Maximizing Luck: Masters in Business with Judd Kessler

Barry speaks with Judd Kessler, author of Lucky by Design: The Hidden Economics You Need to Get More of What You Want, and a professor at The Wharton School of the University of Pennsylvania. They discuss his research into the hidden markets that allocate value to desirable things such as restaurant reservations. They also Judd's research into how couples allocate their resources within a relationship and possible alternate ways to distribute concert tickets. See omnystudio.com/listener https://omnystudio.com/listener for privacy information.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

  At Brookfield, we believe you can own wealth that's measured in generations. Because true ownership looks beyond today and beyond cycles. For 125 years, we've built long-term wealth through expertise, discipline, and a clear vision for the future. Providing investors access to alternative strategies built for what's next. Brookfield. Own what's next. Learn more at Brookfield.com/own. This is not an offer to sell or investment advice. Investing involves risks, including loss of capital. Past performance is not indicative nor a guarantee of future results. Please review performance and offering materials before investing.

• 0:38Speaker 01

  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting and hiring practices.

• 1:21Speaker 01

  But according to recruiters, advisors, and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company and Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates, quote, "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at ChatGPT.com.

• 2:03Speaker 01

  Bloomberg Audio Studios. Podcasts, radio, news.

• 2:12Barry Ritholtz?

  Is Masters in Business with Barry Ritholtz on Bloomberg Radio. This week on the podcast, another extra special guest, Judd Kessler, Wharton professor, author of Lucky by Design, tells us about market design, how we allocate scarce resources for everything from Taylor Swift tickets to kidneys. I thought the book was really interesting, kind of wonky economic analysis, but fascinating. And the conversation, absolutely fascinating. Also, with no further ado, my interview of Professor Judd Kessler. So I found the book to be really fascinating, look at market design, which is an area that

• 2:55Barry Ritholtz?

  we don't usually think about. We'll talk about the book in a few moments. I want to start with your background. Bachelor's, Masters, and PhD from Harvard, but that wasn't enough. You get a Masters in Philosophy from Cambridge. What was the career plan?

• 3:13Speaker 03

  So the career plan was to go to college and then find a career, not in academia. That was not something that I even thought of as an option. I was an econ major. I thought I'd be a consultant. I accepted a Bain New York offer to take after graduation. But senior year of college, I wrote a thesis under a supervisor named Alvin Roth, and I loved it. It was my first experience doing research, and I thought, this is really fun. I'm on the cutting edge of this topic that I chose, that interests me. And so that made me think, all right, maybe I should give it a shot. So that was the trip to Cambridge,

• 3:56Speaker 03

  England, was me doing an MPhil in economics to see, you know, is this something that I might want to pursue as a career? I didn't love the pedagogy in England, so the courses I wasn't enjoying. But every day I'd come home and think, oh, there's some research questions that that lecture prompted. And I realized, oh, the research is keeping me engaged in this program, even though I don't love the coursework. I probably should be doing this full time.

• 4:23Barry Ritholtz?

  What was the research topic in your senior year that led you to heading to England?

• 4:29Speaker 03

  So it was a experiment. So I'm an experimental economist. Most of my, not all of it, but most of my research is experimental, meaning undergrads are coming into the lab, playing a game I've designed, or we're doing some experimentation in the field where people are going about their lives. They don't realize that half of them are getting one version of an experience and half are getting the other. And we're seeing what the effect is. So my undergrad thesis was trying to understand how pairs of people could contribute to public goods, to things that benefited both of them. And I learned about, you know, everything that I could learn about public good provision.

• 5:09Speaker 03

  And I varied both the structure of the game and how the benefits of the public good were split across people. And this was something that had never been done before. And my advisor, Al, was very encouraging, enthusiastic, funded the research study. And I had this experience of looking at the data and thinking, this is the first, I'm the first person, I'm on the frontier. I'm never, I'm never going to be an astronaut, but I'm on the frontier here, exploring the answer to this question that interests me. I'm looking at the data and discovering the answer.

• 5:45Barry Ritholtz?

  So this sounds like it's a cross-section of game theory and behavioral economics. Fair, fair description?

• 5:53Speaker 03

  Exactly right. And it was, it's a paper, you know, I've since become an academic and I've been writing research papers for a long time. This one was never published. And the reason was that in my twenties and even into my thirties, I didn't really know how to motivate it. I didn't know what it was about, you know, at a deep level. I knew what I had done and I knew that it was new and different. But I finally cracked the code in my late thirties. Because what I had studied, unbeknownst to me, was how couples

• 6:27Speaker 03

  Allocate effort to construct public goods in their household.

• 6:32Barry Ritholtz?

  Does that mean who cooks, who cleans, who gets the kids, who basically pays the bills? Is it just that simple?

• 6:38Speaker 03

  Exactly. Well, it's, it's, the game was, we each put in some effort. Sometimes the production is split evenly between the two, and sometimes it's split unevenly. So one person gets more of the output and some per, and the other person gets less. And what I found was that in some structures where we each have to match each other's contribution to generate an output, then the inequality didn't matter. Pairs of people, these are random strangers, they're able to contribute at high levels. It's when we're contributing to the public good and one of us can cut back and kind of free ride off of the other one. When we split it equally, we're able to sustain with the pair, you know, high levels of contribution.

• 7:22Speaker 03

  But when we're split unequally and one of us can free ride off each other, the contribution collapses.

• 7:29Barry Ritholtz?

  I was gonna say, that sounds like a recipe for a divorce.

• 7:32Speaker 03

  Well, I, you know, the reason I was able to later understand what I had studied in, in my twenties was, those are the situations where, you know, my wife and I have conflicts. When we both need to contribute for the public good to be provided, like we both have to be diligent with bedtimes with our kids, because if one of us slips, then the kids' schedule runs them up. Then, you know, it doesn't matter if I care more about that or my wife. We kind of both realize we have to be at the same level, or, or we both lose.

• 8:04Barry Ritholtz?

  Where, where does it sort of, where does that gap between effort show? How does that manifest?

• 8:11Speaker 03

  So if one of us cares more about, say, the kids eating vegetables, so for hypothetical example.

• 8:17Barry Ritholtz?

  Keeping the house neat, but.

• 8:18Speaker 03

  Yeah, yeah. For us, it's, you know, the, the health, healthful eating, one of us might care more than the other, and. In that case, you know, if my wife cares more and I free ride off of her, she fed them a healthy lunch, say, yesterday, uh, then I can feed them a less healthy dinner when it's my turn. That's where the recipe for disaster is.

• 8:39Barry Ritholtz?

  Those are omissions. What about commissions? What about doing things positively where one of you might slip? How does that manifest?

• 8:47Speaker 03

  Ooh, uh, I mean, most of the things I'm thinking of are like, are we giving them too much screen time? Oh, I guess we could, it could be, uh, reading them books at night, you know? I mean, so we both care a lot about this, so we'll, we'll do it. But if, you know, if one of us cared more, that would be a recipe for disaster because that person would read to the kids and the other person would say, you know what, like, uh, you got read to last night, I won't do it. Right? And that's when the, the

• 9:11Barry Ritholtz?

  Trouble.

• 9:12Speaker 03

  Yeah, that's when trouble starts. So I, that was my, my first academic research was exploring those kinds of dynamics in two-person games.

• 9:20Barry Ritholtz?

  How do you go from that to studying market design?

• 9:23Speaker 03

  So this was Alvin Roth, the mentor that I mentioned. He was my undergrad thesis advisor and when I was getting my PhD, I committed a kind of sin of academic sin, which is you're not supposed to go back to the institution you did your undergrad degree to get your PhD. But I wanted to work with Al, so I kind of, I cheated a little bit. I, I went back to Harvard, but it was technically a Harvard Business School PhD joint with the econ department. So I pretended, oh, I'm getting a different angle on this.

• 9:56Barry Ritholtz?

  Right.

• 9:57Speaker 03

  I ended up being helpful because being at the business school helped me transition to my current job as a Wharton professor. But I went back to work with Al and he was doing both. He was doing experimental work and he was doing market design work. And I had gotten exposure to both of them, uh, in his course, courses as an undergrad and, and early PhD student. And the research that kind of transitioned me was on organ donation and organ allocation.

