MALE SPEAKER: Good afternoon.
Welcome to Talks at Google in Cambridge, Massachusetts.
Today it's my great pleasure to introduce Robert Shiller.
Dr. Shiller is Sterling Professor of Economics at Yale
and winner of the 2013 Nobel Prize in economics.
He's the author of the New York Times best seller "Irrational
Exuberance," and with George Akerlof, also a Nobel winner,
he's coauthored a previous book in addition to today's.
Dr. Shiller joins us today to discuss
the provocatively titled "Phishing for Fools:
The Economics of Manipulation and Deception."
As he says in the book, "Competitive
markets by their very nature spawn deception and trickery
as a result of the same profit motives that
give us our prosperity."
I'll let him take it from there.
Please join me in welcoming Bob Shiller.
[APPLAUSE]
ROBERT SHILLER: Thank you.
Jonathan told me that you recently had
Dick Thaler in the same series.
That's interesting to me.
Dick is an old colleague of mine.
We've been running a behavioral economics workshop
at the NBER, which is right near here, for 25 years.
And he wrote a book called "Nudge" with Cass Sunstein
about government policy.
And the book I'm going to talk about
could be considered the anti "Nudge."
It's kind of the opposite.
The presumption was that nudges are used for good purposes,
and maybe they are.
Do you know what a nudge is?
This is a new-- I'm drifting from my prepared talk.
We're all critical of economists.
There aren't any economist here, probably, right?
So economists have adopted a canonical model
of an economy consisting of self interested, utility maximizing
individuals who take prices as a given
and maximize their utility individually.
And that leaves to some kind of optimality
ultimately in the equilibrium that follows.
So both Thaler and I are critical of that model
that underlies economics.
And our criticism has something to do
with the field of psychology, of neuroscience, sociology,
which have a different approach to studying human nature.
I feel a little uncomfortable talking at Google.
I don't think I prepared adequately for you.
That's because a lot of what we talk about is marketing,
and we have an uncomfortable relationship
to marketing as you'll see.
Not necessarily negative, but just uncomfortable.
And I don't know what Google, isn't Google,
there's different ways of looking at it.
By the way, you're Google not Alphabet, right?
AUDIENCE: There's some Alphabet here.
ROBERT SHILLER: I'm all confused.
I'm talking to an organization in transition.
I don't know how to.
But I was thinking, I think of you as a search engine company,
but that's very narrow.
But I think maybe it's better to think of you as a marketing
company.
Is that a good?
You're a big data company, and we have mixed feelings
about all of these things.
[LAUGHTER]
So I thought I should start by saying that I've already
thought of Google as an ethical company in this space.
So just did a test this morning.
I went on to news.google.com, and I just
looked at what came up.
And there was, the way my computer does it,
I saw a big news story about Hurricane Patrick,
which is the biggest hurricane ever that's
about to hit Mexico.
That was the Google story.
And then to compare that I went, can I say it here?
Bing.
[LAUGHTER]
Now their screen, the lead story in their screen
was lone gunman kills one person at Tennessee State University
after a dice game.
OK.
Now that's sort of all right as news, but I think,
that's what we're going to call phishing in my mind.
We use the word phishing in our title,
you see it there, as a metaphor for a broader
range of deception.
So think about Bing putting that story on as the lead story.
Is that really high minded news reporting?
Well, to me it seems not, especially
since there's now a new website, I
forget the name, that lists every mass shooting.
And it turns out if they define a mass shooting
as, this didn't qualify but, four people killed at least.
And there's one every day in the United States.
So it's like why, is this really news?
And then at the bottom left of the Bing screen,
there was a news story, and the title
was "Drunken man breaks in by mistake to a neighbor's house
and crawls into bed with two young girls."
Now that is definitely not a news story
for me in the sense that it's wasting my time.
So I've had this good feeling about Google, largely
from that, well, in many things.
So what this book is about is about what's really,
it's a certain kind of general problem with free market,
unregulated economies.
And by the way, the co-author, George Akerlof
is as you mentioned is my coauthor on another book,
he to me is a very independent thinking person.
I wanted to write a book with him not quite knowing where
it would go, because I like working with people
who think differently.
And both he and I have always felt
somewhat critical about what goes on in our profession.
The point is to bring that out.
Now, the problem-- or also, what is
a fool, that's our coined word.
That's someone who may be very intelligent,
but doesn't appreciate how much manipulation and deception is
being foisted on him.
So the idea of our book is that we
would talk about many different kinds of manipulation
and deception.
Talk about it from a behavioral, from
a psychological standpoint.
And another thing about our book is that we're different from,
there's a long history of books on this topic as you may know.
