Conversation with Dan Ariely — Why People Believe Irrational Things

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1:31Welcome to the 285th episode of the Prop G-Pod. In today's episode, we speak with Dan Ariely, the James B. Duke Professor of Psychology and Behavioral Economics at Duke University, and author of a number of influential books, including his latest, Misbelief, What Makes Rational People Believe Irrational Things. Hmm. What is that, like 98 % of America right now? Now, we discussed with Dan exactly that, why people believe seemingly impossible things, as well as how we can avoid certain facts when we don't like the solution. Professor Ariely is sort of a role model of mine. I just love how he takes behavioral psychology and makes it compelling.

2:05And I think he's a great storyteller. And I've actually seen him a few times on the speaking circuit. He's literally like a bit of an aspirational role model. Okay, what's happening? I'm headed to New York. That's right. The dog's coming into the city. little walking around Soho, little Zero Bond, little too much alcohol, little lot of alcohol. I'm having dinner. Where am I having dinner? I'm having dinner. I think I'm having dinner at Babbo. I'm going to have dinner at Cafe Select, one of my favorite places. I'll do lunch or breakfast or brunch at either Jack's Wife Frida, which I love. And I'll get pastries from the Balthazar, the Boulangerie at Balthazar, where I find a$14 brownie.

2:46I absolutely love New York. Thrilled to get back there. And then I'm going to Tulum. Then I'm going to Tulum to be a total privileged douchebag on mind-altering drugs, minus the mind-altering drugs. I don't really do a lot of that stuff. I love it down there. Everyone says it's turned and it's gotten. Whenever TikTok says something that they're over something and that it's so passe, that's when I start going. Like something's on its way out. That's when I move in. And if you go on TikTok, they'll just convince you that, oh, Tulum was amazing 10 years ago, but now it's not amazing. People say the same thing about New York.

3:21I think New York's never been better post-COVID. I think it's just incredible. Okay, on to some serious news. Elon Musk tweeted that his company, Neuralink, successfully implanted its first chip into a human brain. According to Elon, initial results show promising neuron spike detection. What do you think he was going to say? Yeah, we're killing people left and right. It's not working. Anyways, what is Neuralink? and Elon founded a neurotechnology company that is building a brain-computer interface. The goal is to let those with traumatic injuries, such as loss of limbs, control a phone or computer just by thinking.

3:54So I think this is incredible, and you've got to give in as much shitposting as we do of Elon. He definitely is an incredible innovator and doing really aggressive, amazing things. And this feels, I think there's enormous opportunity here. But I'd also like to point out that he seems to never be the one that goes into space or actually implant shit in his own brain. Anyways, the FDA approved Neuralink's plans for human trials last May. Nita Farhani, a professor of law and philosophy at Duke University and previous property guest, says the global market for neurotech is growing at a compound annual rate of 12 % and is expected to reach$21 billion by 2026.

4:33I'd like to have my friend Josh Wolf on. He's a venture capitalist who invests in what I affectionately call crazy shit. like this kind of stuff. And whenever he talks to me about his companies, I think that's too bleeding edge. But his returns to his LPs would indicate that he's, that's not true. He's done really well. Anyways, moving on, there's some big news in the podcast space. Smartless, a show hosted by Will Arnett, Jason Bateman, and Sean Hayes is ditching Amazon for SiriusXM. Bloomberg reported that the three-year deal between Sirius and Smartless is worth more than$100 million, $33 million a year.

5:06Amazon reportedly paid between$60 and$80 million for the show back in 2021. We haven't seen the big bucks associated with podcasts in quite some time. In 2020 and 2021, these were the hot years for pod acquisition, specifically for Spotify and Amazon that bid the market up. Back in 2021, Spotify reportedly only brought in$215 million in revenue from podcasts, despite investing more than a billion dollars in them. And the Financial Times noted that that was only 2 % of Spotify's total revenue, and then they absolutely exited the business. The thing about podcasting, people ask a lot of questions about podcasting, is that I don't think there is a medium that has more income inequality.

