Interview With Robert Frank: Masters in Business (Audio)

the Myth of Meritocracy. It's a fascinating conversation about how we all tend to under emphasize and and just not realize the impact that random fortune has in our life, for both better and worse. He he also wrote a

textbook with some guy named bed Bernanke on economics. UH. Really, I think you'll find this to be a fascinating conversation if you're at all interested in how not the politics but the economics of of income inequality and how these things have developed and what they're subsequent impact is on both uh, efficiency and productivity of of the economy and what it means for society from the middle class for changes in in corporate structures. I think you'll find this

to be an absolutely fascinating conversation. So with no further ado my conversation with Robert Frank. This is Master's in Business with Barry Ridholts on Bloomberg Radio. My special guest this week is Professor Robert H. Frank. He is a professor of management and economics at Cornell's Johnson School of Management. That's the graduate school up at Cornell. He has won

numerous teaching awards and all sorts of other accolades. Comes to us with a b. S. And mathematics from Georgia Tech, has a master's in statistic and a PhD in economics for Berkeley, and is the author of a number of books, several of which we'll talk about later today, most recently Success in Luck, Good Fortune, and The Myth of Meritocracy.

I would be remiss if I didn't mention the textbook he co wrote with some gentleman named Ben Bernanke, Principles of Economics and he He probably is best known for a book published in The Winner Take All Society that won all sorts of critics Choice Award Notable Book of the Year by the New York Times Business Week's Top ten list for Robert Frank. Welcome to Bloomberg. What a pleasure so that that was the short version of your CV.

I could have gone on if I if I started discussing the published papers, we would be here until next Tuesday. But one of the things that really struck me about your background is how long you've been studying income inequality? How did how did you first get interested in that subject? Uh, it's it's become quite fashionable now. I first started writing about it, it it was very difficult to find anybody who cared.

I think my own interest in it was kindled by my interest in biology, where where if you know an animal's rank in whatever group, it's alpha beta, what happened, right, that's the that's the most powerful predictor of that animal's ability to project its stuff into the next round. So so if if there's a famine, it's not the high ranking animals that starve. The high rank animals typically have much better mating opportunities. There's a whole variety of reasons

for that. But if if you don't care about where you rank, you're probably not coming into the world very well equipped to deal with the competitive fray that we're in. And it is quite a competitive world, especially when it comes to economics. On the other hand, Uh, to really succeed in today world, it's essential to be a trusted member of an effective team. You have to be able to be seen by others as trustworthy and cooperative. Really

effective teams, teams with talented people have their pick. They don't need to hire any jerks for their team if you're If you're not a person they feel they can rely on. When you're out of you and you have a chance to serve your own interests at the expense of the teams, then why should they have you on on their team. They've got better choices. So it's a

kind of a complex balancing act. You have to be somebody who's who's attractive to others and trustworthy in situations where you could cheat them, but they have to feel confident you won't. But you have to also care about getting ahead. So it's a little bit of a balance in society versus what we see out in the wild exactly. Society has done an enormous amount to try to tame the competition. We have all sorts of regulations that prevent arms,

races that get out of control and nature. But I think you know, the income inequality problem is is maybe one of the early signs that our attempts to keep things in balance have been falling short. So let's talk about income inequality a little bit. I want to mention it's funny that you said how fashionable it is today. I'm gonna pull a quote from either your book it was, or it was a paper that you had written around the same time the book had come out that I

thought was fascinating, And this is from quote. The incomes of the top one percent have more than doubled in real after inflation terms between nineteen seventy nine and nine eighty nine, a period during which the meeting income was roughly flat and which the bottom quintile the bottom twenty of earners, so their incomes actually fall by ten percent.

Now that sounds like something that could have come out a year or two ago, about the prior decade, and yet this was not a big issue back I think we were just starting to see clear evidence of those trends that were beginning. They they began sometime in the late sixties or early seventies. There's still some quarreling about

when the exact moment was. There probably wasn't an exact moment, but but as it's gone on, longer, and as the multiples have gotten bigger, more and more people have taken interest. And you know, there's been a lot of very serious work in recent decades on it. Well you you were writing Picketty type stuff twenty years before Pickety was writing them. Yeah. Well it's not always who gets there first, who wins

the prize. Yeah, Picketty has gotten a lot of very well justified attention on these issues, and he's done the rest of us who are in the trenches writing about this subject and enormous service. You know, we can we can now write a piece on on the issue and people will pay attention to it, whereas it would have gone lost in the shuffles. So that's that's a really interesting point I find. First, it's amazing how similar the

data sounds twenty years ago to today. That's astonishing. But was income inequality all that obvious back then to people who were looking at it? Was the boom in technot remember nineties, a huge boom in technology. The stock market was on fire. Well, we just otherwise occupied and not paying attention. How did this slip by relatively unnoticed right in the middle of the nineties. Yeah, I think that's a great question, and I don't have a compelling answer

for it. Uh. It if you take the early onset of the date range the late sixties as the the time when income inequality started growing rapidly, then uh, plenty of time for a lot of people to have noticed it. And many people did notice it. It's just that the the subject hadn't really caught on as a as one of general interest. I'm Barry Ridhults. You're listening to Masters in Business on Bloomberg Radio. My special guest today is Professor Robert Frank. He teaches up at Cornell both economics

and management. Let's talk a little bit about the winner take all society. The book you co authored in that seems to be quite prescient about a variety of changes that have taken place in uh in our economy. Let me let me start out with a quote. What do Boris Becker, Alan Dershowitz, Diane Sawyer, Michael Jordan's, L McPherson, and John Griffin all have in common? They are beneficiaries of the winner take all markets. Now, what's interesting is

how memorable all those names are. And still, unless you're a millennial, you probably know who all those names are. Kas there was a lot of longevity to it. Explain to us what the winner take all society is there. There's a kind of market we've seen, uh, this market structure going back a long long time. Actually, Uh, it was written about in the nineteenth century in similar terms

