00:00:00
Judd Kessler: I think this is true of a lot
of, like, fad crazes. So this summer it was Labubus. I
don't know if you came across
00:00:06
this, but --
Dan Loney: I heard. - Yeah, so you
know, they're these, like, little stuffed animals, and
they remind me of Beanie Babies,
00:00:12
or when I was a kid, Cabbage
Patch dolls, where, like, everybody wants one this summer,
and they're impossible to get.
00:00:17
And that's -- you know, it's not --
I don't think it's just that
00:00:20
they have trouble producing
them. I think they want there to be a mania around them so that
people will get excited by
00:00:27
buying it. And that, you
know, creates these hidden markets that might not otherwise
exist. Loney: Welcome to the Ripple
00:00:34
Effect, the podcast that takes
you on a journey through the minds of Wharton faculty. I'm
your host, Dan Loney. And in
00:00:41
each episode, we'll be diving
deep into the inspiration behind the groundbreaking research that
Wharton professors have
00:00:47
conducted and exploring how
their findings resonate with the world today. - So when you score
an unexpected win, is it by
00:00:57
luck, or is it by design, or is
it a combination of the two? Our guest today believes that it is
actually how we navigate some of
00:01:06
the hidden markets out there.
Pleasure to be joined here in studio by Judd Kessler,
Professor in the Business
00:01:12
Economics and Public Policy
Department here at the Wharton School. He is author of the new
book, <i>Lucky By Design: The Hidden</i>
00:01:20
<i>Economics You Need to Get More
Out Of What You Want</i>. Judd, great to see you. How are you?
- I'm doing well, thanks for
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having me. - So, great title,
because luck and design, seemingly, are two things that
are very far apart, but you say
00:01:37
that there is a connection here.
- Yeah, so the premise of the book is
that there are all these hidden
00:01:42
markets that allocate things
that we value, that we want. The markets are not necessarily
visible to us. We can't -- we
00:01:49
don't always know that we're in
one. But if we see that they exist, we learn their rules, and
then we play the right
00:01:56
strategies, we actually can do
much better in these markets than we might think, and that's
what I call getting lucky by
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design. Figuring out how you can
essentially make your own luck in these markets to get what you
want.
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- And so is it -- it's a recognition
by the person that these hidden markets are there and
there are dynamics that can
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benefit them as they move
forward in some of these areas? - Yeah,
it's a recognition that the
00:02:20
world is not as random as we
think, and that sometimes the reason that we don't end up with
what it is that we want isn't
00:02:28
just luck. I mean, luck often
enters in. So don't get me wrong, there are allocations
that are based on lottery and by
00:02:35
design, are supposed to kind of
have a big luck component. But even in those markets, and I
argue in lots of markets, the
00:02:42
strategy that we play can
actually improve our chances and make us happier with what
we get, and also give us a
00:02:50
little bit more sense of agency,
make us less stressed in these environments, because there's
something that we can do to
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improve our chances. - So when you
say hidden market, you mean what exactly? - So I define hidden
markets as markets that allocate
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things without relying
exclusively on prices. So I'm an economist. Economists love
prices. We really are into
00:03:10
prices. And what normally
happens, or what we think normally happens in markets
where there are more people who
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want something than we have
available to serve them all, is that prices will rise. So if you
ever heard an economist say
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supply equals demand, they're
saying -- they're making an assertion that a price will
change such that, you know,
00:03:29
at some point,
there's not that -- so many people who want something, and you can
give the scarce resource to all
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of them who are willing to pay
that price. Those markets I call visible markets. Those
markets are the ones we see.
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Those are the ones we're used to
interacting with. You go to the store, you decide if something
is worth the price, you buy it
00:03:45
or not. But that's not how many,
many markets operate. Many markets don't allow the price to
rise until the market clears. It
00:03:55
could be because the seller
doesn't want to. So Taylor Swift could charge massively higher
prices for tickets to her tours,
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then she chooses to do so. And
so then there's some other set of rules that decide who gets
access to those seats. And it's
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going to be rule set by
Ticketmaster, who are doing -- who's doing the allocation. If
you want a reservation at a hot
00:04:16
restaurant, the restaurant could
raise its prices until, you know, there isn't a long line of
people standing outside the
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door, but they don't. They keep
their prices low. And then in some markets, like markets that
the government controls, we
00:04:29
often don't want to have prices.
