How to Spend Your Time and Money Better (with Nobel Prize Winner Richard Thaler)

We all behave irrationally. We pay for expensive gym memberships and only go once. We spend windfall cash on things we'd never buy with our salaries. We plan to do nice things in the distant future, but don't actually write them down in our calendars. These things can be bad for our happiness, so why do we do them? Economist Richard Thaler won a Nobel Prize for studying human irrationality - and explains why we all do odd things sometimes and how we can guard against being so irrational. Richard is joined by fellow behavioral economist Alex Imas to explain the updated insights from the classic book The Winner’s Curse: Behavioral Economics Anomalies Then and Now https://www.simonandschuster.com/books/The-Winners-Curse/Richard-H-Thaler/9781982165116. 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.

• 0:00Laurie Santos?

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• 0:04Speaker 01

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• 1:54Laurie Santos?

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• 2:01Laurie Santos?

  As humans, we do a lot of things that don't make all that much sense. I sometimes imagine a completely rational alien species somewhere out there in the universe that's observing us Earthlings and is totally shocked by how often we act against our own best interests. We eat foods that we know aren't good for us. We avoid small, simple actions like exercising or flossing, preventative care that we know will pay off in the long run. But we also do some truly beautiful things, behaviors that might puzzle those rational aliens. We donate blood or even an organ to someone in need and at real risk to our own health. We're kind to strangers who, in many cases, we'll never even see again. I also wonder what those aliens would make of the way humans experience happiness, how

• 2:46Laurie Santos?

  complex and counterintuitive the things that promote our well-being must look to a totally rational being. Unfortunately, it's unlikely I'll ever get a chance to chat with a rational extraterrestrial, like one of the Vulcans from Star Trek, those creatures who embody pure logic and self-discipline, about the anomalies of human behavior. But in this episode, I get the chance to do the next best thing. I get to chat with a Nobel Prize-winning economist, although, as you'll hear in this episode, he doesn't exactly fit the stereotype.

• 3:15Speaker 03

  Lesley, what's my name? I'm Richard Thaler. I'm a professor of behavioral economics at the University of Chicago's Booth School of Business.

• 3:25Laurie Santos?

  You don't mic-drop the, like, a Nobel laureate?

• 3:28Speaker 03

  You know...

• 3:29Laurie Santos?

  Did you bring it? Did you bring the medal? Like, do you bring it in your pocket in case you pull it up on video?

• 3:34Speaker 03

  It's a little heavy, so...

• 3:36Laurie Santos?

  [laughing]

• 3:37Speaker 03

  I don't.

• 3:38Laurie Santos?

  Dr. Richard Thaler started writing his seminal book, The Winner's Curse: Paradoxes and Anomalies of Economic Life, all the way back in the 1980s. So you might be surprised to hear that I'm featuring it in this series about my favorite books of 2025. But several decades after creating the book that transformed the way I think about human behavior, Richard is republishing it with new research and new reflections on the irrationalities of everyday life, all with the help of a new co-author.

• 4:05Speaker 04

  My name is Alex Seemas. I'm also a professor of behavioral economics and behavioral science at the Booth School of Business. I don't have any Nobel laureate stuff to mention, so...

• 4:15Laurie Santos?

  You'll come back in a couple of years on the podcast, and I'm sure things will be different.

• 4:19Laurie Santos?

  So we're featuring The Winter's Curse as one of my favorite books about 2025. But that feels kind of odd because I remember reading The Winter's Curse when I was like in graduate school. So it's kind of an odd book to have as my favorite book of 2025 and one of the books that really taught me important things. But maybe I'll have, Richard, you set the stage of like the origin story of this book.

• 4:41Speaker 03

  Okay, yeah, the origin story is when I was about Alex's age, about 40 years ago, I had just come back from spending a year with Danny Kahneman, my mentor.

• 4:55Laurie Santos?

  Just for context, the late Danny Kahneman is also a Nobel Prize winner, but he was a psychologist, a heavyweight in my field who is credited with pioneering the field of behavioral economics. Richard, then a young professor at Cornell, was building on Kahneman's insights as he forged his own path.

• 5:12Speaker 03

  And somebody suggested that I write a series of columns in a new journal called the Journal of Economic Perspectives. The journal was aimed at like the general economist. So it would be articles that non-specialists could understand. The idea was in each issue, I would write about something, an anomaly. And what is an anomaly? An anomaly is something that is unexpected, right? So a pink elephant in real life would be an anomaly. For an economist,

• 5:53Speaker 03

  an anomaly is something that the theory says won't happen. Like if price goes up and demand goes up, that would surprise us. So I did this for about four years. And when I had enough of these that it looked like a book, I kind of stapled them together and called it The Winter's Curse because it's an intriguing phrase. And it was one of the anomalies.

• 6:23Laurie Santos?

  At the time, Alex was in a very different place in life.

• 6:26Speaker 04

  I was being born.

• 6:29Speaker 03

  How was it?

• 6:30Speaker 04

  I was in Moldova at the time. I was born in Moldova in Eastern Europe. Basically, I wasn't around when the book was first came out.

• 6:38Speaker 03

  He was shirking.

• 6:39Speaker 04

  Yeah, but then Richard and I met when I was a graduate student at San Diego. And our offices ended up being adjacent, and I was super interested in behavioral economics, super shy, kind of didn't want to bug him, but eventually I kind of got the courage to be like, what do you think about this idea? What do you think about that idea? We started chatting. I got my first faculty job at Carnegie Mellon. And then at some point, I joined Booth.