• 10:23Barry Ritholtz?

  The book has some fascinating data points on that. We'll talk about that in a bit. I want to stay with your background. You end up winning the Vernon Smith Scholar Prize in 2021. What work was that for?

• 10:36Speaker 03

  So that was for a line of work, starting with this organ allocation work because that was, uh, Both a public good study like I described in the earlier work and policy relevant. And so the Vernon Smith Prize is for somebody who's contributed with experimental research in a bunch of areas. And I had, you know, I'd done that. I'd done that in organ allocation. I'd done that in course, course allocation. I had done work on summer youth employment, but kind of always with this experimental lens to try to understand, you know, what the effects were.

• 11:11Barry Ritholtz?

  And what's kind of fascinating is you're clicking off a lot of chapters in the book, which are how do we allocate scarce resources when there are a variety of different ways to do it. Sometimes it's lottery, sometimes it's effort, sometimes it's people paying more to get it, which really is, I never thought of those things as market design. And yet, most people look at those things as just, hey, you got lucky. You, you got the summer job or the course you wanted.

• 11:44Speaker 03

  Yep.

• 11:44Barry Ritholtz?

  Or the kidney you needed because you signed up. A big theme of the book is, hey, this isn't luck. This is recognizing all of these market design structures and figuring out the rules and playing them as well as you can.

• 11:59Speaker 03

  Exactly right. And I, in the book, I call these hidden markets because they're not the markets that we always think of when we think of markets. We think of the farmer's market where you're paying a price for produce. We think of the stock market where you're paying a price for equity in publicly traded companies. But there are all of these markets where you're trying to allocate a scarce resource. You might have a price that gets paid, but it's not doing all of the work. There's something else that is deciding who gets access to the scarce resource. And then there are markets where there is no price. We've decided that we want to do the allocation without having folks pay. We want to distribute it in some other way.

• 12:40Speaker 03

  And these are areas that market design thinks about, but that a standard econ class, like the ones I teach to my undergrads or MBA students or executives, would not necessarily cover.

• 12:52Barry Ritholtz?

  Other than the students in your Wharton class, how can individuals become more aware of all of these hidden market mechanisms and use them to their best advantage?

• 13:02Speaker 03

  Yeah, so the first step is recognizing that these things are markets. You want access to something. It's scarce. There is a limited amount that can be allocated and you're competing with lots of other people who want them. Examples might make it more concrete because we're, you know, thinking about things that people participate in every day, these markets. So you want to get a reservation at a hot restaurant. You want to get a ticket to a live event. You want to get a product that is hard to come by, either, you know, a clothing, special clothing drop, or this summer it was La Boo Boo's, the ugly cute stuffy dolls, but you could think of Beanie Babies or Cabbage Patch dolls if you're as old as me.

• 13:47Speaker 03

  And in these cases, there is a price that you pay, but there's also some other ordeal that you may have to go through to get access to those scarce resources. Same thing with benefits or services provided by the government. You want to get your kid into public elementary school. You want to get a library book. You want to get a life-saving organ transplant. These are environments where you have to understand, okay, what is the rule that is doing the allocation? And then how can you use your knowledge of that rule to figure out the right strategy?

• 14:20Barry Ritholtz?

  Your daughter trying to get into her favorite after-school program really resonated because it was such a little niche thing. It's just one of those everyday life frictions. You don't really think of those as markets that have been designed, but you do a really nice job explaining any allocation of scarce resources is a market decision.

• 14:44Speaker 03

  Exactly, and that one is one of the bane's of my existence. I have to, it's a first-come, first-served race, which is what I call the experience that folks have on a regular basis of there is a scarce resource. It is being made available at a point in time, and whoever clicks first gets it. Whoever calls in first in different market structures is the one who can claim that scarce resource. After-school programs at my daughter's elementary school. This is what the kids are doing between 2:30 when school lets out and 5:30 when working parents can pick them up. There are some very popular classes for the kids to do during those hours. But there are a lot of kids who want to participate in them.

• 15:28Speaker 03

  And so every semester, they will say, okay, on, you know, June 12th at 10 a.m., we're going to release all of the fall semester courses and whoever clicks to claim the spots in those classes first will get them and everybody else will be disappointed. And it is a first-come, first-serve race and I like the race analogy because, you know, I don't do a ton of cardio and this is where my heart races faster than, you know, this is fight or flight because I know I'm competing with all these other parents who want to get their kids into these classes. And if my daughter gets what she wants, mornings are wonderful and if she doesn't, it's, you know, I don't want to go to school today.

• 16:10Barry Ritholtz?

  There's some, you seem to have an advantage because there are some fascinating strategies here. Hey, maybe you don't start with the Monday classes. Maybe you do Tuesday, Wednesday, Thursday because they're going to fill up while everybody's racing to get Monday. And if you're disappointed on Monday, but you've locked in the three ones for the rest of the week, there's an advantage thinking about how the rest of the participants are playing the game.

• 16:34Speaker 03

  This is exactly right. So the-

• 16:36Barry Ritholtz?

  All-game theory.

• 16:37Speaker 03

  It's all-game theory and I wrote a book about game theory. I didn't use the term game theory because I didn't want to scare people off, but it's thinking about what it is that you want and then what it is that other folks might be going for and developing the right strategy for that. Now, first-come, first-serve races, there's a bunch of strategy that is kind of, you know, maybe obvious when you think about it of, okay, you have to know that it's a race. You have to know that this is a situation where you need to be available to click as fast as you can at that time, right? When I get the email and it says, June 12th at 10 a.m. is when registration opens, even

• 17:17Speaker 03

  if I've never participated in the registration for these after-school classes, the 10 a.m. tips me off that something is going on. At my son's school where the classes are not as demanded-

• 17:30Speaker 03

  There is no 10 a.m. I mean, there might be a time when the registration begins, but nobody really cares about it because you can go whenever you want that day or later in the week, and there's plenty of options available. But at this market, the 10 a.m. tells you, all right, by 10:01 or 10:02, the good stuff might be taken.

• 17:47Barry Ritholtz?

  Did your wife ever get to the French Laundry in Napa?

• 17:51Speaker 03

  This was a first come, first served race that I talk about in the book. It's for milestone birthdays only because it's so expensive.

• 17:58Barry Ritholtz?

  It's a little pricey.

• 17:59Speaker 03

  So in the book, I talk about how we did not get it for her 40th birthday. So she will try again when she's 50.

• 18:05Barry Ritholtz?

  I was reading that and using your strategy, immediately thought, oh, you're flying out just for a weekend. 4 o'clock is essentially 7 o'clock in New York. Why not do 4 or 4:30? And bang, they're good to go.

• 18:21Speaker 03

  This is exactly. So the strategy to play there is to think about what I call settling for silver versus going for gold. So the settling for silver strategy is you know that 7 o'clock or 7:30 is the most desirable time to eat, at least for regular people, not in retirement communities. That's the ideal time. If you're going to go on a Saturday, that is what most people are going to be aiming for. When I went for her 40th birthday to try to register, I knew it was a race. I knew when the starting gun was going off. I was there. My heart was beating fast. And I went first for the 7:30 reservation. Page reloads. I don't get it. And I see that 4:30 is still available, so I click for 4:30, thinking it's better than nothing.

• 19:06Speaker 03

  And the page reloads, and that is also gone. So struck out there. That's why we're waiting a decade. To your point, if I had, I was doing it as a surprise for my wife. If I had planned and talked to her about it in advance, we might have recognized. Four or four thirty is ju- is nearly as good.

• 19:23Barry Ritholtz?

  Dinner time if you're an East Coaster.

• 19:24Speaker 03

  It's nearly as good as seven thirty.

• 19:26Barry Ritholtz?

  Right.