5:48And that is, I would bet that the top 170 do 98 % of the revenue and 150 % of the profits. What do I mean by that? if you're not in the top 1 ,000 podcasts, it is not self-sustaining. The ad market here is very much crowded in kind of the top probably 500 podcasts. So unless you're in the 0.0001%, you're unemployed or it's a marketing vehicle, not a revenue producing vehicle. This is a very difficult market. Why? The good news is the barriers of entry are just non-existent. The bad news is the barriers of entry are non-existent. It kind of went through some different stages where initially it was sort of a few celebrities who were interested in doing stuff.

6:29That didn't pan out. I think the guy that's really busted this whole thing open is Joe Rogan, both long form. He's very talented at it. He kind of defines the medium. And I've often said that we should all send 10 cents or some sort of royalty every time we do a podcast to Joe Rogan because he kind of exploded the medium. What is also interesting about it is that it peaked in 2019. Everybody wanted a podcast. And what I found is even some very good podcasters have decided to get out because it's a decent amount of work and you effectively have a medium that's not really growing as fast as the podcasts were.

7:05So in, you know, 20, call it 2015, there were maybe 100 ,000 podcasts. By 2020, there were a million new podcasts. Think about that. In 2020, obviously, we're at home a lot. A million new podcasts started. And last year, there were about 220 ,000 new podcasts. My guess is we're going to see a net decline in the number of podcasts over the next several years. So there's some good things about it. It's growing. The podcast medium is growing, I think, at low double digits. And it's getting pretty good CPMs. At Pivot and PropG, we get about $40 or$45 CPMs, which is actually really good for anything that I guess technically is digital.

7:44It's even good for television or radio. Why is that? Because our audience reaches hard to reach demographics. Specifically on Prop G, we reach upper income young men, which are very difficult to reach and also very attractive to advertisers because they buy stupid things like BMWs and Nikes and coffees. And they are difficult to reach because they're not watching ad supported television other than sports. And then on Pivot, we reach kind of the great white rhino of listeners, and that is very, very powerful tech executives who software companies are looking to sell software into. I believe the market's coming back.

8:23Why? The key attribute, the key value out of podcasts, they can be, the top 200 are relatively small businesses for media, but they're very profitable. Once you hit, you have a big production team at half a million bucks a year, or maybe a million bucks a year. And then once you hit that, in terms of advertising, 80, 90 % of it is gross margin, pulse to the bottom line. But even more than that, the reason why it gets higher CPMs is because it's intimate. What do I mean by that? When someone approaches me, I track this pretty carefully. I get about one and a half, when I go out, when I decide to actually leave my apartment, which is one of the reasons I'm looking forward to going to New York and Tulum.

9:00For some reason, I actually leave the hut or the apartment, so to speak, in reverse order. Anyways, I don't get out much. And when I do go out, I get recognized. I'm now up to about 1.3 times a day. Some days I get three people, some days I get zero. And people come up to me, super nice, super friendly. It's one of the nicest things in my life. I can tell how they know me based on how they approach me and the tone and the complexion in which they present themselves. If they come up and they're just like, hey, man, hey, Prop G, high five, it's a video. It's a video. It's something on TikTok or a clip of something or even TV.

9:44If it's they want to like sit down and they kind of put their hand over their heart and they want to talk about how meaningful something I've done is to them. They read something I wrote, specifically something about family or relationships. The written word still moves to the heart faster and in a more impactful way than I think any medium. If they come up to me and just start speaking to me, they don't even introduce themselves. They just come up and they're like, Scott, and I say yes, and I turn around. And it's almost as if I sit there and think, how do I know this person? Because clearly they know me.