to the ones we use to describe it. It's a market where if you have a task that can be done market wide by a single person, then essentially you've got the conditions for a big tournament. Uh. It's it's a valuable task. Typically if somebody can serve the whole market, and if there are thousands of houses of people trying to be anointed the person who gets to do that, then the competition is pretty bitter and there's a lot

of bunching of talent and effort. All the people who are finalists in that contest are going to be really, really good, but typically one will emerge, and it will be some one who's uh maybe a little bit better than most of the others, but rarely the best contestant. He's also had a lucky break or two along the way. But when the winner emerges, there's a huge difference between the reward that person gets and the rewards received by others who were really so close to being as good

that no one could really tell. It was almost an arbitrary choice to anoint the winner. And and so you get a situation where you know, most people feel comfortable if somebody works one percent harder than others, there is one percent more talented, I'll fine, let and be paid one percent more. But here, here you have some but he emerge who's one percent more talented, And and uh, that person might earn ten thousand times as much as as the others who are almost as equal. So let's

let's use Michael Jordan as an example. Wins six NBA finals, which was a huge run, but at the same time has this amazing set of endorsement deals. He makes hundreds of millions, literally hundreds of millions more then he's paid as an athlete to do all his endorsements and other business ventures. And at the time, nobody else is even close to him. Yeah, there there would be plenty of people who would do his job for a tiny fraction of what he gets. You would, I'm guessing I would

have been willing. But you have more hit than me, so you can you can do that? Well, it's not all you need you watch you watch the highlight reel of Michael Jordan's and you think you're seeing something in slow motion, because it really does seem that he's hanging in mid air for thirty five seconds, making decisions on the fly that are not only instantaneous, but three steps ahead of everybody else, and then executing on those decisions

while hanging in midair. So so maybe he's not the best example of a winner who's only a little bit better than the others. Maybe maybe give us another example like Secretariat, he won thirty lengths. But but typically it's not it's not that far ahead of the field. When we see a winner emerged, you know, it could have been any one of a number of people who emerged that way. And and well, you mentioned Alan Dershowitz or Al McPherson or John Grisham. There are a lot of

fantastic novelists who sell millions of books. Is that and their books become movies? Is John Grisham a winner take all? He's definitely an example of someone who's been a really big winner in a winner take all market. So not only have the books done well, but you know, a dozen of his books have become really big movies. And and the surest way to publish a best seller is to have already published one. Uh, if you've published two, then you're even more likely to have a best seller.

And and then once you've got a string of them, the movie people start bidding against one other for the rights. Yeah, the the rewards really do explode once you're on a successful track. But but if you would go back early in a person's career, it wouldn't be so clear that that would be the person who would emerge and become the big winner. Even in Michael Jordan's case, he was cut from the basketball team at a couple of stages school right, didn't do well. What about j K Rowland?

I think her book was turned down a dozen different publishing shops and and she just on a lark published a detective novel or who Done It under a pseudonym after she quit the Harry Potter series, And the book got good reviews but sold tepidly. Vantil was revealed, it was leaked that the author really was j K. It's shot to the top of the best seller lists. So yeah, having been successful is the is the biggest thing that

that can assure your success in the next round. So, so what impact does this star system have on society and what does it mean for the long term economic efficiency of of how things run well, It's got good aspects to it. And also someone's that ought to concern us. So if you think of piano manufacture in the last century, it was a local industry. Why because it costs so much to ship pianos that if if if you try to sell one too far from the factory, the shipping

costs would eat you alive. And and then canals opened up railroads, the market expanded enormously that could be served by a single producer. So the good thing for consumers if there really were some producers who are better than others, now they could extend their reach, so you'd you'd be buying a better piano than you would have had access to before. The downside of that is that it tends to lead to an enormous increase in the concentration of income.

The people who were thriving in local markets before now they compete to see who's going to be the one who dominates the broader market that's now serviceable by these firms. Since transportation costs are low, and and the losers in that contest, they've got to go find something else to do. Basically, I'm Barry Ridholts. You're listening to Masters in Business on

Bloomberg Radio. My special guest today is Professor Robert Frank of Cornell, and we were discussing earlier how the middle class has begun to fall behind, going back as far as the nineteen sixties or seventies, you put out a book called falling Behind, How rising inequality harms the middle class. And again, some of the data points in this are just astonishing. I want to reference the toil index, uh from a paper you put out in two thousand eleven.

Listen to this data. This is astonishing. Between nine seventy and two thousand, the median earner would have gone from working a little more than forty hours a week in order to be able to afford the median priced home to working close to seventy hours a week, almost double. How did that happen? Yeah, it was the monthly number of hours you had to work in order to earn enough money to gain access to the median price house. And and that's an interesting number because if you're in

the middle you would earn in the middle. You would want to send your kids to a school of at least average quality, and to do that you have to buy the median price house because, as is true in every country, school quality tracks house prices in the neighborhoods very closely. So so every parent wants to do that. Houses have gotten bigger during that time. That's partly why families have to work more hours to be able to

afford access to the median house. And it's just that others like them are spending a higher percentage of their income too, so you've got to match what they do or else you fall behind. And it's your kids who go to schools with the metal detectors out front. What what has the addition of a second bread winner in a household done to this this data? Uh so, that's a really interesting question. In the fifties we had one earner families. Now it's much more common to have two earners.