We wanted to take it from a more economic perspective.
With both George Akerlof and I, when we were teenagers,
we didn't know each other then, we read Vance Packard's book
"The Hidden Persuaders."
Do you know this book?
It was a bestseller in the 1950s.
It detailed how advertisers use psychology to trick you.
And you are already aware that they do that sometimes, but you
read Vance Packard's book, and it comes across looking
much more frequent.
The problem with Vance Packard's book,
though, is that it doesn't have any economics in it,
and it seems to portray the marketers
as an evil conspiracy.
And we didn't feel that that was the right way to look at it.
So our book is about what we call a "phishing equilibrium."
It's not that people are evil, it's
that we have a market system that allows,
that almost forces people to play the tricks
that we don't like, and it's called competitive pressures.
So the theory of competitive equilibrium
is sometimes connected to Darwin's theory of evolution,
constant pressure on businesses to make profits,
and that means then that they will
be very efficient, because they will be struggling hard
to succeed.
But the problem is that they might
have to be dishonest within subtle,
it has to be within the law, of course.
But this more subtle form of dishonesty
underlies problems that we see in free markets.
We're going to come around at the end
to a plea for civil society, or an argument
that civil society is what really
matters in a successful free market economy.
By the way, I should add since I'm here,
I believe in free markets, and in fact, I
have something of an entrepreneurial history.
I started with Case and Weiss, a company
called Case, Shiller, Weiss in 1991
that produced home price indices and valuations.
We were ahead of Zillow.
We had an online in the mid 1990s home valuation service.
And the outcome wasn't as successful as Zillow,
but we sold our company in 2002.
And now Core Logic is continuing our index production.
And we've established a futures market for single family homes
based on our indexes, and that's still
going, not hugely successful, but Standard and Poor's
publishes our indexes.
So that was our successful venture.
Then we had an unsuccessful one that I won't tell you about.
But it may not be unsuccessful, because I
think that what we tried, which was
to create markets for real estate
and oil and other maybe GDP is still being talked about.
I think the story is not over yet.
So I'm really pro free markets and pro entrepreneurship.
This is just a, what I'm talking about,
what we're talking about in this book is just a dent into that.
And it's don't go too far with the belief
in that just self interest will promote good economic outcomes.
So I think that one thing that economists don't recognize
is how the world is driven by social movements
and thought leaders.
And they tend to, one of the problems
is that, there's many problems that are,
but in terms of our thinking as academics,
there's a tendency to be affected by prevailing theory.
Something that Daniel Kahneman calls theory induced blindness.
A theory becomes established as part of a movement,
and then it gets tremendous prestige for a while,
and then it becomes overrated.
And I think what George and I want
to argue against in our book is the overratedness
of the free market capitalism idea.
So let me step back and think about, I
don't know if any of you had graduate training in economics.
Probably some of you have had undergraduate training.
There is one of the core elements
that you will be taught in a economic theory
course will be something called the fundamental theorem
of welfare economics.
Do you know this?
At least one of you doesn't.
Whether you've heard of the exact theorem is irrelevant.
I think you've heard of the general sense of conclusion
from it.
The fundamental theorem of welfare economics,
which you can find in micro theory textbooks,
is a mathematical theorem that describes
a competitive equilibrium.
You assume that each individual is completely selfish, only
interested in himself or herself,
and this person maximizes utilities
subject to a budget constraint.
They're also producers that produce the commodities,
and they maximize their profits subject to a budget constraint.
But there is no social feeling whatsoever.
Everyone does it for personal reward only.
The outcome, the theorem says, is in a competitive equilibrium
if there are no externalities, that the allocation of goods
and services will be Pareto optimal.
You ever heard of this term?
Some of you have.
Vilfredo Pareto was an economic theorist
who flourished around 1900.
And he actually anticipated the fundamental theorem
of welfare economics, but didn't prove it adequately.
The Pareto optimality means there is no way
to make everyone better off.
You can redistribute income, you can take from one to another,
and that will make one better off and the other worse off,
but there is no way in equilibrium
to make everyone better off.
Moreover, this became accepted by economics departments
who then thought, well, redistribution is not
our department.
Should we take from the rich and give to the poor, for example.
That's philosophy department stuff.
Economists redefine themselves in the 20th century
as technicians.
Right, they say, should we take from the rich
and give to the poor.
That's not science, that's philosophy.
That's ethics or morals.
We are called in to talk about is the economy functioning
well, and that functioning means Pareto efficiency.
So I think that the economics departments of the world
became less philosophical, less moral in their orientation,
less interested in how people behave.
They had this mathematical framework,
which had nothing about people except that there
are relentlessly selfish.
