An economist walks into a bar | Robert Litan | TEDxKC

Translator: Nga Nguyen Reviewer: Queenie Lee So there are two guys who walk into a bar and say, "No, I'm not going there." It could be the start of a joke. But I really want it to be the introduction to the notion of artificial scarcity. And you'll see why in a minute. So let's go back to the bar. The first guy approaches the first woman he sees and offers her a drink. She rejects him. He then decides to go down the bar and of course all the women watching this see what he is doing and they all reject him.

Now, our boy, I'll call him the antihero. He has not learned from this experience in the real world. He then decides to go to the virtual world. He goes online and joins Cupid.com, trying the same technique, and sure enough, with the same result. Everyone rejects it. So our antihero is in trouble. But you know what? Cupid.com is also in trouble. And the reason is that women who have joined Cupid.com are being inundated with dating offers from men. They get discouraged and quit. And when they quit, the men quit. Cupid is in trouble. Who are you going to call to solve this problem?

No, the answer is more obvious than Ghostbusters. (Laughter) Call an

economist

. (Laughter) Don't laugh, call an

economist

. (Laughs) In fact, you call two of them. These are Muriel Niederle of Stanford and Dan Ariely of Duke. And they've spent a lot of time studying the problem of artificial scarcity and abundance in the context of online dating, which is why Cupid called them out. And they wanted to know how to solve their problem, and the two economists said they had an idea that was as simple as it was profound. Simply put a hard limit on the number of dating offers men can make to women each month.

This is the notion of artificial scarcity. Taking what seems like an abundant resource, which is date offers, and artificially limiting them. And the economist told Cupid that if you do this, men will take his offer seriously. They will look at more than just the women's photos, and will actually look at their profiles. And women will know this and will be more likely to accept dating proposals. Artificial scarcity helps save Cupid.com and other dating sites that copied the technique. Today, online dating is a two billion dollar industry in North America alone. Now I want to talk about much more than online dating and artificial scarcity.

A much broader topic. I want to try to show you how economists and their ideas have contributed to the rise of the entire Internet economy and some of the iconic companies that make it up. I'm sure many of you are familiar with the notion of "name your price" travel. That was invented by Priceline. Well, the "Name Your Price" trips weren't actually the key to their success. Because, if you could indicate your price, what price would you offer? Zero, right? Or one or two. And obviously the airlines or hotel charges would not accept the offer. The key to Priceline was not its great advertising.

It wasn't the fact that you could search online. No, the real key to Priceline's success, by the way, is a $60 billion company, with a current market cap. The real key is that they make this proposal to you. They say that if you offer a certain price for a hotel room or flight and Priceline decides to accept it, you are obligated to pay it. This is called a conditional price offer. And basically what it does is induce you, as a traveler, to take your offer seriously, in the same way as the artificial restriction on dating proposals that Cupid.com made for men.

So who is the brilliant man behind the conditional price offer? (Laughs) He's a smart guy, but Captain Kirk wasn't the inventor of the idea. He was, and still is, the promoter of Priceline. No, the real genius behind Priceline was this guy: Jay Walker. Jay studied economics at Cornell. And he actually listened and thought two steps beyond what his professors at Cornell were telling him, and he came up with the idea of ​​the conditional price offer, which led to Priceline and revolutionized the entire travel industry in America. I have another example. He is one you are also very familiar with.

It is a Google search page. It could be on any other search engine, and what I want you to pay attention to is the right side, the ads there. Google collects about $50 billion a year from advertisers, large and small, looking to get on that right side. They auction the sites. But that's not how the system started, because when Google launched, online advertising was in its infancy, and Google, believe it or not, went door to door, advertiser to advertiser, trying to get an ad placed next to a search. term. It is very laborious and you can quickly see that this is not going to grow, since the number of searches on Google skyrocketed.

That's why Google's founders asked two young engineers, Eric Veach and Salar Kamangar, to come up with an automated system that would solve this problem. Well, they were instinctively drawn to auctions. But they were thinking about another problem. That is, if they auctioned off the sites, they feared that advertisers would offer a very low price and then gradually increase their prices a little and keep the auctions going forever. And if this happened, and there were also many searches going on at the same time; the entire site would collapse. So as an engineering solution, they came up with this idea.

That the winning bid, or the winning placement, will be the price, the second highest price bid plus one cent. This would eliminate auctions, really simplify the process, and in the process, also solve another problem called "the winner's curse." I'm sure many of you have participated in auctions and may have regretted winning because you felt you paid too much. A pretty obvious point. But then-Google CEO Eric Schmidt still wasn't convinced that the second-price auction was his way to go until he ran into this man. Completely by accident at a party. This is Hal Varian. At the time, he was Dean of Berkeley's School of Information Sciences and a world-leading expert on auctions as well as the Internet.

