This is masters in business with Barry Ritholtz on Bloomberg Radio.

On today’s podcast I once again have a very special guest. I know you guys are tired of hearing me say that week after week. But you know what this really is a very special guest Professor Richard Thaler of the University of Chicago, perhaps best known as the father of behavioral economics. When you look at his body of work, when you look at the impact he’s had Professor Thaler on the perennial short list for a Nobel Prize in Economics what I think you’ll find so fascinating about him is not just that he’s incredibly intelligent and unbelievably knowledgeable about how human behavior in the world of economics differs so much from traditional economic theory but you’ll find he’s somewhat somewhat mischievous and very amusing and not your typical dry academic and certainly not a typical dry economist.

His background is is really very very early days of behavioral economics, his early mentors were people like Dan Kahneman and Amos Tversky. He’s worked with Bob Shiller for many many years for twenty five years they’ve been co-chairs of an N B E R panel on behavioral economics and just anybody who’s been pursuing this field is certainly familiar with his work starting with a lot of anomalies that he’s identified in the world of economics including his book The winner’s curse from so long ago.

he did a book with Cass Sunstein called Nudge that’s been very influential. And currently he’s out promoting his latest Book called misbehaving which really is a mix of his own autobiography which of course parallels the rise of behavioral economics over the past let’s call it forty or fifty years and a quick funny story after we finished the interview he had to head somewhere else downtown and so I walked with him down to his hotel. we walked down Lexington Avenue and let me tell you walking through the streets of Manhattan with Richard Thaler is really quite fascinating because there’s a running commentary on everything that’s going on and it’s quite amusing and quite interesting. And he said something that was really has stayed with me it was very interesting during the interview you’ll hear or hear him discuss how traditional economic theory works really well for the small insignificant decisions we make over and over again that we get good at what spaghetti sauce to buy in the supermarket you know where to fill up our cars with gas things like that, that let’s be honest in the scheme of things are not very consequential. But he also talks about how the big decisions you make in life you don’t get to make that often. you don’t get to be that good at making the decisions that really matter you don’t have a lot of experience with them. His examples were you choose what field you go into where you work saving for retirement who and how often you get married how who you’re going to marry to. And I was going to get married to and how often you end up getting married or remarried and the big decisions the ones that really impact your life you do once or twice or maybe a handful of times.

So you don’t get a lot of experience you don’t get a lot of skill at it. It’s something that you hopefully make a right decision and if you don’t the consequences are really significant. And so as we’re walking down Lexington Avenue in New York City. I start talking about that and I jokingly say to him, hey you know that thing about you know how many wives you have and the impact it has on your life is kind of interesting. My secret was to marry my second wife first, just skip the whole first marriage the whole disastrous first marriage go right to the second marriage. And he laughed and then he said something that has stayed with me since we did the interview. It’s really very very interesting he said. You can never be happier than your spouses. And look we’ve all heard the expression happy wife happy life.

But stop and think of it in that sort of behavioral terms that the ceiling on your own personal happiness is a function of whatever your spouse’s happiness is. And when you put it into that context it certainly makes it clear that hey if you make your significant other happy it’s going to come back and ultimately raise the ceiling for how happy you yourself can be. But lots of other comments and phrases like that where he’s just looking at it slightly askance slightly differently then you might consider. And it leads to a lot of insights. So I found him to be absolutely fascinating. I wish I could have kept him there for another hour without any further ado here is my conversation with Professor Richard Thaler.

This is masters in business with Barry Ritholtz on Bloomberg Radio. Once again I have a fantastic and special guest. His name is Dr Richard Thalar. He has been called the father of behavioral finance. And I’m just going to give a short version of your curriculum the bachelor’s degree from Case Western and then a master’s and Ph D. from the University of Rochester. Dr Thaler is the author of over fifty published papers and notable numerous books most notably the winner’s curse nudge and misbehaving. That’s a salary.

Welcome to Bloomberg.

Thanks very happy to be here.

I’m leaving out half of your C.V. will save that for for later. Tell us a little bit about your background how did you find your way to Academia

I went into academia because I didn’t think I was suitable for anything else. That’s literally true my father was an actuary and it was a great disappointment to him that I didn’t follow in his footsteps. But I saw him grew up in Jersey worked a Presidential I saw him taking the train in every day not to you not for me the world’s or subordinate so I could be MIA seemed like a good choice. And you know I was kind of good in math I’m kind of good in economics. So I went into economics so you start out as a was it a graduate school student at Stanford or right after being a graduate student. Yeah. After being graduates and teaching for a couple years the Stanford episode.

You had some really influential mentors.

Yeah. I claim to have discovered Daniel Kahneman and missed a verse in the same sense in which Columbus discovered America. Right I mean it was here too as a surprise to the people who were living here at the time. Yeah. So kind of an adverse he came to as a surprise to economists right. So I came to be the first economist to discover them and I had been interested in weird stuff people do weird from the perspective of economists. So economists have this creature. They study that comes with the Latin term homo. Because I just like calling them economists economic man nomic man or we should say economic person

OK. Come on Barry we have to be in No twenty first century you work in an academic so you have to be more politically correct. Right so economic person but I call them econ and cons are as smart as the smartest economist or possibly even the smartest the smartest economist thinks he is which is much smarter which you are not smarter. Right which is really really smart. They have perfect willpower and never have to diet because they weigh exactly the right amount. No hangovers, saving for retirement, piece of cake. They calculate how much they need how much they’re going to earn on their investments. Implement. So needless to say
Oh one other thing they’re jerks so rational economic man will you know I left my cell phone outside the door to charge if an economy walked by he would take it.

So so let me throw a quote of yours to put this simply. Conventional economics assumes that people are highly rational in fact super rational and unemotional. They could calculate like a computer and have no self-control problems.

So so how does this manifest itself. This this obvious falshood about the way humans behave. How does this manifest itself in terms of the way economics progresses.

Well take the problem of saving for retirement. It’s one one of the biggest financial decisions that we have to make in our lifetime. One is how much education to get and what type of second is who to marry and how often.