So families should be doing much better. Well, they don't seem to be doing much better. And and one reason is that a lot of the extra money has gone into a bidding war four houses in the better school districts, so we've got more money. Now, what's what's the first thing we want to do? Send our kids to better schools. Well, other families want to do that too, And it's as if everybody stands up to see better. Nobody sees any better than before. We just bid up the prices of

the houses in the better school districts. Half of all kids go to bottom half schools, the same as before. There's no way around that. That math is there. That's that's the cruel dilemma that inequality confronts people with. That lake will be gone exists just in fiction, and all of the children are not above average. It can't be, cannot be. Let me let me throw another data point

out that I thought was fascinating. From UH falling behind, the share of total income going to the top one percent of earners was eight point nine percent in By two thousand and seven, it had risen to twenty three and a half percent, just about tripling. During the same period, the average inflation adjusted hourly wage declined by more than seven percent. So the meeting, So last time we looked at this date, in the top one percent we're growing,

the bottom we're falling, and the median was flat. Here we see the top one percent growing much more in this time period, and and the average is actually falling. So what's the drivers of this? You know, I think it's the same technological changes that Phil Cook and I talked about, and that indeed Alfred Marshall had talked about in the eighteen nineties. As technology, let's the most able

performers in each domain extend their reach. Uh, there's just gonna be a bigger slice of the market that they can effectively serve, and then the bidding for their services heats up. We don't need more than two or three sopranos at this point. Uh. A hundred years ago, the only way to listen to music was but now we listen to music mostly in recorded form. Once the master discs have been stamped out, they can make copies MP

three's other media or essentially zero cost to copy. And so the real trick is to find the performer who's better and at least in the public's eye by a small margin, people want that performer and no other. So

this this leads to a really interesting question. You have the current impact of technology and globalization and automation and more and more of the winner take all society pre nineteenth century, it was almost a feudal system where you had the one local monarch and everybody worked for them. That almost leads me to think that the post World

War two middle class was an aberration. That's a theme in Thomas Picketty's book, that the period of post war relative equality was the aberration, not the I think the assumption along had been well, that's normal, and we're moving away from it. I don't think, uh, that issue is completely settled. But the technological forces that are causing incomes to concentrate at the top, those haven't even a gun

to finish playing out. You know, Amazon is going to continue displacing retailers until they're almost aren't any more retailers, and we're a long way from that happening. I'm Barry Ridhalt's you're listening to Masters in Business on Bloomberg Radio. My special guest today is Professor Robert Frank. He is the author of Success in Luck, good Fortune, and the Myth of Meritocracy, as well as the Winner Take All Society and Principles of Economics, say textbook co written with

some guy named Ben bernanke. Uh, let's jump right into success in Law because This is a topic that I find absolutely fascinating. Part of the reason is in this series, in these interviews that I do, you would be amazed at how many billionaires say and of course I got lucky early in my career, or this happened and it was just good fortune. And I know a lot of

people think that that's just a false humility. But I think and have observed that folks really, especially people who were wildly success I don't mean hey, good job, good career, whatever, I mean wildly successful, winner, take all top of their field. Billionaires, Many of them referenced the role of luck in their success. Why is that? I think that's a great thing when you see it happen, and you do see it happen.

I have no successful people who are very quick to acknowledge that they had breaks and wouldn't be where they are now except for them. But still there are many who who whose position seems to be I did it all on my own. I think think back to two thousand and twelve when Elizabeth Warren gave her you didn't build that speech. It was a video that went viral and had millions of angry comments directed at her. What did she say? She said, you built a business, it succeeded.

That's great, but just remember you shift your goods to market on roads. The rest of has helped build you. Hired workers the community, pay to educate. Police and firemen that we hired helped protect you. Part of the social contract is to pay forward, so the next group that comes along will enjoy those same opportunities to succeed that you did. Uh. I don't hear anything controversial in those remarks,

but people were very angered by them. And so if you if you tell a rich person who's beginning with the posture I did it all myself, that hey, you were lucky also, which is almost always true. Uh, they tend to hear you saying that, oh, you don't belong where you were your skillful that's not the message. No, the people who win in these markets are almost invariably

really skillful, and they work really hard. So so it's in a way natural that when they try to explain to themselves why do they succeed, that they focus on their hard work and talent. That's a big pack factor and what did bring them to the top. But they were also very lucky. So so let's take an example from the book that I thought was pretty fascinating. How lucky of a guy was Bill Gates. Oh, Bill Gates, Uh, to his everlasting credit is really quick to acknowledge how

lucky he was. He had one of the few schools that had a computer lab in it. He was born in nine didn't exist where if if he had been born ten years earlier, that wouldn't have existed. If he'd been ten years later being born, every people would have been all over that already. He was there at the right time. He got access to the computer labs at the University of Washington, like an actual lab with real time response, not the punch cards up the hill and

wait three days to see what happened. He was in high school. That's a that's an amazing thing he had. And he'll say there's probably probably what wasn't a group of a dozen worldwide had opportunities like he had. But then, even even so, you would never know who he was. Probably belie if IBM hadn't Uh sort of in a short sighted move giving him the license to sell the operating system to its personal computer that was about to launch.

They didn't have high hopes for sales of that machine, and so he ended up being the richest man on the planet. As he's quick to concede because he got a few really well time breaks. The technology lare is. He goes out and purchases a version of DOS for fifty dollars from a company who the urban legend is that founder eventually commits suicide. Um years later when he figures out what he does, sells this to IBM, and IBM never says, yeah, we're gonna buy this from you.

Instead they'll say, yeah, we'll pay you for each one. We'll pay you less, but every time we sell a machine, we'll give you a royalty. And and that wasn't amazing. But make no mistake, Gates is really smart. He's very talented, very hard working. But that combination of things isn't sufficient. So the the guys who who come in second, the men and women who come in second, they're really smart, they're really hard working, they're really creative and skillful and opportunistic.

