Modern Manipulation: How Tech Companies Are Using Behavioral Economics (w/ Raoul Pal and Dee Smith)

Dee Smith: So Raoul, it’s great to see you
again. Raoul Pal: It’s great to see you. DS: Well, here in New York in your wonderful
new offices. RP: In the new studio. DS: Absolutely. It’s great so really looking forward to talking
about a few things that we’ve talked about in the past and somethings maybe we haven’t. RP: There’s a lot going on all right. DS: There is a lot going on in the world. There is a lot going on. So I’d like to start with that actually. Where do you think we are in terms of markets,
in terms of just the general place where we find ourselves? RP: I’ve spent some time thinking about this,
and a lot of my framework of thinking actually came from your piece World On The Brink when
I try to understand it in the really big context, not just the minutiae of what the market’s
doing today, or where the world is today, or the trade negotiations. But in the big picture, I just see that things
are changing, and people need an understanding of things like what the rules-based global
order system is and what it means, which was really introduced to from you in that piece. I didn’t really understand the framework of
how much of the world we understand today operates because it wasn’t that relevant to
me because it worked. So I never tested it. I never thought about it. But now, we’re seeing some changes that are
really big. Now, does it mean that we are going beyond
what we know into a whole new system? When I read The Fourth Turning by Neil Howe,
which I think I’ve talked to you about before is it was very suggestive that generationally
these kind of cycles happen, and the world obviously contracts and expands in its economic
political thought process. And for me, it feels like this is the time. That it feels like things are getting more
extreme, whether it’s economic policy or the political situation. And the world political situation is getting
more extreme, more polarized. That usually when you get one extreme, you
either get the opposite extreme and eventually as the system comes near to breaking, you
find some sort of middle ground. And I just feel like we’re somewhere in that. DS: That Hegelian synthesis– thesis, antithesis,
synthesis– seems to not be working right now. And it seems like we’re at a point at which
we have not been for a long time as a civilization. But it seems to me that there are different
things going on– the role of technology, which is at a level and in the direction nobody
ever anticipated. The size of the population, which has in my
lifetime, tripled. I mean, it’s astonishing. And the role that those things have played
in increasing the divisiveness of the world. And so you see this splintering effect for
example that I think is manifest in all sorts of areas that nobody anticipated really. RP: Yeah, and the other thing I think is the
demographic– the aging population of the West. And now increasingly China is something that
we don’t know how to deal with because people have entirely different perceptions when they’re
retired for example than when then 30. When you have this many people going through
changes, they become risk averse or they want to look back in the past. That’s a particular focus I know you’ve looked
at it is that kind of focus of what was steady and good in the past or perceived to be steady
and good in the past– is that applicable in the kind of world that we’re talking about
where technology is fracturing and changing society so dramatically that people don’t
really have an understanding of what even is going on. DS: Yeah, well, as you know, I would argue
that it isn’t. It’s the politics of nostalgia, and it’s this
desire to return to what was seen to be a simpler time. But you know in thinking about that as having
finished World on the Brink and just seeing the world change– really when you stop and
think about the ’60s and ’70s, it was a time in which we were faced with nuclear annihilation
between the US and the Soviet Union. They were hiding kids under their desks and
doing drills that of course wouldn’t have protected anybody from anything. So it really wasn’t a golden age, but we see
it as that – RP: And if I look back on film clips or even where I remember growing up
in the late ’70s, in England, it was miner strikes. It was misery. It was inflation. It was no jobs. For instance, the music of the time– it’s
all about how disgruntled and miserable people were. So to look back on that and say those were
the great periods– in Britain for example– and again, I don’t want to make this political,
but more observational– is looking back and saying they were the great times before the
European Union. I don’t see that. And again, I’m not passing judgment the European
Union because I don’t want to get the comment section filled with politics. I just want people to observe what’s going
on. DS: Yeah, I think you’re exactly right, and