They then dragged out of Adam Smith, who in 1776 wrote
the classic of all time in economics, the book,
"The Wealth of Nations."
And there is a quote they pull out
one place in this book where Adam Smith seems
to think that completely selfish behavior within the limits
of a market economy that upholds property rights is optimal.
He said something like, I'm trying
to remember the exact quote, but he
said, "It's not to the beneficence of the providers
of food that I get my dinner.
The Baker, the brewer, and the butcher
provide my dinner, because of my paying them for what they do,
not out of any concern for me."
And then Adam Smith went on to say, you know,
I get more from those selfish people
than I get from all the social reformers of the world who
don't seem to make any difference.
That's all talk.
That was a very loose quote of Adam Smith.
But you know what?
These are extreme views.
And even Adam Smith didn't believe that,
because if you look in other parts of his work,
he wrote another book in 1759 called "The Theory of Moral
Sentiments."
And in that book, he said that people are not selfish.
They have some aspects of selfishness,
but they're inherently social creatures.
Very interesting book, his 1759 book, by the way.
Vilfredo Pareto who named Pareto optimality,
himself didn't believe it.
In fact, he dropped out of economics,
and he spent the last 30 years of his life
as a sociologist trying to understand society.
I think that there is something wrong with this theory.
In 1918-- you see I have a long time frame of history.
I read these old ideas, and I find it's useful to do that.
Go back 100 or 200 years, they have
ideas that we've forgotten.
Professor Irving Fisher at Yale University
said that this whole thing about utility
that economists talk about, it's not right.
People don't maximize their utility.
The word utility goes back to the philosopher Jeremy Bentham
who said all philosophy should be oriented toward,
all morality should be oriented toward utility.
But utility, he said, meant something like the human well
being, human fulfilment.
Irving Fisher said, that's not what people maximize.
They maximize, he said we need another word for it.
And he couldn't figure out a really good word for,
it's not in a language, so he coined one.
And he said it's wantability.
What you maximize is not your utility,
it's what you want at the moment that you make the purchase.
That term, by the way I love Google Trends,
Google Ngrams has changed my life, because I always
look up any idea.
So I looked up wantability on Google Ngrams,
and I find his word did not exist before 1918.
It exploded into usage for the next 20 years,
and then has exponentially decayed since then.
Now if you teach micro theory in a university,
it's kind of a difficult assignment,
because it's supposed to be some classical theory that everyone
should know.
And it's a little bit depressing to have
to teach this old stuff.
So nobody's really interested, oh, I'm exaggerating.
But you'll teach the fundamental theorem of welfare economics
with reverence and never come back to distortions in it.
Now here what we're talking about
is a phishing equilibrium.
I think the simplest example, because you've likely
already heard of it, but it's a very minor example,
but I'll start with this, is the candy bars at the checkout
counter.
Have you ever noticed at a grocery store
when you go to the checkout, you're
standing in line waiting to, now it
might be a computerized checkout,
but it would be still standing in line for a while,
they have candy bars right there.
So why is this?
Well, about 30 years ago some social reformers and thought
leaders decided to make a case about this.
You know why they put them there.
It's because you don't go to the grocery store intending
to buy candy bars, and in fact, you probably
have an idea that I'm not going to buy that.
But now they put them right in front of you at the worst time,
right at the end of your shopping trip
when you're standing there in line.
Moreover, many people go to the store with young children.
Now you've been shopping for 45 minutes, they're getting tired,
and now you're putting them in the experience
of standing in line.
It's a most unpleasant ending.
So they know that you're vulnerable,
and they put it there.
Several decades ago a number of stores
announced that they would not do that,
because there seemed to be a public reaction against it.
However, if you look now at stores,
it's all happening, it's all back, the candy bars are back.
And my colleague George points out
that the children's candy is put at children's eye
level in the store.
So this is just illustrating what I
mean by a phishing equilibrium.
Imagine that you took a job as a manager of a supermarket.
Do you think you would do this?
I've pointed out that you are in a sense
exploiting your customers by putting candy bars right there.
It's almost evil, but it's not.
The outrage has passed, it had its moment,
and now it's now it's faded.
And so, would you do it?
Well, the grocery store business happens
to be a highly competitive.
It's not a mostly innovative business.
There's a lot of competitors.
There's no organizational slack, which gives you freedom.
If you became a manager of a grocery store,
you would probably become very quickly conscious
that other grocery stores go out of business all the time.
Your profit margin is something like 2%.
You can't monkey around too much without risking
the whole enterprise.
So you probably would do it, too, right?
The other thing is that managers learn
that the best way to manage if in doubt, imitate
what other people are doing.