• 19:26Speaker 03

  And that's the kind of situation where you want to settle for silver. Where you want to go for something where there's less competition. Again, the game theory coming in. Fewer people are going to be going for four or four thirty. That is something that you actually have a much better shot at if you go for it first. You have to act as if that is what you wanted all along. Right? Because when the page reloads the first time, four thirty is still available. Meaning if instead of going for seven thirty, I'd gone for four thirty initially as if it was my first choice, she would have been able to cross French Laundry off the bucket list.

• 20:01Barry Ritholtz?

  There you go. Aside from the East Coast, West Coast difference, post pandemic, my wife likes to point out that you use apps like OpenTable or Rezzy, and she says six thirty is the new seven thirty because everybody wants to get home and stream whatever they're streaming. It's so different than it was in the 2010s. And I'm like, am I just getting old? Are we going to start going to the early bird specials? She's like, no, no one wants to have dinner ten, nine, 10 o'clock at night.

• 20:29Speaker 03

  I, I believe that. And at the French Laundry, the meals take forever. So getting out of there, you know, early.

• 20:34Barry Ritholtz?

  Four thirty gets you out at nine, 10 o'clock. Right? Absolutely fascinating. Coming up, we continue our conversation with Judd Kessler, Howard Marks professor at the Wharton School at University of Pennsylvania, discussing his new book, Lucky by Design: The Hidden Economics You Need to Get More of What You Want. I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio.

• 21:44Speaker 01

  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume, so writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting

• 22:26Speaker 01

  and hiring practices, but according to recruiters, advisors, and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company, and Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates, quote, "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at ChatGPT.com.

• 23:10Barry Ritholtz?

  I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio. My extra special guest this week is Judd Kessler. He is the Howard Marks Professor at the Wharton School at the University of Pennsylvania. So I want to talk about Lucky by Design. The book is really interesting. I'm intrigued by how much of what we think of as luck is really just the way allocation mechanisms have been either well-designed or poorly designed.

• 23:42Barry Ritholtz?

  Um, lotteries, wait lists, queues, scoring rules, algorithms, norms. Explain this concept that luck by design may really be based on some hidden economic rules.

• 23:54Speaker 03

  Yeah, so the way the markets operate, there is a set of rules that decides who gets what. So we talked about first come, first serve races. But as you point out, there's first come, first serve waiting lists, there's lines. There are lottery systems where you're putting your name in the hat and we're pulling people out. And then there are centralized clearinghouses where you might rank your preferences over uh, things you want, and then there are some priorities or rules in the background. And I have this sense that people look at these systems and they don't have a framework for thinking about them. And so when they participate in these markets, they don't really realize they're doing so. And then the outcomes seem like they're based on chance.

• 24:39Speaker 03

  Or they try to understand them and they struggle and they, you know, feel overwhelmed and stressed out and then play a strategy that might not be right for them. And then they look around and they think, oh, man, that person got what they wanted, I didn't. They must have been lucky because if you don't understand the system, then it all seems like it's happening by chance. But by understanding the rules that are applying in each market, you then can recognize, okay, this is a situation where it's a first come, first serve waiting list. So I have to, you know, put my name down early, then I have to think about the strategy I'm going to play when it's my turn. Do I take what's offered to me? Do I keep waiting? And you have a, uh, develop a framework for, for that.

• 25:25Speaker 03

  Even in lottery allocations, which we often think of as being the ones that are based entirely on chance. If you understand the rules, you can develop strategies that help you do better. So you want to go see a theater production and there's going to be a ticket lottery. You can go, you can enter your name for two tickets. But maybe you can bring your friend that you're going to go see the show with or your partner and you both enter. Now you have twice as many chances. Maybe you get a bunch of friends who work nearby to enter. And maybe it's online, they enter for you. If they lose, they lose, but if they win, they come down to the theater, pick up the tickets and give them to you. All of a sudden now you've dramatically increased your chances of winning. These are technically allowed often by the rules.

• 26:10Speaker 03

  Sometimes you can enter a lottery in years you intend to lose because the system rewards you in subsequent years for prior losses. It's trying to be fair over time. And so the rules are if you have lost nine years in a row, then in your 10th year, you'll get 10 entries or 100 entries or 1,000 entries relative to someone who's entering for the first time. Or maybe you win the lottery in a year you don't want to win and you defer what you get for a year. And now you basically get to enter this year in the hopes of deferring for next year. And if you lose this year, you get to enter next year for the chance of getting whatever it is next year.

• 26:48Barry Ritholtz?

  So you've gone to school at Harvard and Cambridge, you teach at University of Pennsylvania. When we look at college admissions, that seems to be like a mess of everything. Some credentials, some skill, some checking the boxes, a little bit of lottery, a little bit of early admission, first come, first served. What do you think of that entire college admission process? What's driving that design?

• 27:16Speaker 03

  Yeah, so that is what I call a choose me market. It's a two-sided market where it's, as you point out, it's not as simple as any one rule. It's not like whoever applies first to the school gets it or they're going to totally pick people by lottery. They have a strategic decision as an institution. I maybe I should say we as an employee of one of these institutions. But the features of a choose me market of a two sided market are that there are market participants on both sides. So for college admissions, there is applicants who are trying to get into the colleges. And then there are colleges that are deciding, who am I going to admit?

• 27:53Speaker 03

  We're trying to make a class of smart, motivated, well rounded or very pointy people who are going to make the class, you know, a rich, fun environment. And the dynamics are about, you know, are we both succeeding in getting what we want? So I think that the thing that people think of is, okay, is the candidate strong enough? Do they have, you know, good enough grades, good enough SAT scores, good enough extracurriculars? But something that we think less about as an applicant say, because it requires thinking about the other side of the market is now, how do the universities or colleges feel about the applicants?

• 28:34Speaker 03

  Well, one of the things that they value is high yield. We want the people who we admit to enroll in our school, we want them to matriculate. When I was applying to college, that yield, that fraction of folks you admit who come was in the US News and World Report rankings of best colleges and universities. It's not anymore, but it's still a matter of pride and reputation because it's hard to say you're one of the best schools in the country if, you know, a half or two thirds of the people you admit choose to go somewhere else. And so when you mentioned early admissions, early decision or early action, that is where this kind of yield question comes into play.

• 29:15Speaker 03

  So the way that it works with early decision is when you apply, say to Penn, where my employer, early decision. If you do that, you are committing to come if we admit you. So that's great for our yield because now, you know, you're guaranteed to come. And lots of schools do this. They have an early admission deadline. There's also early action where you're not committing, but you can only apply to one school early action. And so it has similar properties where you're kind of giving up applying elsewhere early. And the kind of deal is that admission standards appear to be a little lighter. And so researchers have estimated it's kind of worth about 100 SAT

• 29:58Speaker 03

  points if you apply early. It's kind of, we're going to, we're, we like the idea that you want to come. We like that you're going to help us with our yield. And so, you know, we're going to kind of be more open to having you enter. Now, I say, I don't work at the admissions committee. So this is right. This is as an outsider doing, you know, looking at the research about it. But all of a sudden, then it becomes a strategic decision as you as an applicant. So you have one shot in the early decision game. Where do you want to apply? We talked a little bit about going for gold or settling for silver. Do you go for the thing you really want, the 7:30 reservation at the hot restaurant? Or do you go for something there where there's less competition, like a 4:30? And the early

• 30:42Speaker 03

  decision game, that strategy, that settling for silver strategy might be a smart play. Because if the place you really want to enroll, that gold medal option for you, is too far out of reach, that even if you apply early, you're, you're not going to hit that admission cutoff, then you're essentially wasting that application in that, in that school. And you should be applying instead to a place where if you applied early, you would actually get in. But if you didn't apply early, you wouldn't. Someplace where you're kind of more on the margin.

• 31:13Barry Ritholtz?

  That's a very narrow little slice. You have to figure out exactly what your odds are.

• 31:17Speaker 03

  Yeah, what you can do with research, with talking to other people, you know, seeing, you know, how does your SAT score compare to the ones that are published on the website? You know, the people who went to your high school in prior years who succeeded in getting in. What were their grades like? What were their extracurriculars like? So when it matters for you, the research that you do to figure out how to succeed in these markets will inform what strategy you should play.