Schmidt asked Varian: "Does this second price auction make any sense? Why not the first price?" And Varian thought about the question and went back to Schmidt and said, "You know, those two engineers have reinvented what this guy came up with." This is William Vickrey, an economist in Colombia, who mathematically proved that the second-price auction was the ideal solution to the winner's curse. And you know what? That earned him the Nobel Prize in Economics in 1996. Well, now that you're Eric Schmidt, you think, "Well, economists can help Google." So he convinces Hal Varian to leave his permanent position at Berkeley and join Google as its first chief economist.

Varian then hires an army of statisticians and economists, who helped refine the online ad auction process and also develop other services for the Mountain View giant. You know, they say imitation is the best form of flattery. Well, guess who was watching, Microsoft from the north? Its main competitor or possible competitor, Microsoft. They wanted their own Hal Varian. And they caught her. This is Susan Athey. Susan is a Stanford star economist, the world's leading expert in auction theory, and she splits her time as a teacher and also works as an economist at Microsoft. I have a third example;

It is bigger than the first two. It's the whole business of web retail. It is a $300 billion industry in the United States alone. And you all know the example of web retail; It's Amazon.com. Now, many of you may think that Amazon's success is due to its fantastic storage and inventory control system. Basically, you can ship everything you order online. But you know, Amazon and other web retailers wouldn't be as successful without a highly flexible transportation system that actually delivered all of that. And guess who helped make that system a reality? Economists. Because in 1980, when Jeff Bezos was just a teenager, the airline and trucking industries were heavily regulated.

Every fare and every route they charged, flew or drove had to be approved by the government. In fact, there was a rule that was set for an airline that owned a trucking company: it could not deliver goods more than 20 miles from the airport where the goods landed. Obviously, this rule was put in place to protect other truckers from competition, which of course was the whole point of airline and trucking regulation. That is why economists opposed it for a long time. But they also opposed it for another reason. There are many airlines and transportation companies. They are not natural monopolies in the same way that a local utility is, which needs regulation to prevent price gouging.

No, airlines and trucks should never have been regulated. And three of the economists who insisted on this the most are in this picture: Michael Levine, Alfred Kahn and Darius Gaskins, and believe me, there were many more, who have been writing for decades that we should get rid of this madness. system. Well, there were two politicians, brave politicians who finally listened to these men and women, and persuaded Congress in 1978 and 1980 respectively, to dismantle the airline and trucking regulatory system against stiff opposition, of course, from those industries. And you may not remember, but prices fell after deregulation. But most importantly for my story, deregulation unleashed vigorous competition between the two giants of the transportation industry: UPS and FedEx.

They then developed a highly flexible and efficient transportation system that was ideal for the Internet economy. So 20 years later, when Jeff Bezos and other web retailers came along, they were able to take advantage and use this system. In fact, Jeff Bezos, if you're watching this, you should send a thank you note to three of the economists I featured earlier and many of the others who made your fortune possible. I want to conclude with one last example that has nothing to do with the Internet, unless you want to count the 32 million people who play some type of fantasy sport online.

I mentioned sports because I'm a sports fan and I want to tell you about Moneyball. I'm sure many of you have seen the movie. It's based on a book, so go ahead and applaud. Fantastic book and movie, written by this man, Michael Lewis, who, by the way, I think is probably one of the best nonfiction writers in America or the world. And Moneyball, as you know, was about Billy Beane, the general manager of the Oakland Aces who built a great baseball team on a shoestring budget. But Moneyball really wasn't a traditional baseball movie. In the same way it was that Bull Durham or Field of Dreams.

You know, the real hero of Moneyball was this guy. Many of you may not recognize it, but I'll admit it: he had as big an influence on baseball as Hank Aaron or Babe Ruth. Because he applied economics and statistics to show how it is possible to produce winning baseball. He invented a field called sabermetrics that was used by Billy Beane and other baseball teams to build their rosters. In fact, it is used throughout professional baseball, not just there. Sabermetrics is used by professional basketball teams, football teams, and even hockey teams that have people like Bill James on their staff.

Economic thinking has revolutionized sport. You know, throughout my career, I have had the good fortune to meet many people in the business world. But unfortunately, from my point of view, many of them do not respect economists. They say we have never known a payroll; "we" refers to economists. What do they know? Well, economists helped build the Internet economy. Economists help make it possible for Amazon and other web retailers to deliver everything you order to your door, efficiently and on time, 24 hours a day, 7 days a week. Economists shape the online advertising system, especially online auctions. Economists make it possible for you to get five-star hotels at three-star prices.

Economists may have even made it possible for you to date and possibly meet your spouse. I think economists deserve some respect. (Laughter) (Applause) That's the answer, right? Thank you so much. (Laughter) (Applause)