You assume that they've experimented.
It's costly for me to experiment.
Apparently, everyone puts candy bars at the checkout,
so I will do that too.
Now I've picked a very minor example about this.
What we did in our book is also somewhat similar to what
Vance Packard and others have done
is just give a lot of examples.
Our examples come from all different times in history.
Some of them-- let me just give you a couple of examples.
One of them is, there's a book by Natasha Schull called
"Addiction by Design," and it's about slot machines.
It's really about machine gambling.
She points out that gambling has changed in recent decades,
and it's become more machine oriented.
That is slot machines are rising as a share of total profits
for gambling enterprises.
And why is that?
Well, she presents an analysis saying
that people are more vulnerable toward addiction
when they are under the control of a machine.
So gambling is less and less.
I'm going to have some friends over, and we'll play cards,
we'll play a little poker, which would be a social environment.
When they first discovered slot machines in the 1890s,
slot machines were found to be addictive to a small percent
of the population.
They seemed to just keep doing it.
Have you ever noticed these people in a casino?
I think it has something to do with a brain bug.
Another book, I like books, so I'm mentioning,
there is a book by neuroscientists Dean Buonomano
called "Brain Bugs."
His premise is that the brain is a computer,
and it has a built in program as well as
adjustments that you add as a part of your education later.
But the built in program has bugs in it.
It's a product of Darwinian evolution, but only incomplete.
Evolution is much slower than computer programs
are and writing code, and so there are lots of bugs.
The book details all the bugs.
And I think it's interesting reading.
It's a funny perspective to take on yourself.
Well, apparently this slot machine addiction
has something to do with a bug in the reward
system in the brain that for some people encourages
repetitive behavior.
I used to code in Fortran, so I kind of think of it
as being stuck in a do loop.
[LAUGHTER]
So according to Natasha Schull, researchers on slot machines
have tried to figure out what makes for a successful slot
machine.
And they found out that I guess the optimal interval
between gambles is 3 and 1/2 seconds.
So they try to make it, that's because it's somehow
the reward neuroscientists have found
tends to come at the moment of anticipation.
The work of Wolfram Schultz, so the dopamine system sends out
signals the moment you think I've just
placed a bet I'm hopeful.
And then that dies out after a certain interval of time.
So if you want it to be optimally addicting,
you have to make it easy for the person
to keep playing bets at that interval.
So they've eliminated the crank that used to pull down.
That seemed to interfere with the optimal frequency.
And another thing they've learned
is that people are trying to stop.
They're sitting there thinking, you know I've lost $25 already,
maybe I should stop.
But they can't quite bring themselves to stop.
Well, they've discovered through research
that people who are gambling machine addicts
tend to stop if there's anything interrupting the flow of just
pushing, pushing, pushing.
It used to be that coins would come out when you won,
and they'd make a loud noise and a big spectacle and great.
But the problem is that it disrupted the flow,
and many people would pack up and leave at that point.
You don't want them to pack up and leave right
when they've won something.
So they now substitute a synthesised digital sound
of coins falling, so it won't break the rhythm
of your keeping on betting.
They've also discovered that people
are a little bit ashamed to be sitting at the slot machine,
so they try to find a nook where they are away from other people
observing them too much.
But they have a social component to the gambling still has that.
They like to see the excitement of the Casino.
So you optimize the structure, so
that they have the slight sense that they're hiding
in privacy with this machine.
Anyway, you get the idea.
I don't how you people, you're not doing anything like this
here, right?
I hope not.
But even so, if you can imagine taking a job designing
slot machines, you might be affected
to do the same sort of thing.
Let me give you another example.
Coca-Cola is the most famous beverage ever.
Why?
Now I've always wondered this, because I never particularly
liked it.
I don't dislike it either.
I mean, it's just, Yeah, it's fine.
But how did it get to be so big?
Well, it's a testimony to marketing.
And the people at Coca-Cola had a belief
that-- I'm relying this on a book "Salt, Sugar, Fat"
by Michael Moss.
It was a best seller a year ago.
According to his history of this,
the Coca-Cola people were acutely
aware of the importance of attaching
memories of good moments to their beverage.
And they would try to use advertising
to make a connection, so that later on you
would just think Coca-Cola, it's great, it's good.
Somehow, I feel good.
Now I think that what those people did was
they did something that was an anticipation
of modern neuroscience.
And that is that neuroscience now
says that the human mind as a computer
has a filing system for memories that attach emotions
to each memory.
So I think it's a good idea to put an emotion on every memory.
It's not a human idea, that's an evolutionary idea.
It's like having a file cabinet with different colored folders,
and important stuff you put in a red folder,
so it attaches an emotion.