• 7:03Speaker 03

  And then, a few years ago, the publisher of this book said, hey, you know, this book is getting old like you, and it's going to go out of print. Maybe you want to freshen it up or something. And I think they had in mind a new cover. And stupidly, I thought, oh, well, maybe there's something more ambitious we could do.

• 7:27Speaker 04

  Fortunately for me, by the way. Maybe stupidly for you.

• 7:31Speaker 03

  Yeah, well, I got the clever idea to get Alex to help. So I had this pile of anomalies. I wrote another half dozen of these after the book came out. And the question was, you know, it's 40 years later. How does this stuff hold up? So that was the concept.

• 7:53Speaker 04

  We got on the phone, and it sounded kind of straightforward and easy. Like, let's knock this thing out in six months. Ended up being anything but that. It took us about four years now to actually finish it up. That's largely because two thirds of the book is brand new.

• 8:10Laurie Santos?

  The new version of The Winner's Curse includes the original anomalies Richard began exploring in the 80s, but also new research examining whether the old ideas hold up today.

• 8:20Speaker 04

  Really, how this has held up in terms of the empirical robustness of the results. Have these results been replicated? Do they show up in the real world? Like, the original results were largely, you know, with some exceptions, in lab experiments with college students, relatively small samples in some cases. And you know, we've had 40 years, there's been hundreds of replications. Where are we now? So part of the book, and we emphasize this throughout, is we went ahead and we replicated all of the studies ourselves. The findings are really robust, everything replicates, everything has been replicated.

• 8:52Laurie Santos?

  The anomalies the book explores are all about the surprising ways humans act differently from what's known as the standard economic model. The model of rational behavior that both Vulcans and economists tend to expect from us.

• 9:04Speaker 03

  The standard economic model is really that people, or as economists call them, agents, solve problems by optimizing. So what route did you take to get to your office today? You took the best route. Why are you doing this podcast? Because it's the best possible use of your time. That plus markets. That is what distinguishes economics from psychology, say.

• 9:32Laurie Santos?

  And so this idea of these agents that are optimized in the best way, interacting in these markets, produced a certain kind of view of what people tended to do when making these decisions. And that's what's often been called homo economicus. Give me the like homo economicus 101, like, you know, what do we think this guy is out there doing?

• 9:49Speaker 04

  Homo economicus is a rational agent who bays principles of rationality. So they have rational expectations. They don't have any memory issues, they don't have any sorts of biases of what's out there in the real world. They're fully rational. They take these beliefs as inputs and then they optimize. They make the best decision, given their correct beliefs about the world.

• 10:13Speaker 03

  We should add that these agents are also selfish jerks. So they don't really care about anybody else, possibly members of their family, though possibly not. And they also have no self-control problems. So no need for any weight loss drugs in this world. Everybody weighs just the right amount.

• 10:35Speaker 04

  No AA, no alcoholics. Nobody gets addicted to drugs unless they really want to.

• 10:40Speaker 03

  And no need to worry about saving for retirement. People will do that because otherwise they're going to starve when they're old.

• 10:47Laurie Santos?

  Of course, you're saying all this stuff quite facetiously because real people don't tend to do this. We are in a world with AA and weight loss drugs and people who haven't saved for retirement. And these are the kinds of anomalies that you pointed out in your book, these cases where you looked and you said, hey, people are supposed to be obeying the standard economic model and they're just not. And so what does that mean for human psychology? And maybe how can we avoid these anomalies, especially in cases where they're kind of hurting us and messing us up? And so that's what I want to go through today. I want to go through my favorite of your anomalies that you cover in the book, six of these. But anomaly number one that I love is the anomaly that the book is named for, the so-called winner's curse. So Alex, tell me what the winner's curse is with the famous jar example showing this anomaly.

• 11:31Speaker 04

  Yeah, so imagine you go into a bar with a jar of coins. The jar has a certain amount of money in it. And then you tell everybody at the bar, look, whoever bids the most for this jar gets the jar and all the money that's in the jar. What's the winner's curse? Pretty simple. The person who wins the jar will end up losing money, in the sense that their bid is going to be higher than the amount of money that's in the jar. So they'll get the jar, they go home, they take all the money out, they're like, oh crap, I paid 20 bucks, this has $15 in it. So that's the winner's curse, that by winning the auction, you're actually losing. The jar example is really kind of easy to demonstrate. You could do it in a class. Richard, you've done this in a class before, I'm sure.

• 12:14Laurie Santos?

  You do it in classrooms, but do you ever do it in a bar? Is this like your bar trick?

• 12:17Speaker 03

  It better be a friendly bar.

• 12:19Speaker 04

  I don't want to get beaten up.

• 12:21Laurie Santos?

  So that's the bar version, you know, the kind of toy version that economists talk about. But you've talked about lots of examples where we see this in real life. A curious example I didn't know till I read your book was the case of oil companies. Richard, kind of how do oil companies fall prey to this winner's curse?

• 12:35Speaker 03

  Yeah. In fact, the winner's curse was discovered by oil engineers at a company that was called Arco. Oil companies were bidding for leases for a certain plot of land in the Gulf of Mexico. We're going to still stick with the original name, the Gulf of Mexico. And what they found was that every time they won one of these auctions, there was less oil there than their engineers had predicted.

