#609 - Uri Gneezy - How To Understand Psychological Incentives

25:42When you can, you're nice to me. AMC last month AMC came up with a similar program. They decided that AMC theaters, they decided that they're going to charge different prices for different seats, right? If you want to sit in the middle of the theater, you'll pay extra, you'll pay, they'll call it premium seats and you'll pay extra. Again, lots of pushbacks, it's not enough that we pay so much for the tickets, that we pay so much for the popcorn. Now you also want us to pay much more for the middle seats, FU. The way they should have said it is, And then they tried to say, well, inflation, whatever.

26:14They should have started with inflation. Look, it cost us more. We have to pay more for labor. Everything costs us more. We have to raise prices. We are really sorry for this. That's not what we want. We want everyone to be able to go. And because of that, we're going to give discount for the first row and for the site. So everyone can still come over and use it. So that's exactly the same incentives, but very different story. Think about coming back from the pandemic. A friend of mine told me a story a couple of days ago, So they worked remotely and then they decided to go back to three days a week in the office and their employees were really upset with them.

26:50They looked at it as punishment. And what you said is that the right thing to do after listening to this two examples, if you said the right thing to do was to say, look, sorry, or not sorry, the pandemic is over. We are back to five days a week. However, because you were so good and so responsible, we're going to let you work from home for two days. Right? So exactly the same story, but it's not we are punishing you by bringing you to the office for three days, but we're rewarding you by giving you two days to work from home. Right? So this, there is a story out there, our brain completes the story, and the incentives can really change the way we look at the story.

27:31This feels like anchoring bias is playing a massive role here. angering by as an expectations are playing doing a lot of the heavy lifting. Encoring framing all of the good stuff that we know from the behavioral economics and behavioral science in general works over here. The twist is that now it's done by incentives. It's not just a story, it's also it's done by the incentive. You give it as an incentive to people. That's important to understand that incentive tell a story. And if you control it, you're going to do better. If that's the case, how is it that Palaton saw an increase in sales when they put the price up?

28:12So Palaton is a great example. So the CEO wrote that when they started they charged a $1 ,000 for the bike. And I wouldn't want to buy it because they decided that it's probably not too good. They concluded it is probably not a great bike if it costs so little. Again, tells you something about the people that think that a $1 ,000 per bike is little, but that's what What he said, double the price, $2 ,000 a bit more than that if you're a member correctly. Everyone said, wow, that must be a great bike and moved in. Imagine back to the wine example, you go to usually you buy a $20 wine. Now you're celebrating something, you're celebrating birthday.

28:52Tonight you're going to the store and say, tonight I'm going to, today I'm going to buy a $50 bottle of wine. Why? Because we have this price equals quality in our brain. which is true in many cases. If you want to buy a laptop with more memory, it's going to cost you more. You want to buy a Tesla with longer range, you're going to pay more. But in some cases, this is just in your brain and you need to know where to put this on. I'll never forget one of the first first ever times that I sat down at AS level business when I was 16 or 17 and they were explaining about the fact that Nike's shoe range and you have the lowest one which is 30 pounds and then 50 pounds and then 70 pounds and all the way up to 250 pounds and this has got all of the fanciest pieces of kit.

29:41But if you look at the difference in terms of the tech that goes into 250 and goes into 150 which might be the next closest, you're not looking at very much. It's apart from signaling I've got the most expensive pair of shoes that always going to look different. You're always going to be able to tell that they look different, especially at the bottom end and at the top end. Maybe you'll be able to tell. I won't. So you have your people that you really care about them being able to tell. So there is a group of people that look at the shoe and say, look, this is my wife's 50 pound per. I wear a $50 sneaker.

30:13But my wife sometimes tells me, look at these white tennis shoes. Those are $250. Sometimes a $1000. So absolutely. Yeah, and the reason for the right people precisely. So that's the first part but the second part and I remember thinking well look if we just take a utilitarian amount of shoe per pound spent equation and try and and try and equate that back Why why does anybody including myself? Why am I seduced by the shoes at the top and there is this sort of signaling thing that goes on But the other reason is that if you look at the area under the curve under the price curve that are people out there who either simply want the absolute best because that's what they want, or have 250 or 300 or 500 or a thousand bucks to spend on a pair of shoes, and if there is one that is within that bracket, that's the pair of shoes that they're going to get.

31:07Now, if the best pair of shoes happens to be $150, they're going to buy that pair. So why not just continue ratcheting up the scene features. These shoes are Bluetooth enabled. these shoes will correct your gluten intolerance, these shoes will do whatever. Will write your papers. Precisely correct, well that would be great for you. Yeah, you just might as well continue to ranch it up. Capture as much area under the curve of that. So think about wine. You go to a wine store, you can buy wine from five dollar bottle up to $50 ,000. Right, and you know, I drank some of the more expensive wines because someone else was buying it.

