Maximizing Luck: Masters in Business with Judd Kessler

26:09Or 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. 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 serve.

26:46What do you think of that entire college admission process? What's driving that design? Yeah. So that is what I call a choose-me market. It's a two-sided market where, 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. 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's applicants who are trying to get into the colleges.

27:25And then there are colleges that are deciding, who am I going to admit? We're trying to make a class of smart, motivated, well-rounded or very pointy people who are going to make the class a rich, fun environment. And the dynamics are about, 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 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 how do the universities or colleges feel about the applicants?

28:09Well, 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, the fraction of folks you admit who come, was in the U.S. 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, 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.

28:51So the way that it works with early decision is when you apply, say, to Penn or 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'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 points if you apply early.

29:36It'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 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 730 reservation at the hot restaurant, or do you go for something there where there's less competition, like a 430?

30:16And the early 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 not going to hit that admission cutoff, then you're essentially wasting that application 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. Some place where you're kind of more on the market. That's a very narrow little slice. You have to figure out exactly what your odds are.

30:53Yeah, which you can do with research, with talking to other people, seeing how does your SAT score compare to the ones that are published on the website. 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. 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.

31:30Give us a little overview of that core framing device? 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.

32:10So if there's someone who really wants something, are we recognizing that and saying, oh, actually, 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.

32:50It's very straightforward to work with prices. 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. Why do these artists not go for, you know, revenue maximizing? What's the downside of that? Yeah. So 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 class is going to be the best for them?

33:33Here's the price. Here's the demand. Where that intersects is your profit maximizer, but they don't do that. 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 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.

34:15Lots of buzz, lots of PR. Yeah. Just by the virtue that it looks like more people want a limited scarce resource. Correct. And that we see that, you know, throughout with lots of fad products or with, you know, scarcity driving interest in 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.

34:53And, 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 kind of closer to the stage seats, is that she's a billionaire. Her Swifties, I'm sure she has billionaire fans because she's such a great artist, but most of her fans, a few thousand dollars is going to be a big chunk of their income for that month or more. And so it might not be a great look if she's charging what would be market clearing prices. So for the Aeros tour, she charges$49 for the cheapest seats. The average ticket price was just above$200.

35:32And so at those prices, there's going to be massive excess demand. But she might think that that's more fair, that that might be not just because it will make her look bad, but also she might want her fans to be able to come and only have to pay$49 or$99 or$199. It might also be that those folks really, really want to go. So you think about efficiency. 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 the fans who can pay more, they're going to get pushed out whenever the market is relying exclusively on prices.

36:17And you end up with a series of rentiers 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? 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.

37:09Now, 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.

37:50but because there's no way for the tickets to be redistributed, you end up with empty seats, which is clearly inefficient. Well, you could redistribute them at a 10 % markup or something like that. And only once, you can't just go 10, 10, 10, 10, 10. So the question is, 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. 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.

38:32And 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. The FTC sued Ticketmaster a few months ago about this issue of basically letting there be bots on the platform that extract too much. Including their own bots that then resell at higher prices. Well, this is part of the problem, which is the secondary market platforms, the ones that are facilitating the trades between the brokers or regular people who buy tickets, but then can't go and have to resell them, those platforms are benefiting from the sales.

39:15They get hefty fees. I bought tickets recently, and my calculation was that Ticketmaster, where I was reselling them, I was buying them, and then I had friends who canceled, I had to resell them, was getting 30 % of the transaction price. You would think the artist would be the one that should garner those gains. I've heard, I love the expression, crypto is a solution in search of a problem. One would imagine that if the tickets, and I'm not a 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.

39:57So you could do that. But of course, if the artists wanted more, they could just raise the prices, right? They don't need the resale market to extract that surplus, right? What I described in the book, you don't need to go all the way to the blockchain for it. You do need names on tickets. Oh, really? Yeah. So it's ticket and ID, not just a scan? Yeah. And it seems complicated because then it's like, oh, it's like going to the airport. I don't want to go to a concert. It'd be like going to an airport. Although last concert I went to, I had to go through security anyway. You go through a metal detector at Madison Square Garden for a Knicks game.

