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 country. If you live on the internet, you live in a different world. DS: That's right, yeah. You have, of course, this kind of idea is the fodder of conspiracy theories and all those sort of things, which I find to be a fascinating topic. And I think they go to some of the cognitive biases that we have. People would rather believe that someone is in control of things, even if it's someone working against their interests. Then they would like to believe that there's simply no one in control, and people are managing from the edges. And the thing is just wheeling. And that is in fact the way I look at it. I don't think any-- I think people try to exercise control. RP: I don't think there is a great master plan. I think people are humans. They try their best, do what they want. Now, whether they have good intent, ill intent, or a balance between the two-- yeah. But then the problem is, is then there is always the hand-grenade when there was a conspiracy theory. I was shocked to the core when I first read Confessions of an Economic Hitman, which was about a guy who worked for I think was the World Bank or IMF and what he did on behalf of the US to destroy governments. I'm like, I don't want to believe in this world. But then if you believe in that, you can almost believe in anything. So that makes it very easy for people to believe in any conspiracy that there is some big lever being pulled. DS: Another way to approach it is that all conspiracy theories are correct in that there's someone trying to do that conspiracy but that none of them have that much effect in the bigger picture. This could be a whole program-- we won't go into that. But it's a fascinating topic. But I think to explore behavioral economics a bit more-- they talk about these two systems. System one, which is fast thinking. It's relatively automatic. It's this idea of heuristics, which means rules of thumb-- things that you just use to make snap decisions. And then there's the system two, which is analytical, slow thinking, considered. And system two is what we prize as the human ability to-- but system one often defeats system two on a daily basis, almost an hourly, minute to minute basis. RP: We think we're individuals. But if we shouted fire in this studio, nine times 9 out of 10 almost everybody would do the same thing. DS: That's right. That's right. RP: So we actually operate in certain ways that are predictable. And the more data you have, the more you understand how it works-- that you don't need to use forecast models. You can actually just analyze the data and trends from that, which throws, again, going back to it throws out all of the old economic models because they weren't based on data analysis. Data analysis now rules the world as these high frequency trading firms, and the algorithm trading firms, and the artificial intelligence players are all proving. DS: One of the interesting topics in that, of course, confirmation bias is one of the most deadly of the behavioral economic biases-- that we look to find information that confirms what we already believe instead of finding information that could falsify it, which is what scientific method is based on. It's that you try to falsify. You don't try to verify. The whole American adventure in Iraq based on the intelligence finding that there were weapons of mass destruction, which was in large part based on ignoring evidence that there weren't. It was simply selective use of intelligence, which is confirmation bias. It can be incredibly problematic, but it's something that is so-- there's some kind of a switch that flips. And you decide, oh, it's an aha moment. I see it. I got it. I understand it now. Let me find all these things that tell me I'm right. RP: Because humans are so delusional. I fall into that bias all the time as everybody does. And this is why the machine is so powerful and why we have to be actually truly concerned-- not flippantly concerned, but truly concerned because there is no bias. And it's the massive ability to process data in ways that human brain can't. We can process incredible data-- like everything we're seeing now in all the colors and all-- machines are no one near that, nowhere near our cognitive abilities in certain ways. We cannot process a fixed type of data in a quantity that machines can without a bias because we need patterns to fill in the blanks. And it's our pattern recognition that causes our problems. DS: It is. It's a double-edged sword. It's a classic double-edged sword. There is you know an emerging narrative that is claiming that computer programs do have biases, and the biases are based on the people who write the programs. And there's been some interesting work on this-- that you think it's unbiased. But when you actually reverse engineer it— RP: So that's an interesting point. So therefore is AI a function of its environment too like a human is. DS: Exactly. RP: So behavioral economics applies to machines in the end too. DS: In some way that we don't understand. RP: Although the interesting one was the DeepMind experiment with go, and chess, and all of these things. And this machine got so fast at beating every grandmaster and every computer that ever existed in all of these games. But what happened was, what really blew people away, it was developing moves that nobody's ever used before. Because humans hadn't done them. So I don't know where that came from because one machine was