#830: Nick Kokonas and Richard Thaler, Nobel Prize Laureate — Realistic Economics, Avoiding The Winner’s Curse, Using Temptation Bundling, and Going Against the Establishment
Timestamps are as accurate as they can be but may be slightly off. We encourage you to listen to the full context.
Podcast Summary
This fascinating conversation brings together Nobel Prize-winning economist Richard Thaler and entrepreneur Nick Kokonas to explore the fundamental disconnect between how traditional economics assumes people behave versus how they actually behave in real life. (03:41)
• Thaler explains how economics transformed after WWII from studying human behavior to creating mathematical models where people are assumed to be perfectly rational "agents" who always maximize their outcomes - a stark departure from reality
Speakers
Richard Thaler
Richard Thaler is the 2017 Nobel Memorial Prize recipient in Economic Sciences for his groundbreaking contributions to behavioral economics. He's a founding principal at Fuller Thaler Asset Management, which uses behavioral finance principles to manage over $30 billion in small-cap US equities, and co-author of bestselling books including "Nudge" and "Misbehaving."
Nick Kokonas
Nick Kokonas is an entrepreneur, investor, and author best known as co-founder of the Alinea Group (sold in 2024) and the reservation platform Tock (now owned by American Express). After revolutionizing how restaurants and experiences are booked and managed, he now focuses on creative ventures blending business, technology, and art.
Key Takeaways
Make Bad Choices Harder, Good Choices Easier
The fundamental principle of behavioral economics applied to daily life is elegantly simple: create friction for behaviors you want to avoid and remove friction for behaviors you want to encourage. (60:00) Thaler illustrates this with his famous cashew story - removing tempting nuts from sight helped dinner guests make better decisions about their appetite. This applies everywhere from hiding your phone when you need to focus to automatically enrolling employees in retirement savings plans.
Understanding Mental Accounting Can Transform Your Financial Decisions
People naturally categorize money into different "buckets" based on how they acquired it, even though economically all money is the same. (68:03) Thaler explains how finding $300 in old jeans feels like "fun money" while the same amount from your paycheck feels serious. Recognizing this bias helps you make more rational financial decisions and avoid wasteful spending patterns like upgrading to premium gas during financial crises while ignoring more valuable purchases.
The Sunk Cost Fallacy Drives Poor Decision Making
Once you've paid for something, that money is gone regardless of what you do next, yet people consistently make irrational decisions to "get their money's worth." (72:16) Kokonas built his entire restaurant reservation system on this principle - when people prepay even small deposits, no-show rates dropped from 14% to under 3%. Understanding this bias helps you cut losses earlier and avoid throwing good money after bad.
Loss Aversion Creates Powerful Behavioral Changes
People feel the pain of losing something roughly twice as strongly as the pleasure of gaining the same thing. (25:08) In Thaler's famous mug experiment, people who randomly received mugs demanded twice as much to sell them as non-owners were willing to pay. This principle explains why small deposits are so effective at changing behavior and why people resist change even when it would benefit them.
Overconfidence Plagues Even Expert Decision Makers
Even Fortune 500 CFOs consistently provide confidence intervals that are too narrow when predicting market returns, with actual results falling outside their "80% confident" predictions two-thirds of the time. (54:57) This overconfidence leads to poor planning and risk assessment. The solution is to deliberately widen your estimates and prepare for a broader range of outcomes than your initial instincts suggest.
Statistics & Facts
- People who randomly received Cornell coffee mugs demanded twice as much to sell them as non-owners were willing to pay to acquire them, demonstrating the endowment effect in just 30 seconds of ownership. (27:13)
- In the NFL draft, when ranking players at the same position by draft order, the higher-picked player is better than the next one only 53% of the time - barely better than a coin flip despite extensive scouting and analysis. (58:59)
- Restaurant no-show rates dropped from 14% to under 3% simply by requiring small deposits, demonstrating the power of loss aversion in changing behavior. (30:12)