I also think that there’s an effect here of simply not being able to put yourself in the
shoes that you were in, in the past. And a friend of mine told me that someone
in England had mentioned to him that, in discussing Brexit, had said this remark, which I thought
was very pithy and expressed a lot of the attitudes of a large part of the British population. They said we would be happy to be measurably
less wealthy to be measurably more British, and that I thought was a very telling remark. Have you run across similar things in? RP: I think there are different narratives
from different people because society is fracturing. And not just in the UK, whether it’s Catalonia,
or whether it’s in the US, or all over the world where we’re seeing this. We’re seeing a little bit at– well, a significant
amount of this in Italy. I think we’ll see the rise in Germany. Different levels of dissatisfaction and discontent
coming from different narratives all rolling into one. It’s people don’t know who to blame for the
situation we’re in, and I think we should talk a little bit about some of the triggers
that got us here. So therefore these narratives get rolled into
one. So Brexit it becomes it. Or Trump or anti-Trump comes the other. When really that’s not the issue. That’s just the superficial level of what
caused these issues in the first place. Why did real wage growth remain stagnant or
shrink since the ’70s? Those are the questions. How much is globalization– it’s very fashionable
to think of globalization as the great opportunity for everybody. But it wasn’t. It was a really mixed thing. And one of the things that had a profound
impact on me was seeing James Goldsmith’s interview with Charlie Rose. This was back in 1996 after NAFTA was first
put in place, and they were negotiating the WTO. And James Goldsmith was a pure capitalist. He’s not a European socialist of the old-
but he was half French, half English. And he sat there and argued with everybody
every way he could to say what you’re about to do is wrong. Because you are going to give the full competitive
advantage to those with the cheapest labor force. So you’re just going to create labor force
arbitrage. And clearly in countries with expensive labor
force you’re going to destroy the labor force and their wages, and that will create social
unrest. It will create populism, and it will create
all things that we got to. It’s so prophetic. His answer was– and I think rightly so–
was have globalization but on equal terms. So his terms were if you want to compete in
China’s market, have a factory in China. Hire Chinese labor force and sell to China. If the Chinese want to be in the US, do it
that way. So you’re on a equal footing. So he kind of believed in some sort of tariff
system. And I had not come across that because everyone
before was so free market capitalist. I thought you know, maybe he’s right. So I understand why the Trump tariffs also
appeal to people, but also he was dead right what the outcome would be– this is Goldsmith–
would be this huge disparity. And in the end, it questions what the role
of government is. Is it for the people or for GDP growth? DS: Well, and this gets into a whole complex
of issues. And I think one of the things people are now
starting to talk about is hyper- globalization. It’s a term that’s now being used. You’re starting to see it. And the context that that’s usually given
in is the idea that globalization became a good in and of itself– became seen to be
a good in and of itself. And this process was encouraged simply of
its own accord, of its own merit without looking at what the actual outcomes of it were. And it became a kind of a thought camp, kind
of a groupthink. RP: Yeah, at all cost. DS: And unquestioned. And that led to a point at which the benefits
became– it is a benefit to be able to buy a $300 flat screen TV. No question. And that is a result of globalization. And it’s the kind of idea that things produced
at the cheapest possible price would benefit everyone– that sort of idea. But it tipped. The tipping point came. I would argue– and I know some of the people
in World on the Brink argue this too– when the financial crash of 2008-2009 happened
and suddenly the tables turned for so many people where there might have been some marginal
advantage to what they were seeing from globalism even though their wages were actually suppressed
or certainly had not advanced in real terms. But they were able to buy certain things,
and that was a compensation. And then suddenly, the bottom fell out of
it. So you had some very interesting observations
the last time we talked about how we got to where we are, and the role of debt, and its
origins. And I would love to hear you talk about that
again. RP: Yeah, my view on this is that is to get
to where we are today, we need to understand where we came from. And my view on this was it’s all about the
