RESEARCH-DRIVEN INSIGHTS ON BUSINESS, POLICY, AND MARKETS WINTER / The University of Chicago Booth School of Business 5807 S. Woodlawn Ave. Chicago, IL 60637 NEVER MIND THE % LET’S TALK HOW TO CREATE MIDDLE-CLASS JOBS WHY PEOPLE MISMANAGE CREDIT-CARD DEBT LET’S TALK ABOUT THE .% Page ABOUT THE 0.0 % Plus: Raghuram G. Rajan WINTER / on populist politics FALL Plus: Why policyThe makers private-equity What fund venture of capitalists can Advice from the father should nudgefunds more that earns itslearn fees from ‘racist’ rats of ecient markets “It’s almost as if people couldn’t decide whether we had cancer, or maybe a fungal infection. We decided to treat them both, and the problem went away, but maybe that had nothing to do with the treatment.” Page 14 EDITORS’ LETTER n the book Nudge: Improving Decisions articles and videos about research by CAN WE about Health, Wealth, and Happiness, people who have won—or could yet win— I Chicago Booth’s Richard H. Thaler distinguished prizes such as the Nobel. and Harvard’s Cass R. Sunstein discuss In this issue, you’ll also find comments NUDGE YOU how it’s possible to structure policies from Chicago Booth’s Eugene F. Fama, a and programs in ways that encourage 2013 Nobel laureate, on topics ranging TO READ THIS people to make particular choices, and from corporate governance to algorithmic how governments and organizations trading (page 45). can use nudges to help people make Online, we have a video of Thaler MAGAZINE? better decisions. For example, when giving NFL draft advice, and one of Fama new hires are presented with a company explaining the role of the government in retirement-savings plan, they may the subprime-mortgage meltdown. We receive a form indicating that they will also have both researchers together, in be automatically enrolled unless they an absorbing episode of The Big Question, take steps to opt out, so that the default our monthly video series, in which the option is to participate. two Nobel laureates discuss whether Thaler’s observations (they extend markets are efficient. Fama developed On the cover: well beyond nudging) have transformed the efficient-markets hypothesis, which Average annual behavioral economics, which explores says asset prices fully reflect all available income of top US how human psychology and other information. Thaler’s work has challenged households since nonmathematic factors affect economic this notion. Part of our mission at CBR is 1950. Read more decisions. When Thaler was awarded the to facilitate such conversations between about the “1 percent of the 1 percent” 2017 Nobel Memorial Prize in Economic big economic thinkers. on page 24. Sciences in October, Peter Gärdenfors, a If you’re not already receiving our member of the prize committee, said that email newsletters, sign up on our website, Top 0.01% Thaler has “made economics more human.” and follow us on social media. Through of households Thaler is the eighth Booth faculty research summaries, articles, videos, Top 1% member to win the Nobel Memorial essays, and briefings, we hope to bring (including Prize in Economic Sciences. The prize you information that can help you make the 0.01%) celebrates distinguished work that has decisions that are thoughtful, informed, been completed. But Thaler’s research is and ultimately, better. $40M ongoing—which is why you’ll see a write- up of recent research he coauthored, Hal Weitzman on the cost-benefit analysis of nudges, Executive director, Intellectual Capital $20M explored in this issue (page 7). Editor-in-chief, Chicago Booth Review At CBR, we try to bring you the best [email protected] $0 and latest insights in business research, Emily Lambert 1950 2015 from our faculty and faculty at other Director, Intellectual Capital institutions. We do that in the magazine, Editor, Chicago Booth Review Piketty and Saez, 2016 as well as online, where we have [email protected] Editor-in-chief Designer Chris Gash Jeff Sciortino Hal Weitzman Nicole Dudka Dee Gill Vanessa Sumo Editor Video editor Howard R. Gold Sebastien Thibault Emily Lambert Elena Guobyte Glen Gyssler Alex Verkhivker Deputy editor Contributors Edmon de Haro Brian Wallheimer Jeff Cockrell Peter Arkle John Kenzie Alice G. Walton Data editor Roger Beale Michael Maiello John Wasik Chuck Burke Boggy Amy Merrick Faculty advisory Social media editor Michael Byers Carl Miller committee Blake Goble Matt Chase David J. Phillips John R. Birge Distribution manager Marty Daks Kyle Platts Lubos Pastor Katheryn Edwards Daniella Deluna The Project Twins Jane L. Risen Copy chief Giorgio Donghi Nicolas Rapp Molly Heim Thomas Finnegan Gregory Reid Multimedia producer Carla Fried Ed Robinson Josh Stunkel Tiago Galo Chana R. Schoenberger Review.ChicagoBooth.edu Winter 2017/18 Chicago Booth Review 1 CONTENTS DEPARTMENTS Editors’ letter Feedback The Equation DATAPOINTS COVER STORY ­ Why policy makers Whoops! China’s NEVER MIND THE PERCENT should nudge more stimulus plan boosted Summers: Why you shadow banking Let’s talk about