40:31Exactly. 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 that's something you've subscribed to, they have similar style products that get used at venues. Major League Baseball has had a version of this that they rolled out at some point. And so validating that you are named on the ticket is easy to do 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 what used to happen, which is standing outside the venue and selling them or selling them on some third-party platform that's not tracking how much more the ticket is being paid for.

41:26If 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 serve. Because even if you have names on tickets, but you're doing a first come, first serve race, the folks who program the fastest bots are still going to be able to extract surplus. 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?

42:03At least the first 10 ,000 tickets are going to go to local people who are her fan base. So for the Ares tour that we started talking about, they did something similar where they did a verified fan process. We had to validate who you were and then folks came to the website if they were lucky enough after being verified to win a lottery ticket. So still a lottery. Still a lottery, but then – But a fairer lottery. Fairer lottery among people that they thought were real folks rather than brokers. and then you had to wait in a virtual queue and wait for some people hours. So what ended up happening was they claimed there were a lot of bot attacks.

42:45People 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 serve line built into the system that was supposed to be a lottery 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 going to 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.

43:30And 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. You can say, I prefer to be in the center and I'm willing to pay more, whatever. But that would make the participation in the market way easier. You could run 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 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 Swifty. Or a broker that wants to flip the ticket. Well, but if the names are on it, then I'm stuck.

44:07If I have to return, if I can't go, I have to return it to Swift and she can give it to somebody on the wait list. But on the randomized wait list, right? You could design this system to basically cut out the brokers altogether. other. 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 seat geek, stub hub, middlemen that, you know, they charge what the market will bear.

44:48They 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. 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.

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47:54I'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 percent of the population.

48:40They were 22 percent of the people that were drafted and 22 percent of the casualties. 2x the representative population. Why did that go down that way? 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, had a bunch of loopholes in them in the system. So you could get a deferment for various reasons. You could have some of your 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 Vietnam.

49:31So if you were politically connected, you had a better shot. Politically connected, wealthier, whiter. Those were the things that let folks. So you could have a medical disability. You could be in college or grad school. You could go to the National Guard. So you would be kind of stay stateside. And not everybody gets admitted to the National Guard. Correct. So having 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 a bunch of folks did not either have the means or have the connections or kind of know that this was a way out.

50:10Did the lottery, and 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? 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.

50:48So folks who are old enough to remember this, my father's generation, this was a big deal. and you wanted to have your birth date picked later so you were less likely to be called. Now, again, still loopholes, but folks looking back at history say this helped facilitate the anti-war movement that eventually got the U.S. out of Southeast Asia because when you have well-educated, wealthier, folks who have a little bit more socioeconomic status, a little more power in society, when their sons started getting called up and 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.

51:36Really, 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. Yeah. I mean, so the reason for that is that there is dialysis for kidney failure. Which can keep you alive for? 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.

52:21It'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 or that's it.

53:00So this is why the kidney list 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 estimates suggest that it's basically 1 % of the federal budget is spent on end-stage renal disease, 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. 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.

53:4820 % of the donated kidneys are just thrown away. This is the nature of these first-come, first-served waiting lists. So 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?

54:26some of the information about whether it's a good match for you, we only can learn after the organ has been removed from the donor who's passed away. And so now we have testing that's getting done on the organ and there's only so much time. So we have this testing getting done and folks are learning, all right, 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, it gets escorted.

55:10I 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, 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? 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.

56:01When 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 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?

56:41You 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 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.

57:20And Israel is a small country. That's a lot. Yeah, it's a lot. signed up in the run-up, you know, kind of before 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. Otherwise, you'd have to wait the three years to avoid, I mean, the three years, by the way, is to avoid a loophole where I get sick, I need a kidney, and I go sign a donor card, and then I have priority. That would totally undermine. Defeat the whole purpose. Which we have research showing that, you know, that it would, in fact, undermine it. So, yeah.