baby boomers, and it’s always the law of unintended consequences. Nobody really realizes what’s happening until
way too late. And then these kind of things– these big
political economic things– they take a long time before you realize the mess you got yourself
into. So if you think of the baby boomers– their
parents were austere. They lived through two world wars. They didn’t spend money. They had high savings rates. Nothing was frivolous. Everything had a function and a form. So then this massive population of young people
rebelled against that system as everybody does. So what they wanted was they want to do the
opposite of their parents. Most of us do that. So a couple of things happened. One was Wall Street picked up on it really
quickly, as Wall Street is quick to figure out how to make a buck out of people’s change
in sentiment. And the quick thing that they decided was
that why should you save like your parents saved? 20%? 30% of your income saving? We don’t need to do that because some smart
guy on Wall Street can take 5% of your income and magically turn it into your retirement
fortune. So you don’t have to do that, so you can go
and spend more money. There was another sub-narrative, which was
the post-World War II narrative across the world, which was spend– particularly prevalent
in America. Consumption was the savior of the US economy. So that was ingrained in these young kids’
heads. Consume, consume. Wall Street says, well, we can allow you to
consume. So up starts the pension system and the financialization
of the economy. So that is a slow process because all of these
baby boomers are young. So they’re not saving any money– much like
the millennials now. But as they started hitting the 30s, that
money started to really accumulate because it was a proportion of their income, and their
income’s are rising because they were going into jobs. And the economy was strong, et cetera. Then the second thing happens. So we’re about in 1980, 1982. And Margaret Thatcher did something that I
don’t think most people realized changed everything. Is she realized to bring the working classes
into the labor force, the best thing to do was let them invest in the economy by having
a house, which was a stroke of political genius and turned tons of working classes into middle
classes by being property owners. And that was the council houses in England. So they were government-owned housing projects,
and they basically sold them off for nothing– basically giving free money much like the
Russians did with the mining properties and stuff like that. So it politicized a whole bunch of people
who became conservative voters, which gave the whole strength to the Conservative Party
through the entire ’80s and into the ’90s. But what it did is turn people with no debt–
literally no debt– into massive debtors overnight and taught them that debt was good. Borrow money, you’ll get rich. At the same time, they liberalized credit
cards and other forms of borrowing for consumers. So therefore you didn’t have to save any money
to buy anything. The pension was taken care of by the smart
guy on Wall Street, and Wall Street had basically financialized your credit. So you now had a mortgage, and now you had
credit card debt. And now you had higher purchase. Then you were buying cars on lease. That was the big move, and this spread to
the US very quickly. Reagan had seen what had happened and realized
that it would incentivize Americans too. So this whole thing was great. It creates an enormous boom in the ’80s. But what happened was the debt boom became
huge because people borrowed more, and more, and more to drive that consumption that was
now ingrained within them. And then the governments were doing the same,
and the private sector was doing the same. And everybody– because interest rates were
falling often due to demographics. And so this whole thing created this enormous
debt bubble. But the other thing that really interests
me– a lot people talk about the debt bubble– but what really interested me is what they
did, which is, I think, the seed of the whole problem, is there used to be a division between
capital and labor. If you have the capital- – i.e. you had money–
you could risk it because you understood the risk. It was your capital to risk. If you were labor, you earned your income
to then eventually retire and leave the labor pool. And what happened is they made labor capital. Because you took savings from people that
ordinarily would have been in cash and leveraged them. The system leveraged all of this money. So people were then taking undue massive risk,
huge stock market risk, and massive debt risk. And they didn’t really realize they were doing
it. They didn’t realize that they had become the
leverage, or they had become the collateral for the global financial system. Because if you think of the world that we
live in now with hedge funds, and private equity, and venture capital, and all of this
