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An economist walks into a bar | Robert Litan | TEDxKC - YouTube
Channel: TEDx Talks
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Translator: Nga Nguyen
Reviewer: Queenie Lee
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So, there are these two guys
that walk into a bar,
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"No, I'm not going to go there."
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It could be the beginning of a joke.
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But I really want it
to be the introduction
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to the notion of artificial scarcity.
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And you'll see why in a minute.
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So let's go back to the bar.
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The first guy,
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he approaches the first woman
that he sees, offers her a drink.
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She turns him down.
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He, then, decides
to work his way down the bar,
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and of course, all the women
watching this, they see what he's up to,
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and they all turn him down.
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Now, our guy, I'm going
to call him the anti-hero.
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He hasn't learned from this experience
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in the real world.
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So he decides to go to the virtual world.
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He goes to the Internet
and joins Cupid.com,
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and he tries the same technique,
and sure enough, with the same result.
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They all turn him down.
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So our anti-hero is in trouble.
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But you know what?
Cupid.com is in trouble too.
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And the reason they are,
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is that the women
who have joined Cupid.com
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are being inundated
with offers from men for dates.
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They get turned off, they quit.
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And as they quit, men quit.
Cupid is in trouble.
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Who are you going to call,
to solve this problem?
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No, the answer is more obvious
than Ghostbusters.
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(Laughter)
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You call an economist.
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(Laughter)
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Don't laugh, you call an economist.
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(Laughter)
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In fact, you call two of them.
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This is Muriel Niederle of Stanford,
and Dan Ariely of Duke.
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And they've spent a lot of time,
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studying the problem
of artificial scarcity and abundance,
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in the online dating context,
which is the reason Cupid called them up.
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And they wanted to know
how to fix their problem,
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and the two economists said
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they had an idea that was
as simple as it was profound.
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Just put a sharp limit
on the number of date offers
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that men could make
to women each month.
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This is the notion of artificial scarcity.
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Taking what looks like
an abundant resource,
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which is date offers,
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and artificially constraining them.
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And the economist said to Cupid
that if you do this,
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the men will take their offer seriously.
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They'll look at more than just
the women's pictures,
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and they actually look at their profiles.
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And the women will know this,
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and they'll be more likely
to accept date proposals.
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Artificial scarcity help save Cupid.com
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and other dating sites
that copied the technique.
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Today, online dating
is a two billion dollar industry
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in North America alone.
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Now, I want to talk about a lot more
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than online dating
and artificial scarcity.
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Much bigger topic.
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I want to try to show to you
how economists and their ideas
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have contributed to the rise
of the entire Internet economy
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and to some of the iconic
companies within it.
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I'm sure many of you
are familiar with the notion
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of "Name-Your-Price" travel.
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That was invented by Priceline.
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Well, "Name-Your-Price" travel
was really not the key to their success.
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Because, if you could name your price,
what price would you bid?
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Zero, right? Or one or two.
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And obviously the airlines
or the hotel charges
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would not accept the offer.
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The key to Priceline
was not their great advertising.
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It wasn't the fact
that you could do searches online.
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No, the real key to Priceline success,
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by the way, it's a 60 billion dollar
company, market cap today.
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The real key is they make you
this proposition.
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They say that if you
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bid a particular price
for a hotel room or a flight,
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and Priceline decides to accept it,
you're bound to pay it.
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This is called
the conditional price offer.
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And in basically what it does,
it induces you, as the traveler,
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to take your offer seriously,
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in the same way
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that the artificial restriction
on the dating proposals
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that Cupid.com did for men.
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So who is the brilliant guy
behind the conditional price offer?
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(Laughter)
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He's a smart guy, but Captain Kirk
was not the inventor of the idea.
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He was the pitchman,
and he still is for Priceline.
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No, the real genius behind Priceline
was this guy: Jay Walker.
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Jay studied economics
as an undergraduate at Cornell.