Third is saving for retirement. Throw in buying a house and you’re pretty much of the big ones right. So you know that’s a piece of cake for economists and it used to be a piece of cake for my father’s generation because there were pensions and you would work at Prudential for your life and then they would give you an annuity and retiring was easy. You never had to think about you never had to think about anything. So then you know we invent the 401K. and now people have to figure out whether to join. How much to put in how to invest it and then how to draw it down which is a whole very hard I’ll probably do it anyway. And so the idea of this perfect person perfectly rational person making all the right choices on emotionally with good self-control and perfectly calculated to their needs that clearly doesn’t exist it clearly doesn’t exist and notice if the world was fill of full of people like that then the 401K. is an ambiguous Alee a big improvement because it’s portable and you can customize it and we all know what’s best for ourselves sure if we’re you cunts. (I don’t think he really said that)

The Dow by our numbers each year show that the average return over the course of thirty years has been about three percent for foreign investors. Yeah. And they have a great tendency to buy high and sell low. they massively got out of equities starting in about two thousand and six and flows didn’t turn positive until twenty thirteen during which time the market doubled. Why is it so challenging to get economists to actually understand. People don’t behave this way in the real world.

Well and let’s just say that one of the things that Hugh. Millions have trouble with is the economic concept of sunk costs. I was going through your list of mentors pretty much your early mentors or all almost all Nobel laureates. I’ve been lucky you know how to pick I’m definitely not a pick up.

So before the break we were discussing some costs and I had asked you why is it that a condom is just won’t recognize some of the reality of the way humans behave in the real world and your answer was. My answer was you know a bit cheeky as I tend to be which is that economists teach people they should ignore what they call sunk costs meaning if that dessert doesn’t taste very good you shouldn’t eat it just because you paid twenty bucks for it. And economists have trouble following their own advice and they have a lot invested in the rational economic model and we’re going to give it up without a fight.

Isn’t that the nature of so many ideologies that there’s all this time and effort. There’s this and down in the fact that it’s yours you’ve done you’ve done the work you’ve done the heavy lifting. Very difficult to just go this is wrong let me move on and find a new philosophy. Yeah that’s true and you know I often say that I don’t think in forty years I’ve changed anybody’s mind.

I disagree with that statement. I know you’ve said that but you’ve actually changed a lot of people’s, If not change their minds certainly change their perspectives and enlighten them somewhat.

Well but not and not economists. So I mean the field is growing. There are lots of great people in it but they’re young and so my strategy from the beginning was corrupt the youth. OK don’t try. You know there’s this old line Science marches funeral by funeral and a funeral at a time. Yeah and you know there’s no point in trying to convince those guys but young impressionable graduate students you know you can have your way with them.

That’s hilarious. So don’t even bother convincing the old fogies just go right for the kids. Yeah it’s a good long term strategy.

You know I was fine a long game. You have good impulse control. I have to work on that.

That’s really interesting so let’s move a little more specifically to the efficient market hypothesis. You once said I love a love a lot of your quotes. We don’t want to throw away the official market hypothesis. We just don’t want to believe it’s true. Explain what you mean by that.

Yeah. So all of behavioral economics and behavioral finance starts with rational models and they give us a benchmark and it wouldn’t really be possible to do behavioral economics without that rational benchmark. So you know the official market i Pods This is really has two components. One is that you can’t beat the market and the other is that prices are right that asset prices are equal to their intrinsic value. OK Now those are very useful starting points. No hypotheses right. And the beauty is that they’re testable. And so over long periods of time. Yeah well sometimes like let’s take the price is right.

OK Here’s an amusing story. There’s a closed and mutual fund which if listeners don’t know these are mutual funds that you have to buy and sell on exchanges which means that their prices can deviate from the value of the asset sale as opposed to traditional mutual funds where you can only sell at the end buy or sell at the end of the day and it reflects a calculation of everything that’s held within.

That that bucket.

Exactly. Now the fact that the prices sometimes differ from the value of the asset is already embarrassing but not as bad as the story I’m going to tell you. There’s a small closed end fund that happens to have the ticker symbol. CUBA – Cuba. Yeah. Now needless to say they don’t own any assets in Cuba because it’s against the law and B. there aren’t any. Nevertheless And for years it was selling at about a fifteen percent discount to its

President Obama made his announcement of his intention to ease relations with Cuba. The Cuba fund went to a seventy percent premium. The next day after the presidential announcement it was up almost to fifty percent a week later it was up seventy percent. How inefficient is that. Not efficient. And you know efficient market Defenders was that all of this is one little tiny example but there are hundreds of.

That’s right. And we study these little examples I call them the fruit flies of finance. Yeah. Because no one can possibly defend this. It’s still several months later selling forty percent above really above net asset value here. But I don’t know where we’re opening relations with Cuba. Why could you why are you so negative on a closed end fund called Cuba.

Yeah yeah because it has nothing whatsoever to do with Cuba.

Yeah well I notice that their their holdings are public information. Yeah. And you can buy those stocks on your own for a hundred dollars. Why would you pay one hundred forty. That’s unbelievable. Well markets are not perfectly efficient. Their kindness or to eventually will get around to it efficient well.

Maybe so here’s what I would say. The part that you can’t beat the market is approximately true. Some people can on rare occasion – Good luck picking them in advance.

That’s right. Look I mean what we know is most active managers underperform and that’s kind of the best evidence in favour of the official market opens and that’s before fees cost taxes time depends on how you do it but they’re certainly certainly not beating the market after fees. But although it’s the best evidence for the efficient market I bought this is it’s also the most evidence against because whereas most of the money in active funds.

Yeah Vanguard has grown a lot. They’re the exception. You know it and they will kill a third of their three trillion dollars is still actively managed right. So. So I think it’s approximately right. And listeners would be well advised to just say I can’t do it. Is it just inherent in human behavior that we’re going to get booms and busts markets are going to rally and crash and that’s just the way it’s going to be I think we’re subject of that risk. But I think there are things we can do to mitigate it.

And let’s talk a little bit about choice architecture and knowledge which refers obviously to the book you wrote with Cass Sunstein.

Yes So the idea of nudge is that because we’re dealing with humans rather than any kinds that you sometimes need help. And can we think of ways to help them that don’t force anybody to join. So that was that can feet of the book. Another word you’re not mandating anything all man made. No bands how much can you do with those restrictions. So just you just kind of just nudging is the right choice.