stuff– it’s all leveraged capital base of the savings of retirement money. There’s very little other money out there. DS: That’s right. RP: There’s central bank leverage money, but
that’s just leveraging this collateral of the system. DS: Which is why pension plans are among the
world’s largest investors. RP: Exactly. Exactly. And so if that’s the collateral, you’ve turned
these people– they’re now risk takers, and they don’t know it. So 2000 came along, and they kind of got away
with it. Many people lost quite a lot of money. But when the collateral part of the system
started to break down in 2008 and the houses collapsed, which was their collateral, which
was then collateral within the financial system and that leverage built upon leverage– everyone
was like, I didn’t know I was doing this. And that was because they basically got taken
advantage of. This is why the financial system so out-sized
versus any other time in history because we turned labor into capital, and they didn’t
know the risk they were taking. So how do you unwind that system? Well, what you’ve got is now there’s disgruntlement
because I’ve lost money. My real wages have gone down. Globalization didn’t quite work in the same
way that I thought. Also you’ve got those bifurcated inflation
rates where anything globalized is ultra cheap, and anything non-globalized like health care,
pharmaceuticals, education is ultra expensive. So they’ve got themselves into a really difficult
situation of which they’re angry. The retirees– the baby boomers– are now
angry because they can’t retire. The young people are angry because they have
not as many opportunities, and they’re now having to do things like borrow money to get
an education. That didn’t used to occur. So we’ve now got those two bifurcated parts,
and then we’ve got the middle of the destruction of industries that were never replaced by
capital intensive industries– the shift to the global services economy. All this has happened at the same time. And then, as you rightly say, you throw in
technology. And the outcomes become kind of warp speed
in how fast they come, and the inability to people to deal with that is huge. DS: And the debt bubble is bigger now than
it was in 2008. RP: That’s right. DS: By quite a large margin. RP: Yeah, and it’s shifted around. And now the emerging markets are part of the
debt bubble. So they’ve got $15 trillion dollars that they
borrowed of dollars. So this whole leverage upon leverage upon
leverage is still there. But my fear is that we are getting to many
tipping points and that these are not quick things that overnight. But those baby boomers are leaving the labor
force, and they’re retiring. I mentioned in Real Vision several times when
my father retired, what did he do? His spending went straight down– fell probably
60% in the first year. And it’s probably 80% less until he recently
became ill– 80% less than where it was at peak. So that’s so deflationary. But also, what did he do? He sells off his pension. He switched to fixed income. So he’s selling off equities. You start thinking about downsizing houses,
buy a new car, and those things. But if those people, which are basically the
collateral of the financial system– most of it’s owned by these baby boomers– if they
start divesting the collateral of the system, the whole leverage has to shrink. DS: And they will because they simply don’t
have enough money. Because they didn’t save 30%. RP: What they’re going to do? Die with a basket of equities? DS: Exactly. RP: No, the idea is that it was there to save. And now the problem is, is we go back to the
original story– that smart guy on Wall Street never made them the money they were supposed
to make. DS: That’s right. RP: So they haven’t got the money they thought
they had, and they would have been much better to have invested 20% of their savings and
put it in the bank. But Wall Street lied to them. DS: Well, one of the things that I think gets
lost in this whole argument is a visceral understanding of what debt is. Because debt is borrowing from the future
to pay for the present. And it only works if the future is always
wealthier than the present. And I think we’ve lost sight of that. RP: Yeah, although there is some complication,
I’m not clear in my mind whether government debt falls into that category. We thought it did. We think of it like a household balance sheet,
but maybe it’s not. DS: Well, that’s true. And this is one of the great fallacies is
that people say it’s easy to run a government. You just run it like a household. But households and governments are entirely
different. For one thing, most households don’t print
money. But nevertheless, I think that– and we don’t
really understand what government debt is. And some people claim we don’t understand
what money is, as you know. But there certainly is an underlying presumption
about debt that it is based on a rosier future than the present. RP: Well, student debt is the clearest example,