31:46I couldn't tell the difference. I love wine, I drink a lot, give me a good $20 bottle of wine, I'm extremely happy with that. But what you said about having very expensive ones, in many restaurants you have, you go to a restaurant, not a very fancy restaurant and you look at the wine menu, there is a $5 ,000 bottle of wine over there. And then you ask the waiter, did anyone ever order it? They probably don't even have the wine. But that gives you that send you a signal, look, This is a serious restaurant because they have this very expensive one. Probably the same goes with the sneakers, right?

32:19So if this company can actually manufacture a thousand dollar pair of shoes, they must be doing something really good. They must be really high quality, even if no one buys them. That sends a signal that they're really good. And some people will actually buy them for the reasons that you mentioned. Also, by pushing the top end price further up, what you're doing is relatively making the mid -range product seem cheaper, right? We're looking at anchoring, anchoring again at the top. Okay. So you've got long -term goals and short -term results as another mixed signal that often happens. What's going on there?

32:57So there is this saying that we all know by a politician. We all know what's the right thing to do. We just don't know how to get elected with it. Right? So think about politicians. Think about, I live in California, think about my governor that understands that building a train from San Diego to San Francisco, a fast train is really important. So if I want to go from San Diego to even to a lay, it's like a three hour trip. It's just impossible. It's not a viable option. And say that our governor will decide, yes, I'm going to invest in this, it's going to cost $50 billion, but we're going to put the money in it and we're going to do it.

33:35You'll have to invest a lot now and the benefit will be 20 years into future. It will be long gone. It will probably not get reelected because it diverts at funds from roads today. It can fix the bridge next to my house. I'll say, wow, it's a good governor. If you invest in something that I don't see, I will not understand it, right? So, why would they invest in the long run if the short run is so, so much more rewarding in terms of getting reelected? Think about a CEO that But the board tells them, look, we care about the long ground. We want to be successful in the long ground. This company, please, you know, but then judge the CEO based on the quarterly earnings, quarterly performance.

34:17What is the CEO going to do? Imagine that the computer system, whatever the network really needs upgrading. So the CEO can decide to invest a lot in it in the coming two quarters and then it's going to get huge benefits in the future. but the next two quarters are going to look really bad, really poorly in terms of profits. And that CEO will probably be fired or will not get the bonus or whatever, right? So we tell the people that work for us, like the governor or the CEO that look, we really want you to think about the long run, but then we give them incentives to do the short run and that's a big problem.

34:53Now, there's not always a good solution. So the solution for the governor would be dictatorship, right? but I don't want to live in a dictatorship, right? So I kind of like the democratic system in which they need to report back to us. So you don't always have a solution for that, but we should try it list. For a CEO, if I had a company and they needed to elect a CEO, I would tell that person, look, I really care about the long run, I'm going to let you do this for two years and just run with it. I'm going to sit and watch you, hopefully you'll do well. I'll try to find a person that they can really trust and just let them run with it.

35:34I would not look at the short run performance. I wonder whether tenured professors have the same sort of sense. Now, one of the problems that you have, obviously, if you lock somebody in and you guarantee them an amount of time that they're going to stay employed or supported by you, that means that they can drag their feet. that then creates another challenge that you have, which is completely disagree. Tenor is the best thing that God ever created. You sound like you might have some of those incentives here. Maybe, maybe, maybe. So it's, look, first of all, we are tortured for many years until we get tenure, right?

36:14So that's that part is there. And you try to really, when we decide whether to give someone a tenure, we really try to figure out, did we get this person addicted to doing research? to doing his or her job. Right? If we didn't get them addicted, then the second will tenure them. They can just go, I need to teach three weekends a year. I can be in the Caribbean for the rest of the time. No one can do anything. Unless I'll do, you know, something horrible. I'll say, you know, racist things or something like that. I will keep my job. Yet I'm working very hard, right? Because I really enjoy it. Right?

36:51So that's part of what I said at the beginning that I'm doing it because I'm getting paid, but I could have worked much less and still get the same amount of money. I enjoy it, right? I want to convince people to buy my book. I'm here trying to do that, right? So we are intrinsically motivated. So that's the, but that's not always working, right? Sometimes you're tenure people and they just quit. See lots of them, we call them, that would in the, in our faculty and you see this and it's very hard to do. Now, I think that the main reason for tenure in academic faculty was the freedom of speech.