• 13:06Speaker 03

  And they're saying, what's the story? Lousy engineers? Or are we just unlucky? And then they figure out, no, actually, it's that if there are lots of people bidding, the winner is going to be the one whose engineers on this plot had the most optimistic forecasts.

• 13:28Laurie Santos?

  And the winner's Chris Dempsey and the fact that we're not tracking the fact that, well, hey, if everybody's bidding that there's less money in this jar than I think, or if all the other oil engineers are bidding less than I am for this oil, maybe I'm wrong about how much oil or money is really out there. Perspective-taking failures are ones that we talk about a lot on this podcast because many of them really impact our happiness in these bad ways, right? We don't realize that other people want to connect with us, or we don't realize that other people don't know we're super grateful or don't know that it'd be fine if they asked us for help. So there's all these cases in the happiness science where perspective-taking failures kind of mess up how much happiness we could be getting from other people. But this is one where it seems to be messing up a lot of the value that we get from winning, like, quite ironically.

• 14:11Speaker 03

  Yeah.

• 14:12Laurie Santos?

  And so how do we overcome the winner's curse? How do we take into account what other people are bidding and other people's perspectives a little bit more to break this?

• 14:19Speaker 03

  Well, the simple lesson is, in the actual bidding circumstances, the more bidders there are, the less you should bid. Now, that is really counterintuitive advice. If Alex is auctioning off this jar of coins and there are 10 of his friends at the bar, and then 20 more people come in and we let them bid, all of Alex's friends should lower their bids. And that's just hard to get your head around.

• 14:50Laurie Santos?

  Yeah, I feel like my intuition is exactly the opposite.

• 14:52Speaker 03

  Right. It's because you have the intuition, oh, I want to win. No. The goal should be to submit a bid that if it wins, it will be lower than the amount of money. It's very counterintuitive, which is why people get it wrong. It's a classic anomaly.

• 15:13Laurie Santos?

  Okay, so that was my number one. Number two, classic irrationality, which is one that just makes me feel good about the human race, is that people aren't the self-interested jerks that economists think they are. You mentioned this in your description of homo economicus, that homo economicus is just out for themselves. But explain why standard economic theory sort of predicts that, in a sense.

• 15:34Speaker 03

  Economists have talked about a world in which people don't care at all about anybody else. Paul Samuelson, one of the great economists of the 20th century, wrote a paper about what he called the public goods problem. A public good is something that if you provide to one person, you provide to everybody, like a fireworks display. And he said, "It will be underprovided because no one will contribute because they can watch it for free."

• 16:10Speaker 03

  Now, of course, people do contribute to charities and to public radio and all kinds of other good causes. If you open your eyes and look out the window, you'll notice that people aren't always selfish jerks.

• 16:28Laurie Santos?

  And this is the kind of thing that experimenters were starting to notice around the time of the Winter's Curse, too. Alex, tell me about some of the classic violations of selfishness that folks talked about early in the literature.

• 16:40Speaker 04

  The real anomaly came when Werner Guth and his colleagues ran something called the ultimatum game. It's super simple. So Richard and I are playing the ultimatum game. I have $10, and I decide how to split that with Richard. I give him ultimatum. I'm the proposer, Richard is the receiver. Richard sees my offer to him. Let's say I say, "Look, I like money. I'm going to keep $9. I'm going to give a buck to Richard." And then Richard says, I want the dollar. Everything's fine. I end up with nine. Richard ends up with one. But if Richard says no, both of us end up with zero.

• 17:14Laurie Santos?

  And so if homo economicus is the proposer, he should give, you know, one penny, right? And keep nine dollars and 99 cents for himself. And if Richard is a homo economicus, Richard'd be like, wow, one penny is better than nothing. I should go for that. But if you're playing with real humans, if you offer one penny of your 10 bucks, most real humans are like, expletive, you jerk. Like, you know, I'll like, I'd take a hit, right? And so what did Guth find in the original ultimatum game of facts? Are people homo economicus? Or do they throw some expletives in there?

• 17:45Speaker 04

  That's exactly what he found is basically people are not homo economicus. Essentially, under 20% of the pipe, those offers are rejected. So if I offer something less than $2, Richard's going to reject my offer. Both of us end up with nothing. And so this is a real puzzle. So the proposer's decision of how much to give, that could be driven by a lot of different things. But the real puzzle is the receiver saying, I would prefer nothing to $2.

• 18:12Laurie Santos?

  So this is in the case of these like standard economics games where we're really setting up these kind of arbitrary situations. You know, I'm giving you 10 bucks. It's these really specific rules. But folks were also finding that people are nicer than you expect when you give them more real world context. Richard, tell me about these famous wallet studies and how it showed that people were nicer than we think.

• 18:30Speaker 03

  Yeah, so there's a guy called Alan Kohn, who was a postdoc here for a while. And he undertook this unbelievably ambitious project where they would take a little wallet that would have some kind of ID. Suppose it's Alex's wallet. And it has something like his email address on it and sometimes money and sometimes a key. And they would turn it in. At some place like a hotel lobby or a train station. And they did this thousands of wallets all around the world. And the question is, what do people do?

• 19:15Speaker 03

  Are they more or less likely to try and find the owner of the wallet if it has money in it? And if people are selfish jerks, the more money that's there, the less likely they are to turn it in.