right? That you’re going to get a payoff from the
money you borrowed that bought you an education that’s going to give you a return on your
capital or on the debt. But maybe that’s the fallacy like the debt
on mortgages was or the fallacy like the equity market was. And it seems to be playing out that if there’s
too much desire for debt to buy something with, usually the thing you’re buying is worthless. I haven’t got it. It’s excess leverage and excess speculation,
or excess desire for something. And it feels like an education is almost becoming
worthless, particularly– and we’ll talk about this when we go forward– is what education
do you need now? What is actually pleasurable to the world
we’re moving into? It’s not clear. DS: It’s not. But it is clear that certain jobs- some of
which are very highly paid, many of which are not– are much more subject to replacement
by automation than others and the ones that are creative. RP: I thought that. And I thought that all creative arts were
not going to be replaced, but I’m even seeing music made by algorithm. And I’m seeing, yes, OK, It doesn’t fall into
the realms of genius and the greatness that great artists do. But for the majority of the population, a
lot of music is now basically an algorithm. So I’m now thinking, OK, well maybe painting
can be as well? Maybe all forms of art work? And that makes me really miserable about OK,
well, who does have a role for the future? And maybe the answer for that is– and I think
we’ve talked about this before– is birth rate collapse. And we think birth rates are low now, but
maybe then they go down to a half. Because in many nations they’re 1.0– 1.3
in some parts of Europe per family. So they’re not replacing. They’re shrinking dramatically. But maybe they’ll fall even further because
there is no actual need for as many people. DS: That won’t happen in other parts of the
world very quickly though. RP: No, that’s right. DS: And that creates another kind of bad taste. RP: Another huge imbalance that’s out there. DS: There’s another discontinuity with this
that I think is just becoming apparent and that is that robots and automation– let’s
say generally artificial intelligence, automation, the world of robots– all those things together
as they replace jobs. Robots don’t buy things. So the whole consumer cycle is broken, and
this is something that is just beginning to become clear. And really, we don’t know what the implications
of it are. Because normally somebody has a job. You pay them. They go out, and they spend money. And that creates the economic cycle. But a robot doesn’t. RP: Because therefore productivity has no
benefits to the economy except to the owners of businesses to get the excess profits, if
there are any. Because with robots, you can compete away
all the profits as globalization did. So it’s not clear that it does that. You’re dead right. Where does the money come from? What is society if it’s not a consumer-based
society? OK, that’s what we understand now. Not all societies have been consumer-based
societies. DS: That’s true. RP: Maybe personal well-being is how the society
becomes over due course. Maybe it’s not. Maybe it’s some sort of self-interest with
a different rewards-based system. I don’t know. DS: This also gets into the issue of equality
because there’s another interesting argument that technology actually accentuates inequality
because technology requires investment. Investment requires wealth. So the people who invest have a disproportionate
advantage as you just mentioned of the fruits of technology. The people with less wealth have maybe a secondary
advantage. So it actually increases the divergence. It increases the inequality. RP: There’s a classic version of this that
I don’t think most people are aware of, but they need to be aware of. So there’s firms out there– and I won’t name
names. There’s a bunch of algorithmic-based AI investment
funds. So there is a world of what these guys are
doing, and there’s a world of traditional investors. So there’s a traditional portfolio manager
in Ohio looking after a state pension fund, investing in the hotel sector. He gets his research from Morgan Stanley. He goes on the conference calls. He listens to the management. He maybe looks at his charts, and he forms
his investment view. And he makes buy and sell decisions. Who he’s competing against is now not the
other fund manager in Florida’s State pension planner or whoever it is. It’s in fact with one of these firms that
ping’s– they have such huge computer power– they’re pinging every single hotel booking
website in the world millions of times a day. Because they know there’s an algorithm within
all of those booking sites that increases the price and lowers the price according to
demand. They ping it for prices. And what it’s telling them is what the occupancy
is like at every hotel they want to check in any city anywhere in the world in any economy–