• 31:44Barry Ritholtz?

  Really interesting. Let's talk about the three E's. You discuss what's equitable, efficient, and easy when people are designing various types of market mechanisms. Give us a little overview of that core framing device.

• 31:58Speaker 03

  Yeah, so the three E's are about how well a market operates. So you mentioned them: efficiency, ease, and equity. Equity is about fairness. It's about are we treating the market participants equally? If that's our goal, right? If we want everybody to have an equal chance at getting the scarce resource, is our allocation mechanism, are our market rules allowing us to do that? Efficiency is about making sure that we're not wasting any scarce resources and whether the scarce resources that we're giving out are being put to their best possible use. So if there's someone who really wants something, are we recognizing that and saying, oh, actually,

• 32:39Speaker 03

  as a society, we're better off if we give that scarce resource to that person? And then ease is the one that I think Standard Econ doesn't think that much about. And the reason is that prices are easy to work with. You might not love that you have to pay a lot of money to buy something, but the actual process of buying something in a market where price is doing all the work is trivial. You go to the website, you click a button, and the thing is shipped to you. Or you walk into a store, you pay a price. Or you go online and execute some trade, or call your broker and do it. It's very straightforward to work with prices.

• 33:17Barry Ritholtz?

  So let's talk a little bit about one of the most fascinating market mechanisms that's out there, which is live performance tickets. You use the example of Taylor Swift, who could have charged a whole lot more for her tour, which still made billions of dollars. But lots of other artists charge less than the market bears. Um, why do these artists not go for, you know, revenue maximizing? What's the downside of that?

• 33:46Speaker 03

  Yeah, so I, when I think about sellers deciding, should I set a price below the market clearing price? The price that I would teach in my econ classes is gonna be the best for the-

• 33:57Barry Ritholtz?

  Here's the price, here's the demand, where that intersects is your profit maximizer, but they don't do that.

• 34:03Speaker 03

  So, before we get to Taylor Swift, let's think about the restaurant that is letting there be a line around the block, or the fad product that is making it hard to get access to their, you know, to what they're selling. In those cases, I think one of the reasons is to bolster future demand. I see a line around the block for a restaurant. I walk by, I might have never heard of the restaurant before, but I look and I think, oh, man, that restaurant must be really good. Look at that line. That might mean that I get turned into a future customer, or at least somebody who's interested in going when the line might be a little shorter.

• 34:39Barry Ritholtz?

  Lots of buzz, lots of PR.

• 34:41Speaker 03

  Yeah.

• 34:42Barry Ritholtz?

  Just by the virtue that it looks like more people want a limited scarce resource.

• 34:47Speaker 03

  Correct, and that, we see that, you know, throughout with lots of fad products, or with, you know, scarcity driving interest and demand. Now, I don't think Taylor Swift has to do that. I think we all know who she is, her fans are famously loyal, and she, you know, doesn't have to worry so much about getting more people to be interested in her as an artist. So she might have other considerations. She might think more about the equity and the efficiency of the allocation of her scarce resource. And, you know, one reason she might not charge very high prices, which might be, you know, hundreds of dollars for the cheapest ticket, and thousands for the, the kind of closer to the stage seats.

• 35:29Speaker 03

  Is that she's a billionaire, her Swifties, I'm sure she has billionaire fans because she's such a great artist, but you know, most of her fans, a few thousand dollars is going to be a big chunk of their, of their income for that month or, or more. And so it might not be a great look if she's charging what would be market clearing prices. So for the Eras Tour, she charges forty nine dollars for the cheapest seats. The average ticket price was, you know, just above two hundred. And so at those prices, you know, there's going to be massive excess demand. But she might think that that's more fair, that that might be, you know, not just because it will make her look bad, but also, right, she might want her fans to be able to come and only have to pay forty nine or ninety nine or

• 36:14Speaker 03

  a hundred and ninety nine dollars. It might also be that those folks really, really want to go. So you think about efficiency, right? There's no guarantee that the person who can pay the most actually values going to the concert the most. If her biggest fans have less income than, you know, the, the fans who can pay more, they're going to get pushed out whenever the market is relying exclusively on prices.

• 36:41Barry Ritholtz?

  And you end up with a series of rentiers and, and middlemen that arguably contribute nothing positive to society and just exact a cost. In the book, I don't remember, was it the UK or Europe, EU, that they banned places like StubHub and those sort of ticket middlemen?

• 37:01Speaker 03

  Yeah. So this is one of the super interesting things about these hidden markets is that whenever you are giving folks access to a scarce resource at a below market price and there is the opportunity to resell it, you will get middlemen, you will get speculators or brokers who come in exclusively to try to extract surplus from the fact that the market is letting the price kind of be low initially.

• 37:33Speaker 03

  Now, there are economists who say, oh, that's how it's supposed to work. We're supposed to get to market clearing prices. But that's not what I argue because the seller has decided that she, in this case, wants to keep the price low. She wants people, regular people, to be able to buy for $49.99, $199. So the middleman becomes a problem that the market has to address. One way to do that is ban resale. But then you get situations where, this was the London Olympics, where there were seats that were empty to see some of the events when there were people standing outside the stadium who would desperately want to get in.

• 38:15Speaker 03

  But because there's no way for the tickets to be redistributed, you know, you end up with empty seats, which is clearly inefficient.

• 38:22Barry Ritholtz?

  Well, you could redistribute them at a 10% markup or something like that.

• 38:26Speaker 03

  So there's-

• 38:26Barry Ritholtz?

  And only once, you can't just go 10, 10, 10, 10, 10.

• 38:29Speaker 03

  So this is the, the question is, you know, how do we innovate in this market? So in the book, I have some ideas about how to do it. I think one key problem with how a lot of live event tickets are being allocated is that they're relying on first come, first serve. Uh, first come, first serve races is the way that we do it on the internet now. And that allows the ticket brokers to program bots that will race faster than any human can. And that is going to mean that the folks who are building the bots with the intention of getting a bunch of tickets and reselling them are going to be at an advantage and be able to extract surplus.

• 39:10Speaker 03

  The FTC sued Ticketmaster a few months ago about this issue, basically letting there be bots on the platform that extract-

• 39:20Barry Ritholtz?

  Including their own bots that then resell at higher prices.

• 39:22Speaker 03

  Well, this is a part of the problem, which is the, the secondary market platforms, the ones that are facilitating the trades between the, the brokers or, or regular people who buy tickets, but then, you know, can't go and have to resell them. Those platforms are benefiting from the sales. They get hefty fees. I bought tickets recently and my calculation was that Ticketmaster, where I was, you know, reselling them, I was buying them and then I had friends who canceled, had to resell them, was getting 30% of the transaction price.

• 39:53Barry Ritholtz?

  You would think the artist would be the one that should garner those gains. I've, I've heard- Um, I, I love the expression, um, crypto is a solution in search of a problem. One would imagine that if the tickets, and I'm not a, you know, Bitcoin bro, but if you could sell tickets on the blockchain and there's a smart contract built into that, that the artist gets half of the resale price. It changes the dynamics there a lot.

• 40:21Speaker 03

  So you could do that, but of course, if the artists wanted more, they could just raise the prices, right? They, they don't need, they don't need the resale market to extract that surplus. Right? The, what I describe in the book, it doesn't, you don't need to go all the way to the blockchain for it. You do need names on tickets. Meaning, yeah, because, right?

• 40:41Barry Ritholtz?

  So it's ticket and ID, not just a scan?

• 40:43Speaker 03

  But yeah, and it seems complicated because then it's like, oh, I'm going to the, it's like going to the airport. I don't want to go to a concert to be like going to an airport, although last concert I went to had to go through security anyway, right?

• 40:52Barry Ritholtz?

  You go through a metal detector at Madison Square Garden for a Knicks game, so.