• 19:31Laurie Santos?

  Or at least to turn it in with the money, at least to turn it in with the money.

• 19:34Speaker 03

  Right, exactly.

• 19:35Laurie Santos?

  Yeah.

• 19:35Speaker 03

  And the opposite happens. The more money that's there, the more likely that it gets returned with the money to the fictional owner.

• 19:46Laurie Santos?

  And so, these are anomalies when it comes to the standard economic model. But they're kind of great when it comes to human nature, that we're kind of naturally not selfish jerks. But a question I had for you, given all the evidence, is what can we do to get people to become even more cooperative? Are there ways that we can bump this lack of selfishness up even more?

• 20:04Speaker 04

  Yeah, so one of the things that's been shown to matter a lot is how much people can connect interpersonally. So, any sort of communication between people before some sort of potential exchange takes place or any sort of decision takes place facilitates more cooperative, less selfish behavior. People kind of get to know each other, that connection brings them closer together, and then they're a lot less selfish. So that's one thing that really, very intuitively, boosts cooperation. The other thing is that in society, we have a bunch of norms. Some of those norms involve punishment of people who don't cooperate. And when you introduce these sorts of norms into these kind of very abstract games, turns out that boosts cooperation tremendously.

• 20:47Speaker 04

  It's one of the largest effects in the behavioral economics literature, is that when you take a standard sort of abstract game where people can contribute to the public good or something like that, if you introduce the opportunity for other people to punish non-cooperators, at a cost to themselves, by the way, which is itself an anomaly. In the standard economic model, if it costs me something to punish somebody else, I would never do it. But turns out, people do. And because there's this threat of punishment, everybody ends up cooperating. So, this is kind of like a little model of society where you take a group of people interacting. You introduce the types of things that we see in the real world, like norms and the ability to punish, and all of a sudden, the world looks a lot less selfish.

• 21:30Laurie Santos?

  And so it seems like there's some fun happiness implications from this anomaly. It seems like happiness implication, number one, is like, we can just trust people more than we might think. The other is that there's ways you can boost cooperation even more, talk to people more, get more social connection, which honestly is great for happiness anyway. And if possible, give people the opportunity to set up norms where you can call out bad actors, which is good.

• 21:52Speaker 03

  Yeah, the one finding is that if you are trusting, you produce more trustworthy behavior. You know, in the old book, I talked about farm stands in Ithaca, where I used to teach at Cornell, where a farmer would put out like fresh corn on the honor system. And people would put money in the box. And Alex and some of our behavioral economics friends were out hiking in the Swiss Alps this summer and came across a place that had wine and cheese.

• 22:37Speaker 03

  What were they selling, Alex?

• 22:39Speaker 04

  There was like, you know, these like little cabins secluded in the Alps. There's nobody there. You come in, there's a wine and cheese setup. You take however much you want, then you put your money in the little box and you leave.

• 22:50Laurie Santos?

  It's less quaint than Cornell, I guess, like fresh corn versus really nice French wine, but yeah.

• 22:55Speaker 03

  But you have to hike up there to get it.

• 23:00Laurie Santos?

  Coming up after the break, we'll dive into more of my favorite irrationalities, like why I keep paying for a gym that I've only ever used once, and why it's so hard to actually redeem the frequent flyer miles I've been hoarding. The Happiness Lab will be right back.

• 23:17Laurie Santos?

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• 26:08Laurie Santos?

  All right, so now we're moving on to irrationality. Number three, something that I struggle with a lot personally, which is that as humans, we seem to have more of a problem with inertia than the standard economic model might predict. Richard, tell me about the classic mug study that showed us the problems that people face with inertia.

• 26:27Speaker 03

  Yeah, so this is something that I originally called the endowment effect because your endowment is something you own and the empirical result is that we value stuff we have more than we would be willing to pay to get it.

• 26:46Laurie Santos?

  So maybe have me and Alex play. If you were putting me in an endowment effect study, how would you do it?

• 26:51Speaker 03

  You and Alex are in a class, sitting next to each other, and I go around and I give half of you a Yale University coffee mug that says Bula Bula or something on the mug.

• 27:07Laurie Santos?

  Bula Bula, which of course, for those that don't know, is the Yale fight chant. There are literally those mugs in the bookstore, so yeah.

• 27:14Speaker 03

  And then we say, all right, what we're gonna do is we're gonna have a market for these mugs. Laurie, you have a mug and you're asked, for each of the following prices, are you willing to sell it or not? So $10, $9.50, so forth down. And Alex is asked, at each of these prices, are you willing to buy one? Now, a principle of economic rationality is if you wouldn't pay $6 to get it, then you should be willing to sell it for $6. Suppose we hand out $5 bills. Well, people will be willing to trade those for $6 and they won't pay $6 to get one, right?

• 27:58Speaker 03

  So mugs should be like $5 bills. But when we run those experiments, the people who get mugs demand twice as much to give them up as the people who randomly didn't get a mug are willing to pay to get it. And notice, it's not like we're asking about your favorite hat, right? This mug has been in your possession for about two minutes and you haven't grown to love it. But you act like you do.

• 28:32Laurie Santos?

  And so Alex, explain why the endowment effect is an example of us showing inertia. Because I think that it's part of a broader set of biases that you talk about in the book that I find really fascinating.