learning from another. So I don't know whether those biases carry through necessarily because there's been clear evidence in that particular experiment that they learned their own way, which hadn't been used before. DS: They did. And that is very interesting. And this is yet another topic we don't have time to go into. But one of the most fascinating things about the argument about artificial intelligence is computers are great a calculation, and they're great at things like go and chess that require calculation. They are not great at things that even animals can do that require something that seems to be beyond calculation. There's a lot of debate about what that is now, and whether computers will ever get to it, and whether computers will ever get conscious. There's this thing called "Mary's room." And the "Mary's room" is a thought experiment. And I can't recall the name of the philosopher who came up with it. But Mary is a very bright girl who has learned everything possible about color. She's learned everything about how the eye receives color and the cones. And she's learned all the things about the electromagnetism of color and of the color red particularly. And she's learned everything that you can learn from reading about the color red. But she has done it her entire life in a gray room on a gray screen, and she's never seen any color except for gray. So the question is when the door finally opens and she walks out and she sees a red apple, does she have new information? Is the actual visceral experience of that something that can't be accounted for in her vast knowledge of the color red? And that's one of the thought experiments they used to say will computers ever have consciousness? Will they ever actually be able to do the things that humans can do so easily like looking around the room and saying those are chairs, and that's a box but I could turn it over and use it as a chair-- all these things that we can just do without thinking about it and many, many more. And so I agree with you. We need to be very worried about it, but it's still up in the air whether artificial intelligence is really intelligence or whether it's really consciousness and where that divide comes between what makes us human or even what makes biological intelligence different from silicon-based intelligence. RP: Yeah, and then he who controls the machines in that world rules the world. And again, it goes back to whoever has the capital to run these things essentially can run the world. DS: Well, and this is going to become I think one of the biggest issues is that as-- and again, there are going to be political solutions that are going to have to emerge. Because it's not going to be feasible. It's going to be a negative externality if you want to put it that way to the people who own these things that there's going to be too many people who are simply not going to be satisfied for them to have all that the— RP: But thing is, is Silicon Valley thinks it has an answer in the universal basic wage. But I've never seen that, which is an inverse incentive system actually creating happiness amongst humans because they have no sense of purpose. And they're not intending for us to be productive. Maybe that they don't need to be productive. How do they then live productive lives that gives us a sense of being? DS: Meaningfulized. RP: Meaningfulized. That's very complicated, and that requires a whole new set of governing-- maybe if you look up the experiment Bhutan did and the universal happiness. Maybe that is something that's within it, and that's maybe what the government's role is to do in the end and not just endlessly drive GDP for their purpose. But you need to have a happy population. The question of what is government and what is its purpose is nothing that's really ever addressed. DS: No, that's true. And we've had lots of theories about it. And I think another interesting thing about the present moment is that all of the systems that we've had are seem to not be working. So again, we're at this point where I like the term a "horizon problem," meaning that you can't see what's over the horizon by definition. RP: But what's odd is that horizon is hurtling towards us. DS: Exactly. Exactly. RP: I think the world is becoming almost ungovernable in the way that we understand it, And I produce a piece in Real Vision for the macro insiders guys that most people haven't seen but I think will put it together with this to go out. Because I talked about the tribalism stuff that you and I have talked so much about. And what world can you construct a societal moral code, or ethics code, or a group of society norms when we physically are located in the society. We're right now in the United States. But we can do anything online. We can be anybody. We can have whatever ethics code we want, and we are basically not restricted by any government in what we do. So we have the code that we have in this country, but that now is an increasingly small part of our lives. Because increasingly more and more of our lives are lived in the global sphere of the internet. And I don't know how government can even operate in that system. How do you even get people to do things? Which is why I think behavioral economics is part of it. And also somehow the problems of the tribalism is that it breaks rifts. Everywhere you go. We've just seen the story broken about the Russians and the vaccine story-- that they've gone online looking for a contentious issues - vaccine - and then have given the pro and the against arguments, created big fights, and splintered people, again, using basically behavioral economics principles on what drives people's emotive behavior and created a rift where none existed. And the online tribalism creates rifts everywhere. DS: Well, of course, Russia is an interesting example because what Russia really is afraid of is the United States undermining and overthrowing the Russian government. And so their policy, if you step back and look at it, is not about putting one group forward politically as much as it's about simply creating discord and chaos. RP: Absolutely. DS: That's what they want. RP: Because the more domestically focused the US is on its own domestic policy and the discontent within its people, the less they operate on the world stage, the freer Russia is to operate in its own way, and the less they're under pressure for a regime change or any other change. DS: And of course you do have to say that the United States has over the last 20 years attempted and accomplished in some cases many examples of regime change. So it is not an insane idea. RP: No. And of course the US is doing the same. I'm just not sure they're as prevalent online as the Russians, and the Chinese, and the Iranians, and the Israelis have been who've been masterful at this. Because they realize that I can't fight you with a nuclear warhead. There's no way I can fight you with a gun or any other weapon. But guess what? You don't regulate your internet, so I can walk in and do anything I want. And it's completely open architecture for me. I can get anything out of Facebook, which has been proven. The worst thing is people are bang all about this is Google is the largest receptacle of information on humans that exists on earth. It is owned by private hands. Not one of us knows the security measures how the data is secure. What hacks happen on a daily basis to Google? What are the state players doing in cyber wars with Google? Who's protecting it? Is the US state helping it not lose it? Should it be in private hands? I know the libertarians amongst people would say it should be that the state has too much power here. I'm sorry, but this is a company that has a finite number of resources. It's not even worth a trillion dollars, and it needs to fight the entire Chinese cyber program so they don't steal our program? Because if they steal our data using behavioral economics, they can adjust how we do things and what we do and the malcontent or happiness-- everything about us. DS: Well, and of course they've stolen data left and right. How did the Chinese get an aircraft carrier? One of the most complicated machines ever up and running in record short time? They stole the American manuals on how to run an aircraft carrier essentially. That's what they did. And that is just one example. RP: Yeah, IP rights and all this. And the US are bad players in the same-- everybody's a bad player in this world. So the conspiracy theorists are right. DS: But of course, the answer to your question how do you deal with this is, again, this splintering effect. Scott Malcomson has come up with this term "splinternet," which he things-- and he's being proven prescient about it-- is that the world is splintering. The internet is splintering. And so the Russians and the Chinese can reach a point where the United States has to change the configuration of its internet. And then you see it's a win-win situation. They win from their standpoint if they create chaos in the US. They also win if they turn us into a less free society. So it's— RP: Yes, and the problem is, is a lot of the answers are more government control. But I've got an idea that's been developing in my head about this is how do you do this. And Tim Berners-Lee's been looking at this-- the invention of the internet-- in how we can deal with this. And one of my things is firstly we need to be responsible online. The anonymity of the internet is a big problem that creates tribalism. Because I may online call you anything I want, but the chance of me doing that to your face are very slim. Maybe after a few drinks, I might. But you know what I mean. That kind of human element is disconnected by the internet. Now, if you had some form of identity online-- and let's call it a blockchain-style identity. So everything you do in your footprint online is traceable to you. So therefore you're trolling online. Your abuse, what you do-- well, it's decentralized. So it's very difficult to hack. It's very difficult to do anything with. Maybe there's an answer with that, that allows you to do that. And then voting can come the same way, and a number of things can be built off an architecture that means you have to take responsibility for who you are. Because then if you're a Russian bot, I can see from this that you're not part of that system. So then you can have a decentralized internet but without centralized control because it gets controlled in itself. Because you can't have an identifier without being somebody. DS: And if you're just some jerk in high school who's harassing some other student to the point that they might commit suicide, you can also see who you are. RP: Exactly. And does that have to be handed over to government? Because the Bitcoin world has been not too bad at policing itself when there's theft and stuff like because you can see where things move and who does what. So maybe it doesn't require what people would think, oh my