37:25Because now I can really say whatever I think, again, within reason, I cannot say racist things, I cannot say some other stuff, but I can say radical opinions that maybe my university doesn't like it, but and many other people will not like it, but I can still express it. And that seems to be really important. And you can pursue innovation, you can focus on the long term, etc., etc. Yeah, I don't But I don't disagree. It's very interesting. I didn't really know what tenure was until I started the show. I haven't involved myself in the inner workings of how employment of professors at universities actually goes on all that much.

38:02So given what we're trying to do there is incentivize good behavior, why is it that finds a so ineffective at incentivizing against unwanted behavior? just to finish the previous one exactly what you said the longer I can invest in the book I talk about a female genital mutilation project that we're trying to do we're working on it for six years it's going to take many years until it's ready I can do it because I don't have to worry about the short run let's talk more about that I want to talk about this female genital mutilation thing how are you how are you trying to change the incentives of these places where it's a common practice when you go to Africa there are many places is so tens of millions, if not more than that, of young women that go through this female genital mutilation, which is a horrible, horrible procedure.

38:52We focus on domestic tripe, because over there, as far as we know, the data is not clear, but the vast majority of girls around the age of 10 to 12 go through this procedure. Now, we might say that, oh, again, these Americans come and try to change the behavior of the culture of our indigenous people, All the good stuff that was done way too often in the past, this case is not the same because people understand what they're talking about say that it's worse than rape. What happens over there, right? So it's not something that if it was raping 10 -year -old girls, no one would say, well, it's part of the culture we should allow it, right?

39:29FGM is worse than that by many cases. So the question is why does it happen? So we look to it and try to understand why does it happen. It turns out that to a great extent it happens for economic reasons. Because the girl after she goes through this FGM, her value in the marriage market is much higher. And that's, you know, it's a very patriarchal society. Basically, the value of a woman is measured in the number of cows. How many cows you're going to get for? Is it 10 cows or 15 cows or whatever? And the value of the girl for her family is going to be higher if she's going through this procedure.

40:06And she'll be able to find a better husband. So that's why it happens. Why? Because she can be part of the group of women over there. If she's not caught and everyone, all the other girls are, then women later on, they still treat her like a baby. They should be outcast, to a great extent. Have you considered the motives, the culturally adaptive reasons why this would have first come about? I'm going to throw my bro science evolutionary psychologist hat on here and guess that maybe one of the reasons why, you know, speaking as a westerner who quite enjoys it when the girls that you have sex with most of my friends want their partner to enjoy it, I'm going to guess that this is because if the incentive for individual women to have sex gets dropped through the floor, chastity is something that you can expect much more highly.

41:02Is that what it seems to be? Everything you said, it has a few layers, but first of all, according to people who understand, I'm not an anthropologist, I'm not an historian, but apparently the man used to go for a year to fight or some kind of come back, find their wife pregnant. They wanted to prevent this. Now, interestingly, what you said about sex, you ask the young man that needs to decide what they're going to marry. Do you want your wife to enjoy sex? They all say, yes, we want it. Exactly like you said, we want her to enjoy sex as much as we do. But then what are you going to marry? well I'm going to marry a woman that went through this procedure because then she'll be a better wife in a sense, their value as a wife, right?

41:40So it's really complicated, right? But it's all about the economics of it. Now what we came up with is how can we create an alternative economic institution that will compensate for this, for the loss of value of the woman in the marriage market? What we found is that they really want the girls to go to high school. High school is is far away, cost a lot of money, think about college for us. It's really, it's a boarding school that costs lots of money. If the girl goes there for high school comes back when she is 18, then her value is much, much higher already. She doesn't need to go through FGM.

42:15She is already an independent woman. She can be a teacher or nurse or whatever. She's really going to do well. But the parents don't have money to send her out. But we said, look, we're going to have nurses check validated. that they didn't perform this horrible procedure on them. If you didn't, we're going to pay for high school. As long as she's uncut, we're going to pay for high school. And we think that that's going to be a very strong motivation for the parents, again, because of the economic aspects of this. And hopefully, you won't have to do it forever, because once you have enough women that will not be cut, the peer pressure will switch from, oh, you're not cut, you're a baby, we don't have to consider it all to, or your cut, that's unfortunate.

42:59Yes, this is a... Hopefully this would change that. Also, that would mean that the women who are cut are also most likely to be uneducated, which is a signal that women would not want to be associated with. This is something, it's a, again, neither of us educated, fully educated anthropologists or evolutionary psychologists, but the knife edge that different cultural technology the way that the status of different types of behavior viewed in society to me seems. It's so, I mean, you know, we're talking about here a relatively small intervention to stop an incredibly heavily ingrained piece of culture.