10:16No, I don't. It's the podcast. People believe that they know you. And one, you're in their ears for an hour. And specifically, the operative term there is in. It's very intimate because you're inside of their ear. You're on their person. And also, they're usually doing something quite intimate or they're doing an activity that traditionally was reserved for people or things that meant a lot to them. They're fixing breakfast for their family. They're listening to it in the car with their son. They're with their dogs on a walk. They're working out. Whatever it might be, it's usually a space or a time and space where they don't typically have strangers speaking to them.

10:56So when you're in their life that way, they feel as if they know you. And as a result, host readovers get twice the CPMs of inserted ads. Why? Because if they hear your voice continuing to read an ad, they're sort of interested in the ad. The skip-throughs or whatever you call it, the percentage of people who actually listen to the ads, I think is above 70%. And for some podcasts, it's 80 or 90, which makes no sense to me because people can skip the ads pretty easily, but people don't seem to mind when it's the host reading the ads. Anyway, so So small but profitable business, still growing, unlike most of media outside of TikTok and kind of the digital guys.

11:35A huge income inequality, high CPMs because it's very, very intimate. Okay, one last story before we get to our conversation with Professor Ariely. Layoff season and the year of efficiency continues for the tech sector. In just the first few weeks of the year, nearly 100 tech companies, including Meta, Amazon, Microsoft, and Google, have collectively laid off around 25 ,000 employees. As a reminder, 2023 was brutal for tech companies. Around 1 ,000 of them cut nearly 260 ,000 jobs last year. In 2022, we predicted that 2023 would be the year of the Patagonia Vest recession. But in their last quarters or toward the back half of the year, the big guys would have their most profitable quarters because while their revenue growth wouldn't accelerate, it wouldn't decline, and they would be able to reduce costs.

12:22And we saw a tripling in the net income of Meta. The bottom line is the market loves layoffs when they're not economically, they're not driven by a recession. And these are, quote unquote, discretionary layoffs. And here's why layoffs are cost reductions. I don't even say layoffs, but cost reductions can be so powerful. If you have 20 % operating margins, meaning for every$100, you end up with$20 in gross profits, right? And that's pretty healthy. That's not tech-like margins of 40. Some of these companies have 40%, but it's not manufacturing operating margins of high single or low double digits.

12:59So let's call it 20 % operating margins. You have two choices to grow shareholder value. How do you grow shareholder value? You grow the company. You more strategically grow top line revenue or become more strategically advantaged to companies, whatever it might be. Or you just increase earnings. One increases the multiple, one increases the earnings. So how do you increase earnings? Right. One of two ways. You either grow the top line, right, by five bucks, or if you have 20 percent operating margins, you reduce costs by one dollar. So when faced with growing, when Meta, Alphabet, and Amazon said, all right, we need to increase our profits by$10 billion, what would be easier?

13:43Growing the top-line revenue by$50 billion or cutting costs by$10 billion? So they said, you know what, it'd be much easier, given that we've been stuffing so many calories on the esophagus of this company for the last 20 years, to cut$10 billion expenses as opposed to growing the top line$50 billion. That's probably the wrong example. Cut costs by$2 billion versus trying to grow the top line by$10 billion. And I think this is kind of rolling through the economy. And then they've been given this tool called AI, and they think, well, I could actually probably use this to replace some jobs. In addition, it's been such boom times and we've been hovering up all human capital.

14:19Quite frankly, we could probably lose 10 or 15 percent of our employees and not notice or the end consumer, the front end consumer wouldn't notice that they're gone. This is all to say that as an entrepreneur and as a manager, your job is to grow shareholder value. Your job is to grow enterprise value. And there's a bunch of ways to do that. I give you an example of Prop G or we have Prop G Media. We have several lines of revenues. We have speaking, we have podcasts, we have books. What else do we have? Oh, revenue from our newsletter. And up until about two years ago, everything was basically a marketing vehicle that was sort of break even to drive this incredibly high revenue, high margin business called my speaking business.