• 40:55Speaker 03

  Exactly, but, but no, your phone can identify who you are. If I tap my tickets through my phone, right, it can validate who I am. Facial recognition is getting very good. And so, you know, there's clear, the service you use at the airport, if, if that's something you've subscribed to. They have similar style products that get used at venues. Uh, Major League Baseball has had a version of this that they, uh, rolled out at some point. And so validating that you are named on the ticket is easy to do, uh, or getting easier. If you don't have that, then you could put some cap on resale. But then, you know, it doesn't, nothing stops anybody if they have a physical ticket from doing

• 41:39Speaker 03

  what used to happen, which is standing, uh, you know, outside the venue and selling them or, or selling them on some third-party platform that's not tracking how much more the, the ticket is, you know, being paid for, right? If it's in cash, there's no way to validate that it's only 10%. And then the other thing you have to do, and this is trickier, it is a different type of change, is get away from first come, first served. Because even if you have names on tickets, but you're doing a first come, first served race, the folks who program the fastest bots are still going to be able to extract surplus.

• 42:12Barry Ritholtz?

  So could someone like Taylor Swift with an army of Swifties, hey, sign up here, and it's two tickets per name, and you have to be in their system for that long, and so at least, what is Madison Square Garden, 25,000 people, at least the first 10,000 tickets are going to go to local people who are her fanbase?

• 42:33Speaker 03

  So the, for the Eras Tour that I, that we started talking about, they did something similar, where they did a verified fan process. You had to validate who you were, and then folks came to the website if they were lucky enough to, after being verified, to win a lottery ticket.

• 42:52Barry Ritholtz?

  Still a lottery.

• 42:53Speaker 03

  Still a lottery, but then, then-

• 42:54Barry Ritholtz?

  But a fairer lottery.

• 42:55Speaker 03

  Fair lottery among people that they thought were, were real folks, rather than brokers. And then you had to wait in a virtual queue, and, and wait for, some people, hours. So what ended up happening was, they claimed there were a lot of bot attacks, people that didn't have the verified fan code that they needed to buy the tickets were coming, and the systems ground to a halt, and they crashed, and people were waiting for hours. And so, all of a sudden, you had a first come, first served line built into the system that was supposed to be a lottery.

• 43:24Barry Ritholtz?

  Right.

• 43:25Speaker 03

  Where now you're going through an ordeal. We talked about, you know, is the market easy? It's not easy if you have to wait online in front of your computer for hours. It's almost as painful as having to wait outside the box office, which we used to do for hours. And so, you know, I think the solution is to actually lean more on the lottery, and basically say, look, at some point, we're just gonna have you put your name in, say what your preferences are, what shows you want to see her perform at, which sections you'd be willing to buy tickets for. And you're going to enter yourself in and we will tell you whether you won. But you don't have to be there and pick the specific seats. Right. You can say, I want, I prefer to be in the center and I'm willing to pay more, whatever. But, but that would make the participation in the market way easier.

• 44:09Speaker 03

  You could run, you know, whole tours or sections of tours at once. You could reward folks who are more flexible. If I'm willing to see Taylor Swift perform at any venue, you know, on the East Coast, and I'll go to any show and sit in any section, I am revealing myself to be a very big Swiftie.

• 44:27Barry Ritholtz?

  Or a broker that wants to flip the ticket.

• 44:29Speaker 03

  Well, but if the names are on it, then I'm stuck. If I have to return, if I can't go, I have to return it to the, you know, to Swift, and she can give it to somebody on the waitlist. But on the randomized waitlist, right? But you could design the system to basically cut out the brokers altogether.

• 44:45Barry Ritholtz?

  So the craziest thing about the brokers in the U.S., I heard stories from several people who said, rather than pay the markup in the U.S., it was cheaper to secure tickets in Paris or London. Fly over there, stay in a hotel for a few days, go to the show and go home. That was less expensive than paying full boat to any of the SeatGeek, StubHub, middlemen that, you know, they charge what the market will bear.

• 45:12Speaker 03

  They charge what the market will bear. They don't add anything to the production. And yeah, it couldn't be, you know, and you get a vacation out of it. You go to Paris to see the show.

• 45:20Barry Ritholtz?

  Coming up, we continue our conversation with Judd Kessler, professor at the Wharton School, discussing Lucky by Design, the hidden economics you need to get more of what you want. I'm Barry Ritholtz. You're listening to Masters of Business on Bloomberg Radio.

• 45:47Speaker 01

  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job Candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs. And hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting and hiring practices.

• 46:30Speaker 01

  But according to recruiters, advisors, and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company. And Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates quote "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute, brought to you by ChatGPT. Get started at ChatGPT.com.

• 47:12Barry Ritholtz?

  I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio. My extra special guest this week is Professor Judd Kessler. He teaches behavioral economics and market design at the Wharton School at University of Pennsylvania. His new book, Lucky by Design: The Hidden Economics You Need to Get More of What You Want, is out now. So let's talk a little bit about some things that are lucky by design. One of the things that, slightly before my time, but certainly resonated, was what took place during Vietnam with the draft lottery. Some of the data was pretty shocking. At the time, African-Americans made up 11% of the population.

• 47:58Barry Ritholtz?

  They were 22% of the people that were drafted and 22% of the casualties. 2X the representative population. Why did that go down that way?

• 48:11Speaker 03

  Yeah, so the situation that arises when you have these hidden markets is whoever's in charge of the market gets to pick the rules, and they might not be equitable or efficient or easy. And the Vietnam draft before the lottery, which was introduced to kind of correct some of these issues.

• 48:33Speaker 03

  Had a bunch of loopholes in them, in the system. So you could get a deferment for various reasons. You could have some, some of your, you know, friends or family members lobby folks on the local draft boards that were going to decide which men of that age were going to be sent to be.

• 48:49Barry Ritholtz?

  So if you were politically connected, you had a better shot.

• 48:52Speaker 03

  Politically connected, wealthier, whiter, those were the things that let folks.

• 48:57Barry Ritholtz?

  So, so you could have a medical disability, you could be in college or grad school?

• 49:02Speaker 03

  You could go to the National Guard, so you would be, kind of stay stateside.

• 49:05Barry Ritholtz?

  And not everybody gets, gets admitted to the National Guard.

• 49:08Speaker 03

  Correct. So having a, a kind of way to circumvent what would have been the task of going overseas, the loopholes were kind of played by a few and, and a bunch of folks did not either have the means or have the connections or kind of know that this was a way out.

• 49:27Barry Ritholtz?

  Did, did the lottery, and I, I learned a lot more than I knew about it in the book. So they just randomly picked birth dates, your month and day of birth, and that was the order in which people were drafted. How did that impact how things proceeded? Did it have the desired effect?

• 49:46Speaker 03

  Well, I mean, it had the desired effect. There were still loopholes that you could use to get out of service, but it had the desired effect of 366 possible birth dates, including February 29th, because you didn't want to leave those folks out. You know, they got pulled in order randomly, one at a time, and then the way the lottery worked was they would just call down the numbers. So folks who are old enough to remember this, my father's generation, this was a big deal. And, you know, you wanted to have a later, have your birth date picked later, so you were less likely to be called. Now, again, still loopholes, but folks looking back, you know, at history say this helped facilitate the anti-war movement that eventually got the US out of Southeast Asia.

• 50:29Speaker 03

  Because when you have well-educated, wealthier, kind of folks who have a little bit more socioeconomic status, a little more power in society, when their sons started getting called up, and, you know, this was a fair system, and so it was harder to get out. Then you saw a bunch more kind of influential folks saying, no, no, this is not a war we want to be in for the long term.

• 50:54Barry Ritholtz?

  Huh, really, really interesting. Let's talk about the area that you spent so much of your career on, which is organ donation and what those rules look like. To start, I have to ask about the numbers. There are 100,000 Americans on an organ waiting list, organ transplant waiting list. I was shocked to read of that 100,000, 90% are waiting for a kidney. That's amazing.

• 51:23Speaker 03

  Yeah, I mean, so the reason for that is that there is dialysis for kidney failure.

• 51:29Barry Ritholtz?

  Which can keep you alive for?