We don't have prices at all. So your elementary school, your
public elementary school, there
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is no kind of price. Everybody
gets a spot for free. I do a bunch of research on organs and
life saving organ transplants.
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We decide we don't want to give
organs to the people who are willing to pay the most. And in
these markets that don't have
00:04:51
explicit prices, you need some
other set of rules to decide who gets what. - So obviously these markets are
different, because you're
00:04:58
talking about different
dynamics here, but are there characteristics of these markets
that are similar, that if
00:05:05
somebody recognizes this market,
then they naturally can see the next one coming down the road?
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- Yeah, so this is what I say.
You have to kind of see that these markets exist and learn
their rules. And a lot of the
00:05:16
rules are familiar. So you know
when you're rushing to click before everybody else for a
reservation or a ticket, you
00:05:24
know -- or, in my case, also for
elementary school after school program to get my daughter into
the classes she wants after
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school ends, right? I know it's
a race. I've experienced that before. And so there's lots of
markets that have that feature,
00:05:38
where you have to be the first
one there, you have to click immediately, or you're out
of luck. And so you can identify
00:05:45
that a market is like that, and
develop the strategies to play in markets that have that
structure, that are first come
00:05:51
first serve races. But then
there's other markets, like first come first serve lines,
where you have to decide, all
00:05:56
right, I know that there's going
to be a line around the block. I have to decide when to join that
line or decide not to
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participate at all, not to get
on that line. If I'm going to have an example in the book
about going to see the Sistine
00:06:08
Chapel, which was the first kind
of cultural thing I did when I left the country, and you have
to decide, all right, I'm going
00:06:14
to have to wait on line to get
into this great cultural institution. What time should I
join the line to kind of make my
00:06:22
experience in Rome as enjoyable
as possible? And then there's markets where they're lottery
based or centralized
00:06:28
clearinghouses, right? Like, each
set of markets has their own rules. And then once you
identify them, you figure out,
00:06:34
okay, what's the strategy to play? - You were saying Sistine
Chapel. All you can think about
00:06:38
is going to Disney and trying to
get there at the right time and get in the right lines so that
you can have the best
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experience. - Exactly. And one of
the things I talk about in the book, which happens at Disney as
well, is, you know, when these
00:06:50
markets arise, right? There are
strategies you can play. Sometimes money comes back in,
right? Sometimes there is a --
00:06:56
you know, at Disney, you can pay
extra to get advantages on certain lines. And
that comes up a lot, and you
00:07:03
have to decide as a market
participant, is that something that I want to do for this
experience or not, or is part of
00:07:09
the enjoyment, given the cost, to
stand in line and just enjoy being in the park?
00:07:15
- So that opens the door to my
next question, because then, seemingly, there's an element of
this, probably for some
00:07:21
companies, I don't know if it's
for all, that it is a conscious decision to kind of go this
route, because it is the
00:07:28
greatest benefit for the bottom
line of the company. - Yeah, so when I talk about, you know,
why do firms choose not to raise
00:07:36
the price just to clear the
market, what the economists say is kind of the optimal thing
to do. I mean, sometimes it
00:07:43
doesn't make sense to do it
because of what you're selling. So, you know, if it's admission
to an elite college or
00:07:51
university like Wharton or
University of Pennsylvania, we don't just raise tuition until
we fill a class with the people
00:07:57
willing to pay the most, because
that's not the point of the institution. The experience of
being here is we want to admit
00:08:04
only the best and brightest and
have them get to interact with each other, and kind of we think
our teaching will be most
00:08:10
effective for that group. So we
are very selective in that market for kind of picking the
group that is right for us. And
00:08:17
that same thing is true on the
labor market, which is another of these hidden markets, where
you don't just lower your
00:08:22
offered salary until you get one
person apply. You have to kind of work through the
applicants that you get and kind
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of pick the right one. But some
of the firms, when they do this strategy, it's not just about
kind of finding the right
00:08:34
people. It might be about
bolstering future demand, right? Maybe the restaurant likes the
line around the block because
00:08:41
then it builds demand for the
next night, when people walk by and are like, "Oh, my god, how do I
get into that restaurant? It
00:08:47
looks so good, right?" And
so I think this is true of a lot of, like, fad crazes. So this
summer, it was Labubus. I don't
00:08:54
know if you came across this, but --
- I heard - Yeah, so you know, they're these, like,
little stuffed animals, and they
00:09:00
remind me of Beanie Babies, or
when I was a kid, Cabbage Patch dolls, where, like, everybody
wants one this summer, and
00:09:06
they're impossible to get. And