Another is starting to see that the brain is really
structured that way.
So for example, you have the amygdala,
which is somewhere in here, that attaches emotions to memory.
The right amygdala specializes in fear, for example.
Did any of you see the new movie "Inside Out."
It's a children's movie, Disney Pixar.
I went with my wife to see it, because it's
supposed to be a children's movie,
but I thought it was far more interesting
than most adult movies, most that I've seen lately.
It features an 11 year old girl.
It gives you a peek inside her brain.
Now it's a little bit simplified.
It says there are five emotions, just
like there are five senses.
You know sight, hearing, touch, smell, and taste.
There are five emotions.
They're fear, anger, joy, disgust, and, I forget.
AUDIENCE: Anger.
ROBERT SHILLER: Anger, yes.
And so the idea is that these are already built in.
It's the same in every culture.
And it shows, the whole drama of this movie
is that the attachment of emotions to memories
and the concern that the people inside your brain
have about the dangers of attaching emotions
to core memories, because it can change your personality
afterward.
It's dangerous to have negative emotions attached
to important memories.
So I think Coca Cola people appreciated this right
from the beginning.
And it was that sort of thing.
Well, I'm giving you some examples.
We have many other examples.
We attribute the financial crisis recently to at least
partly to phishing.
People had the advantage of selling certain securities.
That a lot of emotional tension in life that people have
is running out of money and fearing
for their possible bankruptcy, and I
think that marketing helps them do that.
Anyway I'm supposed to wrap up.
What I wanted to do is get to what is our,
I don't know if I presented this well,
but I wanted to get to the idea that we
have about why we are as successful as we
seem to be in this country.
What is our core reason for success.
A view has enveloped that it is because of our free market
institutions that encourage entrepreneurs.
That's certainly partly right, but is that the only thing.
Or should we, it seems like we might be oversimplifying
to give quite so much.
So why is America a great country?
I have a couple of suggested readings on this, which
you can find on Google Books.
And I'm so thankful to Google, which gives me so much help.
In 1780, I think the year was, Benjamin Franklin wrote
a short article to be published in Europe.
And the title of the article was "Information
for People Contemplating Repairing to America."
It was a description of America in 1780 for Europeans.
And in that description he said, "Be warned.
Your erudition will do you nothing in America.
The Americans are very practical people,
and they want to see results.
If you are a skilled workman of some sort, fine,
come to America and you'll do well.
But if you're on an aristocrat or an artist or a philosopher,
don't come."
That's something about America.
It reflects the kind of people who came here
and the attitude that developed.
The other one you my read is Alexis de Tocqueville
who has a lot to say about American character.
The point is that this country is a success partly because
of free markets, but also because of civil society.
And it's actions that people have
taken to prevent the phishing equilibrium from dominating.
So it's not just individual acts of ethics or acts of concern.
We can exhibit, for example, the founder of Ogilvy and Mather,
the ad agency, Ogilvy in the 1940s
announced that his company would not take on any more cigarette
advertisements.
I think that if you read the medical literature
in the 20th century, it started to become
like I have a hunch cigarette smoking is bad for you by 1915.
By 1940 it still wasn't proven, but someone
who read the literature would probably say, this is it,
I'm not smoking.
It looked pretty bad.
So that's when Ogilvy pulled out of a cigarette advertising.
But it didn't have no effect on the outcome,
because somebody else just goes right back in.
There's a profit to be made.
And there was a profit to be made from phishing.
The cigarette companies tried a strategy of sowing confusion
about tobacco.
They found that the president of the University of Michigan,
Little, was a skeptic and a smoker.
He loved his smoking.
And they got him to say that no one has
proved at a statistically significant level
that smoking is harmful.
Maybe he was right, or maybe they
didn't understand causality well enough to prove it.
But basically, it was a feint to try to get people confused,
and it was for profit.
So what we really need is somebody
who will stand above the profit incentive
and will do something to try to limit profit opportunities
for things that we can't stand.
And I've been concluding my talks
by just giving a few examples of heroes who sort of started
social movements.
And there are a great many heroes.
What I've been doing as a game, I've done a book tour for this.
I'll try it here, too.
The game is I'll give you some names of famous people
who upheld morality in business and ask you
if there's anyone here who can tell me
who they are by their name.
Now, if you read our book, you'll know,
but that's cheating.
So let me start with Florence Kelley.
Anyone heard of her?
As anticipated, no one has.
Florence Kelley in 1899 set up the National Consumers League,
which tested products for safety and put a white label,
this was a nonprofit, a white label
on products that were safe.
William Henry Merrill, now this is not the Merrill Lynch
Merrill.