43:47And it's just, I find it so interesting how fine the line is between those two things. And they have lots of other problems that over there I can see the problem of people with us changing the culture because they have So a girl is getting married at 14 with their 30 year old man Start having kids and they have lots and lots of kids now pre -enterbiotics About half of the kids died so it was Manageable now they have too many kids in the sense that the resources that they have cannot support them Right so in terms of planning It's much harder to do and they have serious problems with that as well, right?

44:25So like I said, very simple thing, very simple incentive, very simple change in what you do can really have a huge impact on the society. Given that you're not quite the fully robotic behavioral economics professor, but probably are not used to having such a fundamentally the Netherlands impact on a culture with the work that you do, how does it feel personally crossing into pretty much a universal good being able to utilize what you've learned in your theory to really make a pretty important change to the world here. How does that feel for you? So that's what happens with age, I think, right?

45:12So as a young man, I wanted to publish as many papers, become famous, be successful, whatever. Now when you get older you start to think about again how can I use it to really impact the world? So I work with companies but that's usually not doing good to the world, right? So I help companies make more money that's not, come on, that's that's not creating value to the world, that's creating value to the company and to me. And then you can think about few things that are like this that you know if I can help these girls right if I can help if I can save one girl from going through this that's already I'll die much happier, right?

45:46And clearly, if we can have more. And you can think about other things that we try to do. So I mentioned, don't call it just, we're trying to do end -of -life kind of planning to help people plan better to the end -of -life. And this kind of things, and I find it much more exciting than running another lab experiment about some negotiation game that I still find interesting, but that's less exciting, like you said. You've become an ascended individual, a patriarch who is trying to bestow his insights on the world. I just need a white beard, a long white beard. I think that you could grow it out.

46:23I think it would look like that. What about the fines in terms of stopping unwanted behaviour? What's the problem, sir? The problem is with your perception. I think you're wrong. So fines, all we know about fines comes from really silly experiments in which, now, they, first of all, you cannot come to my lab and live with less money than you came in. So I can't really give you a fine in my lab. And much of what we say, exactly what you said is the perception in psychology, and I think that it's wrong, that, small, that finds or don't work. Well, small fine don't work. So I have this study about the decars.

47:02So our girls used to go to a decar in my wife and I lived in a suburb of Tel Aviv, and we needed to pick them up by 4 pm in the end afternoon. We used to go to Tel Aviv to have lunch, then one day there was traffic, I drove like crazy in order to be there by 4 p .m., because you don't pick up your kids too late. Then the principal decided that she'll put a $3 fine if you come more than 10 minutes late. Again, we were in Tel Aviv again traffic, this time I didn't drive like crazy because I'm not going to risk my life for $3. It doesn't make any sense. Right, so the small fine over here did change the perception.

47:35And by the way, when we ran the experiment, we found that indeed many people came late, more people can die. And it's not because they thought about it as babysitting system way, you know, I'm paying for babysitter because when we remove the fine after a while, they kept coming late. So what happens? What we think happened? It's otherwise to keep dying. What we think is that before that you didn't know how bad it is to come late. Now, we told you that it's three dollars bad, right? If it's only if it's that, it cannot be important. Now, you can never remove that anchor. Exactly. There's knowledge.

48:10Once I once I learned it, you can take it. Now, if in some places in the US, it's $10 per minute, then then you'll think about a friend of my told me that in Paris, there is a place where if you're late, they take your kid to the police station and you have to pick up your kid from the police station. That's that's big. Wow. Yeah. And you've got the social impact of that. You've got increased inconvenience. So I remember it's not that fines don't work. It's small fines that don't work. Interesting. Okay. Now I remember learning about Estonian speed traps. Have you heard of these? No. So in Estonia they have police by the side of the road.

48:52And what they do is they'll ping you. If you're going over the speed limit, they'll catch up. They'll take you to the side of the road. And you'll have the choice between, I think it's a really, really high fine. I think it's 350 euros maybe, or you can stay by the side of the road for 30 minutes. Nice. And I thought that that was a really interesting way, or, you know, most people that are going to be pulled over by the Estonian police are not making 700 euros an hour, right? Right. But there are people for whom I'm on my way to pick my kids up from nursery. We have a wedding we're getting to we're making a flight we're doing whatever and it just really makes people I think Question the time and the money element in them It's much more interlinked.

49:41I thought that was a very smart way to do it. I would put both so why not pay 350 and wait 30 minutes Some people are reaching off some people are reaching after they don't care about the money

49:57Let's think about it this way. If you do do that, what you are optimizing for are people who are both time rich and money rich. Exactly. That's equalizing. Everyone is going to suffer. One way that they did it in many places is this preventive driving. If you catch you, you get a ticket, you have to go to this school. That's pure punishment. You don't really learn anything over there. But it's very effective punishment. So now I think you can do it online. But in the past, you really had to go there. I was fortunate enough not to go there. But my friends who did said that it was like three afternoons real punishment.