that's -- you know, it's not -- I don't think it's just that they
have trouble producing them. I
00:09:11
think they want there to be a
mania around them, so that people will get excited by
buying it, and that, you
00:09:18
know, creates these hidden
markets that might not otherwise exist. - So how common then are hidden
markets? And are they more
00:09:25
common than maybe we think, that
they're out there? - They're definitely more common
than we think. So when I
00:09:31
started kind of talking about
hidden markets and thinking about all the ways that they
crop up, I mean, I was writing a
00:09:37
book on it, and I was also
surprised how often that they pop up. And they pop up in
these environments that are
00:09:43
particularly important. I mean,
dating and labor markets, right? Those are two of the most
important decisions that you
00:09:49
make in your life, potentially,
and they are dictated by, you know, these hidden market rules
rather than just, you know, I
00:09:57
decide I want something, so I
pay for it. - Right, but once somebody kind of
understands that maybe they have
00:10:03
benefited from a hidden market,
I'm going to assume they have to start thinking that and looking
for some of these other avenues
00:10:11
where they may be able to
benefit from it down the road. - Yeah. I mean, the nice thing
about kind of thinking through
00:10:18
the strategy of how to play in
these hidden markets, some of them, you know, I will admit,
are like unique to the market.
00:10:23
So if you're playing in a first
come first serve race, there's a lot of advice that's like, know
that the race exists, be there
00:10:29
ready to, you know, click as
fast as possible, and kind of, you know, be on high speed
internet, right? Those are --
00:10:34
that's advice that's specific to
first come first serve races. Now, of course, that same advice
is useful for any first come first
00:10:40
serve race you play, and
whether it's kids after school, program, restaurant reservation,
you know, getting housing.
00:10:47
Sometimes, when I was applying
for housing for graduate school, it was like an online interface
that had that same market
00:10:55
rules. But then there's other
strategies where, when you figure out how to play them in
one market, they kind of apply
00:11:02
in lots of different markets
with very different rules. So one of the ones I talk about in
the book is what I call settling
00:11:08
for silver. So it's silver
as in silver medal in the Olympics. And the idea is, like,
our temptation is to try to get
00:11:18
the thing that we want the most,
and that we always approach a situation, I think our default
instinct is, this is what I
00:11:23
want, I'm going to go for it. I
call that going for gold, and that is often the right thing to
do. It turns out, though, in
00:11:29
some markets, it might be that
when you go for gold, you're facing a lot of competition for
something that a lot of other
00:11:36
people also want. So if I'm
trying to get my wife a reservation for a birthday
dinner at the French Laundry,
00:11:45
this fancy, expensive, but very
notoriously hard to get a reservation for, they only have
60 seats in the whole
00:11:52
restaurant, going for gold would
be trying to get her a Saturday night reservation at 7:30 p.m., like
an ideal time for dinner. But
00:11:59
everybody wants that time, and
that's what they're going for. Settling for silver might be
going for something little bit
00:12:06
less desirable, acting like it
was my first choice, like a 4:30 p.m. reservation, five p.m. reservation. It
might not actually be when she
00:12:13
wants to eat, but while
everybody else is racing to get the 7:30 reservation, if I
quickly, you know, click on the
00:12:19
five o'clock or 4:30 reservation,
I might end up getting to eat there while everybody else does
not. And so that kind of
00:12:27
strategy of pretending that
something that's not your real first choice is your first
choice ends up coming up a lot.
00:12:35
So you know, there are students
who will soon be applying to colleges, and this is a case
where, you know, there is early
00:12:42
decision where you can apply to
one school, and you know if you get in, you're committing to go.
And it might be that the optimal
00:12:50
strategy for you is not to apply
to your dream school that you'd love to get into. It could
be that that school is not going
00:12:56
to admit you whether you apply
early or not. It might be the case that, since you only really
get one bite at the apple for an
00:13:03
early decision application,
maybe you should apply to your second or third choice school
that might not admit you if you
00:13:09
applied regular, but would admit
you if you applied early, because they like that. They
reward early applicants. It
00:13:16
might be the case that kind of
playing that strategy will allow you to get into your second
favorite school, but you might
00:13:23
not if you kind of go for gold
and try to get into the dream school that's probably not going
00:13:28
to take you. - As this was all
playing out, all I'm thinking to myself, these are the
conversations I had with my
00:13:33
older daughter just a few months
ago, trying to get off campus housing at the school that she's
going to right now, and just the
00:13:40
process of getting there is just
so crazed, you know, to get what you want. - I mean, and again, you
know, another example of a
00:13:48
hidden market that comes up that
we don't think. Oh, it's just a housing market. We know how
housing markets work, but of
00:13:53
course, sometimes there are many
more people who want the available housing stock. And in
places where the price rises,
00:14:00
it's a visible market, but in
places where it doesn't, a hidden market comes up.
