47 But we don't say wages are negotiable. And then we look at whether men and women.
00:29:52 First of all apply in then whether they negotiate and what we find is that when we say Wade. Edges are negotiable.
00:30:01 Many many women apply and they negotiate as much as men. Now when we leave that sentence out of the job description.
00:30:12 What happens is women shy away from applying and they shy away from negotiating
00:30:20 and in fact the men negotiate a lot more than the women when that aspect is ambiguous
00:30:26 and what that tells us is that in these M.
00:30:29 Big us who vegs settings women are taught to shy away from asking because they don't know if it's appropriate where men
00:30:38 in our experiment was actually the low quality men who came forward in the bargain the most so men are taught to be
00:30:45 aggressive as boys and go after what you deserve. So then they do it in markets and you have these inequities.
00:30:53 But I think that's right.
00:30:59 When you look at the way our economy is set up the the highest pain jobs are the ones that are the most competitive.
00:31:08 They're the ones that you build your way up the pyramid in then when you're at the top.
00:31:15 It's highly competitive because your firm is competing against another firm that is altered competitive
00:31:20 and the world is a place of competition but my argument is that. If we can set up.
00:31:28 The wage schemes in the rules of the game in a way in which we recognize that society is handicapped in certain types
00:31:36 of people. If we set up the rules of the game at the entry level.
00:31:40 This can systematically affect where these two types of people go in the long run and market.
00:31:51 It's look many things are extremely competitive The question is should we set up our wages in our house.
00:32:00 We pay people in a competitive way.
00:32:02 Or are there ways in which we can set up wage contracts that get people to perform at their highest levels
00:32:10 but they're not cutthroat wages.
00:32:13 You see and and I don't think is economists
00:32:16 or policy makers we have thought hard about setting up the rules of the game in a way that will give everyone a fair
00:32:24 chance but will still lead to really good outcomes.
00:32:28 Because right now you have a lot of lost human talent because women shy away from the set ins
00:32:35 or a lot of women who are very very talented who shy away from settings that are too competitive so we're essentially
00:32:42 wasting their human capital because of the manner in which our wage contracts are set up that's what I'm saying.
00:32:50 I think something can be done.
00:32:51 One example is my study that I just talked about where if we're very clear about the rules of the game
00:32:57 and how people should negotiate they will then negotiate as hard is they should
00:33:01 and they will start out with wages that are much more equal than they otherwise would be.
00:33:07 Women should just negotiate say that you know some of the implications from our studies when we go overseas
00:33:21 and look at behavior in major lineal societies what you have is women are much gentle or with the resources.
00:33:34 We've been given here on Earth.
00:33:36 For example when we look at men and women farm in a run in in Iran Chalong what you see is that
00:33:46 when women have the choices about what crops to plant and how to rotate their crops they tend to be much kinder
00:33:57 and gentler to the soil. Than what. The men will be so in this way you have some indications that on some dimensions.
00:34:07 We would be much better off having the gentle touch of a woman. Absolutely. If.
00:34:15 I think they are playing very different games I think men are playing name a much shorter run game over there in women
00:34:22 are playing in the long run game that we need to continue to that say nurture this land
00:34:31 and it's going to be ours for a long time in we want to live in a symbiotic way where the man might just discount the
00:34:39 future a little bit more than women and they're playing a different fundamental market game in
00:34:45 and in this case farming game than women are. Yes that's right that's right. That's right.
00:35:06 So my work in education started about a decade ago.
00:35:09 There's a local community around Chicago called Chicago Heights and they came to me with a plea.
00:35:19 They had read about some of my work in the New York Times magazine on charitable giving.
00:35:25 So I work a little bit on the economics of charity why people give to charitable causes
00:35:30 and they wondered if I could come into their school district and help them
00:35:36 and I visited the school district a few days later and what I found was.
00:35:45 A school district that was in very difficult shape.
00:35:50 They were they had two high schools and they had about a thousand kids entering the ninth grade each year and all.
00:36:00 The About four hundred seventy of them were graduating from high school.
00:36:05 So you had this community that was largely in trouble with its public education.
00:36:12 So we began to use field experiments to try to learn about why that inner city school was failing.
00:36:20 And in the last ten years. I have been thinking hard about using Chicago Heights is my laboratory.
00:36:28 And in this sense it's a field experimental laboratory that is meant first of all to test economic theory.
00:36:35 So we have different theories about what's called the Education production function.