50:34So there is everybody in the UK will be aware of the speed awareness course, which is what you're talking about. So in the UK, you're allowed a 10 % over the speed limit. That was originally introduced because analog speedometers had a 10 % tolerance where the car may be sufficiently inaccurate. The fact that that's been legacy grandfathered in in a world with digital speedometers that are probably accurate to 0 .1 % of a mile per hour etc is still hilarious. But and then I think it's the next 10 % over that if you are in that bracket, it, you have to choice between a hundred pounds fine and three points on your license.

51:21If you hit 12, then you lose your license or you can go into a speed awareness course. The speed awareness course is a morning or an afternoon with an incredibly grumpy gentleman stood at the front asking you, I've been, so this is personally relevant to me. The most banal boring questions, wagging his finger, saying you are driving down the street, How can you tell if you're going too quickly? Like just oh my god, it's torture. However, you're only allowed even one of those, I think once per two year period. So you only even get one of those grace periods. So there's this sort of ascending punishment ladder that you can go through.

51:59And if you use that, you lose one of your lives. But honestly, I think that the, you know, I have a number of friends who are regularly in and out of points on their license. I've only ever got pinged by this once, either through my great driving or through fortune you know, whatever, however, how the speed awareness caused stuck in my mind, I can remember the classroom that we sat in, I can remember how boring the tapes were, I can remember the effort of having to drive there on the more, I can remember everything about it, right? That's a very, very strong, and disincentive. So you see, fines do work.

52:33You just need to find the right find, whatever will make you drive carefully after that. whatever hurts the most talking about cars. What was that online car shop? Edmonds. Yes. So that's actually interesting. Edmonds is a great company. I worked with them there from LA and What they do is give you information about cars. So you want to buy a car you go there you check I don't know Toyota Corolla from You know a new Toyota Corolla and you learn about it and then when you want to buy when you're ready to buy They have ads from local dealerships. You put in your zip code and they know where you are.

53:09They offer you deals. Now if you buy through them So if you click on on the link over there and you end up buying the car They that's of course good for them because then the dealerships are going to pay them more for advertising Now what I did is gave you say Say that you bought a $20 ,000 card. They gave you $500 discount if you if you clicked on Edmond's and went over there Now, $500 is a lot of money, but not when you compare it to $20 ,000. So we know from previous research, all research from the 70s and 80s that imagine that you're going to buy a mouse for your computer, right? You'll go to the store and the guy will tell you it's $50, but if you'll walk 10 minutes, there is another store, they have it 50 % off, you get $25 off.

53:57Most of us will go. Many of us will go. I imagine that you buy a computer and then you also buy this you pay $2 ,000 for the computer and you also want as one of the accessories and mouse. And now the guy will tell you can either pay $2 ,050 over here or you can go and buy it over there and pay $2 ,025 over there. He'll say, well, it's not. Right, so you compare it to the deal itself. So $500 in itself didn't work but not as good as you would imagine. What we thought is something that is called mental accounting, mental accounting is basically what you care about. What is it that you really care?

54:34Not all money is created equal. And what we thought about is gas money. Right? So if I give you a credit card for $500 that you can spend on buying gas, now you can imagine yourself standing in the gas station and you know, fueling your car, $500 is a lot of money. You can fuel it for a long time. This is something that you really don't like to do. And now you get it for free. That has much stronger impact. The same amount of money actually we found in our experiment that we did with them the $200 in gas money were more effective than $500 cash. Now if I'll ask you what do you prefer that I'll give you $500 in cash or $200 gas money?

55:10Of course you choose the $500. But because it was separated, it was different. People did not look at it as part of the deal. They said, oh, I'm going to get this. That's great. And that was more effective. And that's again about the story that you tell yourself, what it means in order to get this money. Another car that you looked at, the Toyota Prius, what was interesting about that? So in the late 90s, early 2000, both Honda and Toyota came up with hybrid cars. And fortunately for them, those were really bad cars. Why fortunately? So today, if you buy a Prius, it's a competitive car. It's a very good car.

55:49Back then they were bad and that was great because if you wanted to see now look I'm a good guy, I care about the environment, you should buy a hybrid car because for the same amount of money you could have bought a much better car. The only reason that you would buy some the Prius or whatever the alternative will get to it in a second by Honda is because you care about the environment. That's why you buy hybrid cars. So that's great, right? And that's that's very good and that's why people were actually attracted to it, I think to a great extent. But then Honda made the decision that was probably dictated by the engineers who said, look, do it based on the Honda Civic, the parts are going to be the same, everything is going to be much easier.