But some of them just don't get a lucky break, and they don't achieve the sort of success that we see from the smart, hardworking, lucky ones. Brian Cranston I had never heard of I've watched Breaking Bad. He was unbelievably good in it. When Vince Gilligan proposed casting him in the Walter White role, which was the heart of that series, the studio bosses said, no way. This is a guy who's never had a leading dramatic role. He's a middle aged sitcom guy. He was the goofy dad

in the middle, which I had never seen. But people who saw it said, well, it was good. If you saw it, you would have never in a million years imagined him exactly. He was a goofball, funny, but certainly not that intense dramatic. So so the studio people, they said, no, we're gonna offer the part to John Cusack's totally wrong. Cusack turned it down there all right, Matthew Broderick. Matthew Broderick turned it down. Even then did they go to Cranston? Now,

of course Cranston is a superstar. Everybody wants him in their picture, and he was in his mid fifties. He was not going to become a superstar. If either Cusack or Broderick had taken that role, that was gonna be a fate for him. Just like thousands of other actors, they're good enough to succeed, but they don't get their chance. So I've noticed you've written about this, Other people have written about this. The issue of luck versus skill seems

to divide along the political spectrum. Some people on the left are are faster. Liberals are more quick to attribute luck to people's success. Conservatives have a tendency to attribute skill to me. It's luck and success. So so what is the basis of this divide? Yeah, it's a very interesting question. And John Hight, my friend John Hight, the psychologist, has done some interesting work. There are temperamental differences between

liberals and conservatives. Actually, the the split between the two groups on the role of luck is is maybe a little more nuanced than our popular impressions make it seem. But you know, conservatives are less likely to believe in the challenges to the concept of free will than than than liberals are. And so there there are some similarities

and belief patterns across the groups. But but I think if you, if you probe a little more deeply, uh, people from all along the political aisle, if they really think about the examples that they know about, are are quick to concede that. Yeah, it helps, it helps to be lucky, being good and working hard by themselves aren't

usually enough. So we were speaking earlier about Michael Mobisan, who is a credit Swiss and professor at Columbia who wrote the success Equation, which looks at skill and lack in in business, uh, sports and investing. And I said, hey, I'm gonna be speaking to Robert Frank any questions for him? And he said yes, absolutely. Uh. He gave me a few, But let me give you one or two of my favorites.

How do we justify CEO pay based on skill or are there other processes that better explain the current ratio between CEOs and workers. That ratio, as you know, is exploded. It used to be something like twenty times as much as the average worker pay for the CEO in the CEO of ratio that recently twice this week has tracked the CEO paid average worker ratio since then, and it's it's up depending on how large the corporation, it's up around or hundred has has gone higher than that. It's

a huge increase. It's it's the ratio itself is exploded by factor of ten. And there's a lot of argument about why people talk about crony boards that are voting favors for their pals who have installed them on the board. You know that happened when I was a boy. We used to hear about interlocking directorate's and but you don't ratios. You didn't And I think, uh, there are clear examples of waste, fraud and abuse still. But the world really is a lot more like the NBA now than it

was when I was a kid. It's it's all it's all competition. What have you done for me lately? If you're not if you're not performing up to the highest standard, if there's somebody we could replace you with who would be even epsilon better, where you're out the door, And I think that's you know, you don't know who's going to be a good CEO up front. You take your chances.

But the data are pretty clear. If you hire a CEO and the and the performance doesn't follow, then they're on a very short leash now compared to the old days. So but but they're on a short at least with a very nice get a very high salary. Uh. If

they don't perform, they're out. They land whole because they get the nice parachute but think about it, if if you're right about the CEO, and the CEO really is let's say three percent, five percent, if you're if you're a ten billion dollar company annual earnings, you know that's three million difference on your bottom line. So so having somebody who's just a little bit better in this kind of market really does translate into a huge difference in

the bottom line. If people want to find your work other than Amazon, where else can they find your writings. I have been for more than a decade a contributor to the Economic View column in the New York Times. Do it less frequently now, but occasionally I still write one. Uh Mainly I'm writing books these days, so so i'd go to the Amazon page and search out what's available. On Twitter, I'm at econ Naturalist. Easy to find you

via Google. Be sure and check out my daily column on Bloomberg View dot com or follow me on Twitter at rit Halts. I'm Barry rit Halts. You're listening to Masters in Business on Bloomberg Radio. Welcome back to the podcast. I don't know why I do this every week, but I do. Bob, thank you so much for doing this. I'm I'm was really looking forward to to chatting you, and you have not disappointed. It's been great fun to

get a chance to talk with you. So, so before we get to some questions um that I skipped over during the broadcast portion before I forget. So, you write an economics the Economics View column for The Times. That's a a monthly typically in the Sunday Business session. Is that right? Yeah, it's It depends on how many people are in the rotation, which is varied anywhere from five to ten. But it's come out. But at the same time, there is a Robert Frank who writes for The Times.

He's a reporter and he's the author of the book Richester and a Journey through the American Wealth Boom. How confusing is it to have to Robert Frank's both publishing in The Times about wealth and economic inequality. Even before he started writing for The Times, we were being confused for one another again and again. In fact, The Times published an article about how often people mistook one for

the other back in two thousand seven. I think it was and probably the best story, uh, in connection with with people mistaking us for each other is an email I got from a friend in Houston. He had seen an announcement for a conference catering to high net worth individuals, and there was in the brochure for the conference a picture of me with him, picture just of me. I was gonna be talking about high net worth strategies or this, this and that. That's not something he thought I would

be likely to be doing. So he wrote back and asked me, and I said, wow, you know, I'm I'm if I'm speaking at that conference. This is the first I've heard about it. So I made some inquiries and it turned out that they had tried to book the other Robert Frank. They called the Speaker's Bureau who represents me,

and booked me instead, by mistake. The Speaker's Bureau requires a hefty nonrefundable fee upfront deposit, and the Speaker's Bureau refused to refund the fee to the client, even after it became clear that they hadn't meant to engage to me. And I said, well, he's willing to to talk to you, We're prepared to send him. So I got a fat check for doing nothing that time. That's great. Well, you you did go and speak, right, did not? You did?