Again no one.
In 1893 he was an electrician who
was asked to inspect the electricity at the Chicago
World's Fair palace of electricity.
It was really an exciting display
of what things were going to come through electricity,
but it was unsafe.
Their wiring wasn't right, so he decided
to set up a nonprofit called United Laboratories or UL,
and they would put their mark on safe products.
This worked, because it made it impossible to phish.
The word got out, don't buy if it doesn't say UL,
and that stopped certain kinds of phishing.
By the way, UL made a corporate change
just as Google has in this month in 2012, it went for profit.
I believe it's still doing the same business,
and it's the same socially conscious business.
Another hero, Alice Lakey and Harvey Washington Wiley.
OK, 0.
I've done this before.
I hope I'm not offending you.
What these people did is made a public campaign about drugs.
They argued that as of 1900, most
drugs that you could buy in a drug store were fraudulent.
There was something like Swaim's Panacea.
What is that?
First of all, it claimed to cure any illness.
There's something wrong about that.
And then secondly, they tested what was in it.
And it was just ordinary household flavoring.
It was a complete fraud.
And they said, but what's to stop a business
from doing that?
When they advertised in magazines,
they're telling the magazine, don't criticize
us or we'll pull our ad.
So there's no incentive for the advertising.
Well, maybe there was some incentive.
But to do a testing lab and to do-- so anyway,
they got the government to create the Food and Drug
Administration in 1906.
Another hero, Stuart Chase and Frederick Schlink.
OK, Stuart, they wrote a book in the 1920s
called "Your Money's Worth."
And they said the FDA is not enough, because they're still
monkeying with you.
They said, take the example of toothpaste.
I'm quoting from their book.
"We go to a drug store, and there's
10 different brands of toothpaste,
and they all make health claims.
Maybe they're all safe, the FDA has tested them,
but what about those health claims?
How does anyone know?"
So they said, "We need a regular publication
that tests products."
That was done in 1936.
That's Consumer Reports.
Finally, one more here, Ben Bernanke.
[LAUGHTER]
Well, I guess I don't have to tell.
But I think that he's a hero.
It's not a for profit operation that he led,
it was the Federal Reserve.
And he probably prevented another Great Depression,
which was based on a loss of confidence
and a tumult within the financial sector.
Controversial things that he did.
So anyway, that's my view, our view expressed in this book.
I say that our book is, I'm already controversial.
I may have offended some of you.
It's considered unpatriotic to, it seems considered unpatriotic
here in America especially to say anything
in favor of any kinds of regulation.
But I wanted to add that I'm not,
there's a tendency to think about free markets
versus government.
I'm not thinking so much about government.
Those heroes I gave you were outside of the government
except for Ben Bernanke.
The idea of civil society is a society
with people who have a sense of community,
a sense of responsibility for what goes on.
They tend to view the government as just people we hire to do
what we want as a community.
They don't allow themselves to be
captured by propaganda, because of their sense
of responsibility.
And they tend to be educated people,
and they take the effort to get knowledge.
So that's what this book is a plea for.
Now how this fits into Google with its big data
and its Cloud.
There's so many things you do here,
I find it hard to summarize what I would think.
But it seems to me that there is already
a moral spirit at Google as I was saying at the beginning.
And I think you have more organizational slack
than a grocery store does.
That means you can philosophize about the long run
future of this organization.
And you can take steps that are maybe costly in terms
of profits today, but in the long run are the right things
to do, and may not even be in the long run crossly.
I'll stop with that and open this up to questions.
[APPLAUSE]
Thank you.
AUDIENCE: How can behavioral economic theory influence
like what's taught in universities?
Will it take over?
Will rational actor eventually not be taught?
ROBERT SHILLER: Well, I think it will always
be taught, because it's actually a useful thing
to the rational actor, and the idea of Pareto
optimality is worth talking about.
But the problem with the economics profession
now is that it like other academic disciplines,
they get separated and isolated.
And it develops a sort of departmental inertia.
Here's what happens.
You become the economics department.
Now in your research.
Now you're a community.
There's a social tendency, tribal tendency.
You start to view the psychology department as arrival,
arrival for university funding.
And moreover, you start developing a brand.
So you attract PhD students, let's say,
who wanted to become mathematical economist.
So what do you do?
You can't say, well, we've changed our mind this year,
we're going to teach you psychology.
That's not what they want.
They want to get jobs.
It becomes all routinized.
They want to get jobs, so you have
to teach them what will get them a job
in a conventional economics department.
And also there's this pressure to be
at the frontier that means that you don't have time
to read other things.
So you're struggling so hard to get
at the pinnacle of some mathematical discourse.