57:49So then they implemented it and it seems to work. Have any places in the U.S. adopted this? No. So it would have to be this is not a state by state thing that Oregon allocation systems are national. And so you would need the country as a whole to have a change in the allocation rules. So I have been advocating for that since we did that research over a decade ago. But we have not yet had movement on that, although I remain perennially optimistic because it's been many years. and the problem isn't getting better. So basically anything we can do to make this scarce resource less scarce is valuable.

58:27I'm recalling Richard Thaler's book, Nudge. I think he co-wrote that with Cass Sunstein. Yep. And there was questions about opt out and opt in. In other words, if everybody by default is an organ donor, but you have to opt out, the reasons people didn't want to do that, religious reasons and other, but is that a potential solution? So that was like a great hope of behavioral economics was that these kinds of nudges in this space. Choice architecture. Yeah. So there are many places where it works well. This is a case where it doesn't. And the reason it doesn't is that if you are – say it's an opt-out system.

59:07So I should pause and say we can't do that in the U.S. without a major law change because organs fall under the GIFT Act. So you have to actually make an affirmative statement that you want to. Got it. You could make it salvage law. So if you're not using it, we can take it. But people might not want to do that. But in the countries that use these opt-out systems, the next of kin are still consulted. So what 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.

59:47Because it always goes to... That affirmative decision. Yeah. And when I've opted in, I mean, I might be special because I talk about it a lot. But if you've opted in, then the next of kin see that and they know that it was your wish. You said at some point, yes, I want to register. They know 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 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.

1:00:23So 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. 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 sort of things did you go, huh, that doesn't make any sense? So at the end of the book, I talk about how you are a market designer. We've talked about you as a market participant. We've talked about others as market designers. But a hidden market is one where there's a scarce resource that needs to get allocated without prices being what determines who gets what.

1:01:03And 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 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. So for many years, 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.

1:01:41So 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 or 15 ,000 people, but it's now a million and a half, they had to cut back. even though for them it was drinking water and for California it was, you know, 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.

1:02:22The race that determined who got what was run, you know, centuries ago. Yeah, centuries ago. And so, you know, 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 in 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 a.m. Every week, Thursday at 11 a.m. is being allocated to, you know, this this project, even if it's not the most efficient or equitable use of my time.

1:02:58And 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. 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?

1:03:38But 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. Costco very famously has the$1.50 hot dog for 36 years. How do you think about those different price mechanisms really as a form of branding or marketing? Yeah. I mean, I love the Costco hot dog, so I can see the branding and marketing benefits there. I have thought a bunch about this because it has the potential to create hidden markets or exacerbate hidden markets that are already there. So I recently wrote a piece about affordable housing lotteries.

1:04:22So 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 30 % of the units that are built are going to be designated affordable, meaning folks are only expected to spend 30 % of their income on housing. 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 6 million applicants for about 10 ,000 units. So each lottery entry has a 1 in 600 chance of winning. And so as a result, folks are kind of constantly applying to these lotteries.

1:05:11because 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 not in my desired neighborhood. It was still a good lottery to enter because it's better to get affordable housing than not. Maybe you win in the neighborhood that I want, 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 the same thing with freezing rent, where the folks who are in a rent-controlled or rent-stabilized apartment that are going to be able to kind of keep paying that low rate, that's great for them, but that doesn't solve the bigger problem, right?

1:05:54It'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 I can see why folks are eager to do that, but it's hard to think about how to solve that problem without broader changes. Right. It doesn't move the needle on the broader underlying problem. It just for that handful, it kind of raises the issue 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.

1:06:44But this is definitely, you know, a supply and demand problem. 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 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 now all of a sudden it's cheaper to go to have the full night out at Citi Field or at Yankee Stadium. And so is there also going to be a price control on the ticket or not?

1:07:20And then are we actually getting the gains that we want or are we getting nice sound bites? 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 date, 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.