56:29Toyota took a very different approach. They said, let's redesign the car completely. Now, when you see a Prius, you know that you see a hybrid car. I imagine that you drive into the park in lot with your not -so -great car. In one case, there is a small plant at the back, same hybrid car. That's the Honda example. In that case, everyone sees it from distance. Look, oh, you're a great guy. You're driving this hybrid car. And according to every people, all the people that understand, that's why Toyota won the market because they produce a bad car and it was clear to everyone that you're driving a bad car.

57:07So you're a good guy. That's exactly. And something important to note over here is the importance that not all incentives are good for everyone. Right? So in this case, we're talking about people who care about the environment. If you think about the guys that drive pickup trucks, those incentives will mean nothing to them. Right? You really have to target when I tell, when I say that you send a signal and you complete the story, you need to think about the people that you care about. It might be if you want to sell a hybrid car, don't create signals that talk to the pick -up drivers. Those are not going to be.

57:47Freedom of the open road and loud country music. Whatever they care about, give them and whatever incentives these people care about. And that's true about, in general, when you design incentives, you really think about the culture that you're talking about. So it could be a culture like we use, you know, maybe the US, you can make it more competitive in Japan, competitive incentives are not good. But even within San Diego, it could be taxigrivers versus teachers versus lawyers versus doctors. Everyone will have a different culture and they'll care about different things and you need to adjust your story.

58:25And very often I wouldn't know it. The people that are there, they should know what, what is it that people like that care about. It's very culturally dependent in that case, which also means the advertising company, the behavioral economists that are working, whoever it is, there is still an incredibly important role for you to couch whatever the deal is, whatever the incentives are within understanding the incredibly intercomplex played structure of all of the different ways that status and stories and framing and anchoring and so on and so forth happens not only within the country, not only within this particular demographic but within this region, within that cohort, etc.

59:09You mentioned the shoes. Don't ask me about shoes. I really have the same shoe. I buy five of them every year, $50, great shoes. Don't ask me about the sneakers that cost $1 ,000. Well you can ask me. I can guide you through what you need to learn in order to understand it. There are some rules that I can tell you, but the details of this, you really need to figure out yourself. You need to find people that care about it. Don't ask me about TikTok, I heard about it. I don't know exactly what it is, right? So it's really, you need to find the people that understand what you're talking about. Is a bad incentive worse than no incentive at all then?

59:47Yes. No question about that, because bad incentives will... Like, you asked me at the beginning, the first question was, what's incentive incentive will take you in the direction that I want you to go. Bed incentives will take you away from the direction I want you to go. So think about the Daker example. Instead of getting parents to come late last time, we got parents coming late more times. And you wanted maybe a UK example. So in Wales, they had something similar. They, parents will really identify with this example. We always go to vacations during spring break, say, when it's crowded and it costs much more, because that's when the kids are off school.

1:00:24So parents took their kids away from school either the week before or the week after. It was much cheaper and much nicer vacation. Schools didn't like it. What did they do? Put a fine of 60 pounds of parents coming late, right? Bad mistake because now people, instead of saying, look, it's bad to do it. Now they said 60 pounds. I'm going to save a thousand pound by not going during the crowded time. And so what was that story about? Is it cobras in India? Yeah, so that story is a bit fishy, but there is a similar story that I think is more grounded in reality. That's by the way, one of my favorite pastimes to look at the incentives gone bad.

1:01:03I call it stakes and mistakes. So the French came to Anoy, Vietnam today, and they wanted to have sewage because that's what French people wanted to do. With sewage came, you know, they wanted toilets, with sewage came rats. rats are not nice and they decided to kill them and someone really smart came up with the incentive scheme instead of sending my own people, hiring people to do that. Let's give the people, part of the people. So they decided to give say one cent per rat tail per person. So if you bring a rat tail to the city, you'll get ten cents or one cent whatever it was. You have this poor guy, the city hall that counted rat tails.

1:01:44Great example. What can go wrong? right? That's a good, we want you to get rid of them. Well, turns out, first of all, that you started seeing a tale less rats running around the city. Because why would I kill the rat? We want to have more of them. We want to have more babies. People started to farm them. So, you had rat farms. People started bringing rats from other places, right? So, you need to be careful. The idea was good. The implementation was less good. You asked me, are bed incentives worse than knowing something, yes. Especially when related to rat tails. Yes. What about using incentives to identify problems?