You just run out of time.
By the way, there's another interesting book,
which just came out by Gillian Tett called "The Silo
Effect," which argues this more generally for corporations.
Maybe this is an argument against Alphabet, by the way.
They said, Larry Page said it would
be neater and more incentivizing or accountable or something
if we divide Google into a separate unit
with separate CEOs.
But what Gillian Tett says is that can produce
a bad outcome of too much specialization,
and then also a kind of culture developing
in each one of these units that's
kind of antagonistic to other cultures in a sense
that if you defy the norms of your tribe,
you will be unpatriotic in some sense.
So I haven't finished reading her book,
bu it sounds like it's a really important topic.
And it accounts for the kind of errors that are commonly
made in modern society.
AUDIENCE: So because of some of this momentum in economics
like forgetting graduate students
that want to do mathematical economics,
is there any math associated with some of these more
behavioral approaches?
ROBERT SHILLER: Oh, Yeah.
AUDIENCE: Can it?
ROBERT SHILLER: Yeah, behavioral economics
has some mathematics in it.
Right, I mean you can ask what is it that people do,
and there can be, there's mathematical psychology.
But the problem is it doesn't have
the elegance of general equilibrium economic theory.
And people who want to understand
how did this whole set of prices get set.
Where did they come from?
Free markets generate them, but where and how and why?
That incline, there's a sort of wishful thinking bias that
develops if you are a theorist.
You kind of hope this expected utility maximization
theory is right, because it makes for a nice modeling.
If you look at what psychologists say,
it's just too messy.
And you can't say whether we've-- parade or optimality is
a nice concept, because it gives you a clear conclusion.
But if people are psychological animals,
how do we know that we've made them better off?
I'll give you an example that Daniel Kahneman, who
wrote a nice book, "Thinking Fast and Slow."
He's a psychologist interested in economics.
But one thing he did is he questioned whether we even
know our own happiness.
You assume that people are making purchases
to make themselves happy.
Do people know what makes them happy?
So he did the following experiment.
He asked subjects to thrust their hand
into a bowl of ice water for 60 seconds.
By the way, try that.
You won't like it.
It gets really annoying.
That was condition A. Then condition B,
he asked them to do that again, but actually it's
for 90 seconds.
But he's got a little temperature raiser
in the bowl that raises the temperature for the last 30
seconds to something more comfortable.
And then later asks which did you like better A or B?
Most people like B better.
That's because, apparently their memory
is affected by the improvement.
It's been 70 seconds, now I'm starting to feel OK again.
But they were actually in ice water longer.
So by some objective criteria, they should have picked A,
but they didn't.
So the question is whether people even know
whether they're happy or not.
It's a different view.
It makes it harder to do economics, because yeah,
the human brain is this complicated interconnected
calculating machine.
What's good?
I don't know what's good for it.
And if people don't know, it just kind of leaves
you inconclusive.
So economists won't like that.
AUDIENCE: It's interesting that your heroes were not
government people.
And of course, the defenders of pure--
ROBERT SHILLER: Ben Bernanke was, but most weren't.
AUDIENCE: Your free market theory
would argue that the most extreme would
say, oh well, we don't need government regulation,
because the markets will pop up people like this
where there's demand for them.
I'm curious about your general views about that.
And even professional licensing, of course,
Milton Friedman famously argued that not even doctors
and lawyers should be licensed.
But I'm interested in the latest phenomenon
of this seems to be reviews.
So Amazon has reviews of products,
Uber, Airbnb both have reviews of both sides
of the transaction.
Google is trying to get more reviews.
I'm curious about your thoughts about the review phenomenon.
Obviously, it has lots of problems,
not just organized campaigns to do biased reviews,
but sort of the herd instinct with reviews
and lots of other things.
Are reviews really the latest of this heroic phenomenon
or is it all just self deception or what's going on
with the whole review thing?
ROBERT SHILLER: Well, you raise a lot of interesting points.
Let me start with Milton Friedman.
In 1962 he wrote a book called "Capitalism and Freedom" that
was actually an outgrowth of an earlier work he'd done with,
who was at, Kuznets on occupational licensing.
And in that book, he argued that occupational licensing
is merely an effort by the practitioners
to exclude competition.
So here's what happens.
The AMA goes to appear before a medical licensing board
and argues persuasively that something has to be,
a practice has to be prohibited unless it's licensed.
But that in fact is merely keeping others
out of practicing.
The outcome is that our medical services are excellent,
but there aren't enough of them, and they're too expensive.
He said that somehow the community doesn't understand
that, and so it's a doop.
He's really talking about it kind
of manipulation and deception.