Now that sounds like an economic inefficiency to say the least. Um, I want to get to a couple more questions that we skipped earlier, some of which I find really really intriguing on success in luck. So again another Michael Mobison question. We tend to attribute our success to skill and our failures to bad luck. How do we get people to be more aware of the true role of serendipity in their lives as opposed to merely thinking when it goes

my way, it was all me. But if something goes along just well, you could steer people to the studies that show that that there's that asymmetry. I suspect few people would want to read them. Uh, And there's actually kind of a perverse adaptive quality to the asymmetry. So, for example, if you believe that when you succeed it's because of your skill, not your luck, then the next opportunity that comes along, you'll say to yourself, well, skills

a persistent trait I had skilled before I succeeded. There's no reason not to explore this opportunity. So that's good. You're you're you're more likely to take the action that would lead to success. But isn't that how he ends up with a Michael Jordan playing baseball. Yeah, well, there's there's never a strategy that works well all the time, you know. But with the bad luck side of that, if you attribute your failures to bad luck, then you

you'll you'll try something you'll fail at. Oh I was unlucky. Then another opportunity comes along, and and bad luck is not a persistent trait, You'll say, oh, I was just unlucky last time. I'm gonna try this time. There's no reason to think I'll fail again. So so the person who has that asymmetric view about good luck and bad luck may actually do better over time than the person

who's more realistic in his beliefs. It's funny, it's it's long been the case on Wall Street trading desks that they recruited athletes, and a number of people have have pondered this, and and my best explanation for that is you can work hard all week, you can run the drills, memorize the playbooks, and on a Saturday you get a bad bounce or an unlucky call, you have to get up on Monday and brush yourself off and start all over, which pretty much describes what what happens in the random

walk on on Wall Street. You have to be able to say that just was a bad bounce and start all over. It seems it's a little bit of hindsight bias. It seems to fit the existing facts and it it sort of rationalizes it. But I have yet to find a better explanation than that. That a symmetrical, asymmetrical way to shake off the bad news and take credit for the good news. One of the themes in the book is that, uh, false belief sometimes are adaptive for you.

So when you're thinking about his luck important in your life, UH, let me read Duncan Watts's blurb that he's a very distinguished sociologist. If you're listeners don't know him, run out and by his book, everything is obvious once you know the answer. It's a terrific, terrific informative book. Uh. He writes, building a successful life requires a deep conviction that you are the author of your own destiny. That's absolutely right. By the way I think, if you think, oh, I'm

a cork in the river, what was me? That's you're not going to attack your life in a very effective way. He continues, building a successful society requires an equally deep conviction that no one's destiny is their own. To write balancing these seemingly contradictory ideas maybe the most important social challenge of our time, And then he goes on to say nice things about the book. That's a fascinating um way to look at it from bottoms up and top down.

Exactly what what works for an individual may not work for a society. Yeah, what what we what we should believe if we want to be effective psychologically confronting the world may not be a very accurate description of how the world works. So if inequality, as an example, is a natural outcome of and again I'm gonna quote mobis on a path dependent outcome luck, what if anything, should we do about that? One of the points I try to make in the book is that we haven't been

investing for the future. The kids who are growing up today without a lot of money in their families are having a hard time getting through school, that they're handicap from a very early age in terms of training they get. It would cost money to do something about that. But the point I try to make in the book is that those of us who have done well could easily supply the resources. We need to do something about that without making any sacrifices that would be painful at all.

And And for instance, I had a conversation with a colleague. He was afraid about the new taxes that were coming. I said, look, don't worry about them. People like us. It doesn't matter. He has a successful textbook. He's not going to spend everything. You arned, I don't spend everything. Iron We have everything we need, right, what's an issue? Will we still be able to get what we want if taxes go up to Yeah, that's what he was worried about. Well, what do people like us want? We've

got everything we need. We want something special, And you want to be able to have a special celebration when your daughter gets married. You want to have a house with a sweeping view of the Lake of Choy, Slip at the marina, whatever it might be. There aren't enough of those things. You have to bid against other people like us to get them. What happens if their taxes go up and our taxes go up? Who gets those things?

The same people as before? So and he bought this, Uh, you know, I'm not gonna say he bought it but he seemed willing to think about it. But if if someone were willing to think about it, it's uncontroversial. You know, the the things that we care about are defined very heavily in relative terms. Everybody wants to have a special occasion for his daughter's wedding. What's special? It's a purely relative concept. People today are spending thirty dollars on weddings

on average in New York. It's not not around here in Manhattan. Why and it was ten thousand back in Why have they gone up so much because other people are spending more? And why is that? Because people at the time opper spending more. It trickles trickles down. But they're not bad people. They just want to have a special occasion, and special is relative. If you spend way less than everybody else spends, then it seems like a

kind of a two bit wedding. You use the example that people lovers in poor countries the when dating, they give a single rose as a gift, and it's it's well received. But in wealthy countries, if it's not a dozen roses, it's thought of as as you're being cheap, and it's not the same sort of resonance. Yeah, it's it's a familiar point. No, No one hears about examples like that and say, oh, that's not the way the world is. Uh, everybody knows that's the way the world works.

So it's interesting that people resist the notion that framing effects and context matters as much as it does. So let's let's take another example something I enjoyed from the book, where where we were talking about how relative things are and how when the the same tide goes up or down it affects everybody equally, and use an example of we have big tax cuts, which affords somebody to drive a Ferrari, but it's over these beat up, pothole cracked roads.

Had we not had such large tax cuts, if the tax cuts were a little smaller, society can afford to pave everything and have nice smooth asphalt. And at that point, you're driving a Porsche on a smooth, clean road, which overall is the better experience for the individual, and what's the better experience for society. And the conclusion is the Porsche on the smooth, well paved roads is better for everybody than a Ferrari on a horrible pothole road where

you can't get out of second gear, you know. You know, Barry, I have yet to meet anyone who who says, oh, no, that's not right. I'd rather drive a Ferrari on roads riddled with footneep potholes. No, he say, Well, the pushback would be, it's not just the Ferrari, but it's all this across the whole board, and it's confiscatory, and we can have high tax rates and it's a whole philosophical digression, but I'm talking at a marginal change sufficient to I

don't know, pay for the infrastructure we all use. And I'm a car fan. I like anything that goes fast. Um, and I have been complaining about the roads for a long time. We've had a gas tax that's been frozen in place since, which leads to a question. Uh, something else came up in one of your columns, which had to do with the the anti government, Uh, philosophies that say we can never raise taxes, We shouldn't be spending money.