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And he actually listened
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and thought two steps beyond
what his lecturers told him at Cornell,
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and came up with the idea
of the conditional price offer,
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which led to Priceline and revolutionized
the entire travel industry in the US.
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I have another example.
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It's one that you're also
very familiar with.
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It's a search page at Google.
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It could be in any other search engine,
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and what I want you to pay attention to
is that right-hand side,
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the ads over there.
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Google collects
about 50 billion dollars a year
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from advertisers, large and small,
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seeking placement on that right-hand side.
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They auction off the sites.
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But that's not how the system started,
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because when Google was launched,
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online advertising was in its infancy,
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and Google, believe it or not,
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went door to door,
advertiser to advertiser,
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trying to get them to place an ad
next to a search term.
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Highly laborious,
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you quickly can see
this is not going to scale,
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as the number of searches
exploded on Google.
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And so the founders of Google
asked two young engineers,
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Eric Veach and Salar Kamangar,
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to come up with an automatic system
that would solve this problem.
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Well, they were instinctively
attracted to auctions.
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But they were thinking about
another problem.
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That is if they auctioned off the sites,
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they feared that the advertisers
would bid a very low price
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and then incrementally
raised their prices just a little bit
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and keep the auctions going forever.
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And if this happened,
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and a lot of searches
were also going on at the same time;
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the whole site would crash.
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So, as an engineering solution,
they came up with this idea.
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That the winning auction,
or the winning placement
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will be the price,
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the second highest price
that was bid plus one penny.
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This would cut off the auctions,
really simplify the process,
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and in the process,
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also solve another problem
called "the winner's curse."
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I'm sure many of you
have participated in auctions,
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may have regretted winning
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because you felt like you paid too much.
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Pretty obvious point.
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But the CEO of Google
at the time, Eric Schmidt,
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still wasn't sold on the second
price auction as the way to go,
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until he ran into this man.
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Totally by accident in a party.
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This is Hal Varian.
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At the time, he was Dean
of the Information Sciences School
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in Berkeley,
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and a world-leading expert
on auctions and also the Internet.
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Schmidt asked Varian,
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"Does this second price auction
make any sense?
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Why not the first price?"
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And Varian pondered the question,
and came back to Schmidt,
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and he said, "You know,
those two engineers,
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they have reinvented
what this guy came up with."
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This is William Vickrey,
he was an economist at Colombia,
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who proved mathematically,
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that the second price auction
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was the ideal solution
to the winner's curse.
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And you know what? That won him
the Nobel Prize in Economics in 1996.
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Well, now you're Eric Schmidt,
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you think "Well, economists,
they may be able to help Google."
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So he persuades Hal Varian
to leave his tenured position at Berkeley,
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and join Google
as its first chief economist.
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Varian then goes on to hire
an army of statisticians and economists,
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who helped refine the online
ad auction process,
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and also develop other services
for the Mountain View giant.
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You know, they say that imitation
is the best form of flattery.
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Well, guess who was watching,
Microsoft from up north?
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Their chief competitor
or would-be competitor, Microsoft.
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They wanted their own Hal Varian.
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And they got her. This is Susan Athey.
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Susan is a rock star
economist at Stanford,
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world-leading expert in auction theory,
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and she splits her time teaching
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with also working
as an economist at Microsoft.
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I have a third example;
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it's bigger than the first two.
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It's the entire business of web retailing.
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It's a 300 billion dollar industry
in the United States alone.
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And you all know
the poster child of web retailing;
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it's Amazon.com.
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Now many of you may think
that Amazon's success
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is due to its fantastic system
of warehousing and inventory control.
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It's able to basically send out
all that stuff that you order online.
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But you know, Amazon
and other web retailers
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would not be as successful as they are
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without a highly flexible
transportation system
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that actually would
deliver all that stuff.
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And guess who helped bring
that system to reality.
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Economists.
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Because back in 1980,
when Jeff Bezos was just a teenager,
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the airline and the trucking industries
were heavily regulated.