• 28:42Speaker 04

  Yeah, so basically, there's a bunch of different biases that are essentially an effect that's observed in a particular context that are kind of driven by the same sort of underlying psychology, which you can describe as inertia, that is driven by something that we discuss as loss aversion. Particularly, look, I'm already here, I have this thing or this activity that I'm doing or whatever you want to call it. This is now kind of my status quo. This is where I'm at. Lose that thing and that loss really hurts. In fact, a loss hurts about twice, maybe sometimes more, than an equivalent gain feels good. This is what we call loss aversion.

• 29:23Laurie Santos?

  And this fits with the mug results that Richard was just talking about because people are demanding twice as much to sell this mug as buyers are willing to buy. It's like losing the mug kind of hits them twice as hard financially.

• 29:34Speaker 04

  Exactly. Now this mug is mine. This is kind of now my status quo. Giving it up will hurt a lot, so I need more money to be compensated for that pain.

• 29:43Laurie Santos?

  And so that's in the context of, again, this sort of toy example where you're selling mugs. But this kind of status quo inertia bias is something that lots of companies are using against us all the time. I have my own example. Right now, I have paid to join a gym as part of this summer program. This really cool bouldering gym near my house was like, we have yoga classes. And I was like, oh, great, I'm going to join the bouldering gym. And it turns out that so far this summer, I've had a very expensive, single yoga class for the price of the entire summer enrollment. It's like a $300 yoga class, which is really embarrassing. But this is my status quo bias at work. Richard, explain why this is.

• 30:19Speaker 03

  Yeah, our friends, the married couple of Stefano Delavina and Ulrika Malamende, wrote a paper about this when they were grad students that was called Paying Not to Go to the Gym, which is what Laurie. Did this summer, you know, this is an example of what's called status quo bias. Whatever the status quo is, you tend to stick with. We all know this happens. Suppose you're watching some show, say you're streaming and an episode ends. And then the next one starts. So if you do nothing, which people are really good at, then you start watching the next one.

• 31:02Speaker 03

  And the next thing you know, you've watched four of this stupid sitcom. That really wasn't all that much fun, but you just found yourself doing it. You know, you can use this for good or for bad. And firms have figured this out. So that gym, warning Lori, they are going to automatically renew your subscription. It is true. Yeah, right. And you know what? You're only going to go once this fall because you'll be even busier. So I'm going to save you a lot of money here and suggest you quit now. But we've used exactly that trick for good.

• 31:45Speaker 03

  When the new kind of retirement plans, 401k type plans first came on the scene. One of the problems was that people just didn't sign up. Even if their employer was matching their contributions dollar for dollar, which is really, really stupid. And so we got the clever idea, hmm, why don't we just change the default? And say, hey, Lori, we have a new retirement plan. We're going to put you in unless you fill out some form and say you don't want it. And boom, that gets enrollment up to 90%. And notice that's something economists would say will have no effect.

• 32:27Speaker 03

  Because what kind of idiot would turn down a dollar for dollar match of 6% of their salary? No, no idiot would say, oh, because I have to fill out a one page form. But you know, enrollments went from 50% to 90% just by doing that. So that was using inertia for good. Automatically renewing your gym membership is for profit and we observe both.

• 32:57Speaker 03

  And there are lots of policy decisions. One that is a little up in the air. The last weeks of the Biden administration, they passed a rule saying that you have to be able to unsubscribe the same way you subscribed. So if it was with one click, it should be one click. Some gyms during COVID were requiring people to come to the gym, which was closed, in person to quit. That's really evil, right? So this rule is up in the air. I don't know whether it's going to be enforced or not,

• 33:39Speaker 03

  but I strongly believe that's a rule for good.

• 33:43Laurie Santos?

  So it seems like the happiness lesson from this problem we have with inertia is like, if you're stuck in some status quo, make sure it's a status quo that you like or build your own status quos that might be helpful. But try to notice when you're getting stuck in something just because it was the thing that you're used to.

• 33:59Speaker 03

  Yeah.

• 33:59Laurie Santos?

  Okay, so that was irrationality number three that I think has interesting implications for happiness. Now we get to irrationality number four, which is, I think, a very, very big one when it comes to our happiness. And this is this idea that we have a defective telescope. As economist Arthur Pigou put it. What does Pigou mean by a defective telescope?

• 34:19Speaker 03

  The idea is that the difference between today and tomorrow seems bigger than the difference between two days apart in a year. Irrationally so. So Laurie is going to say, well, today she's busy. She's taping this podcast. She doesn't have time to quit that gym. She's going to do it tomorrow. And tomorrow, there's going to be something else. So we all procrastinate. That may be one reason it took us four years to do this simple revision of this book. Alex had a couple of kids, so he has an excuse. So that defective telescope affects things

• 35:03Speaker 03

  like saving for retirement because retirement seems like it's a long way off. And then suddenly you wake up and you're old, like me.

• 35:14Laurie Santos?

  I mean, I'll give you an even closer to home example for listeners who might not be as old as you are, Richard, which is.

• 35:20Speaker 03

  Imagine that.

• 35:22Laurie Santos?