There’s an interesting little. All bit of behavioural engineering which is and I see it here in New York I come up out of a subway to get to my office because it’s the fastest way to get around town and it’s a double escalator. I mean this thing just goes on forever. And about half the people stands on the escalator and have people walk. But sometimes you get people who don’t understand the social norms and they stand on the left side instead of standing on the right side. I’m in an airport or somewhere in maybe it was Brussels and I see this escalator and on the right hand side are two feet on each step two to two on the left hand side is alternates left and right foot. And I made it clear oh this is the walking path. And that whole issue you never ran into the person to understand the social etiquette. And if you’re standing slow traffic moved to the right. It was amazing it was so simple and very effective yet you know people have lots of misconceptions about nudge. One is that it has to be sneaky. These notice these things are the opposite of right in your face.

Right. Look my favorite nudge one that I claim I saved my life many times is in London at street corners there’s a sign that your feet look right now because the cars are coming from the wrong direction. If you’re from Europe or American right and so you know many years of looking for cars coming from your left all of a sudden boom. So you know there’s something sneaky about that. It’s right that nobody tells you you have to look at it but several double decker buses haven’t hit me because of that look right. You know a couple years ago I wrote this thing for tourists coming to New York City. And one of the things was there are many want to. They streets but the bicyclists don’t have any obligation apparently to follow that. So when you step off the curb look left and right to make sure you don’t. And let me tell you how many times I’ve just missed the bicyclists because I happen to look right it’s the same it’s the same exact thing. So this really is kind of consistent with the philosophy at the University of Chicago which is really known as a a libertarian a sort of right leaning philosophical efficient market hypothesis place.

Are you considered a bit of a heretic there because you really don’t fit the mold of of Chicago economy.

Yeah I think heretic would be one of the more polite to have been called. You know we called our philosophy libertarian paternalism libertarian paternalism the way many of the Libertarians were mad that we stole their word and that everybody hates paternalist they think of the journalist as Ralph Nader. So but what we need by Libertarian we use it as an adjective and by paternalism we mean helping people achieve their goals like not getting run over by a bus. So if we can do that without forcing anybody to do anything why wouldn’t we be known as the father of behavioral economics.

I’m about halfway through the book and I found it to be both informative and amusing which is an unusual combination So let’s talk a little bit about theory induced blindness. I know you’re going to be seeing your mentor Daniel Kahneman and you mentioned that’s a quote of his he called Theory induced blindness the refusal to see facts when it disagrees with a theory or ideology. Some people call that cognitive dissonance is.

He difference between this is a different concept so the idea is that if you have a certain lens that you look at things through then you’re going to see everything to be consistent with your point of view. And so you know it’s like that people have various views about the economy from the left and from the right. And every you know every time there’s a bit of news they’ll find a way of inter-breeding that piece of news as just confirming what they’ve always thought. Where I see that every day is the bull bear debate that takes place in the media and print and no matter what’s the data point is the bulls who are long equities and explain why this is good for the markets and the bears just tried out a counterargument. This is proof that we’re all going to die. It’s amazing with the same data points out people just focus on right. What justifies and how much of that is selective perception and how much of that is just you know we see that which agrees with us. Yeah yeah. Psychologists call this confirmation by yes. So we go out and looking for evidence that supports our point of view. I mean what theory should show should be one hundred percent of them are trading at or pretty close to intrinsic value. That’s right. So the fact that you find in one that’s fifteen percent below one day and seventy percent above that really shows that hey that’s theory is a little bit or that it’s what we call an anomaly mental accounting.

What is mental accounting.

Mental accounting is the one. Think of it as the financial accounting of people and economists tell us that money is fungible. If you want to impress people at a cocktail party use fungible it just means there’s no law.
But of course people put labels on stuff. You go to the casino you can see this. A guy wins some money early in the new plan with house money. Exactly that’s the expression Yeah playing with the house money. What does that mean. The casino is called the house so it’s like you’re playing with their money. Well suppose you won five hundred dollars you put in your right pocket. You brought five hundred dollars to gamble us in your left pocket. Both of them will buy something pretty nice if you get it home but the one the house money easy come easy go and it’s entertainment. You’re just putting in a different right option. So you know that sounds like small potatoes.

But during the 1990s technology bubble Oh sure. During that boom everybody thought they were playing with the house money. And for one gain best years were just increasing and increasing their equity exposure. And at the time I said one of two things is true. Either they understood that equities outperform bonds or they think stock prices only go up those things that give us an answer is a crash. Fortunately we got a crash and we got an answer.

You know I’ve had this conversation with people that this was early in my career and I remember getting the calls from people who were significantly older than me saying hey I got a ton of profit some rolling a little money out into real estate I’m taking up that vacation house or I’m trading up to a bigger property. But they were really the exception you it was rational it made sense. I think most people wish they could go back and buy real estate in 1995 prices. That said you really didn’t see a whole lot of it. And any time people sold at least in the until two thousand they seem to have regretted that. All decision.

Yeah. Because you know everything was upside down during that period. The most the most exciting value. You know it was in the lawyer did with nearly Yeah but it did poorly that they all value investors were getting crushed and you had to just be patient. But meanwhile your neighbors were getting rich. It was hard to do so. So why don’t why is it this mental accounting

Why do we love bargains so much you tell one of the anomaly stories about when J.C. Penney’s decided to get rid of the fake prices with the artificial markdowns and just have one price and it was a disaster. Yet people like deals even if they know it’s nonsense and you know even rich guys like deals. You know plenty rich guys travelling in December to get their one K. you know to get more miles. And so only at the next break point and get all these free miles right. That and you know you go to Costco the big discount retailer you see a parking lot full of fancy Mercedes S.U.V.s with my wife pointed out we went to Target a few weekends ago and there is this Rolls Royce race in the parking lot yeah which is a three hundred fifty thousand dollars car at Target. I guess he needed a lot of time. Yeah yeah. I used to tease my father who was driving around in a fancy B.M.W. looking for the cheapest price for gas. And I said you know Dad how much gas you use using to find the cheapest price. But he had to find the cheapest.