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Every fare and every route that they
charged, or they flew, or they drove
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had to be approved by the government.
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In fact, there was a rule
that set to an airline
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that owned a trucking outfit:
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it couldn't deliver merchandise
more than 20 miles away from the airport,
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at which the merchandise landed.
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This rule was obviously in place
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to protect other truckers
from competition,
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which of course was the whole point
of airline and trucking regulation
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in the first place.
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That's why economists long opposed it.
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But they also opposed it
for another reason.
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There are lots of airlines
and trucking firms.
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They're not natural monopolies
in the same way that a local utility is
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that needs regulation
in order to prevent price gouging.
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No, airlines and trucks
should never have been regulated.
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And three of the economists
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who were most insistent
about this are in this picture:
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Michael Levine, Alfred Kahn,
and Darius Gaskins,
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and trust me, there were many more,
who have been writing for decades
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that we ought to get rid
of this crazy system.
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Well, there were two politicians,
courageous politicians
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who finally listened
to these guys and women,
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and persuaded Congress in 1978,
and 1980 respectively,
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to dismantle the system of airline
and trucking regulation
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against the stiff opposition,
of course, of those industries.
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And you may not recall,
but prices fell after deregulation.
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But more importantly for my story
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is that deregulation
unleashed vigorous competition,
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between the two giants
of the transportation industry:
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UPS and FedEx.
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They went on to develop a highly flexible
and efficient transportation system
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that was ideal for the Internet economy.
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So that 20 years later, when Jeff Bezos
and other web retailers came along,
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they were able to tap into
and use this system.
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In fact, Jeff Bezos,
if you're watching this,
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you should send a thank you note
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to three of the economists
that I showed before
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and many of the others
who made your fortune possible.
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I want to conclude with one final example,
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has nothing to do with the Internet,
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unless you want to count
the 32 million people,
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who play some form
of online fantasy sports.
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I mentioned sports
because I'm a sports nut,
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and I want to talk to you about Moneyball.
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I'm sure many of you have seen the movie.
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It's based on a book,
yes, go ahead and applaud.
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Fantastic book and movie,
and it is written by this man,
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Michael Lewis, who by the way,
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I think he's probably one of the best
non-fiction writers in America
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or the world for that matter.
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And Moneyball, as you know,
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was about Billy Beane,
the general manager of the Oakland As
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who built a great baseball team
on a shoestring budget.
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But Moneyball really
wasn't a traditional baseball movie.
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In the same way, that Bull Durham
or Field of Dreams was.
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You know, the real hero
of Moneyball was this guy.
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Now many of you may not recognize him,
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but I submit to you:
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he had as big influence on baseball
as Hank Aaron or Babe Ruth.
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Because he applied
economics and statistics
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to showing how it's possible
to produce winning baseball.
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He invented a field called sabermetrics
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that was used by Billy Beane
and other baseball teams
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to build their rosters.
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In fact, it is used
throughout professional baseball,
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not just there.
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Sabermetrics is used
by professional basketball teams,
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football teams, and even hockey teams
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have people like Bill James
on their staff.
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Economic thinking
has revolutionized sports.
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You know, in the course of my career,
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I've had a good fortune to meet many
many people in the business world.
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But unfortunately, from my perspective,
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too many of them
have no respect for economists.
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They say we've never met a payroll -
"we" meaning the economists.
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What do they know?
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Well, economists helped
build the Internet economy.
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Economists help make it possible
for Amazon and other web retailers
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to deliver all that stuff that you order
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to your doorstep,
efficiently and promptly 24 - 7.
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Economists shape the system
of online advertising,
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especially online auctions.
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Economists make it possible for you
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to get five-star hotels
at three-star prices.
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Economists may even
have made it possible for you
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to have a date
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and conceivably for you
to have met your spouse.
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I think economists deserve some respect.
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(Laughter)
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(Applause)
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That answers it, don't you?
Thank you very much.
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(Laughter) (Applause)
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