But the problem is, what would we
do about not having any licensure for doctors?
The problem is we know that there
is a lot of quack medicine that could
be sold to ignorant people.
So maybe what he proposed has never been adopted
by any country, I think.
Any advanced country has licensing for doctors.
But another thing is I actually like Milton Friedman and admire
his works.
What he actually did with that book
was quite significant, because within a few years
of the publication of that book, the first nurse practitioner
program was started, or a physician's assistant.
What that did is it really increased
the supply of medical services.
The AMA back down and allowed that a physicians assistant
could practice in the office of a licensed MD.
The outcome of that was the reduction
in the cost of medical services and improved health.
So I think that the idea that regulators
can be captured by the regulator,
that the regulations don't always serve the public
is correct.
But that shouldn't be taken as a blanket
argument against regulation.
The other thing you've asked is about reviews on websites now
that allow people to see others comments.
I think that is a wonderful development.
It used to be that-- our ability to shop
has become so much better.
We get the right thing.
By the way, our GDP numbers don't reflect that.
If you were back in 1955 buying shoes that bothered you,
buying medicines that made you sick,
things like that, because you couldn't read those reviews,
you had a salesman who wasn't unbiased.
That's all you could get information from.
So I think our human welfare has gone up
much more than GDP has gone up.
So there's a real question about the productivity numbers
and the outcome numbers.
So what you talk about are wonderful things.
But offsetting that there are risks on the other side that
phishing that is malicious can be pursued more dramatically.
Well, that's why we use that word phishing and with a "ph."
It goes both ways.
I'm reminded that ISIS is a product of the internet.
Apparently, their ability-- the whole business model
of the Islamic State is to recruit fanatics
from all over the world.
And they have a way to do that now.
And it's creating a real problem.
So I don't know where all this is going net,
but I think it's important that people at Google
maintain a sort of philosophic and moral stance
about what they do.
And they already are doing that as I said at the beginning,
and it is important to keep that up.
Yeah.
AUDIENCE: So I have two comments.
One is about physicians and licensing.
I once proposed to a friend who's
a physician that that was a means of limiting
the number of doctors and keeping costs up.
And she told me that, well, actually it's the opposite.
In the cities where we have more doctors per capita,
the medical expenses are much higher.
And so the more doctors you have,
the more you spend on them.
ROBERT SHILLER: Yeah.
AUDIENCE: And so I have a question,
what you think of that.
And then I have another question follow up,
which is in the press we've seen a lot of articles
recently about the cost of drugs,
and how drug companies are buying up old generic drugs
and combining them in interesting ways,
and then charging essentially whatever
they want for them, because they are the only supplier.
They really have a monopoly.
And I'm curious how you think the government
or the population as a whole should deal with that issue.
ROBERT SHILLER: Yeah, OK, well, first thing there
is a natural moral hazard in the medical profession
that doctors will recommend surgery that's not necessary,
because they want to make the money.
And you as a client have no ability to judge.
That apparently goes on.
Similar things happen in now financial professions.
Financial advisors will steer you
to client the products that charge huge management fees
for questionable activities.
These are all part of the phishing equilibrium.
So what do we do about that?
Well, that's a big and long and complicated story.
One thing is I think that there is something
about appealing to ethics.
And also you're asking doctors to sign an oath of loyalty
to their client.
I was proposing in one of my books
that right now we have a tax subsidy for financial advice,
that is it's deductible, but I think
that we should make two changes in that deductibility.
One is it should be a tax credit rather than a deduction,
because the people who need financial advice the most
are low income who generally don't have any advantage
to itemizing.
The other thing is that I think financial advisors should
get a government subsidy of this form
only if they sign an oath of loyalty
to their client meaning that they will not steer them
toward products that are more lucrative for them.
So that would create, I think a financial advice profession
that resembles the medical profession.
I think most doctors don't schedule you for surgery
that you don't need.
And that's especially true, because they
have signed some kind of oath.
And they could be sued for malpractice.
So it's partly a fear, but I think it goes beyond that.
People do have some morals.
And if you said you would do something,
you probably would just, most people will just do it.
So buying up drugs and raising the price, that
is something that we, it was in the news
recently for an outrageous example.
I can think of free market justifications for that
if that additional profits would then eventually
go to more drug research that would help.
Maybe it's expensive to do the research,
and so maybe some drugs have to be high.
AUDIENCE: The government funds it.
ROBERT SHILLER: Well, anyway, you've
brought an example of a questionable activity
that I don't have answers to all of them.
This book is just a general thought piece
that's supposed to change people's deep assumptions
about the free market.
I think I'm out of time.
Is that right?
OK, well, thank you.
[APPLAUSE]