  Which is just what's happening in your calendar weeks or months from now. You know, today, Laurie, if you ask me, hey, would you want to write a chapter for a book that doesn't even sound that interesting? I'm like, no way. But if you ask me, does December Laurie want to put some time into writing a chapter? That sounds kind of interesting. I'm like, oh, my God, December Laurie would love that. She would love to spend her time doing that thing. And so I feel like my personal calendar is filled with these instances of past Laurie's myopia. Like somehow she thought that, you know, doing this podcast interview today, it'd be totally fine to do that with a bunch of student meetings and she doesn't need lunch that day, she'll just squeeze other things in.

• 35:59Speaker 04

  And I think that, you know, in terms of like rules, in order to kind of solve these sorts of issues, my favorite one is what if that person asked you to do that today? Would you do it? If the answer is no, don't do it a year from now. Because a year from now, unless something real bad happens, will at some point become today. And you'll be like, holy, you know.

• 36:20Laurie Santos?

  Yeah. No, I think, I think this is so powerful, right? Because I think one of the big happiness implications of this defective telescope is that we're just constantly screwing over our future selves. Interestingly, we talked recently on a podcast about a different way we screw over our future selves, that I'd be curious to think how behavioral economists think about this. Behavioral economists are constantly talking about cases of myopia, but happiness scientists often consider these cases of what's called hyperopia, right? Where you kind of wind up saving these good things for the future that you never end up enjoying. So I'm thinking of cases of like my frequent flyer miles. I'm sitting on 100,000 frequent flyer miles that I'm like, someday I'll want to enjoy these, but I never actually planned the vacation to use them. Or, you know, a really nice bottle of wine that a good friend gave me for a birthday.

• 37:06Laurie Santos?

  And I'm like, oh, I want to wait for the special day to use that. And then I never use it and years later, I'll probably open it and it's corked and I've forgotten about it. Are there hyperopic cases that behavioral economists think about?

• 37:17Speaker 03

  Yeah, so I have a student named Suzanne Shu, and she talks about the example that you have two tomatoes sitting on your kitchen counter. And one is perfect. It's like God's tomato. And one is two days past. Which one do you eat tonight? And in my family, we refer to the perfect one as Suzanne's tomato. My wife is more frugal than me, and she can't bear the thought of throwing away that almost still good tomato. Whereas I always want to go for the perfect one.

• 38:01Laurie Santos?

  And that's important because if you wait till tomorrow, Suzanne's tomato is going to be not so good, too.

• 38:07Speaker 03

  You never eat Suzanne's tomato. That's the problem. So you gotta go for Suzanne's tomato when it's there.

• 38:16Speaker 04

  Our friend George Lowenstein has, and we talk about this in the book, this idea of anticipatory utility. You know, you were talking about a nice bottle of wine or all of these travel miles or something like that. You're kind of saving it for something. You have this dream in your head that there's going to be this perfect event where you open up the bottle. You have this incredible dinner party. Everything is amazing. It's going to happen at some point in the future. And what this allows you to do is kind of just like, go on imagining that that's going to happen, which provides you some sort of happiness over time. And this sort of anticipatory utility leads to what looks like putting nice things into the future too much.

• 38:54Laurie Santos?

  And so it seems like we want to embrace the savoring. We want to embrace the anticipatory utility, but maybe just put in the calendar that like, you know, October 21st, I'm going to drink the good wine. Or maybe like in January, write in your calendar, use the frequent flyer miles this month.

• 39:09Speaker 03

  The next time Taylor's in New Haven, that's when you open that bottle.

• 39:15Laurie Santos?

  We'll see if we have some of Suzanne's tomatoes then. I don't know if we will.

• 39:18Speaker 03

  Okay.

• 39:19Laurie Santos?

  When we get back from the break, we'll dive into my final two favorite anomalies. Think why Dustin Hoffman hounded Gene Hackman for lunch money and why people buy convertibles in snowy climates. The Happiness Lab will be back in a moment.

• 39:35Laurie Santos?

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• 41:05Laurie Santos?

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• 41:47Laurie Santos?

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• 42:14Laurie Santos?

  Irrationality number five gets us into monetary territory. And it's the idea that money is actually fungible, but we don't treat it like that. Alex, what's this idea of fungibility?

• 42:25Speaker 04

  The idea of fungibility underlies the whole reason we have money in the first place, and we're not bartering anymore. It just basically means a dollar is a dollar. It doesn't matter how I got the dollar, it'll buy you the same thing. So you should spend it the same way regardless of how you got it. So let's say you got a nice bonus at work. Come home, you think about how you want to spend that $500. Or you found $500 envelope on the ground. You think about how you want to spend it. You should basically spend it the same way. It doesn't really matter how you got it. The money is worth the same to you. You should spend it exactly the same way. And this idea of fungibility underlies the very, very basic principles of economics.

• 43:06Laurie Santos?

  Except the problem is that we tend not to do that. In fact, we violate this fungibility principle in pretty much every behavior we engage in. Richard, in the book, you use an example of the way we violate it when we're purchasing gas under certain situations. I hadn't heard about this. Well, share the gas example.

• 43:22Speaker 03

  Yeah, so one of the big themes in the book in terms of methodology, Alex referred to this earlier, is a lot of stuff that was demonstrated with thought experiments or lab experiments has now been replicated with actual data. And this is a good example of that. Our friends Jesse Shapiro and Justine Hastings looked at what happened when the price of gasoline fell by 50% during the financial crisis. Right, so this was really bad times. Lots of unemployment. People are cutting back on everything, but gas has gotten cheaper.