• 51:31Speaker 03

  For, you know, five or more years. I mean, you want to get a kidney as soon as possible. Dialysis is time intensive, it's painful, it's expensive, although the cost is borne by Medicare primarily after a certain number of months that your insurance, your private insurance covers it and then it gets handed off to Medicare. So there's a lot of costs that go into it. But of course, if you don't have a kidney that you can get as a recipient, if there isn't a donor kidney available, this is your only option. But this is why the waiting list for kidneys is so long, because folks can kind of wait for an extended period of time. Think about another organ like a liver, there is no dialysis. So at some point, if your liver function gets bad enough, you either need a transplant

• 52:15Speaker 03

  or that's it. So this is why the kidney list, you know, goes on for so long, but it's also a major financial burden, in addition to all the emotional and physical burden that the folks, the patients and their families face. The estimate suggests that it's basically 1% of the federal budget is spent on

• 52:40Speaker 03

  End stage renal disease on on folks who have kidney failure because Medicare is covering it. You know Medicare, a big chunk of the federal budget and this in particular, this line item is very expensive.

• 52:52Barry Ritholtz?

  And the crazy thing about this, another data point that shocked me is sometimes an imperfect match shows up and you have the option of, you know, rolling it over and saying, I'll wait for the next one. 20% of the donated kidneys are just thrown away.

• 53:09Speaker 03

  This is the nature of these first come, first serve waiting lists. So, you know, there's when an organ becomes available, there's a list that's generated. It's based on how close you are to the transplant center, on the medical match between the organ donor and the recipient. So there's a bunch of considerations that come in, including how long you've been waiting. So if you've been waiting many years on dialysis, you're going to be closer to the top of the list. So an organ becomes available and you, as the patient, with the help of your doctor, have to decide, is this going to be an organ I take or not? Some of the information about whether it's a good match for you, we only can learn after

• 53:50Speaker 03

  the organ has been removed from the donor who's, you know, passed away. And so now we have testing that's getting done on the organ and there's only so much time.

• 54:01Barry Ritholtz?

  24 to 48 dollars.

• 54:02Speaker 03

  So, you know, we have this testing getting done and folks are getting are learning or this, it could be this organ that you take or we can keep waiting. And if you're at the top of the list, maybe you get offered a bunch of organs. And so, you know, it is hard to get through the whole list of, you know, 90,000 folks waiting for the organ. And so, you know, if the organ's not great and we can't identify somebody who might take it.

• 54:27Barry Ritholtz?

  It's wasted. I was kind of fascinated by the example you describe of what they do in Israel, that if you check, I'm willing to be an organ donor three years prior.

• 54:40Barry Ritholtz?

  You're higher on the recipient list, the theory being, hey, if everybody understands this, there's that many more organs available for transplant. How has that tested out in real life? And are any states here putting that into work?

• 54:57Speaker 03

  Yeah, this was the research that got me into market design in particular. I was working with Al. We started thinking about organs. It has this nice feature of being a public good. If I agree to register as an organ donor, hopefully I won't be in this situation, but my organs are available for transplant if I die in a way that makes them available. When folks agree to register, they are making this scarce resource, the organ, they're making it be less scarce. There are more organs available in expectation if folks are registered. So a bunch of countries, including Israel, but also Chile, China, and Singapore, have

• 55:38Speaker 03

  built into their allocation rules an incentive to get people to provide this resource, to make it less scarce. And as you said, in Israel, it's three years, but you can think about doing it different ways where if you're 18 years old and you're going to the DMV and it's the first time you've ever been asked, do you want to be an organ donor? You are rewarded if you say yes, insofar as 50 years later, if you end up needing a kidney, you're going to get priority over someone that's kind of in the same situation as you, but when they were 18 said, no, no, no, I don't want to help out other people. And so we saw when we did our research that this incentive of being given the option

• 56:21Speaker 03

  to be a donor so that you can have priority later on induced a lot more people to say they wanted to donate in a game that was modeled on that decision. We looked at Israel and we saw when Israel implemented it. Our estimates suggest about 100,000 more people and Israel's a small country.

• 56:39Barry Ritholtz?

  Right, that's a lot.

• 56:40Speaker 03

  Yeah, it's a lot, uh, signed up in the run-up, you know, kind of before the, they, they announced it and they were letting people sign up and it was the date when if you signed up before, you'd immediately have priority.

• 56:52Barry Ritholtz?

  Oh, really?

• 56:52Speaker 03

  Otherwise, you'd have to wait the three years to avoid, I mean, the three years, by the way, is, is to avoid a loophole where

• 56:58Barry Ritholtz?

  Right.

• 56:58Speaker 03

  I get sick, I need a kidney and I go sign a donor card and then I have priority. That would totally undermine

• 57:03Barry Ritholtz?

  Defeat the whole purpose.

• 57:03Speaker 03

  Which we have research showing that, you know, that it would in fact undermine it. So, yeah, so then they, they implemented it and it seems to work.

• 57:10Barry Ritholtz?

  Um, have any places in the US adopted this?

• 57:13Speaker 03

  No, so it would have to be, this is not a state-by-state thing, the organ allocation systems are national and so you would need the country as a whole, the, to have a, a change in the allocation rules. So, you know, I have been advocating for that since we did that research over a decade ago, uh, but, you know, we have not yet had movement on that, although I remain perennially optimistic because it's been, you know, many years and the problem isn't getting better. So basically, anything we can do to make this scarce resource less scarce is valuable.

• 57:45Barry Ritholtz?

  I'm, I'm recalling Richard Thaler's book, Nudge. I think he co-wrote that with Cass Sunstein.

• 57:50Speaker 03

  Yep.

• 57:51Barry Ritholtz?

  And there was questions about opt-out and opt-in. Um, in other words, if everybody by default is an organ donor, but you have to opt-out, the, the reasons people didn't want to do that, um, religious reasons and other, but, uh, is that a potential solution?

• 58:07Speaker 03

  So, that was, uh, there, that was like a, a great hope of behavioral economics was that these kinds of nudges in this space.

• 58:14Barry Ritholtz?

  Choice architecture.

• 58:15Speaker 03

  Yeah, so this is a ca, there are many places where it works well. This is a case where it doesn't. And the reason it doesn't is that, you know, if you are, say it's an opt-out system, so I should pause and say, we don't, we can't do that in the US without a major law change because organs fall under the Gift Act. So, you know, you have to actually make an affirmative statement that you want

• 58:36Barry Ritholtz?

  Got it.

• 58:37Speaker 03

  You know, you could make it salvage law, so if you're not using it, we can take it, right? But that's, uh, people might not want to do that. But, but in the, in the countries that you Use these opt out systems, the next of kin are still consulted.

• 58:49Barry Ritholtz?

  Right.

• 58:49Speaker 03

  So, you know, what the the next of kin are told is that the person did not opt out. And it defaults basically to the next of kin to decide. And so what the research shows is that there just isn't a delta between the countries that use opt in and the countries that use opt out.

• 59:05Barry Ritholtz?

  Because it always goes to that affirmative decision.

• 59:08Speaker 03

  Yeah, and when, when, you know, I've opted in, I mean, I might be special because I talk about it a lot, right, but, but if you've opted in, then the next of kin see that and they know that it was your wish, right, you did, you said at some point, yes, I want to register, they know that that you want to do that. And so if you pass away, they know that they should donate your organ, so they're not going to stand in the way. It is, you know, a binding agreement to be an organ donor, but of course, if the next of kin don't want it, right, they're the only ones who are left around to sue the doctors, right, so, so, so, but it ends up being the case if you register, you know, the vast majority of folks who register have their organs recovered.

• 59:49Barry Ritholtz?

  I, I found a lot of the book had really surprising themes and data. Doing your research, what's the thing that surprised you most about market design? What, what sort of things did you go, huh, that, that doesn't make any sense?

• 1:00:04Speaker 03

  So at the end of the book, I talk about, you know, how you are a market designer. We've talked about you as a market participant, we've talked about others as market designers, but hidden market is one where there's a scarce resource that needs to get allocated without prices being what determines who gets what. And if you think about it that way, you are a market designer for things like your time and attention, which lots of people want, they want to have you respond to their emails, they want to get on your calendar, and you have to decide who you serve and who you don't. That's the, the preface. The thing that I learned was a set of market rules that I thought made no sense, which was how we used to allocate water from the Colorado River.