00:36:40 You know how do the inputs such as children's effort parents Safford in teacher effort map into outcomes that we care
00:36:49 about outcomes like finishing high school outcomes like going to college outcomes like it in a high paying job outcomes
00:37:01 like. Being a better citizen. In our global community.
00:37:07 So we started thinking hard about how those inputs affected the outputs that we cared about
00:37:14 and then also how can we change those inputs.
00:37:18 How can we fundamentally change the effort levels of parents
00:37:22 or how can we fundamentally change the effort levels of children or or teachers or administrators. Absolutely.
00:37:33 So this is markets now again. Now when I started this research.
00:37:39 I thought hard about what do we know in public education because in the US We've been at public education for over one
00:37:45 hundred years you should say we should know a lot but I think public education got caught in this rut.
00:37:52 Whereby they more or less took this Mark Twain quote is once you have.
00:38:00 Ignorance and confidence then success is insured so I think people were ignorant
00:38:06 and confident that they knew what was happening.
00:38:09 And then for years here in the States especially our public education system was broken
00:38:15 and I think it's fundamentally because we use our classrooms to simply teach our kids.
00:38:24 We don't use our classrooms to teach our kids and teach ourselves what works and why.
00:38:30 And I think we need to change that mentality because this is life or death. Much like medicines.
00:38:37 You know in the medical community we figure out which drugs work by testing them by using science in testing whether a
00:38:46 heart medication works better than another heart medication better than the control group which receives a sugar pill.
00:38:53 I fundamentally don't understand why we don't take that mentality to the classroom
00:38:59 and all around the world we should be using our classrooms as laboratories laboratories of innovation to figure out
00:39:09 what works. Why does it work and how can we make the world a better place through education because fundamentally.
00:39:16 You know it is I said before we don't choose parents.
00:39:22 We don't choose a community in which we're born into and if we don't give these kids in equal chance to succeed.
00:39:30 We are leaving so much human potential on the table. We've talked a lot about equity here.
00:39:37 Equity is giving everyone a fair chance in life and that's important but you can also talk about efficiency.
00:39:43 I don't think we've wasted.
00:39:47 This much human potential since the Dark Ages
00:39:51 when you look at our technology that we have in place around the world in you look at all of the human potential that
00:39:58 we're wasting. Because kids are not receiving proper education. That's a crime.
00:40:04 That's a real crime
00:40:05 and it's because we have not been serious about using field experiments in the classroom to learn about what works
00:40:11 and why. So what kind of the.
00:40:16 Yes So in Chicago Heights in the last decade we've been running in a number of field experiments
00:40:22 and let me tell you about one with teachers so. For decades.
00:40:27 People have argued about whether teachers should be paid for their performance so.
00:40:35 Some people say if a teacher does a really good job with her students.
00:40:41 Then she should get paid a bonus but there are people say. No no no we don't want to add money.
00:40:49 To this equation because great teachers. Don't value money they value teaching per se.
00:40:57 So some people have gone out
00:41:01 and they've explored a typical way in which to pay a teacher a bonus what they've said is in September.
00:41:08 They tell teachers that if you do a good job.
00:41:12 You will be paid a bonus next June at the end of the school year and by and large they haven't really found.
00:41:19 Very promising results and they have been small
00:41:23 and in consequential So that's a place where we started we said Can we start there
00:41:29 and use behavioral economics to make the incentive better.
00:41:35 So our idea was what if we took a group of teachers in in September we actually gave them the bonus upfront
00:41:43 and told them.
00:41:46 We will take the bonus away from you in less your students achieve if your students achieve you can keep the bonus if
00:41:54 they don't achieve. We will take it away from you and what happens is that incentive scheme.
00:42:00 Works in a brilliant way is an example if your child was placed in the classroom of a teacher who received that claw
00:42:11 back incentive scheme. They their test scores.
00:42:16 Actually it Vance by about what's called Point two standard deviations above the control group which turned out to be
00:42:24 several months of education.
00:42:27 So you're basically getting several months of extra education because the teacher is in this claw back incentive scheme.
00:42:36 Now you might ask yourself why does that club back incentive scheme work.
00:42:41 We can go back to the days of Dan economy and Amos to versity they wrote about something called loss aversion
00:42:47 and what that means is that people value losses much more than they value comparable gains.
00:42:56 So a dollar loss is felt much more acutely than a dollar again. So we're leveraging that insight if you use it.
00:43:03 Introspection and say. I'm I like that many of us are like that we really do not like losses.