15:00Over the last two years, our speaking revenues have gone from 50 % of our revenue to about a quarter of our revenue. And while that is slow top-line growth, it has made the enterprise worth more because it's a media company, not an enterprise supporting one person's speaking business. My speaking business will never be acquired, or at least I don't think it will be. I don't see how a company would come in and say, we want to buy this company to get your speaking revenues. But they might want to buy a media company that has repeatable assets, that seems to have consistent revenue. in our podcast does generate within a certain confidence interval, a certain amount of revenue each month, and it's growing, call it 20, 25 % a year.

15:38If you were to describe, if you were to try and zero in on what drove an incredible year in the markets in 2023, you'd say, well, it was really just seven stocks or AI inspired. But even more than that, more than that, specifically talking about the operational efficiencies, if you will, or what was the financial, I don't know, construct or dynamics that drove so much shareholder value was the following. It was one, the great taste of reduced expenses without the calories of reduced revenues. These companies continue to increase their revenue growth or continue to have revenue growth as they were decreasing their costs.

16:11If you're ever in a situation where you turn around, this happened at a bunch of companies, quite frankly, sometimes it wasn't their idea. Salesforce had an activist investor, Elliott, come in and say, we own a couple billion dollars your stock now, we'd like you to take a hard look at your costs. Mark Benioff, who is very savvy, what is the rookie move among quote unquote experienced CEOs when an activist shows up? They circle the wagons and they immediately put up the middle finger and say, how dare you question me, master of the universe, and they fight them. Well, no, Mark Benioff is a grownup, smart, very shareholder driven and said, sure, guys, what are your ideas?

16:42Listened to them and said, yeah, there's probably some fat to cut here. Cut some fat, didn't lose any revenue growth and And boom, champagne and cocaine, bottom line, explodes. So as a young entrepreneur, you're going to be totally focused on growth. That makes a lot of sense. But adults also focus on costs. And I know firsthand that venture capitalists love entrepreneurs who throw nickels around as if they're manhole covers. Keep in mind, you push up revenues or you push down costs. Both are fantastic ways to grow shareholder value. We'll be right back for our conversation with Dan Ariely.

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18:56Welcome back. Here's our conversation with Dan Ariely, a professor of psychology and behavioral economics at Duke University and the author of a number of books, including his latest Misbelief, What Makes Rational People Believe Irrational Things. Professor Ariely, where does this podcast find you? I'm currently a Duke in my office in the Center for Advanced Hindsight. But my mind is scattered all over the place. I'm thinking about Israel. I'm thinking about Gaza. I'm thinking about London. I'm thinking about what's happening in American universities, about Iran, Syria, what's happening in South America.

19:38and so the world is really troubling these days. I think if somebody wrote a book about this particular era that we're living in, we wouldn't believe them. Yeah, I sometimes assign it to the fact as I get older, I get more anxious. I was sort of sleepwalking through life from sort of zero to 30. I think from 30 to 50, I had the right amount of anxiety. I call it productive anxiety. And now I'm anxious about everything, but it feels, these times feel especially anxious. So it feels... Actually, let me say one more thing about this. You know, I view my world, my job, as trying to promote small improvements.

20:23Big improvements are tough. Small improvements are possible. I think that within the realm of social science, there's lots of opportunities for small improvements. We can get people to sleep slightly better. We can get people to save a bit more, to fight a little bit less, all of those things. But then these big things happen. They take us back. And, you know, it's very hard to say, okay, we make these small improvements. And it's a big step back that are, how do we find the energy to continue driving these small improvements? We were speaking off mic about how the Holocaust deniers are now merging with the October 7th deniers.

21:02people who are saying or questioning whether these events ever really happened. And that in itself is disturbing. But what I find more disturbing is when I hear these people and I see them interviewed, other than the words that come out of their mouth, their background, their education, it just doesn't fit. You think these look like normal Americans that you would expect to be rational, and they're not. And that's where your work kind of comes in, what it means to be irrational. So let's start there. Give us an overview of what it means to be irrational. Yeah. So there's lots of ways to be. There's one way to be rational and there are many ways to be irrational.