in real time. So they know of course what the results are
going to be. They know at any one day how well the hotel
sector’s doing. So what chance has the poor guy who’s been
doing the work the world used to be– applying his brain, applying his blood, sweat, and
tears into his portfolio? What chance does he have? So what happens is the excess profits go to
the other guy, which is what you’re talking about. DS: Exactly. RP: The automation is creating excess profits
or super-normal profits elsewhere. Now, can those super-normal profits get competed
away? Well, we’ve seen that in the high frequency
trading industry where there were super-normal profits and then so many entrants that profits
collapsed. DS: And that can be algorithmically driven
as well. RP: Of course, of course. Once the technology’s there, the barriers
to entry actually collapse quite quickly. So I don’t know what that means either into
the overall things. There are a lot of questions here– no answers. DS: Well, I think that we’ve got to peel the
onion on the questions before we can even start to— RP: Yeah, I totally agree. DS: But one of the things that I think is
very evident– and you mentioned financialization, which I think is a huge issue. But the tie of that to short termism and the
whole way we think about the world now in terms of very short term returns, and very
short term gratification, and so forth– and again, ties back to what our ancestors who
had gone through not only two world wars but a depression though about. And they thought of much longer terms. And that, itself, has a psychological effect. And I think you’re seeing it not only with
the older generation, but I think you’re seeing it with the younger generation that they’re
interested in right now. And there is something to be said for treasure
the present moment and focus on the carpe diem and all that. But nevertheless, when your focus is entirely
on the short term, perhaps because you don’t even believe you have any idea what the long
term— RP: Or is it a behavioral aspect of we are now conditioned for a gratification-based
economy? DS: Exactly. RP: And we’ll come onto behavioral economics
later because I think this plays a big role in where all of this is going and some of
the real complications of the world. But maybe we’re now conditioned to an environment
where we want it, and we want it now just because that’s where the world’s gone. So we’ve become much more short term in nature. Now normally, for me, if I see that, I know
that the out-sized returns or the great opportunities lie in different time horizons. And wind forward the political clock 20 years
let’s say, maybe to stop this ridiculous cycle that goes through politics that people have
a 12-year term or a 10-year term. And so your vote counts, so you really make
a difference. And then you get the government in as long
as they don’t do anything illegal. The government is in and stays in, and we
don’t have those mid-term cycles of, as we’ve just gone through, a fiscal boost to goose
the economy. Then it slips off again. Then you have to have another goose to get
into the election, get re-elected. This is no way to run an economy, particularly
not an economy the size of the US, where it’s ultra-prevalent in that. And all of those things– I think the opportunity
if we’re looking for answers, the answers will lie in the opposite of short term. The opposite of things that are there now
are probably where the answer lies. Because as we talked about in the beginning,
there’s only a number of outcomes. And usually the polar opposite’s somewhere. It’s either the opposite of what we’re doing
now or a centrist ground. DS: Yeah. And of course, the other side of that equation
is that there are arguments now that the tempo of politics is mismatched to the tempo of
society so that it moves too slowly. So these political points of decision like
Brexit– and you have this thing and it’s like collapsing a waveform physics. Suddenly, it’s there, and you have to live
with it as opposed to some system where there’s a constant re-measuring, which it sounds like
science fiction now. Although it’s technologically possible. And the idea of that is that society and technology,
and the techno-social reality is moving so fast that our 19th and 18th century systems,
which posited where you elect a government or you decide on policies that you leave them
there while– it is actually mismatched. RP: So could you go to a kind of semi-referendum
based system– again, we’re just now theorizing– based on some sort of accountability system–
and I want to come into this later– using let’s say block chain technology where you
get to vote on all various issues. And you poll it. Is that a way of dealing? Switzerland does that by having its many referenda
on certain things. I don’t know if that’s the right answer because
referendums are somewhat dangerous on their own path, but it works for Switzerland. There’s not much extremism in Switzerland. The country has a path in the way it goes