00:43:12 So can we leverage that is a public policy tool we found we can we found that teachers will work a lot harder if you
00:43:22 leverage loss aversion. Now we've done this. Also in other venues too.
00:43:26 We've gone to China and we've looked at Chinese manufacturing workers in we've used the exact same incentive scheme.
00:43:34 We've said at the beginning of the week. Here's a bonus. And if you work hard on Friday.
00:43:41 You can keep that bonus in we compare that to the idea that work hard all week will give you a bonus on Friday loss
00:43:49 aversion one works a lot better
00:43:51 and in fact we did the one in China over a six month period over all six months the manufacturing workers worked hard.
00:44:00 Or
00:44:00 when they were getting the bonus Up front this is a useful way to leverage behavioral economics to make the world a better
00:44:06 place. Yes We actually did the same with students as well.
00:44:12 So you might ask yourself how can I make my child work hard for experiments with students is the morning of the test
00:44:19 when they enter the room where they take the test. We announce to them.
00:44:23 Here's twenty dollars if you perform better than you did on your last test you can keep the twenty dollars if you don't
00:44:32 perform better.
00:44:33 We will take the twenty dollars away
00:44:35 and what happens is those students significantly increase their test scores in an amount that you cannot even imagine
00:44:43 compared to people who we tell them we will give you twenty dollars if you perform well.
00:44:48 Those people perform much worse than people who you give the twenty dollars to.
00:44:54 We did we then saw the teacher results and we said.
00:44:58 Will that work with students we did a little bit differently with students.
00:45:03 We had them and to the test room and then after they entered the test room.
00:45:09 We announced our incentives so they did not have time to prepare.
00:45:13 We were just looking at the morning of the test can we give them incentives in leverage loss aversion
00:45:20 and get them to try harder and perform better on the test.
00:45:23 So what we did is we gave a big group of students twenty dollars
00:45:27 and said If you perform better than you did on the last test you can keep the twenty dollars in we compared their test
00:45:34 scores to people who we said if you improve on your test score from last time you will receive twenty dollars.
00:45:41 What happens is
00:45:42 when you give students twenty dollars they perform much much better than if you tell them you'll receive twenty dollars
00:45:50 in the future.
00:45:51 That's of I think it's a very important insight about what our task measure when you
00:45:56 when you look at these standardized tests they're not only measuring in name.
00:46:00 Debility they're also measuring in effort. Oh or how hard students try on these tests. Why.
00:46:12 Yeah I think the underlying reason why loss aversion works is because people develop a deep pain
00:46:21 or a distaste for something that they have to give up.
00:46:25 So my own research that started back in two thousand and three in the sports card market.
00:46:30 I tried to explore why do people not like to trade.
00:46:35 Why do people not like to give something up in what I found back then was it looked like it was a pain of giving
00:46:43 something up. That's why people did not like to give up or trade what they owned.
00:46:49 So now recently what we've done is we've placed people in F. M.R.I.
00:46:56 Tubes and we've looked at their brain activity
00:46:58 and we've explored really inexperienced people in what their brain activity looks like compared to people who have a
00:47:06 lot of experience in trading in people who trade a lot.
00:47:10 They tend to code trades in a different part of the brain than people who are inexperienced traders in particular the
00:47:17 people who are experienced Do not go to the last part of the brain in people who are inexperienced go to the last part.
00:47:24 when they have to give something up. So it's sort of uncovers through the market and through F. M.R.I.
00:47:33 Or imaging of the brain. It tells you why people when they gain experience why they can trademark. It. Absolutely.
00:47:46 I think the major reason why markets work is because people trade.
00:47:52 You have people who trade by definition the seller gains in the buyer gains through a trade.
00:48:00 So if we can contemplate why there's a lack of trading and markets we can figure out why doesn't the market.
00:48:10 Work the way it should we can then design incentives to get people to trade more in markets.
00:48:16 What we find is that there is not enough trade in in markets
00:48:20 or the market gains are smaller than they should be because of loss aversion.
00:48:23 So what can we do to make the market function more appropriately.
00:48:28 My argument is you have to give them a sense of overcoming loss aversion
00:48:34 and that's through market experience so you have to give them trades and give them. Let's say free trade.
00:48:40 So to speak and once people trade in trade in trade. They don't have loss of us preferences anymore.
00:48:45 That's how we can use it to make markets better. Yes.
00:48:50 I think if we somehow change the rules to make people want to trade more
00:48:55 when they're first enter a market the market can be more efficient in the end that's right.
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