Government should be as small as possible. And that's how we end up painted into an a gas tax that's unchanged for UM over twenty almost twenty five years. Yeah, it's it's just not in the interests of anyone to have that rigid anti tax position, and yet that's become almost a default for half of the politician. You hear people say without any self consciousness that taxation is theft, and the presumption there seems to be I earned it, it should be mine to keep. Well, every country in

the world has mandatory taxation. What what's the position here that Samalia Smalia is your exception? Taxes should be voluntary like there are in Smalia. Do you want to move there? Nobody seems to be queueing enough to move there. So so if you don't have mandatory taxes, then you don't have a government, you don't have an army. You get invaded by some other country that has an army, then you pay mandatory taxes to them. So so the interesting questions are what should we tax, how much should we

tax it? All those things are ripe for discussion, but we don't seem to have any a bill to discuss something that has the word tax in it. I have a sneaking feeling that this coming election that might be a big issue, and and the fallout after this election might see some some interesting rethinks of of pre existing thought processes. We'll have to see how that that plays out. We'll watch that with great interest, won't we. So back

to um the Ferrari. You had a column in the Times that that I when I was researching this, I found and thought was pretty interesting, which said, conspicuous consumption is not so crazy. You know, we we're we're creatures of our inheritance. Uh is it cold out? Well, if you ask somebody that in Miami, where I grew up, on a sixty degree day in November, they're not happy.

They know it's cold out. It's a stupid question. But if you ask somebody and I don't know Helsinki on a sixty degree day in March, they'll think you're stupid, would for asking, But the answers the opposite of it was not called out. So yeah, context shapes are evaluations. You know, I lived in a two room house with no plumbing or electricity the two years I was Peace Corps volunteer and rural Nepal. Not for one minute did

that house seem in any way unsatisfactory. But neither you nor I could live in that house here in the US without feeling ashamed from our circumstances. Your kids wouldn't want their friends to know where you lived. So so context is clearly important as a as a a frame from making evaluations. How am I doing? You can't answer the question without a frame of reference. How am I doing relative to what? Relative to people like me? Here

and now? How am I doing? And and what is it about some of these um luxury purchases that are either signaling events or you know, the difference again, to go back to the portion of Ferrari, the difference between the portion of the Ferrari e it. At a certain point it becomes harder and harder to justify each hundred thousand dollar increment for the next mill you know, the

next tenth of a set. Once you're up to the portion of nine eleven, that's a hundred and fifty thousand dollar car, you've got virtually every design feature that affects performance in any significant way. So if the Ferrari Berlinette is a better car, some people will argue that it isn't. But if it is, it's at most just a hair's breadth better, and so you're not getting much in absolute terms. But if you were on a planet where the Porsche were the best car and we could hook in the

driver's brains. How happy are they about their car? They'd be just as happy as the as the drivers on the other world where the the Ferrari where the best car, and and so you know, it's the it's the subjective sense that you're driving something special that people are really willing to pay for. You know, if you're if your car would get to sixty miles money, it would seem fast to you. Uh, eventually if it got that that fast,

Now it's got to get there. Now the Tesla gets there in three point two seconds in in a ludicrous mode. It's now under In fact, the Tesla is faster than the portion of the Ferrari. So tho, just standards are are very elastic. That defined special and so this is subjective, it's relative, and the context makes a great deal of difference.

And and collectively we have some say over what the context is, you know, meaning it's not in our interests to keep throwing tax cuts into pockets that will result

in spending that just bids up the context. Why would an executive be happier in a world where everyone had at square foot mansion in that circle than in a world where the mansions were only And you use the example in in one of the books that if you ask people which would they p are if everybody has a two thousand square foot house and yours is three thousand, or if everybody has a six thousand square foot in your house is five thousand, and people take the bigger

small house rather than the smaller big house. Yeah, if the small house gets small enough, they'll flip, right. But yeah, within a reasonable range. I think people judge correctly that they're probably going to be happier about their house if it's not a relatively inferior one in their local context. That that's interesting. Um, last of the mobisan questions. So most people understand luck at a very high level. How we capable of of pinpointing the role of luck um

in very successful outcomes? Is there a way to identify other than Bill Gates saying, Hey, I was really lucky. I went to this high school, I got this IBM, made this bad deal which we took advantage of. Unless someone's in hitting that, how could we really identify luck versus skill? You know, it's it's interesting how you get people to think about the role of luck in their lives and uh, there was a article on Mother Jones

by Kevin Drum last Uh. He had seen a piece that was excerpted from my book on vox vox dot com, and he was quick to identify all the lucky things that had benefited him in his life. But he was skeptical about my claim that telling rich people they'd been lucky would make them more willing to pay taxes. Uh. The claim in the book is that if you're more cognizant of having been lucky, then you are more generous to the next generation. And I wrote him back and