So you had mentioned casinos earlier Twain once called Gambling a tax on the stupid. Do you agree or disagree with that.

You know I think it’s Mostly right. Why do we why do people love gamblers like the thrill. You know and there are some things like horse racing would be unbelievably boring if you didn’t have some action right. And of course the betting is irrational because the rate of return is minus seventeen percent per twenty minutes because that’s the take. Right. So it’s funny you say that. So I’m on a cruise with my my wife and we’re walking through the casino to get to the other side of the ship and we just walk by one of the tables and I notice because I have a bit of a I have a I head for math I say to her. Notice that this pace two to one but you have three chances to lose and that pays three to one and you have four chances to lose and it was a roulette table. And I go look at all the odds the odds are relatively bad relative to the risk. And she teaches fashion illustration and design so she’s a visual person and she says I don’t know about that but they certainly seem to be sweeping up a whole lot more chips and they’re handing out each each roll. And I’m like oh well that’s the other way to to look at it. And yet people sit at the tables and play for hours and hours.

So I’ll give you my favorite recent mental accounting story which is in the early days of the financial crisis the price of gasoline fell by fifty percent. What did people do. Remember everybody was belt tightening on all fronts except one people were splurging on premium gas on premium gas premium gas because they have a gas budget and they have been paying one hundred bucks a week to fill up the tank and now it was only fifty. And they’re thinking oh well guess is cheap. All right I’ll splurge by premium every once in awhile. What what of the fact that unless you have an engine designed for premium gas that extra octane just goes out the tailpipe you know. There’s a lot of money left in the gas budget. So just buy premium gas just so you know it’s completely stupid. But you know what can you do.

So let’s talk a little bit about self-control that’s another chapter in the book that’s another one of your favorite topics. People really seem to lack all manner of self-control. How does that manifest itself economically.

Well you know we talked about saving actually United States not an especially high saving area you know we went through a decade where we had negative saving rates. And you know this is the place the domain where behavioral economists have had their biggest impact and we’ve managed to change the way most for one game plans work with two small changes but on one automatic enrollment so you start a new job at a company that has a 401K. and you’re automatically enrolled. Right. Unless you opt out you have to fill out a form not to join. And that raised enrollment in the first year from about fifty percent to eighty five percent. Huge huge difference and a completely trivial change. And what was even the last thirty seconds what was the other the other one is what I call save more tomorrow which is get people to agree to increase their saving rates every time they get a raise. And that has an impact and therefore they’re contributing more.

You know we’ve been speaking with Professor Richard Thaler of the University of Chicago author of the book misbehaving the history and making of behavioral economics. If you enjoy these conversations be sure and check out our continuing chat which you can find on bloomberg dot com and on Apple’s iTunes Check out my daily column on Bloomberg View dot com and follow me on Twitter @ritholtz.

I’m Barry Ritholtz You’ve been listening. A master’s in business on Bloomberg Radio.

Hi this is Barry Ritholtz You’re listening to a masters in business on Bloomberg Radio this is our podcast portion where only you folks lucky enough to go to Sound Cloud or Bloomberg dot com or iTunes and I have to tell you if you’re listening to this you already have found the podcast portion and we just kind of take our ear pieces out and relax and have some fun.

I didn’t get to mention some of your curriculum of the day and I know you said it’s way too long but you do something with Professor Bob Shiller That’s kind of interesting. You guys are the you’re the co-director of the behavioral economics project at the National Bureau of Economic Research. Professor Shiller is your co-director is that right.

You know we’ve been doing this for I think I’m over twenty five years really so here’s what I find fascinating and there are amazing parallels. So Bob Shiller is also a behavioralist he thinks people make mistakes markets get crazy We have bubbles we have crashes. One of his very best friends is Wharton professor Jeremy Siegel couldn’t be more opposite philosophically than then Professor Shiller. He stocks for the long run we can never you know what’s not worry about this if you’re thinking long term you have to be long equities.

Bob is you know things look a little pricey here is my Shiller cape and then I look at you and your University of Chicago you’re the father of behavioral economics and your golf buddy is Eugene Fama who couldn’t be more opposite in terms of philosophy then you are. How did that relationship develop.

You know when I first arrived at the University of Chicago a reporter asked. Couple of distinguished financial economists why they had allowed this to happen. This heretic to shield one I’ll make you read the book to find out who said he didn’t block it because each generation has to make their own mistakes.

That’s hilarious. A very warm welcome to a new colleague. Gene said oh we are them because we wanted him. We wanted him nearby so we could keep an eye on him. That’s very funny also. Yeah so but a little nicer right. And I had a little tongue in cheek a little you know yeah I have to looking if they’re exactly exactly and you know Jean. what Jean says is and I agree with this that he and I agree about almost all the facts we disagree about the interpretations.

Yeah but you agree that there are bubbles. He sort of has ducked that question what is a bubble. What’s a bubble right. Look. But what’s his real objection is that we can’t predict when a bubble is going to end which is true. OK And you know a lot of us had a pretty good run a lot of it. No no no. Look Bob is my buddy for twenty five years. But he was warning. When did he give the speech to Alan Greenspan ninety six around four years early but he wasn’t saying it’s a bubble get out he was saying hey things of it on well you know but kind of what we’ve been hearing that you have by doing is about like ninety eight.

Yeah you know it was as hair was on fire and you know 2000 you know. So my selective perception and confirmation bias is that I only saw the 2001 and. Well I don’t remember the ninety six. He’s the one who planted irrational exuberance and exactly and there and then Greenspan gave him that phrase which Bob never used and the S. and he turned it into a bestselling book which happened to come out in two thousand which was lucky.

Good timing good timing while he was very dead on with the housing. Again you know again he started warning that house prices are going to look in pretty scary especially in places like Vegas and Scottsdale but they kept going up for a couple more nights. So so Gene’s right that calling tops and bottoms. There’s nobody is good at that. And now I think it was pretty obvious in both of those cases that there was a bubble going on but you know I thought it was ridiculously priced in 1998 and you know some people would argue it was.