god, the government's going to take all of our data. Maybe the data can be decentralized, and the government doesn't need to do it. But the government can adjust our behavior patterns by incentive programs to create a unified approach to society and a globalized internet society. DS: I think the issue is to make it ubiquitous there has to be something that does that. In other words, somebody has to ensure that every single person or you avatar every fake person-- whatever-- they all have this blockchain identity ID. RP: Yeah, and whether it's blockchained or whether it's something else— DS: Whatever it is. But there's something that has to-- it's not going to simply happen on its own. And so how do you effect that? RP: Or maybe you can have it unless you apply for it in person. So i.e. it comes with your birthright as your identifier. Call it your passport number. DS: Your social security number. RP: Yeah, and call it in India your Aadhar number. OK, because I know some people don't like the Aadhar thing because it's a centralized database. But just say it's your fingerprint. It's your retina scan. It is you, your digital footprint. And let's say it's not held by government. That will appease all of the people who are scared of the government having control over this. And true, it's not right. So that decentralized thing could be somewhere the answer. And again, I think somewhere the answer is some sort of behavioral economic element to get people to have an incentivebased system to behave in a societal way-- whatever that is. DS: So in the midst of all these things that we've been talking about of splintering, and social de-cohesion, and all of these issues-- we're seeing the rise of a kind of a figure globally-- the strongman-type leader that we have not seen except here and there. But it's now a global phenomenon. What do you think is behind that? RP: I think when fear of change becomes extreme, usually you find a strongman. So if you look at the strongmen that came in the Middle East-- and again, a lot of this was in World on the Brink-- it came after periods of huge change. Strongman is you'll save us. We don't know what's going on, but you'll help us. Now, obviously, the strongman usually alienates a better part - a because it usually comes with populism. It's very rare. Sometimes you get the centrist, the Gandhi-style, which brings everybody together. But often you would get the polarized version, which is what we're getting now, which is we're rejecting that, so this is something to stand behind. So I think it comes out of all of these seeds of discontent. It comes out of this fear of change. You talk about it-- the desire for nostalgia. Please take us back to something we understand. And it's difficult to express to people because people take a snapshot of now. They don't realize that 2010 Facebook was just taking off, and now its ruling governments-- our spending patterns, our news patterns-- the information, the false information. Everything we know is being run by these platforms that didn't exist a decade ago or existed in a really nascent way. That's how fast things are changing. We cannot catch up. We're fighting a warfare with nuclear warheads when in fact the warfare is being held over Facebook. This is how fast things are moving, and that's only one of the things. Artificial intelligence, robotics, all of this stuff-- everything is coming. And I think big data was the kind of big revolution that was the enabler for the whole lot. So that is why I think is people just holding on to somebody who will tell them a message that they can believe in. DS: Because they simply can't deal with being out and adrift in the ocean of change, and they don't recognize the world that they find themselves in. RP: Well because most people-- and I talk about this a lot in business, personal lives, everything. Most people fear change. I'm the kind of guy who actually likes change. DS: Yeah, so do I. RP: But most people fear change. They like things just be as they are. If you can, that's fine. I want to be at home. I want to have my barbecue on Saturday. I want to have the kids. I want to have the dog, and that's how my life is. Nothing wrong with that. So when change is happening fast and somebody says I will stop this, I will hold back the sea. Then they go, OK please, just do that. DS: Yeah. I think there's also this fear of cognitive dissonance or this need for cognitive dissonance to be resolved where you think you understand things and then things are going an entire-- it's very closely related. But it's a little bit distinct is that you've got two things or more than two things that are at loggerheads or in opposition in terms of the concepts that you're having to hold in your head at one time. And it seems that that's something that's extremely corrosive, or difficult, or just unpleasant for a lot of people. Personally, I believe I try to have cognitive dissonance. Because if I don't have it, then I think I'm convincing myself that I understand something that I maybe don't understand. And I think it's a useful trait, but I think it's also-- and it is disturbing. But if you're going to use it as a tool, you have to get used to being disturbed. RP: That's right. The future is uncertain. Arguably, it's more uncertain than it has been for a very long period of time because of all these changes we're talking about. Not necessarily the politics, I'm just talking about the technology and where is this path going to