I said, well, I agree. Just telling them that they're lucky will elicit a reaction of anger and defensiveness, much as that you didn't build that speech to you're telling people you don't belong where you are. Uh. But there's an interesting twist. If you'll ask a successful person, can you think of any examples of breaks eve enjoyed along the way that completely disarms the anger and the defensiveness. People seem to immediately light up. They think about what

you know they're they're past. If they think of an example of a break they had, they want to tell you about it right away. The more examples they can think of the happier they seem to get. It's just a complete jiu jitsu maneuver. It has a dramatically different effect on how they react to the idea that luck may have mattered in their their lives. And so I wrote that up into a piece uh with the title I like best of any piece I ever wrote. The title is ask Comma, don't tell ask people about their

their like. Um, that's a variation on a Ben Franklin issue. Instead of debating with people, he would agree with them and ask them as to you know, my position is wrong and I can't figure out and he would have listened their help, and by the time they were done, they had convinced him that his position was was right. But there's a certain fact to having people volunteered themselves rather than you know, the Socratic method has been around for a few thousand years, not for no reason. So

let me jump to some of my favorite questions. UM, I was gonna ask you about your background, but pretty much out of the PhD talk math. And then you ended up at Cornell twenty years ago or so. How long have you been there for I've been at Cornell since nine, right out of graduate school, UH and started my teaching career at Cornell, and I've been there ever since except for various sabbatical leaves. Like so, who are

some of your mentors? There's one I have to ask because I'm a fan of his work, But I would say that the two economists who have shaped my thinking personally the most by a wide margin, even one would be Tom Shelling, Nobel laureate, a long time Harvard Public

Policy School professor. I think he, more than anyone, had written clearly about why what it makes sense for us individually to do may not make sense for us to do when we think about it from the perspective of the groups we belong to, so all standing to get a better view, no one sees better than if everybody remained comfortably seated. That's kind of a trivial example of that sort, but that's been a big theme in my

own thinking about behavior and social organization. The other economists who's had the most influence on me is Ronald Co's, who U also also no. He was University of Chicago. He was also a Nobel laureate. UH and UH wrote very little, actually, just a handful of articles, but one I think is the most widely quoted and cited article of all time and economics, the problem of social cost and it's it's it's a way of thinking more clearly about what happens when somebody does something that has either

negative or positive spillover effects on others. You make noise that disturbed the neighbors, You drive a heavy car, you put others at greater risk of injury and death. Uh. It used to be that people thought about those kinds of issues in terms of perpetrators and victims. You know, there were good guys and bad guys, and and his insight was that, no, these are people whose interests, both legitimate,

are just in conflict with one another. Their shared interest is to figure out the most efficient way of resolving their conflict, and that sometimes leads to very counterintuitive conclusions about what ought to be done. So let me ask you about two other people who were at Cornell. One as someone you referenced in the book, Ed Gramleck was on the Federal Federal Reserve. He was a member of

the Board of Governors of the FED. Very insightful way ahead of the curve, criticizing subprime lending, predatory lending, and a whole slew of different things that uh he brought Alan Greenspan's attention, and Greenspan said, don't worry, the marketplace will take care of it. And actually Greenspan was right. Eventually the marketplace did take care of it. Jeter, we went through the Ringer right, just just not quite the

way I think he anticipated. But you tell a wonderful story in the book about Graham Lock and you on a ski lift. Yeah. He he came as a visitor my my fourth year when I was at Cornell, I had written very little. I had various UH issues had sort of kept me from putting as much time and energy into my writing. So I was, you know today they would fire somebody like me in year three. Then they kept me on just because I was a good teacher in the a big class. It was hard to staff.

But they would have fired me at next opportunity, I'm quite sure. But but but Ned took an interest in my work. We became friends. He offered to publish a paper if I would write it for a volume he was editing, uh and and nobody else had shown any interest in what I was doing up until and so I happily agreed and wrote the paper, I was pretty

pleased about it. I gave it to him, and then a day or two later he came to my office with a hangdog expression, saying that the sponsor of the volume that the paper was to have appeared in had called him to say the volume had been canceled, and it seemed like bad luck to me. I sent the paper out to a very selective journal just on lark, and it got accepted for publication, which was for me a way better outcome. And if it had gone into a an edited volume, which hardly anyone reads, and you know,

isn't isn't really a good career move. But yeah, I was incredibly lucky to get that paper accepted where it were, And and I had a string of papers that got accepted in quick succession with almost no delay. That's never happened to me since then. The later papers I've written, I'm sure we're at least as good as those early ones. But if if I'd had the usual editorial delays even with them, I would have been fired the next opportunity. So the lucky break that the editor journal is canceled.

What was it Econometrica that so Econometrica accepted my paper, did that success be get the other substit well, then I had There was a quick extension of the econometric of paper that I thought to write. I sent it out, It got accepted quickly. I wrote three more papers the next summer. I sent them out for review. They got accepted in quick succession by three of the top journals

and economics. That never happens. You know, all my other papers since then have gotten rejected at least once, many of them four times, and when they accepted it's after a year's delay or three rounds of revisions. So so, if he didn't ask you to do this paper, you wouldn't have written it. If it wasn't canceled, you wouldn't

have submitted it. And if none of these sort of random things in the car that really ended up getting you tenure at Cornell, Yeah, which was so far and away a better outcome for me professionally than what would have happened, which I also know a little bit about. I would have had a very different life except for

that string of fortunate events. So so the other person outside of um Gramleck is a person who wrote a book that started me down a path into behavioral economics, which is Tom Gilgovich who wrote How We Know It Isn't So, which I I found. I don't even remember how I found it. Maybe a friend gave it to me way back when. And it's it's not a lay person book. It's a it's really a little more detailed

academic book. But it makes clear that the way we perceive our own cognition is wildly wrong, and that we're really just a series of errors waiting to happen. Um. And you've you, I believe in. I don't remember which book it was you referenced some of Yeah. Tom Gilovich is in fact a very close friend. We've been collaborators for decades. Uh. He saved my life once. Uh really there was literally literally Yeah. No, he and I played tennis regularly. Oh, you mentioned we were playing tennis one

sat morning. In the second set, we were seated on the bench during a changeover. He tells me this, I don't have any recollection, he says. The next scene, knows I'm lying motionless on the court, no breath, no pulse. He kneels to investigate, realizes this looks uh not quite right, and he yells out for somebody to call nine one one, and then he flips me over onto my back and