and the way it does things. And it kind of works. DS: I think we would have to really understand
how well-educated the Swiss are. Because I think when historians look back,
one of the great failures I think– at least in terms of the United States– is going to
be our failure of education. Because we expect people to vote and make
decisions. Even if it’s indirect, you’re voting for politicians
in whom you’re putting a trust– political trust to make decisions on your behalf. But you’re expected to vote on a range of
very complex issues, more complex than ever. And our education system has failed to the
extent that people don’t actually understand what they’re voting for. Not because they’re not intelligent but because
they’re not sufficiently educated. RP: Yeah, but the pushback you get from suggestions
like that is oh, well, that’s an elitist world that you’re looking at. And that’s complex, and you’re right. From the ground up, people need to have a
better understanding of these things. But then it does become the intellectual elite
against the others, and does that actually take into account their voice? I’m not sure that it does either. So I get the point, but I worry that it also
misses the point. DS: I agree with you. You’re almost blocked at every— RP: That’s
right. There are no easy answers there. DS: We don’t see the answer at this point. It’s the horizon problem. It’s over the horizon. RP: Yeah, and this is where I’m super excited
and super worried about where things are going, and that’s the rise of behavioral economics. And the reason being is let’s say we go into
a world where– well, it’s happening now. In fact, politics has become behavioral. So behavioral economics came out of a guy
called Skinner. And Skinner basically tested rats in a lab
and gave them stimulus– positive and negative stimulus. And as soon as the rats learned it, they learned
that they could get the stimulus. Whether it was water or whether it’s to avoid
an electric shock, which was the negative and positives– an avoidance of pain. So they would hit a lever, and the electric
force field in this cage would stop. That whole thing was about how your environment
conditions you, and it was a big breakthrough. Out of that came behavioral economics and
Thaler has just won the Nobel Prize for behavioral economics. But the advertising industry has to first
catch up. They realize you can create incentives for
people– false or real– to act in certain ways. But now technology has allowed us to do this
at scale. And the last US election, the Brexit vote,
and a number of other things were really the grand experiments of behavioral economics. And now, the problem is with this. In a technology driven world, it’s incredibly
easy to influence people without them knowing. Just look at your Amazon feed, your Facebook
feed, and all of these. Incredibly– and I don’t think anybody understands
this– behavioral economics has basically won the world, and nobody realizes it. Back in the mid-2000s, Jeff Bezos, the two
founders of Google, Mark Zuckerberg, and a bunch of others– I can’t remember who else
was there– all had a meeting with Daniel Kahneman who’s one of the founders of modern
behavioral economics. And he explained to them that basically the
dopamine sensors and how people are conditioned by environment and not necessarily by reasoning
or other things and how Facebook could use the Like button and emoticons to drive dopamine
releases in humans, which they want more. It’s the lab experiment for the rat in the
water. It’s exactly the same thing. Amazon picked it up. They all picked it up, and they used it to
extremes. But then what they found is firstly they could
get people to buy things and engage in the platform because anger, like– all of these
things create don’t dopamine receptors and stuff like that and adrenaline– things that
we get slightly addicted to as humans. But then after that, they realized that they
could sell that ability to anybody. Firstly to advertisers and then so anybody
else could abuse it. Now, we have this open system of these things,
and they can be abused. Now, whatever extent the Russians influenced
the election– I’m less interested in that. But anybody can influence anybody. DS: That’s right. RP: So now governments can influence anybody
in the same way by using behavioral incentives because they have massive data abilities. If you think go back to the artificial intelligence,
and the speed of processing and all that stuff– now, who stands a chance in any of this? Do we even have what we think of freedom of
choice anymore? I don’t know. Behavioral economics could be really interesting
as ways of creating incentive systems. So they’ve used it in India right now to stop
people getting run over on train tracks. And they use these nudges. The UK government has used them. The US government did for a little bit but