1:08:07So as I was reading this, I thought about that. 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 5 o 'clock waiting to sit at the bar. I said, we're on the waiting list. He's like, well, we have like 100 seats and the waiting list is about 400 long. I'm like, oh, forget it. And I said something to the maitre d'.

1:08:48And he said, why don't you come down later and see what the line looks like. It usually moves pretty. And it was beautiful out. You could sit at the bar. It was outdoors. So it was like we had a 7 o 'clock reservation, the gold. The gold. Well done. 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 that behavioral hack? This is learning about the market and the market rules and getting inside information about when is there less demand?

1:09:29What 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', if you're polite to him or her, they might want you to come and give you the inside tips. But you have to either do your own research or have folks advise you that you trust. And yeah, you can often succeed in markets where other people fail. 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.

1:10:14Yeah. So the main one, I already mentioned him, so you can see how big an influence is Alvin Roth. So he took me in as an undergrad mentee. I had this story in the book and then it got cut for space. I put it in the acknowledgements because it was such a formative experience for me where I was taking his Ph.D. 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 put me at this table talking to you now, I had procrastinated asking him to be my advisor because I was a little intimidated.

1:10:51I felt a little out of place. And I came up to him on the day the form was due. And I said, I want to write a senior thesis. I would really like for you to advise it. The form is due today. And 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. Yeah, I can imagine. What are some of your favorite books? What are you reading right now?

1:11:26So 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. That's a great title, Who Gets What and Why. 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.

1:12:05My 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 Lowe, and I'm really enjoying that book. I mean, I've heard about everything that was in it along the way, but she writes about the time that 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, you know, household chores are split. It has not changed. So women end up. Really? Yeah. The data in that book is quite shocking.

1:12:50I mean, I had been hearing about it as she was doing the research. But women, even in households where they earn more than their male partners, will still be doing more household labor, all of that stuff at home. So 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 on average couples display. 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 cooks. And it's, I'm like, honey, we're married 30 years, you know me, is this how I roll?

1:13:36You know, you gotta... Yeah, sometimes this is just my technique. But one of the things that I talk about in the book... Must you pour from so high? It's olive oil. Splatters everywhere. It doesn't need that high... No, you gotta get that... You're not aerating it, it's... It's part of the fun. But no, one of the strategies is having one person be in charge of the whole task from conception to execution. So that means if you are 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.

1:14:12The 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 it might be more efficient and equitable if one person does that whole task and somebody else does a whole other task. You cook and I'll do the laundry and clean the floors. And that's the split. That might be fair. 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 feed and walk the dogs early. We've never discussed it. It just kind of worked out that way.

1:14:48Sometimes that's how it happens. But for those who are not finding it that easy, talking it out and kind of splitting the tasks is an effective strategy. Tell us what's keeping you entertained these days. What are you watching or listening to, either podcasts or Amazon, Prime, Netflix, whatever? So I am a major fan of The Simpsons. Get out of here. Yeah, I have always loved it. What are we up to, season 40-something? It's crazy. Almost. 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.

1:15:24Right. When I started watching. It's one of those things that works for just both kids and adults at the same time. 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. Our final two questions. What sort of advice would you give to a recent college grad interested in a career in either market design or economics or academia?

1:15:57Yeah. 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 wins as well as other things. Demographically, there's slightly smaller admission classes. And I just read 17 % drop in international students. That's a big number. 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.

1:16:49So 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 in getting, and they have not yet done it, they may have done it in undergrad, getting exposure to the research experience. There are pre-doctoral programs for folks who work with 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?

1:17:26I 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. 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?

1:18:05Yeah, 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 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.

1:18:49So I'm excited to be working on it for the next 20 years. But if I 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. I wish I knew that. And I want others to kind of look at these markets and say, yeah, this could be better. Fascinating. Professor, really enjoyed the conversation. We have been speaking with Judd Kessler, professor of behavioral economics and market design 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.

1:19:29I 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. Sean 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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