starts pounding on my chest. You know, you've seen that many times in movies, so have I. So had He'd never been trained to do it, but just started pounding on your chest. He said. Uh. One of his Israeli graduate students who had been in the military had told him once that if you don't break the victim's breastbone, you weren't trying hard enough. So he he No, he didn't break break my breastbone. I don't think they never

told me if he did. But he got a cough out of me after what seemed like forever, but then I went dead again, and he was about to give up hope when in through the doors of the tennis facility comes in the MT team. They cut my shirt off, they put the paddles on me, They rushed me to the hospital. They put me on a helicopter and fly me to a bigger hospital in Pennsylvania. They put me

on ice overnight. Three days later, I'm beginning to uh come out of the fog, and I'm told by the medical people in Pennsylvania that I suffered sudden cardiac death just like that, not a heart attack. I died on the tennis court. Of the people who who don't get im media attention never revive the two percent, they told me, the two percent who do make it, you don't want to see them. They're they're all kind of messed up, typically long standing. But if you're without that, lots lots

of problems for you. And and uh, for some reason, I escaped all that. And the reason had to have been that the ambulance came as quickly as it did. But that was the mystery. How did an ambulance come so fast when we were six miles out of town and the ambulances are dispatched away from the other side of Itha. And what I learned was that there had been two auto accidents close to the tennis center that had occurred before I collapsed. Two ambulances are well on

their way to those accidents. One of them. The injuries aren't serious, so when the call comes to that one, they say, divert to the tennis center. We got something more important for you. And they were there. And except for that, I'm I'm a dead man. So not a coincidence. You you write a book on the road right about what you know that's what they tell authors, And I tell people I'm probably the luckiest person they know. Maybe that's not true, but I'm certainly one of the luckiest.

That's pretty fascinating. Um, so let's talk about other books. What what are some of your favorite books that perhaps you haven't written, you have not written. Uh. Tom Shelling's book US, in which I didn't mention the title of is Micromotives and macro Behavior. Absolutely wonderful book. If you liked grow Behavior all right, if you liked Tom Gilovich's book, it's it's sort of aimed at that same slice of the market for the intelligent, curious person. I mentioned Duncan

Watts's book. I think I actually have that at home. That is a fabulous book. Is the Mona Lisa famous because it's a great painting, No, says Duncan. He says it's famous because it's famous. It's famous because it was stolen. Prior to that, nobody really gave a damn about it until nineteen eleven. Then it was stolen from the Louver. Not a big picture, by the way, everybody thinks it's John It's no big deal when you see it. At

least that was my my reaction and his two. And so he saw that there were two Leonardo canvases in the very next gal Nobody seemed to be crowding around to look at them, but there were three people elbowing one the other side to see the Mona Lisa. And so he did a little digging and he found that until nineteen eleven, nobody cared about the Mona Lisa. Then it got stolen. Took two years for them to resolve the crime. They arrested the Italian custodian who stole it.

Then again, the paintings splashed across the newspapers all around the world, first time that had ever happened. And so now it's a symbol of Western culture, quite quite amazing, pure chance that it got to be that. Uh and what was the name of Duncan's book? Everything is obvious and then there's an asterisk, and in parenthesis beneath its asterisk. Once you know the answer, I'm gonna have to take a look. I'm pretty sure that's sitting in my queue

waiting to be to be read. So so let me get to my last two favorite questions I asked all my guests. So a millennial or a recent college ad comes up to you and says, I'm interested in a career in economics. What sort of advice do you give them? I tell people to try to think of a time when they felt completely immersed in some activity, that the hours went by without them being conscious of time flying by it all, and to try and find a career where you would be doing that activity much of the time.

If you if you can find something that you can engage with at that level, you will become an expert at it because you'll care so much about it. Won't seem like you're working hard to become an expert. It'll just be an organic process. And if you want to be a success, I think becoming developing deep expertise at something is the route to take In today's climate. We were talking about winner take all markets. You know, being the third best person that something isn't gonna do much

for you. If you're the best at something, though, even it's if it's something that not that many people care about, there's often a lucrative niche for you. There's very least you're gonna be doing something you like that. There's a number of studies that talk about having an expertise, having a sense of control and actually being able to affect the outcome that that leads to workers satisfaction and and so you're giving that exact advice um to millennials, exact advice,

you know. Charlie mungerh Warren, Buffett's second in command, said that if if you want to get what you want, a good strategy is to try to deserve what you want. Makes sense, and and getting really good at something that's that's how you most likely to get what you want. My final question, what do you know today about skill and about income inequality, about economics that you wish you understood better in the beginning of your career twenty plus

years ago. You know, most people, as I say in the book, tend to overlook the role of luck in their lives. That hasn't been true of me. Not so much because I think I'm more observant or or perspicacious than the typical person. I think luck has had a much more obvious effect in my life. I would not advise anybody to organize his life the way I've done. You know, I think I've stumbled into a career that's been in so many ways just the right career for myself.

I think if if you're more systematic about it and and today, I probably wouldn't have succeeded. I think the doors start closing at younger ages. Now you have to be I have credentials, solid line even to get into a good school. Now. It wasn't so much true when I was. But I think, you know, finding something that you you like and you can get lost in would be the same advice I'd give to somebody almost at

any age. So if you're if you're a parent, you've got kids, uh, you know, kids don't like everything that they do, uh, and their reactions to the various activities that you urge them to try or instructive, So pay attention. Do they love something? You know, open some doors and see if you can get them more deeply involved in that thing that they love. Thanks Bob, this has been absolutely fascinating, and thank you for being so generous with your time. Thank you Berry. It was just an absolute

pleasure for me to get to come down. If you've enjoyed this conversation, be sure and look up an inch or down an inch on Apple iTunes and you can see the other ninety or so such chats that we've had. I would be remiss if I omitted Taylor Rigs for helping to organize each of these conversations, and Charlie Vollmer, who is our chief engineer here. Uh, you've been listening to Masters in Business on Bloomberg Radio