haven’t for a while, but many governments have started to do this. DS: And there’s a huge debate about nudges. RP: That’s right. DS: There have been several. RP: That’s right. And so there should be. Some of it could be very useful in creating
incentive-based systems that work. China, on the other hand, has taken a huge
private economic experiment based on punishment systems, which don’t work as well as reward
systems. But their punishment systems– they’re kind
of good society credits or penalties that you get for doing certain things aren’t right. And that by behavioral economics to run a
population, which is really getting more concerning. So I think there’s many things we can fix
using behavioral economics in the sense of how to get people to pay taxes, how to do
this, how to incentivize people into the economy, how to get people to set up business and become
entrepreneurs, how to get education in better ways– all sorts of things. If you understand behavioral economics, you
can change an entire education system. Problem is there’s the will of governments
and what they can do with it– if you’ve got the wrong government. And worse than that is the bad actors in this
open architecture of technology– the information superhighway– what the hell they can do. And then you say, who was smart? Were the Russians, the Iranians, and the Chinese
smart to close their internet? Maybe they are. DS: Well, this is the splintering effect that
I think you see. It’s part of the same— RP: Yes, it’s all
part of the same thing. DS: It’s all about the same thing. But one of the things that I find so fascinating
about behavioral economics is the extent to which it has blown away essentially the neoclassical
economic assumption that essentially people are rational actors who take actions designed
to maximize their benefit. And that’s just not actually true. RP: It’s scientifically proven. That’s the difference here. With behavioral economics, it’s scientifically
proven that people base most of their actions not on– the behaviorists will argue there
is no nature or nurture debate. Everything is nurture. That there is very little instinct within
the human being, and there’s very little proven. And that’s a very complicated argument I won’t
go into, but basically everything is an effect of our environment. So therefore, all economic theory is essentially
worthless. DS: But there’s also the element of behavioral
economics that goes back to the early humanoids, hominids, and our immediate predecessors who
evolved in small groups and hunter-gatherer societies where it was always safer to think
that there was a lion in the grass and that this has created a whole series of what they
call “cognitive biases.” RP: Exactly. DS: And those biases are incredibly interesting. And I think if you learn to see them in yourself,
you can at least try to recognize when you’re making some of these mistakes. And those mistakes often, I think, contribute
to failures in markets and just failures in life. RP: Well, look, if we go back to the big examples
that we talked about of the rise of debt and the rise of the pension plan– both were basically
reward-based systems. They were basically you don’t need to spend
as much money. Get this guy here, you get him some gratification
consumption. DS: Exactly. RP: So as humans, we’re almost conditioned
to do that because we’re the rat in the lab who’ll go for the water every time because
it feels good. What chance have we stand? And that was the failure of government and
regulation I think. Many people at first would have said you can’t
regulate this. We all need the ability to do this. In the end, we created a rotten pile of mess
because it wouldn’t be regulated. And then we have the other problem of the
influence of global corporations within governments. DS: Well, what you’re actually describing
is several different kinds of social engineering experiments going on at the same time. RP: Yes. DS: All of which are using one form or another
of behavioral economics but to accomplish different things. RP: Exactly. DS: And I think that that’s where we are right
now. RP: Now, but government overall has not used
it yet for the good. How do you nudge society in certain ways? How do you create– and we’ll come onto a
bit of this– how do you create let’s say a moral code in this tribalized world where
technology is tribalizing everybody? Can that be done by incentives-based systems
when you talked in The World on the Brink about what is the future kind of system? I see a role for this because there are ways
of not having the government that we know now but having a more– it’s the world where
we have a more kind of disintermediated government, where then they don’t have the overarching
rule but they’re involved at a micro level and in a number of things. Maybe that’s the way you can deal with it
because you can’t have an overriding skill set when half your population live in a country
but don’t live in the co