• 44:03Speaker 03

  So they were spending $80 a week on gas, and now it's 40. So there's forty dollars extra in their budget. And what do they do with that windfall? Well, they spend some of it, very stupidly, on better grade gas.

• 44:20Laurie Santos?

  So it'd be like I would buy the eighty-seven percent, you know, the cheapo gas, the cheapest one on the board. But then when the price of gas falls, instead of saying like, oh, I can save that money and go get a extra coffee or something like that, I say, today I'm gonna get the ninety-two percent, I'm gonna get the premium.

• 44:36Speaker 03

  Right, exactly. And that will do exactly no good. The car won't appreciate it. Go buy a better bottle of olive oil, you know? So that's a good example of what I call mental accounting.

• 44:48Laurie Santos?

  Yeah, and so what's mental accounting? Because I think it's so intuitive once you explain it.

• 44:53Speaker 03

  Mental accounting is sort of the way we keep track of stuff. There's a great video you can find online, Dustin Hoffman and Gene Hackman. And they're having this discussion, it's about Back When They Were Starving Actors. And Hackman tells this story about going to, he calls him Dusty, going to Dusty's apartment in Pasadena. And Hoffman says he needs some money. Can he loan him some money? And then Hackman goes into the kitchen and he says, hey, you don't need any money. There's these jars in your kitchen and they've got money in them. Why do you need money?

• 45:36Speaker 03

  And Hoffman says, yeah, but there's no money in the food jar.

• 45:41Speaker 03

  Right? So that is mental accounting. Now, I should say, budgeting per se is not stupid. You know, and making sure that you have enough money to pay the rent each month, that's smart. And in fact, creating the equivalent of those jars can be helpful. But spending the gas windfall on gas, that's stupid.

• 46:06Laurie Santos?

  But we can harness these biases also for good. You mentioned before the example of the tool you were using to get people to save more. And this is another spot where you were able to use people's mental accounts to do better a little bit too. Using people's raises, for example, to get them to save a little bit more. Explain what you did in that program.

• 46:24Speaker 03

  Yeah, so I mentioned before that the first problem we had to solve was getting people to sign up. Then the second problem was getting them to put more money in. And the trick there was another one of my former students, Sholom Ben Arzey, and I created a program we called Save More Tomorrow. And this goes back to what we were talking about before, because tomorrow-

• 46:47Laurie Santos?

  Tomorrow's far away. I'm happy to save. Lori's gonna be a great saver tomorrow.

• 46:51Speaker 03

  Right. So we would go to people and say, how about if you increase your saving contribution when you get your next raise? All right? So that's combining two of the things. So first of all, it's tomorrow, right? You know, it's in January when I get the raise, so sure. And I'm gonna have more money. So I'll take some of that new money and I'll save that. And that program, in the first company we tried it, we tripled saving rates.

• 47:23Laurie Santos?

  Wow.

• 47:23Speaker 03

  That has created billions and billions of dollars in savings around the world.

• 47:30Laurie Santos?

  And this kind of fits with the ideas we've been talking about for so many of these other anomalies, right? Which is that mental accounting in some contexts looks sort of silly when you're just kind of spending your gas budget on higher-priced gas just because you can. But you can also use mental accounting to do things that make you happier, right? You can think of the account of, oh, I'm gonna get this future raise. That's not allocated for yet, so I can put that into savings. I feel like I do this all the time when the so-called pain of paying is kind of high. Like, I want to do something, but it feels sort of luxurious. If I take some random windfall I get, say I get an extra honorarium from a talk I wasn't expecting, I put that towards the stuff that normally I'd feel a little bit embarrassed about getting, and then that makes me feel not so bad. That's like a happiness hack that I use for mental accounting all the time.

• 48:15Speaker 03

  I'll tell you a funny story about my daughter. Uh, my daughter Maggie, who has been raised by a behavioral economist, right? She lives in Rhode Island and one of her neighbors grew into be a major league baseball pitcher, playing for the Mets. And I noticed the Mets were gonna have a game in which this kid was gonna be pitching. And so I called Maggie and said, hey, would you wanna go to that game? I'll treat you to two tickets. And she said, okay, great. So this game was like in another day and a half. So we had to act fast. So I look online, I send her a link and say, look, Mag, you can get what look like pretty nice tickets for $300 each. Buy the ones you want.

• 49:00Speaker 03

  I'll send you $1,000 and go have fun. And she texts me back and says, LOL, this is just like in your book. If you send me $1,000, I'm not gonna use it on going to a baseball game.

• 49:18Laurie Santos?

  All right, so now we get to my final irrationality that I think matters for happiness, which is the problem that we don't always know what we're going to like in the future. Alex, in the book, you use this so-called the hungry shopper example. What's that?

• 49:31Speaker 04

  Well, I think everybody is kind of probably familiar with this one. You're, you shouldn't shop on an empty stomach because everything feels like it's gonna be really good. And you fill your grocery cart with all of these delicious looking things. You go home, you eat dinner, and then you're like, why did I buy 17 different types of potato chips? And it's the idea that you can't really accurately imagine what you're gonna be like and what you're gonna want in the future. So if I'm hungry, you kind of think, I'm always gonna be hungry. I'm always gonna want these things. You're gonna fill your grocery cart with those things and then all of a sudden you eat and your house is filled with stuff you don't want, especially, you know, stuff you really don't want, like chips and other sorts of unhealthy things. It's this idea that we started with, perspective taking.