lead to. How are all of these things going to fit together? That's very hard for most people to deal with who like to go to work every day, get paid, go for dinner on the weekend-- that thing is very much under threat, obviously. DS: So I'm going to end ask you a very unfair question-- two unfair questions. RP: OK. DS: What do you think the biggest surprise we're going to have in the next 12 months and secondly in the next five years might be? I'm not going to hold you to it, but I'd just love to have your thoughts. RP: So I'm going to talk against my own biases. Maybe the biggest surprise is that this whole process of what many of us think is the big change, The Fourth Turning, the fracturing of the global economic system-- the system that creates the new system from within-- maybe it doesn't happen in the next 10 years. Maybe it drags on longer. Maybe we're in a lot longer phase-- the phase that Argentina's been in for 50 years. I don't know. But there's a hope amongst all us optimists even though we're pessimistic. We're still kind of optimistic that something better will come out of it. And maybe it doesn't. Maybe that process is much longer because we're talking human terms and not in our instant gratification in terms of the next recession. It'll all blow up. It'll all happen. It'll all clean. We'll all clean slate. The new leader will arise who's a centrist, who will take us through with this enlightened journey of understanding the world that we live in. Maybe that doesn't happen. Maybe we flip between left and right-- strongmen, a general loss of freedoms. So all of these things that have been the feature-- maybe that continues. Maybe each time is a blow up in certain areas it gets papered over yet again, and again. And this thing goes on, and on, and on. So that would be a longer term thing, which is against my view, but I'd just like to question the short term. I like to question my own views. And to that, I would say most people-- I think we are on a 50/50 outcome of the US, of almost the entire administration going to prison, or the entire administration getting voted in twice on a landslide victory. I think those are the two outcomes. Because if we do not reach resolution, things only get worse. It'll strengthen that story. Because if I look at the story of the centrists, or the oppositions, or anybody else, there is no cohesive story except to attack. If you're attacking, you're not listening. So the people who are doing that-- and so I think that that's not a way to win anything. The other thing is I think there's a reasonable probability without trying to put my own bias into this that there's an extraordinary amount of criminality that went on. Whether that was with the Russians or without the Russians. So I think there is a reasonably high probability if I look at how Mueller is pursuing this like a mob prosecution and going up the chain and basically discrediting everybody within the chain. I think he's not put a foot wrong. And so I feel that that is a reasonable chance. There's a 50/50 chance of half the administration going to-- I mean literally half the people involved in the administration going to prison or they get a landslide victory in an election and it'll last eight years. DS: I wouldn't argue with you about that, and I wouldn't argue with you about your longer term prediction. And I think that one of, again, the biases that we have is that it's either dystopia and it's an apocalyptic scenario. It's nuclear war, a zombie apocalypse-- whatever it is. Or it's utopia. And we may just muddle through. And maybe that's the best. RP: Well, it depends. It depends whether muddling through because I think you'll agree that the muddling through is creating more extreme outcomes right now— DS: That's true. RP: --in the political environment and maybe the personal welfare of people and a number of things. So if that's the case if the muddle through is A, we don't have a slate cleaning opportunity with a new way for a new world-- I think the extremes get further. And that's not a great world to live in, but that was the world of the 1970s. We talk about the '70s has a halo effect for people. I grew up in the '70s. I could play in the streets, and I could ride my bicycle and all of that stuff. But the reality was it was a bloody awful world of a huge geopolitical mess, a huge economic mess, which was an economic hangover for almost the entire decade. Maybe that can go for another decade or so. DS: I guess. I hope we see it. I hope we see what happens. RP: Yeah, exactly. Seeing what happens is the most interesting thing here because we don't know. Neither of us know. We're just trying to observe. And again, neither of us are coming with any particular bias in this. We're just saying, listen, this is a fascinating set of circumstances, which is probably I think one of the most exciting points in all history is the point we're now in and where we go. DS: I agree with you. And you know the old Chinese curse-- may you live in interesting times. And I'm not sure it's a curse. I think it's fascinating too. Raoul, always a pleasure. RP: Dee, loved it. Thanks so much. DS: Thank you. It was great to interview Raoul on so many topics that relate to our changing world today. We really covered the waterfront, and I hope you enjoyed as much as I did Raoul’s thoughts and ideas on the nature of the changes we’re seeing, where markets might be going, and where we as a world are going today. Thank you for watching.