00:14:03
- And seemingly, I would think
that for some of these hidden markets, is there an element of
this where it is kind of created
00:14:10
by the company, the value that
kind of gets it to be more viral? - Yeah, so I think that that is
absolutely the case that, you
00:14:19
know, companies that want to get
people excited about their products will often create fake
scarcity to generate it, and
00:14:28
generate a hidden market just
for the attention of it. So that's certainly going on. But I
think a lot of times hidden
00:14:33
markets just come up naturally,
or, you know, it's not a -- no one thought carefully about how to
do the allocation, they just,
00:14:43
we've always done first come
first serve for, you know, tickets to some concert, and
maybe that made sense before the
00:14:51
internet and credit cards,
where, you know, you got online if you wanted a ticket for a
live event, you could signal
00:14:58
that you cared more about the
performers by, you know, standing in line earlier. And if
you were there overnight, you
00:15:04
clearly were dedicated. And
we want to give you, you know, the best seats, because
you are, you know, a clear fan.
00:15:13
Then there's credit cards.
People can start calling in over the phone. And so the race
becomes who can call in the
00:15:18
fastest. And then, you know,
maybe having a boiler room set up with more callers is like
going to be the way that you get
00:15:24
tickets. And now, all of a
sudden, instead of die hard fans, it's speculators who are hiring
these people to call. And then
00:15:31
now it's online, and a lot of
the tickets that are getting bought to these venues are being
bought by bots, by programmed
00:15:39
computers that can click way
faster than me, even if I am the most excited about this artist.
And of course, those speculators
00:15:46
are only buying the tickets so
that they can resell them to me at higher prices. Then that
seems like kind of a market gone
00:15:53
haywire. - What do you hope then is the
takeaway for people that read the book? And I guess part of it
is just kind of the
00:15:59
understanding that these markets
are out there in the first place. - Yeah, I mean, I want them to
know the markets are out there,
00:16:05
to kind of see them, start to
understand their rules, develop some strategy for how to play in
them. Whether they get what they
00:16:12
want or not, knowing that you
did everything you could is kind of -- it reassures you that
kind of you have agency in these
00:16:19
environments, and I think
makes us feel better about being market participants. You know,
and then there's another part of
00:16:27
me that wants people
thinking critically about these markets. You know, should it be
the case that we use first come
00:16:32
first serve races to get tickets
when those races are always going to be won by bots that are
programmed, you know, to be
00:16:40
faster than any human can. And
so, you know, another angle is thinking about, okay, how could
we improve the hidden markets
00:16:46
that we participate in? And then
a third thing is that there are hidden markets that we control.
You know, it's not just firms
00:16:53
deciding their pricing. It's not
just governments deciding the rules to get into elementary
school. We control the markets
00:16:59
for our time and attention. We
decide which emails to respond to, which meetings to put on our
calendar. We decide how
00:17:05
household chores are done by
ourselves and our spouse and our kids. And those are hidden
markets where, again, you know
00:17:12
your time and attention is a
valuable, scarce resource that you do not sell to the highest
bidder, typically, but you know,
00:17:20
you have to then decide what is
going to get your valuable attention and your valuable
time. And you can set up rules
00:17:27
that make it better for the
people who are trying to get in touch with you, and better for
yourself to kind of be spending
00:17:32
that time efficiently. The book is titled, Lucky By
Design: The Hidden Economics You
00:17:37
<i>Need To Get More Of What You
Want.</i> The author is Judd Kessler, Professor of Business,
Economics, and Public Policy here
00:17:43
at the Wharton School. Great to
see you again, Judd. - Thanks for having me. - Thank you. Judd
Kessler, joining us here in
00:17:48
studio. - Thank you for listening
to the Ripple Effect. We hope you found this episode
informative and engaging. Don't
00:17:54
forget to subscribe and leave us
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