• 1:00:44Speaker 03

  So for, for many years, the, the rule was first in time, first in right, which meant that the first folks to tap the river, to take water out, to divert for their own purposes, kind of always got their allotment. So that was California in 1901, where they diverted water from the river to turn a desert into farmland. And then decades later, when there was a drought and there was less water coming down the Colorado, California got to keep the exact same allotment. And folks who tapped the river later, like the city of Phoenix, Arizona, which in 1901 was 10,000 or 15,000 people, but it's now a million and a half.

• 1:01:27Speaker 03

  They had to cut back, even though for them it was drinking water and for California it was to grow alfalfa to feed to livestock. So I looked at that and I thought, oh, man, what a terrible, it's not efficient, it's not equitable. The race that determined who got what was run, you know,

• 1:01:43Barry Ritholtz?

  Centuries ago.

• 1:01:44Speaker 03

  Yeah, a century ago. And so I'm feeling like, oh, man, isn't it great that we don't use these kinds of systems anymore? And then I looked at my calendar and I saw my recurring meetings on there. And I thought, that's first in time, first and right. I'm doing what they were doing with the Colorado River. A meeting that I put on my calendar, you know, two years ago, that takes Thursday at 11:00 a.m. Every week, Thursday at 11:00 a.m. is being allocated to this project, even if it's not the most efficient or equitable use of my time. And I realized like, oh, man, you know, there's some stuff that's sacrosanct, like my teaching, but a lot of these recurring meetings, it's not adhering to the efficiency and equity standards that I would want for my allocations.

• 1:02:29Barry Ritholtz?

  Having read the book, I keep coming across things. As I was reading it, I was thinking about different things. And then either yesterday or this morning, I saw a Wall Street Journal piece, the new mayor-elect in New York wants to freeze prices, not just on apartments, but at Yankee Stadium on hot dogs and beer. And there's a couple of interesting issues that, hey, are people going to get too drunk? But some other stadiums have done this and it's worked out really well. When we look at price controls, how do you think about rent control for apartments or capping the price of hot dogs?

• 1:03:09Barry Ritholtz?

  Costco very famously has the $1.50 hot dog for 36 years. How do you think about those different? Price mechanisms really is a form of branding or marketing.

• 1:03:21Speaker 03

  Yeah, I mean, I love the Costco hot dogs. So I can see the branding and marketing benefits there. I have thought a bunch about this because it is that has the potential to create hidden markets or exacerbate hidden markets that are already there. So I recently wrote a piece about affordable housing lottery. So this is in New York City and a bunch of major cities around the world do this where a new development will be built and you'll have thirty percent of the units that are built are going to be designated affordable, meaning folks are only expected to spend thirty percent of their income on housing.

• 1:04:01Speaker 03

  But there are so many people who are finding rents hard to bear in New York City and these other big cities that the lotteries get flooded. So in a last full year, there were about six million applicants for about 10,000 units. So each lottery entry has a one in 600 chance of winning. And so as a result, folks are kind of constantly applying to these lotteries because that's the only way that you're going to have a chance of getting something is if you're applying to every possible lottery. But then there's all these inefficiencies that can crop up. Maybe I win a lottery. I get really lucky, but it's it's not in my desirable desired neighborhood. It was still a good lottery to enter because better to get affordable housing than not.

• 1:04:46Speaker 03

  Maybe you win in the neighborhood that I want. There's no way, but there's no way for us to switch, right? It's kind of like golden handcuffs if you're getting an affordable place. And you know, the same thing with freezing rent where you know, the folks who are in a rent controlled or rent stabilized apartment that you know, are gonna be able to kind of keep paying that low rate. You know, that's great for them, but that doesn't solve the bigger problem, right? It's affordability for the lucky few, but not for other folks who are moving to the city for the first time and want to make a life here. And so, you know, I can see why folks are eager to do that, but it's hard to think about how to solve that problem without.

• 1:05:31Speaker 03

  Broader changes.

• 1:05:33Barry Ritholtz?

  Right, it doesn't move the needle on the broader underlying problem. It just for that handful, it kind of raises the issue of of NIMBYism and just not building. Well, since the great financial crisis, we've wildly underbuilt. Single family homes, affordable housing, go down the list. The focus has been on luxury properties because hey, there's the most amount of economic benefit for the builders to put their time and energy.

• 1:06:01Speaker 03

  But this is definitely, you know, a supply and demand problem. If you if you want to bring costs down, you have to increase supply. And, you know, as an economist, we are trained to kind of think one step further. So I'd have to read the specific policy about the, you know, Yankee Stadium concessions, right, but my my first instinct would be, oh, if you cap the price of concessions, the logical next step is that the ticket price goes up a little bit, right? Because like now, all of a sudden, it's cheaper to go to, you know, to have the full night out at, you know, Citi Field or at Yankee Stadium. And so, you know, is there also going to be a price control on the ticket or or not? And then are we actually getting the gains that we want? Or, you know, are we are we getting nice soundbites?

• 1:06:45Barry Ritholtz?

  The the thing about constructing your own market design is kind of interesting. I have a friend, Dave, who comes to New York a couple of times a quarter, works in finance, comes down from the Berkshires. And since he's one person and doesn't care which Broadway show he goes to, his market design hack is he waits to, depending on the day, five minutes to seven or five minutes to eight, the prices plummet because they're about to expire worthless. Oh, Hamilton for half price, let's go. Wicked, half price. And he's seen half the stuff on Broadway at shockingly reasonable prices. So as I was reading this, I I thought about that.

• 1:07:28Barry Ritholtz?

  And then I just had an experience up in Newport, my first time visiting. You wrote about this in the book about the restaurant reservations and the waiting list. So we stayed at this hotel and there's a super hot restaurant there, which I didn't even know about. We made other reservations for the weekend. And we stop in and there's a line of people at five o'clock waiting to sit at the bar. I said, we're on the waiting list. He's like, well, we have like a hundred seats and the waiting list is about 400 long. I'm like, oh, forget it. And I said something to the maitre d and he said, why don't you come down later and see what the line looks like. It usually moves

• 1:08:10Barry Ritholtz?

  pretty and it was beautiful out. You could see it at the bar. It was outdoors. So it was like we had a seven o'clock reservation, the gold.

• 1:08:19Speaker 03

  The gold.

• 1:08:19Barry Ritholtz?

  And we walked and we were going to walk to the restaurant. So we come down like 6:30, no line at the bar. So I said, hey, you're not seeing people at the bar? He goes, no, there's no line. Get over there. And it was just simply being nice to the maitre d and asking a question was, was that behavioral hack?

• 1:08:38Speaker 03

  This is, you know, learning about the market and the market rules and getting inside information about when, when is there less demand? What, what is the optimal strategy in this environment? It requires often doing a little bit of research, but it's not unattainable. We all have the ability to think about the market rules, think about who will know the maitre d, you know, if, if you're polite to him or her, they might want you to come and give you the, the inside tips. Uh, but you know, you have to, you kind of have to either do your own research or, or have folks advise you that you trust. Um, and yeah, you can, you can often succeed in markets where other people fail.

• 1:09:21Barry Ritholtz?

  So I only have you for another 10 minutes. So let me jump to my favorite questions. I ask all my guests, starting with, tell us about your mentors who helped shape your career.

• 1:09:31Speaker 03

  Yeah. So the main one, I mean, already mentioned him. So you can see how big an influence is Alvin Roth. So he took me in as an undergrad mentee. I, I had this story in the book and then it got cut for space. So I put it in the acknowledgements because it was such a formative experience for me where I was taking his PhD class as a senior in undergrad. And so I was kind of a little bit out of place already. And I wanted to write a senior thesis, the thing that kicked me off to this career and, you know, put me at this table talking to you now. I had procrastinated asking him to be my advisor because I was a little intimidated. I felt a little out of place and I came up to him on the day the form was due and I said,

• 1:10:14Speaker 03

  "I want to write a senior thesis. I would really like for you to advise it. The form is due today, but this is the commitment." He was like, "All right, why don't I sign the form and we'll see how it goes." And he signed the form and the rest is history. But it was both the idea that I could be involved in learning new things that people didn't know before and do it with somebody who was willing to mentor me. That was a real, real big impact.