21:44But what you said is very true about this notion of beliefs. And my latest book is called Misbelief, exactly because of that. And we see these people and we say to ourselves, five years ago, we thought that we had the same beliefs. And now we look at the same people and say, we don't understand how are they and us looking at the world in the same way and coming to such different conclusions. And it turns out that there's a psychological machinery that gets people to a state of misbelief. And as a metaphor, you can think about the cookie. and the cookie is a weaponized food that is designed to get us to want one and then eat another one and another one and somebody designed the cookie not intentionally to create the obesity epidemic but somebody designed the cookie with an optimal combination of sugar, fat and salt to get this behavior and we have this machinery that gets us to believe very strange things things that you would say I don't understand how this happened, but this machinery is much more complex than the cooking because it attracts almost all of our psychology.

23:06If you look at misbelief, it's basically kind of almost like an introduction to psychology textbook where it's about emotion and stress, cognition, personality, social, and all of these elements have a role in that descent of people from having standard beliefs to having some very strange beliefs. And the basic ingredient that starts this whole path is stress. And let's take us for a second away from politics and the world around us. Think about two tribes of fishermen. One tribe of fishermen fishes in the deep sea. One of them fishes in the lake. those in the deep sea have a much more unpredictable environment those that fish in the lake much more predictable which one of them develops more superstitions the ones in the deep sea why because a superstition gives people a sense of control i'll clap my hands i'll pray to a god i'll do this and this thing and it will give me some sense of control and it turns out that when we're stressed.

24:20And I don't mean the stress of saying, oh my goodness, I'm so busy, I'm not sure how I'll manage. I mean the kind of stress that says, I don't understand the world. I don't understand why the Kutis in Yemen are all of a sudden attacking Americans. I don't understand what's happening in South America. I don't understand why Russia is attacking the Ukraine. I don't understand what chat GPT is going to do for my future work. When people are living in an environment, they say, I just don't understand the world. They want a story. So superstition is one story, but we want a story. But we don't end there.

24:58It's not just a story. We want a story with a villain, right? Because now it's not our fault. It's somebody else's fault. And we want a complex story. And why do we want a complex story? Because the complex story basically gets to say, I thought I don't understand how things are. Now I feel that I understand more than other people. I understand that there's a cabal, there's all kinds of things like that. So people want story with the villain and the story has to be slightly complex. And that's not the end of the final of misbelief. It's not the end of the descent that will misbelieve. This is just a starting condition of what it starts.

25:41And if you think about COVID, I don't know what your feeling is, But my feeling is that we haven't finished even dealing with the emotional aftermath of COVID. I think about kids who are now in college, who spent the last two years of high school or the first two years in COVID. I think about people who are restricted, worried, concerned, lost money, lost faith in other people helping them. Think about all of this. It takes a long time to recuperate. And we haven't recuperated from COVID. And now we get these other avalanches that are just making it very tough for us. Very tough psychologically.

26:24Very tough to cope. I want to double click on that. I find it really interesting, the notion that we become more vulnerable to conspiracy theory or misinformation or behaving irrationally when we're under stress. And that just makes a ton of sense to me. And as a boomer, I find that some of the views, some of this conspiracy theory, I mean, it's kind of cuts across all age groups. But the place I find it most surprising is with young people because they're the most educated generation in history. And yet on some of the biggest issues, I find that they're the most prone to misinformation or conspiracy theory.

27:01So taking that one step further, you know, the thesis I would put forward, it's not what's going on in Ukraine or even in the Middle East that stresses them. It's what you said, COVID. I think that's remarkably obvious, and I wish I'd thought of that. But also that the younger generation with Instagram, social media, bulldozer parenting, my colleague and your friend Jonathan Hyde has written eloquently on this, that you have the most stressed generation in arguably American history. I mean, maybe young people during World War II, but you see all the indicators are young people are depressed and anxious.