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Transcription of interview with Randall Bartlett on November 25, 2013.
Douglas Goldstein, CFPÆ, Financial Planner & Investment Advisor
Randall Bartlett is a professor of economics at Smith College since 1979.
Douglas Goldstein, financial planner & investment advisor, interviewed Bartlett on Arutz Sheva
Radio.
Douglas Goldstein: Through the Great Courses, you teach a course on thinking like an economist
and applying that kind of rational thinking to life.
Life really isnít that rational.
How did you build that in?
Randall Bartlett: One of the things about economics and rationality is that when we
talk about it, weíre really talking about the means that people use rather than the
ends that they try to achieve.
If you had what to me would be a totally irrational passion for trying to summit the highest peak
on every continent in the world, to me that would be a crazy objective but if it meant
something to you, economists talk about rationality then as taking strategic steps to try and
accomplish that and so if we can have an opportunity to further that goal, you would take it.
My wife for example would think taking a rock climbing course would be just absurd but if
you have that objective which is somewhat sentimental and emotion, an economist would
say thatís perfectly rational for you
to do and irrational for her.
Douglas Goldstein: Basically on what youíre saying, if someone tells me ìI want to buy
a Ferrariî and I know he can afford it but he really wants it, is that rational?
Randall Bartlett: No, the rationality then has to come when you compare that with the
possible means.
So you have to fundamentally tell him, ìHereís whatís available to youî and the other thing
that economics is all about is the tradeoff.
If you do the Ferrari, you will not be able to survive retirement.
If you do the Ferrari, youíll have to sell your house but in the sense to bring reality
and information to it is rational, but the fact that he loves Ferrari so thatís an emotional
thing and I certainly canít say ìYou shouldnít love Ferrariî but to bring the possibilities,
the attainability of that goal into clear light is probably what your role is.
Itís not rational to try and attain things that are really none your means but it is
rational to try and find the best possible way to get close to what you want.
Thatís what rationality is really about
Douglas Goldstein: One of the problems is trying to explain anything rational to someone
who has an emotional connection to it could be impossible but you teach about thinking
like an economist.
How do you teach that?
Randall Bartlett: Some of it is just to have some awareness of a couple of things.
If thereís anything thatís fundamental to economist, itís that they think people respond
to incentives.
Itís not just looking at your incentives but looking at the incentives you create for
other people as you interact with them.
An example where somebody did not think like an economist was in the old Soviet Union and
Iím sure everybody remembers the great pole vaulter Sergey Bubka.
In 1986, he first set a pole vault record and then in the next 10 years, 35 more world
records for the pole vault but each one was only a tiny fraction of a centimeter higher
than the last one.
It turns out that the Soviet government at that time was providing a large cash bonus
to any of their athletes that broke a world record and Sergey took this to heart and said
his goal then was not to raise it by the highest than he could but raise it as often as he
could.
He then changed the full strategy of how heís going to compete, constantly push the pole
vault record up by the tiniest fraction and get a large bonus each and every time.
Another way you can think about people responding to incentives is that I have a friend whose
daughter went to first year college and sent home a bill for $2000 for textbooks and the
mother of course was horrified, but she was an economist so the next semester what she
did is, she sent her daughter $500 to pay for books and told her she could keep anything
that was leftover and at that point, the daughter had a great incentive to use textbooks or
go to the library and use the reserve room.
It was just recognition that youíre creating incentives for other people and anticipating
how theyíre going to respond to it.
Thatís part of what thinking like an economist is.
Douglas Goldstein: Iíve spoken to Dan Ariely and one of the things that he has told me
personally was a test that he had done where they laid that people could buy a gift certificate
for $20 and they only pay for $7 for it or they could get a $10 gift
certificate for free.
The people chose the $10 for free.
How does that fit into your thinking here?
Randall Bartlett: What Dan is doing is a whole new field of behavioral economics where they
find in sort of psychological experiments that people donít do behave as rational as
we would like them to or at least as we anticipate in our models that they are going to.
Thatís just one of those things where physicists spend a lot of time talking about friction
models and what would happen in a world without friction and economists often spend time talking
about what would happen if everybody was perfectly rational, but I think we all recognize in
the real world these deviations from rationality is kind of hard to fit in to our models.
Douglas Goldstein: I was just reading an article that in Japan, they are having a terrible
problem because they donít procreate enough.
They arenít marrying because they actually say itís just bad for their careers.
Are people thinking today much more in economic terms than perhaps in previous generations
where family might have seem important?
Randall Bartlett: Thatís hard to say and certainly thereís a lot of debate in economics
about what people are doing and of course a lot of the models and theories says people
donít have to consciously be thinking rationally but they tend to do it.
Again with the question of for example procreation, thereís a lot of theories and some evidence
that says one of the reasons why when economic development takes place, an average income
rises, the number of children people have goes down.
The economic argument for that is the children in that sense become more expensive individually
and so you invest in quality of children rather than quantity of children.
You have fewer kids because you want to be able to send them to college, because it takes
a lot more to educate them and take care of them in a more expensive world.
I donít think people sit around and consciously do that.
I donít think many people say whatís the marginal cost and marginal benefit.
It certainly would not be a very romantic relationship if they did but I think they
act as if they do so I think people have always responded to the kind of incentives that were
available for them whether they were doing it in a careful thoughtful fashion or just
doing it sort of half thousand fleet.
Douglas Goldstein: Do you think that in the world of economic thinking, there is room
for feelings and emotion?
Randall Bartlett: Iím an economist.
I live in the world.
I do kind of careful modeling when I deal with economic issues but when I sit around
and watch my grandchildren play, itís just bad as the richness in life, itís so much
more important than checking my portfolio or anything, but economics is the side of
life but it certainly isnít life at least in the way I live it.
Douglas Goldstein: One of the things Iíve noticed about economists is I find it funny
that when I get clients who are economists and I always figure, ìYou know much more
than I do.
You got the PhD.
Youíre writing papers all the timeî and they say ìYeah but you take care of the money.î
What does economist really do if he is not dealing with money?
Randall Bartlett: Economists tend to think they deal with everything.
When students take the first economics course, they think thatís what itís going to be.
They think itís going to be about money, stocks and bonds and all that but thatís
really very peripheral.
Itís a social science and the social science is really trying to understand the broader
institutions by which every society has to balance off scarcity of wants and unlimited
needs.
So a lot of what weíre dealing with is social questions of what kind of a policy would efficiently
deal with inflation or how do you control congestion on highways and things on those
lines.
Itís not so much about how I get rich, itís how the society as a whole function to try
and improve the quality
of material existence.
Douglas Goldstein: How can people follow your work?
Randall Bartlett: I think with the kind of things weíve been talking about, I do have
this course in the Great Courses called How to Think like an Economist: The Guide to Rational
Decision Making and thatís where I discuss this kind of stuff more.
In my more formal professional life, I tend to do more esoteric stuff under economics
just probably interesting to a broad audience so I would recommend that as a way to hear
about the kind of things weíve discussed.
Douglas Goldstein, CFPÆ, is the director of Profile Investment Services and the host
of the Goldstein on Gelt radio show (Monday nights at 7:00 PM on www.israelnationalradio.com.
He is a licensed financial professional both in the U.S. and Israel.
Securities offered through Portfolio Resources Group, Inc., Member FINRA, SIPC, MSRB, NFA,
SIFMA.
Accounts carried by National Financial Services LLC.
Member NYSE/SIPC, a Fidelity Investments company.
His book Building Wealth in Israel is available in bookstores, on the web, or can be ordered
at: www.profile-financial.com (02) 624-2788 or (03) 524-0942.
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