1:02:20That seems like a pretty big opportunity. Right. So in many cases, we think that we know what's going on, but we don't. I have this paper with my friends in which we looked at the pizza testing. Pisa is something that is done by OECD. They, in Brussels, they look at many places, many countries, and try to have the same test to everyone and try to evaluate who's best in math, for example. Turns out that the US invests lots of money per student and is ranked somewhere in the mid -30s, not doing very well. And China, for example, Shanghai was number one. Now, the question why and the interpretation by everyone is, look, it's because of the ability.

1:03:03We need to learn from the chain needs. So Finland, for example, is ranked very high. We need to go there and try to understand what they're doing better than us. So the assumption is always that the kids are doing better, that basically what you measure is the ability in doing math, for example. Now the way the test is done is they take a bunch of 15 year old kids, put them in the room for three hours, tell them, look, answer these questions as best as you can. You'll never know the outcome, your parents will never know your teachers, the school, no one will know some, accountant in Brussels will know.

1:03:34But it's really important that you work on it. I don't know if you can relate to your 15 -year -old self. I can think about myself that I would have told them, you know, I wouldn't work that hard. Right? So basically, what they're measuring is your ability to do math and your willingness to invest effort in the test. Right? We wanted to test how important is this second ingredient. Your willingness to actually, your intrinsic motivation to do well, if you like. So what we did, we took kids. We didn't tell them what we're going to have kids in the US kids in Shanghai, like I said, number 35 versus number one.

1:04:10In one case, we just gave them a test. We saw similar differences as in the pizza. Then we paid them per success. So for every question that they got right, they got paid. Now we saw that the Chinese student didn't do better because they were probably already at the top. No matter how much you'll pay me to do well in the SAT, I have a limit that they can all do better than that. Probably that's what I can do. The American kids and the other really improved. They did significantly better when you pay them, which showed that it wasn't just ability. If you don't know, if you sit down in an hotel, I'll pay you more if you'll be successful.

1:04:45If you don't know the math, you can do better. If I'll take you and ask you to fill up some testing Hebrew, no matter how much I'll pay, you're going to fail, right? Apparently they knew the material well enough that when we pay them they improved drastically. So the US kids for some reason if you just ask them to do it didn't invest. You can think about culture maybe in China it's more of a collective culture in which if I ask you to to work hard on this you'll work hard on it even if you don't get individually rewarded for it whereas in the US it's not like that. So the diagnostic aspect of this is we thought that it's just ability or people thought that it's just ability we should know it's ability plus you're willing as to invest effort.

1:05:29Plus. Ruthless American capitalism. Yes. That's what it was. You want me to work, pay me. Precisely. What's the pay to quit strategy? I love this one. So I teach negotiation, and I tell my students that no matter what, they shouldn't lie in negotiation. It's bad for ethical reasons. It's bad for your reputation. Just don't lie. With one exception, the one exception is that when you apply for a job, even if you're not excited, you should pretend that you're excited. So I imagined that I would come to your podcast and I said, ah, I really want to take a nap now. Okay, ask me your question. No, I need to pretend that I'm excited.

1:06:08I'm really excited, but I need to pretend if not, right? Because otherwise the podcast is going to be much more boring. And the same is true for the job. If you are going to, if you're looking for a job and you say, well, idea, I'm really disappointed that that's where I landed. but you know, I have no other options I'll come over. Then I don't want you. I want only people that are excited because otherwise they're not going to do the job well. Right? So if I just ask you, say that you work from industry, are you happy? You'll say yes because otherwise I will fire you or something. That I can devise a way that will be what we call incentive compatible for you to tell the truth.

1:06:44So I can find a way to use incentives to get the truth out of you. And the way is by offering you this pay -to -queed say that I offer you, you know what, if you'll quit, I'll pay you $10 ,000. No, stranger, I'm not going to upset with you. I want you to stay, but if you want to leave, here's $10 ,000, let's depart as friends and you can go. Now, if you're, you know, on the margin, you want to leave, but you're waiting, you'll take this $10 ,000, you leave us, you're not going to bed mouth us. I don't have to suffer through firing you. Everyone is going to be happy. I lost $10 ,000, but I gained something that a person who didn't want to work here is not working here.

1:07:23And the people that stay, first of all, I know that they're really motivated, otherwise they wouldn't be here. And second, they have to convince themselves now that they're not stupid, that what they did was not a mistake. It was a mistake if they would have taken the $10 ,000, they would be better off. If they decide to stay, they really need to justify why it wasn't a mistake to take the $10 ,000. So they're going to work harder to convince themselves that that was a good idea. Otherwise, why would they stay? There's a little bit of sort of continuity bias of sub cost fallacy of opportunity cost, all pushing people forward once okay, we've passed this threshold.