• 50:16Speaker 04

  Only it's not perspective taking with respect to other people. It's perspective taking with respect to what you're gonna be like in the future. So people struggle with both.

• 50:25Laurie Santos?

  In some ways, it makes sense that we struggle with both when it comes to like hunger, right? It's hard to kind of imagine a different state that you're in. But we see these kinds of effects more broadly than like what's happening in the grocery store. Alex, tell me the example of the effect of a person's weather in the present day on their car purchases.

• 50:42Speaker 04

  Yeah, so this is by our colleague Devon Pope and his co-authors. They basically looked at data. This is again going into this kind of revolution in behavioral economics. We started out with these experiments with college students, and now most of the results that we're seeing are with data, millions of car purchases. They take this database of what sort of cars people are buying and when, and they find that when it's sunny, people are a lot more likely to buy a convertible. And the funny thing is, is that, you know, if you're in Minnesota, you're on that one sunny day, June 7.

• 51:14Laurie Santos?

  Yeah, you all lived in Chicago. We know the one sunny day in Chicago.

• 51:19Speaker 04

  And, you know, people are buying these convertibles and they're, they're going out, they're happily driving off the lot. And then, you know, the rest of the year starts and they're like, oh crap. And the idea is that when it's sunny, you kind of imagine yourself wind flowing through your hair, driving down the highway. And it's really hard for you to imagine, wait, it's going to snow tomorrow, probably. And I'm going to have to close it up. And it's just going to be kind of a windy, cold car. And then similarly, you know, when it's a cold day, people are really not likely to buy convertibles because they can't imagine the sunny day where they're actually going to enjoy it.

• 51:55Speaker 03

  Danny Kahneman, my mentor, coined the phrase the focusing illusion. Like, nothing is as important as the thing you're thinking about right now.

• 52:06Laurie Santos?

  And so this is a big problem, right? Because we need our predictions to make decisions about the kinds of things that we're going to engage with in the future that are going to make us happy. And it seems like this focusing illusion really messes us up, right? Whatever our attention is focused on, we start thinking about that and we ignore all the other stuff. So how can we do better? Alex, any advice for how we can kind of notice what we're going to like in the future a little bit better and maybe open up our narrow attention?

• 52:33Speaker 04

  Yeah, so I have some work on this myself. I mean, the kind of easy advice is just to think about it for longer. People become a lot better calibrated just by giving them what we call a waiting period. And these waiting periods are actually not something we invented. As you probably know, waiting periods are all over the place. Many states have them as part of kind of gun laws. The idea is that if I'm in a hot state, I can't imagine what it's going to feel like when I'm in a cold state. If I'm in a hot state, I'm angry at somebody. I go out there and buy a gun and do something really stupid that I'm going to regret. So states impose a waiting period to kind of simulate like, ah, let me think about it for a little longer. And then maybe I won't need it. It's there for marriages too, right?

• 53:16Speaker 04

  Somebody meets somebody at a bar and is like, you're the love of my life. Let's go. Uh, and it's like, wait a second, wait to think about it for a little bit. And this same sort of very simple intervention, we found this in careful experimental tests, allows you to kind of simulate what you're going to feel like in the future a lot more accurately.

• 53:33Laurie Santos?

  And so it seems like there are two pieces of advice there when you're making a big life decision, right? One is give your attention a moment to catch up with all the stuff it's not currently paying attention to. And the other piece of advice is just like, when in doubt, give it a little time. Cause over time, more stuff will reveal. And whatever state you're in now, if that's hungry, sitting out in the sunshine, thinking you want a convertible, you might revert to a different state, which might be more of a baseline for how you're going to feel in the future.

• 53:59Speaker 03

  You know, and there's one other extension of that. When I'm talking to students about career choices, the mistake I find people make all the time is they decide a career based on what they like to study in school. And I always say, no, think about what you can imagine doing every day for the rest of your life. And that may not be the same thing. Go, you know, shadow somebody for two weeks. See if that seems like that's exciting. I think there are lots of careers that sound good until you think about doing it every day.

• 54:41Laurie Santos?

  Well, Richard, I'm so glad that what you decided to do every day for the rest of your life was to be a behavioral economist, because it's been so fun to learn about these anomalies from you through the years. It was fun to read this book back in the late 90s, and it was even more fun to read it in 2025, when we have all of Alex's new insights there. So everyone should go out and check out The Winner's Curse. There's so many cool anomalies that we'd get a chance to go into. But, Richard and Alex, thanks so much for being on the show.

• 55:04Speaker 03

  Thank you. Thanks, Laurie. Great to see you.

• 55:07Laurie Santos?

  So it seems humans are not Vulcans. We don't always act rationally. But as these six anomalies show, understanding the irrational quirks of our species can help us live richer, happier lives in ways that I think pure logic may not have predicted. The new and improved version of The Winner's Curse is out in October, and it's available for preorder now. Next time on the Happiness Lab, we'll hear about another of my favorite books of 2025, one that's also from a scholar trained in economics and who, like Richard Thaler, also wants to break the rules. But her rule breaking involves teaching us why we should all be working a bit less. All that next time on the Happiness Lab with me, Dr. Laurie Santos.

• 55:56Laurie Santos?

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• 57:23Laurie Santos?

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• 58:07Laurie Santos?

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