• 1:10:40Barry Ritholtz?

  Yeah, I can imagine. What are some of your favorite books? What are you reading right now?

• 1:10:44Speaker 03

  So this is a pop econ book, my book, Lucky by Design. It's in the spirit of another pop econ book about market design, which Al wrote, which is called Who Gets What and Why. And so for a while, I didn't want to write another pop market design book because I didn't want to step on his toes.

• 1:11:02Barry Ritholtz?

  That's a great title, Who Gets What and Why.

• 1:11:04Speaker 03

  Yeah, and there's a little, in the text of my book, I drop that every so often, that kind of question, that wording of that question. So that was an idea for me, this idea that you can communicate these market design concepts to regular folks. I recommend my book, but also that book for folks who are interested in this. My colleague, whose office is next to mine, had a book that came out a few weeks before mine. It's called Having It All. So my colleague is Corinne Low and I'm really enjoying that book. I've heard about everything that was in it along the way, but she writes about the time that

• 1:11:42Speaker 03

  women and their partners spend in doing household production and how society has progressed over decades where women have entered the workforce, but the norms at home about how time is, household chores are split, has not changed. So women end up...

• 1:12:03Barry Ritholtz?

  Really?

• 1:12:03Speaker 03

  Yeah. The data in that book is quite shocking. I mean, I'd been hearing about it as she was doing the research, but women, even in households where they...

• 1:12:15Speaker 03

  Earn more than their male partners will still be doing more household labor, all of that stuff in at home. So that, you know, in my book, I talk a little bit about how my wife and I manage our household responsibilities, using the concepts of market design to kind of avoid some of these systematic problems that that on average couples display.

• 1:12:39Barry Ritholtz?

  Huh, really, you know, I love to cook, but I tend to make a giant mess. And my wife is convinced that it's a purposeful strategy. So she could. And it's, I'm like, honey, we're married 30 years. You know me. Is this how I roll? You know, you gotta.

• 1:12:54Speaker 03

  Yeah, sometimes this is the just my technique, but but one of the things that I talk about in the book and.

• 1:13:00Barry Ritholtz?

  Must you pour from so high? It's olive oil.

• 1:13:03Speaker 03

  Splatters everywhere.

• 1:13:04Barry Ritholtz?

  It doesn't need that high.

• 1:13:05Speaker 03

  No, you gotta get that.

• 1:13:06Barry Ritholtz?

  Aireating it, it's.

• 1:13:08Speaker 03

  It's part of the fun, but no, we, one of the strategies is having one person be in charge of the whole task from conception to execution. So that means if you're a cooking, you're also cleaning would be part of that, right? Because then the incentives are aligned when when you don't do that, the person who cooks can leave a giant mess. The other person cleans that that seems fair. But the decisions, the resentment comes in and why are you making such a big mess? And so it turns out, you know, might be more efficient and equitable if one person does that whole task and somebody else does a whole other task, right? You you cook and I'll do the laundry and clean the floors. And that's the, you know, the split that might be fair.

• 1:13:49Barry Ritholtz?

  You know, I'm usually out the door early or if I'm home, I'm at the desk writing. So she takes care of the dogs. And during the weekend, I try and give her a break and and feed and walk the dogs early. We've never discussed it. It just kinda worked out that way.

• 1:14:05Speaker 03

  That sometimes that's how it happens, but be, you know, for those who are not finding it that easy, talking it out and kind of splitting the tasks is is a effective strategy.

• 1:14:15Barry Ritholtz?

  Tell us what's keeping you entertained these days. What are you watching or listening to either podcasts or or Amazon Prime, Netflix, whatever?

• 1:14:24Speaker 03

  So. I am a major fan of The Simpsons.

• 1:14:27Barry Ritholtz?

  Get out of here.

• 1:14:28Speaker 03

  I have always loved it.

• 1:14:30Barry Ritholtz?

  What are we up to, season forty something? It's crazy.

• 1:14:33Speaker 03

  Yeah, and but what has been great, I found throughout my life, you know, rewatching old episodes that I kind of get jokes that I didn't get before, which makes sense, right? When I started watching.

• 1:14:43Barry Ritholtz?

  It's one of those things that works for just both kids and adults at the same time.

• 1:14:46Speaker 03

  Exactly. And so what has been phenomenal for me is exposing my kids to it for the first time. And, you know, I'll say, I'll make some reference to something and my kids will be like, what are you talking about? And then I'll pull up the YouTube clip, I'll show it to them and then they'll be like, oh, can, you know, can we watch that episode? So that has been phenomenal.

• 1:15:03Barry Ritholtz?

  Our final two questions, what sort of advice would you give to a recent college grad? Interested in the career in either market design or economics or academia?

• 1:15:15Speaker 03

  Yeah, so academia, there is a path forward for folks who have just graduated college and are thinking about this. And that is to get some experience doing research to see if you like it. Because the market for tenure track academic positions is getting tightened. We're feeling the political winds as well as other things that kind of.

• 1:15:39Barry Ritholtz?

  Demographically, there's slightly smaller admission classes. And I just read seventeen percent drop in international students. That's a big number.

• 1:15:48Speaker 03

  For a lot of the universities that have big PhD programs, the budgets for things like the PhD program will depend on their revenue streams. And foreign students coming for undergrad or for master's degrees is a big revenue source for a lot of institutions. So all of that is to say that academia remains a great option for folks who are interested in it, but it's getting harder and harder. But if folks are interested getting, and they have not yet done it, they may have done it in undergrad, getting exposure to the research experience, there are predoctoral programs for folks to work with.

• 1:16:27Speaker 03

  Academic researchers on their projects and kind of get a sense of what it's actually like. There are master's programs that folks can participate in to see what the coursework is like. So that is definitely, you know, one way to go. There are kids who start earlier, who start in college, but I was not one of them, right? I told the story about senior year, kind of realizing, oh, I want to do academia. So I hadn't done any research assistant work until after I graduated. But that was the next step for me was saying, okay, I want to see what this is like. So it is a path to do, but you should only do it if you really want to have a job that only someone with a PhD can have because there are a lot of great jobs out there for folks interested in these topics, but not in academia.

• 1:17:10Barry Ritholtz?

  So, final question, what do you know about the world of market designs and economics, or even academia, that would have been useful 20-plus years ago when you were first getting started?

• 1:17:23Speaker 03

  Yeah, I think something I've recently developed, in part researching for the book, is just how diverse the hidden markets are that we participate in every day. As a young economist being trained in how markets worked, I thought basically exclusively about prices and the price mechanisms. That was how I was taught, that those were the markets I looked at. And it's only recently that I've realized markets are much broader than that. And thinking through the rules of those markets, how we could design them better, so that, you know, they're more equitable and efficient and easy for participants. I think there's a lot of gains for us to have as a society. So I'm excited to be working on it for the

• 1:18:08Speaker 03

  next 20 years. But if I could go back 20 years and say, hey, maybe focus on these markets a little bit more, because there's a lot of low-hanging fruit, where we could be making things better for everybody. You know, I wish I knew that, and I want others to kind of look at these markets and say, yeah, this could be better.

• 1:18:26Barry Ritholtz?

  Fascinating. Professor, really enjoyed the conversation. We have been speaking with Judd Kessler, Professor of Behavioral Economics and Market Design.

• 1:18:37Barry Ritholtz?

  At Wharton at the University of Pennsylvania and author of the new book, Lucky by Design: The Hidden Economics You Need to Get More of What You Want. I would be remiss if I failed to thank the crack team that helps me put these conversations together each and every week. Alexis Noriega is my video producer. John Russo is my research assistant. Anna Luke is my producer. I'm Barry Ritholtz. You've been listening to Masters in Business on Bloomberg Radio.

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