1:08:07I need to make sure, oh, yeah, so you mentioned that that you do, you teach negotiation. Yes. What do most people who've never studied negotiation get wrong about negotiation? There are many things, one of them, so you have a large group of people who just don't negotiate. And it's surprising what is negotiable, right? As long as you do it in a sensible way, many things are negotiable. So it could be when you check into the hotel, you can try and negotiate a better room. you might be surprised what you can get or when you rent a car and it's true later on. So many people just accept what is offered to them or not accept, decide not to take it instead of trying to negotiate them.

1:08:51So it is one thing that my students take out of the class. If the one thing that they take out of the class is now they enjoy out to negotiate, that's already a lot. The second thing is like we said about creativity and failing. deep brief what happens. So think about what happened, why did it happen, how can I do better in the future? So after each negotiation try to debrief with yourself, try to learn from your own experience. That's also something really useful that you can take out that people don't do. What is your favorite strategy from negotiating that seems to convert incredibly well, whether it's a framing of how you say something, whether it's a way to broach a particular topic, is there something that you think is a long lever when it comes to negotiating?

1:09:42So one of the folks to mind is, imagine that we are going to negotiate something. You're trying to sell me a car, you're working a dealership, you're trying to send me a car, but you're stuck with only yellow cars. Right? Or you need to get rid of as many yellow cars as you can. And I'm coming to buy a car from you. Now, in one case, you can tell me, you know what, if you'll buy a yellow car, I'll give you a discount. Now, I might say, no way, I don't want a yellow car, or I might say, sure, or I might say, actually, oh, great, I also want a yellow car. That would be a mistake by me. So if you're telling me, I'll give you a discount if you have a yellow car, I should tell you, I shouldn't lie to you, but I should tell you, okay, you want a yellow to sell me a yellow car.

1:10:26Let's see what else you can give me in order for me to take it. Right? So in many cases, we go into this that either we, that likely we want something different and we'll need to compromise somehow. In many cases, we want the same. And if we want the same, I should let you speak first to tell me about your preferences. And then I shouldn't say, oh, great, that's exactly what I want, but I should say, look, okay, if that's what you want, we can, I can work with this. Let's see how. Right? So try and get something out of you by doing this without lying, but without revealing the information that we want the same thing.

1:10:59One of my friends that I spent last weekend with in Las Vegas has a method of negotiating that he uses on his wife when he wants to go to a particular restaurant. So give me your thoughts on how effective this is. So let's say that he wants to go to Cheesecake Factory. So that's his desire. He doesn't know what she wants to do for the evening. As opposed to saying, I would like to go to Cheesecake Factory this evening or where do you want to go for dinner tonight, what he'll say is, would you be opposed to going to cheesecake factory? And she's not going to say, like, I'm not opposed to going to cheesecake factory.

1:11:37Maybe the replace is that I would prefer to go ahead of that. And he said, well, look, I would quite like to go to cheesecake factory. And if you are not opposed to going to cheesecake factory, that seems like we've got a pretty good setup here. Unfortunately, Now that he's talked about it on a podcast, she's become wise to the trick that he was playing on her. So I think that he has sacrificed his restaurant choice for the good of everybody else. But yeah, that's his negotiation tactic. So few thoughts about this. First of all, you need to find friends that don't want to go to the cheesecake factory.

1:12:13Come on. I'm fine if cheesecake for Uri. You're not going to do it anymore. It's such a great podcast. And at the last moment, we had to fall out about cheesecake factory. It's an elite establishment. Okay. Okay. So a serious one and a joking one. So the serious thing about this, imagine that you go with, that I go with my wife to a restaurant in the movie. So one way is to find a compromise that will go, I want the cheesecake factory, she wants a sushi place and we end up in Italian place. And with the movie, I want the movie with lots of blood people killing each other. other, she wants lots of romantic and we end up in the middle.

1:12:56That's a mistake. The right thing to do is to find what she cares about more and what I care about more. So it might be that I really care about the restaurant and she really cares about the movie. So compromising is not necessarily, you shouldn't compromise on each one of the items that you have. So find what who cares more about what and then try to compromise this way. And the real answer is, you know, I'm with my wife for 34 For years now, just do whatever she wants. That's the easiest thing to do. When you're talking about worldly wisdom, I think that that is absolutely perfect. Uri Neese, ladies and gentlemen, if people want to check out the work that you do, why should they go?

1:13:36So my website has all the academic work that I have. And if people want, I'm always happy to get emails from readers that are interested in some other things and start a conversation. Yeah, fantastic. Mixed signals will be linked in the show notes below. I very much appreciate it. Super, super easy and accessible to read. I think I love the fact that you integrated flowcharts. You put drawings in there and illustrations and stuff. It's really, really good. And today is the day that the book launches. So congratulations. I know that you've been working hard on it. Thank you. It was lots of fun.