Yeah and by that I had a guy in my class I was teaching a Ph D. class and behavioral finance and I said Amazon who buys this and there’s a guy who raises his hand and he bought it at the I.P.O. Well come on and he says still on it still holding on to this is ninety eight so isn’t that old and so he’s still holding on to all that I don’t know I don’t know but. So each week in class you know I’m teasing him about this and each week in class he’s getting richer tips because you know at the end of the quarter I gave him an A. I said What the hell. Who knows what I mean you know people forget that in 1998 the Nasdaq was up eighty. Five percent and in ninety nine it more than doubled was up more than a hundred percent. And that’s just you could throw a dart at any tech stock and you’re making crazy money of course you subsequently ended up with an eighty percent not too far off from the ’29 crash an eighty percent subsequent debacle starting in March two thousand.

But Amazon is one of the survivors it yells the American money the example I always give people when they say Imagine if you bought the I.P.O. of Amazon or or apple and my answer is always how many of the original I.P.O. holders valuable do you think are still long Apple that that people buy it and they can. They’re afraid of oh my God I’m a loser we’ll talk a little bit about Prospect Theory and about why people seem to hate losses so much more than they like gains in a little while.

But how many people who bought Apple even fifteen years ago are still long today. Yeah well it’s very hard. People have a tendency to get rid of their winners too quickly and to hold on to their losers too long and that’s the exact opposite I started as a trader in this business. It’s the exact opposite you have to let the runners winners run you gotta let them run and but and you’ve got to be willing to admit you made a mistake and you started to get into law also version lots of evidence shows that losses hurt about twice as much as games feel good.

So I have to ask why. I have my own pet theory which is very esoteric I’m really curious as to why you think why that is that losses hurt. I think we’re just hard wired that way. Amos Tversky one of my psychology mentors had a joke that there once were species that didn’t exist but loss aversion and they’re now extinct. It so. If you are right near subsistence it makes really good sense to be lost a verse right now for those of us who if we lose two thousand dollars we’re not going to fail to make our mortgage payment or stop eating. No longer you know that the evolutionary cycle is very slow and so it made sense to be loss averse when losing something meant you starve to death. Right but but now you know people do stupid things like buy extended warranties right. Twenty seven billion dollars a year. That’s an industry and most of it is for stuff that is just to those of all.

Yeah I forgot what even the last washing machine we just bought a washing machine. We moved in September November or October we bought a washer and dryer and they were nice but they weren’t you know crazy expensive and they stuck pitching in the washer. I’m going to throw that breaks you going to fix and if you know fix it I’m thrown away and I’m buying a new one. I’m not going to. Why do I need to spend more money on the possibility of this breaking. You know what people have to think about is they’re making money selling you that policy right. And the salesman at those especially is making money and that means you’re losing money. They’re making more money. In college I worked part time in an electronics store and they would make more money on the extended warranties then they would make on the products.

So here’s an example of mental accounting. What people should do is say every time somebody offers me an extended warranty I’m going to take that money and put it into a special sale. Right and then any time and then goes to a repair fund. Yeah I had a I had a friend that at Cornell who had here was his mental accounting trick at the beginning of the year. He would set aside money for the United Way say five grand is going to give them anything bad happens to them. He did ducked it. From what he’s going to give to the United Way right now. So he was totally insured so he had an insurance policy and at the end if he had a good year United Way got five grand. Yeah that’s funny you know speeding to get no problem comes out of United Way

You know one year the roof blew off is very close you know in North Carolina and I told them Look you the reason why you were covered is you’re too cheap to give United Way enough money to cover the roof right. That’s unbelievable. So in other words he didn’t have the homeowners and journo you have insurance but you know he didn’t have insurance for the doctor bill. That’s that’s pretty fast. Mental accounting insurance.

So let me keep working my way so might My pet theory on on why people hate losses more than they like gains gains represent a temporary increase in your standard of living. Stamper ery Yeah and we all know you behaviorists have taught us hey you go out and buy a bigger car a bigger house or a nicer television or whatever. And six months later that just becomes your benchmark your frame of reference and whatever benefits accrue to that for the most part don’t really most people don’t feel

I’m an exception with cars and I could tell you my wife’s car every time I drive this. We’ve had this for two years. It’s an utter thrill. The car I forced her to get. It’s just this little rocket ship and it’s a deal. Other than getting pulled of speeding tickets it’s a delight and I’m aware as I’m doing this I’m like you know it’s two years and I just the thrill is not yet gone but I know that it’s about six months for for most people or most things. And so you’re on to a basic fact of life which is that we adapt to our surroundings and to the upside and the downside

Yeah I mean look when you’re a grad student you don’t feel poor because you’re living with a bunch of other grad student right. And you know you’ve all got second hand furniture and macaroni and cheese and you know it’s temporary and now you know if we had to go back to live in like oh yeah but you know we were happy then you’re sure. So you know that. And so that’s the first basic fact of human nature and then the second is that improvements make us happy but that governments make us miserable.

Right. So I know you also version. So so the loss aversion thesis. So not only are the gains temporary but and this sort of traces back to what you said about people on the edge when you lose money in that mental accounting that we do with that loss of the average salary in the United States is about fifty thousand dollars you lose a thousand dollars. That means that a week of your life is gone and you have nothing to show for it. You work that week you got a thousand you lose it. That’s a significant loss. It’s a permanent loss versus the benefits a temporary. Hey here’s a thousand dollars you could buy some nice stuff you could do things but it’s only temporary. And that’s the only way I’ve been able to rationalize why we despise the losses so much more than we enjoy the game you know.

I’m not much for evolutionary stories but this one. Is just we’re just hard wired. And maybe in another fifty thousand years we will get over it but not anytime soon. There’s a book I almost done reading that actually put it down to start yours called last apes standing and it looks at the past ten million years and that there were approximately thirty species of either human like or near human and how the the way they’ve evolved led to some to thrive and some to not make it. And we happen to be the last state standing and it’s a lot of the decision making that that we see today a lot of these what you mention is hardwired. Well sometimes it is a hard wiring to send you down the wrong path.

Right. Hey you ain’t around anymore. Well you know we got hard wired to win that battle with the others. Sapiens and it came you know there were pros and cons we are bad backs so you know that’ll teach you to walk upright right YOU hundred thousand years just to say the least. Let’s talk a little about the winner’s curse we kind of skipped over that earlier. What exactly is the winner Scott’s idea of the winner’s curse this was discovered actually by a couple of engineers at Arco Arkell

is Arco all the oil company almost all Atlanta Richmond.