should avoid chasing Companies don’t wait the crowd for legislation to react the 0.01 percent Credit shocks boost to politics By Howard R. Gold economies, but beware Meaningless numbers the fall can boost people’s How health-insurance performance subsidies can help Holier than thou? No, FEATURES patients and hospitals just less evil What Tweets and Yelp Money might infl uence Why we should teach people how to lie reviews are revealing people less than believed In some situations, it’s better to be dishonest To reduce food waste, Do corporate whistle- By Chana R. Schoenberger build more stores blower laws actually The rise of corporate saving Douglas W. Diamond deter fraud? Household saving has declined relative to GDP, but says the next crisis will Why people mismanage companies have picked up the slack be diff erent credit-card debt By Boggy How to save struggling banks: Get tough with high-risk borrowers Trump supporters say they’re optimistic—but they’re not spending Page 1 7 24 33 Featured Faculty Richard H. Thaler, Charles R. Eric Zwick, assistant professor Walgreen Distinguished Service of fi nance and James S. Kemper Professor of Behavioral Science and Foundation Faculty Scholar, Economics, won the 2017 Nobel studies the interaction between Memorial Prize in Economic Sciences. public policy and corporate His research is being used to inform behavior, with a focus on public policies worldwide. The day fi scal stimulus, taxation, and he won the Nobel, Thaler taught his housing policy. He is particularly regularly scheduled Chicago Booth interested in the problems faced class on choice architecture, a term by new ventures and small- and originally coined by Thaler and medium-sized private companies. Harvard’s Cass Sunstein. (Page 7) (Page 24) 2 Chicago Booth Review Winter 2017/18 FOOTNOTES Embrace passive management already By Eugene F. Fama What venture capitalists can learn from ‘racist’ rats By Waverly Deutsch With Whole Foods, can Amazon fi ll your every need? By Pradeep K. Chintagunta ­ The real questions the Fed should ask itself By John H. Cochrane What’s the matter with handouts? By John Paul Rollert It’s time to rethink Milton Friedman’s ‘shareholder value’ argument By Asher Schechter, Oliver Hart, and Luigi Zingales The market power of ‘superstar’ companies is growing By Ram Shivakumar ­ Watergate and presidential power in America By Philip B. Kurland ­ What contributed most to the fi nancial crisis? The IGM Panel ­ How can we improve social mobility? The Big Question 40 80 Emma Levine, assistant professor Eugene F. Fama, Robert R. of behavioral science and Charles McCormick Distinguished E. Merrill Faculty Scholar, studies Service Professor of Finance, interpersonal trust and ethical is a 2013 Nobel laureate. He decision-making, especially the is widely recognized as the tension between honesty and “father of modern fi nance,” kindness. To explore the importance having devised the effi cient- of dishonesty in everyday markets hypothesis. He joined communication, she and her the Booth faculty in 1963 and is coauthors asked research subjects to chairman of the school’s Center tell the truth in every interaction for for Research in Security Prices. three full days. (Page 34) (Page 45) FACULTY ILLUSTRATIONS BY JOHN KENZIE KENZIE JOHN BY ILLUSTRATIONS FACULTY CHASE MATT BY ILLUSTRATION COMPASS Winter 2017/18 Chicago Booth Review 3 Go to Review.ChicagoBooth.edu to fi nd the articles to which these ANOTHER LOOK AT PARTISAN ON COMBATING comments refer. PERFORMANCE CORRUPTION In response to ‘Why are stock returns lower In response to ‘Should we stop the under Republicans?’ (July 2017) “revolving door”?’ (Fall 2017) WE WELCOME I enjoyed the video based on Chicago Research on the effects of the ‘revolving Booth’s Lubos Pastor and Pietro Veronesi’s door’ is pointless if we ignore the LETTERS research. Their analysis looks specifi cally at the similar effect of pay-to-play, i.e. bribery of our We welcome your comments. US president and his political party. That begs government offi cials in the form of campaign Send email to a question about the other partisan branch of fi nancing, collateral benefi ts accrued by their [email protected] government, Congress. relatives and friends, etc. or send letters addressed to It’s a different story if you include Congress. Transparency (i.e. the opposite of Chicago Booth Review at any of Stock markets during Republican-controlled opacity) is overrated when there is an the following addresses: Congresses outperform Democrat-controlled almost complete absence of enforcement of Congresses by about percent annually. If current laws and regulations and, in cases S. Woodlawn Ave. you look at stock markets when a Republican where there is any enforcement, criminals Chicago, IL president serves with a Republican Congress, get away with a slap on the wrist and that combination outperforms a Democrat taxpayers bear a big portion of the burden Woolgate Exchange president–Democrat Congress by about of the consequences.