Yeah exactly. Land Richfield Richfield right. So what. Here’s what they discovered they discovered that when they were bidding for oil leases. Every time they want to lease there was less oil in the ground than they expected. Not every time but on average now they had pretty good geologists and they couldn’t figure out why they were so unlucky. And then they had the Internet. Well there’s a reason. One the auction. They too much. We paid too much

So the lesson is the more bidders there are the more likely it is that if you win the auction you lost. That’s really interesting so if there is something that you want that you’re bidding at auction for you should be at a moderate price and either you get lucky and you pay that under price or if you get enthusiastic and bid too much that’s that’s a losing situation and a lot of options have a way people get carried away. They certainly do. The only way to rationally participate in the auction is to submit your bid and be done with.

Yeah and walk away. So figure out the intrinsic value apply a reasonable discount some of that in writing and find out the next day did I win or not right. Because if you go in person you’re doomed. A friend of mine dragged me to an antique watch auction that took place in uptown and men an hour from where we are yet still uptown from here and I looked at all these and they come out with the white gloves and they bring this watch is four thousand dollars and this watch is ninety thousand dollars and this watch is five hundred that it’s was just insane that’s a whole different universe of collectibles. And I watched online the auction go off and there were some things I thought were really interesting and I hadn’t the slightest idea of. I would love to pay you know steal that for twenty percent below. But auctions are pretty good at getting people at the very least to bid fair value and most of the time to bid above and there’s they have a cost on top of it. Well that’s right but a colleague of mine that Chicago Booth called Devon pope has studied the auctioneers. Turns out that there are some there are good and bad auctioneers. Not surprising but again in a world of recounts that wouldn’t be true because who would all be up to our reservation price and stop.

So what is it that the good auctioneers are getting people to do that the better not.

Yeah I don’t remember the other now getting about four of us that really just but all I wrote all the headline of the is there are different just like there are good baseball pitchers and bad ones. There are good auctioneers and bad ones and the only reason that would only be surprising if you’re an economist. Right because they shouldn’t be there should be only good to so much money and you know it sure is a huge incentive to get a good option here right. If you’re the one having the OP You know if you’ve ever gone to like a charity auction and if there’s a good auctioneer they raise a lot of money really. Then you know they just they just have their ways of get emotionally excited they get into entirely and the right has that right and then know that there is a good trick which is they’ll have two people bidding on like a weekend some villa in Italy and one bids twenty grand then the other wins it at twenty one and the twenty guy and Guy finally says own on call and then he says OK I have about the second week and then he sells the second week to that twenty gram guy. That’s amazing and so yeah there’s a lot of skill in that.

So let’s talk a bit about these biases that are so challenging to overcome. Why is it that a we just creatures of habit is the way we’re wired. Why do people find these inherent issues so challenging to to circumvent.

You know again I mean it’s you know it’s. Like asking why we have bad backs you know or why why we can’t run as fast as her same bolt were built that way and you know in many domains we recognize it. So you know if my wife sends me to the store to pick up some groceries if there are more than two items I need a list. You know I you know I understand my memory. My wife hasn’t figured that out yet. You know she’s like where’s the juice you know.

You know so we all understand at some level you know we set all our clocks if we have to get up early in the morning. And so we’re not perfect and it’s just silly to think that we are perfect. And you know as you mentioned earlier in the show. There’s nothing wrong with theories that assume everyone’s perfect. The only thing that’s wrong is believing that those theories are true.

So you know Greenspan was convinced there couldn’t be a technology bubble because acid prices are equal to their intrinsic value. The rational of course. And you know meanwhile companies are selling for one hundred times sales and they’re computing that because there are no profits. And you know we’re all looking at this and saying this is completely crazy. But then the market goes up another fifty percent and you start to wonder maybe this time is different. One of my missing Well yeah. Yeah I’m not seeing that thing well although he did do a mea culpa post financials and I did do a miracle.

That’s right. And I believe that reputation would have prevented banks from doing the really dumb things they did. You know what bank is going to risk a one hundred fifty eight year. As Lehman Brothers invest Arens and everybody else did and now they’re no longer. Yeah and I think a lot of that a lot of the companies is something I talk about in the book is you know economists have a theory of the agency theory about principles of age I’m sure. And the idea is usually that principle is the owner. So the shareholders the shareholders are you know Bloomberg it would be Mr Bloomberg right so he would be the principal and then you know he’s got guys like you working for him and or shirking that it was kind of the usual idea is that things go wrong because the age and the employee isn’t doing their job right.

I think in a lot of cases it’s what I call a dumb principle Prop eight. So you know let’s take the banks that were paying mortgage brokers two grand a pop to sell mortgages without any documentation. Now I’m not blaming the mortgage broker. That’s what he’s getting paid to do. I’ll take it a step further. Those mortgages had a warranty on them that was often ninety days three months. So you’re selling the thirty year mortgage you’ve basically told this mortgage broker go find me someone who’s going to lease make the first three right first three out of three hundred sixty payments.

Yeah yeah. Crazy right. So you know on principle dumb principle and you know I think in a lot of cases you know if we think of the big catastrophes like Barings and Barclays and. What we had. Or CEO’s who didn’t understand What The people that were working for them were doing. That’s a dumb principle. Yeah to dumb principle that’s fascinating.

So we’ve talked about finance we’ve talked about how irrational people can be in the markets. Let’s talk about fairness with people and fairness games where people are willing to give a benefit to themselves even if they think something is because they think something is not fair.

Yeah a classic experiment is something called the ultimatum game. So let’s say the experimenter gives me one hundred dollars and he tells me to make you an offer of some share of the hundred. And the rules are either you take it and you get what I offer you or you say no in which case we both get nothing. So it’s it’s an all or nothing ultimatum. And that’s why it’s called the ultimatum game. Now let’s suppose I offer you two dollars out of my hundred. Well I don’t need two dollars. You’re keeping ninety eight that with you go jump.

Right. So what we find is in that game if you offer less than about twenty percent you’re likely to get turned down. That’s amazing. And why is that cost to this person making that decision it’s free money. It’s free money. It’s but you know they say The hell with you. I mean that’s not fair.

You know my friend Dan Kahneman and I did a study way back in one 1984 85. What pisses people off. Eight. Well the more polite term was what people think is fair. Right. And we had an example. There’s a blizzard the hardware store has been selling snow shovels for fifteen dollars. There’s they raise the price to twenty dollars The morning after a blizzard. Is that fair. Well people hated it right. You know they all hate it. Price gouging.

Yeah right exactly. Now think about Hoover. Right they do. Surge price surge pricing now at some level surge pricing makes total sense. You know greater demand finite supply prices we’re all used to the fact that if you want to buy an airline ticket at Christmas and a hotel room in Aspen you’re going to pay more than two weeks earlier. They they even call that hey it’s high season and it’s prime season. Right. But you do it in a blizzard you’re going to make people that get you well your gadget you’re now Jake ing advance think that the very word gouging the literal means poke a hole and that’s the way people feel.

So my opinion about Uber is that they should cap the surge and to reduce animists and right and maintain a reputation. Yeah and it makes sense because they’re fighting a political battle in every city as to whether they can operate and whether they can go to the airport. They can’t afford to be making people mad at least not in the beginning. And you know there’s it never makes sense to make people mad. I mean if you’re in this for the long run the most businesses have learned this.

So after a hurricane down in Florida the cheapest place to buy plywood Wal-Mart is Wal-Mart. In Florida they’re notorious for anticipating weather and shipping X. Whatever it is actually ply whatever is needed after and it generates a lot of goodwill a lot of goodwill. Now there will also be a guy in Atlanta who will load up his truck with plywood sell it off the back of the truck right for a market price. Both Wal-Mart and that guy are being rational. Wal-Mart’s playing the long game and that guy is just doing a one off. Right it’s not my reputation that my business in Florida I’m selling this plywood and going back to Atlanta right.

So you know we’ve all had the experience in New York. It’s raining. Can you disappear so cabs disappear. Some guy in a black car pulls up twenty bucks twenty bucks right. And you know you pay unless you want to get what you want to get wet. But if if a cab driver pulled up and let’s say it’s a six dollars fare normally and he says it’s raining it’ll be twenty bucks you’re going to ride down is going to be very very unhappy. Right but you put up with it from over because it’s a different choice. It’s a third option. It’s a third option but I think they could they could do better.

So let me ask you some of my favorite questions that that I ask all of my guests these are these are some regular ones. Let’s start with an easy one. What are some of your favorite books and they can but don’t have to be economic books what books do you really have you really enjoyed.

Maybe my favorite book of all time is catch twenty two. I love Joseph Heller. That book was just I really got your college in just that some catch that gets money. It’s a fantastic catch.

Here’s a weird thing. It’s not on Kindle. That’s funny because it’s high priced I’ve been I’ve been meaning to really read it. It’s read it sold something like twenty million Curry’s right. I wonder theist. Eight has not is the reason why it was published pre candle so there’s no obligation to write about that right

if you like if you like hell are you a Vonnegut fan at all. Yeah I love so fantastic catch. So the two big ones Slaughterhouse Five always comes up every time. Catch twenty two comes up but few of his other ones would just catch cradle is just so yeah you know there’s a book that that many people know that I read because I was there about called Galapagos I think that’s the title. Maybe it’s not the title but it’s a book that takes place there. And I bought a good book a violent book off the Galapagos book that’s in the back of my head.

Douglas Adams who wrote The Hitchhikers Guide to Galaxy he did a book called Last Chance to See and he talked about by the way you want to go see this is not going to be here for another hundred years. If you want to go see this go take a look if you want to go see that go go take a look.

So here’s another book and this is a book I went back and really read while I was writing my book and it’s Richard Feynman’s Surely you must be joking Mr feynman and yet that it’s an ordeal now also you can get the versions of him narrating some of his speeches and so really tough. Yeah his stuff is wonderful.

So in some ways writing this book was my final act of misbehaving. You know the title technically refers to the fact that people misbehave according to economists right. But the second meaning is that by pointing that out during my career I was misbehaving. Well you didn’t conform to what right ones they were expecting you. Two to conform to. And then the third act was writing the book the way I did because my publisher assured me that there’s no market for a book like this right. They’re very bad at predicting these sorts yes.

Yeah but that’s true in television and film right. You know that’s the famous William Goldman line nobody knows anything. Talking about Hollywood that they would make these if it was up to them they would just make sequels of what was originally successful. But you got at least try something to see what’s going to be success so fireman’s book a you know you’ve read it. It’s a bunch of stories and some of them are very funny. He’s a funny guy and but there’s no physics. So the book I wanted to write is as it would be if I had tried to explain physics on Apple.

Got it.

That makes but I don’t know whether you think I have that but that was what I was trying to do.

So let me ask you the my next question is what sort of advice would you give to a young economics student or a millennial either just entering grad school or just starting their career today.

Find your own problems or work your own problems. Don’t. Don’t be or advisors a research assistant and it may cost you a year. Because it’s the easy thing to do is do a variation on your adviser’s life work and that you and good standing for the rest well you know I think you know the my book starts out with this story about Daniel Kahneman having it in your view with Roger Lowenstein.

When Genius there I love another grad and I just had lunch with a not so long so insightful Roger.

Yeah he’s a great guy.

So the story is that Roger was writing a piece about me for the New York Times magazine you were in the room while while Danny was actually having the conversation. So then he said you want to stay for this. And I said sure and then he starts explaining to Roger sailors’ best quality what really makes him special is that he’s lazy and I’m waving my hands in the air and shaking my head and saying you know come on. I admit to being lazy but is it my best quality. And Tammy still sticks to that story.

I love that that’s a great story.

Professor Thaler thank you so much for being so generous with your time. We’re going to wrap right here I know you have a place to go to from here and I will see you on the radio tomorrow.

For those of you are listening we’ve been having a conversation with Professor Richard Thaler of the University of Chicago. Be sure and check out some of our other pod cast you can look it inch up orange down and end up checking them out. Check out Professor sailors’ Twitter handle at our underscore Thaler at Twitter. I’m Barry Ritholtz You’ve been listening to masters in business on Bloomberg Radio.

I found this I found some of the work of Scott Professor Galloway up on You Tube and he’s done a number of really interesting videos. he does a weekly video but but the most fascinating thing I saw of him was called The Four Horsemen of technology: Apple Amazon Facebook and Google and he did this presentation at a conference. It was something like ninety slides in fifteen minutes and it was really just a tour de force discussion of what’s going on in branding in retail in technology and it was really just an amazing conversation. And so I saw this I started doing some research. He’s right here in N.Y.U. is you know ten minutes from from the Bloomberg studios and so I invite him to be on the show and to my great surprise he said yes. And so we had this conversation and he is one of the most fascinating knowledgeable people when it comes to those areas things like luxury brands and marketing and the intersection of your physical stores with your online sites with your social and mobile engagements. And it’s really quite a fascinating conversation which we covered so many different things. It’s really so interesting and amazing and as you’ll hear. At a certain point it shifts from me you know doing the radio thing and asking questions and having him answer to just a real conversation about what is happening in the universe of technology and retail and branding and Amazon and Apple and Google and Facebook and Twitter and everything else. So I I really had a great time sitting and chatting with him. He’s a sort of guy you would love to pull up next to you know in a bar sit down and have a beer and just talk about what’s going on. And that’s pretty much what we did. A little cappuccino and we were off to the races so without any further ado here is my conversation with Professor Scott Galloway of N.Y.U.

this is masters in business with Barry Ritholtz on Bloomberg Radio. My guest today is Scott Galloway. He’s a professor of digital and brands at N.Y.U. Stern is that the correct title.

Yeah close enough proposer marketing professor of marketing.

Welcome to Bloomberg. Thanks for. So before we get started you may not be well known to all of our listeners. Let me go through your very very significant curriculum curriculum beats a bachelor’s from U.C.L.A. and then an M.B.A. from Berkeley. Currently clinical professor of marketing N.Y.U. Stern School of Business author of the digital I.Q. index a global ranking of prestigious brands we’ll talk about that and a little more detail named one of the World’s fifty Best business school professors founder of numerous firms L two red envelope and profit and named the World Economic Forum’s Global leaders of tomorrow which is one hundred individuals under the age of forty whose accomplishments have an impact on the global level you’re also on the board or have served on the board of directors of Eddie Bauer the new. New York Times Gateway computer and Berkeley’s School of Business. Did I skip anything or is that.

No it’s great thanks.

So so let’s talk a little bit about your background first of all why would you leave sunny California for this mess.

Yeah makes it makes no sense I don’t throw things every time if I’m back in L.A. I know it around you get your convertible you think why did I ever leave. I just want to live in New York you know it’s like this is if you’re on energy. It’s the center of the world’s only at the helm of the bobsled the tip of the spear the greatest experiment the density of culture interesting people is a great place to live I love San Francisco did my graduate out there started much in a chemist but it’s a one industry town and stack L.A. is a one industry town it’s entertainment a thing one of the great things about New York is the currencies of power and success here are multiple. E e there’s a lot of different ways you can get your groove on here and just just love it here. Oh sure. Business investing theatre publishing television real estate is just huge here although it seems to be huge where if we look around the country you know so you come to N.Y.U. as a professor.

What was tell us a little bit about red envelope and profit to very different companies.

Sure so I started out of Morgan Stanley only real job I ever had and then I actually got kind of sick and when you get sick at a young age you reevaluate your forced maturity is kind of forced on you and decided I didn’t know what I wanted to do I didn’t want to be an investment banker so did what anyone who is fairly ambitious and doesn’t know what they want to do I went back to graduate school and then got very inspired by a guy named David Dockers considered the father of modern branding and started chemical profit a brand strategy firm focused on his principles. We grew that about four hundred people really rewarding but then decided I didn’t want to be in a services company I both decided our thought a services company is really a young man’s business you kind of on your client’s schedule and then was fortunate to get swept up in the Internet era started read on below. Multi-channel e-commerce company. And then on the day of the I.P.O. said this is great I have some opportunities and some flexibility with what I want to do with my life and decided to pursue this kind of lifelong passion or dream and teach and change my life moved to New York joined a faculty N.Y.U. and here we are. That’s that’s a huge huge set of changes in a very short period of time. Yeah it’s it’s but it’s been a lot of fun.

So. So you briefly were at Morgan Stanley So you have some experience in the real world. How long have you been an N.Y.U. for

I was joined a faculty N.Y.U. in 2002 and it’s been just it’s been thirteen great years is still exceptionally exceptionally fortunate to get to teach at such a fantastic university it’s been it’s it’s just been wonderful.

So let’s talk a little bit about the digital I.Q. index something I believe you were involved in creating Was it two thousand and ten is that right.

Yeah it’s it was really accidental You can’t get very far in academia without doing research and my background is in e-commerce a thought there’s there are metrics for return on equity and price earnings. Car quality with J.D. Power is how many people watch a program with Nielsen but there really isn’t a measure or a benchmark for how a brand is telling across its entire digital footprint so architected an algorithm of eight hundred fifty data points across digital marketing social and mobile and then applied it against one hundred brands and lank them thinking it would be a piece of academic research. Within about forty eight hours of releasing it heard from about forty the brand saying Who are you and why are you doing this and recognize there was a commercial opportunity so I asked the dean if we could spin out the IP and start a private enterprise called L two and why he was very generous with us and said fine as long as you’re supportive of N.Y.U. And and that’s it was really the birth of an accidental business and now I’ll to works with everyone from P. and G. and you know lever to coach Tiffany Nike Samsung So it’s been a lot of fun.

So you talk about looking at and evaluating a company across a site. Digital social mobile

Yeah that’s a pretty broad yet inclusive set of data points. It’s the thinking behind that. Every place a consumer might come into contact with a brand. So all the touch points and every brand has different strengths and weaknesses and regardless of how much capital you have the cruel truth of capitalism and investing in digital is you have to pick your punches. So even a Home Depot or a four or a veto on organizations you think would have a ton of resources have to pick their punches and the issue is you know what lever you going to pull if you’re really about increasing your percentage of sales online you’re going to be more focused on side if you’re about signalling innovation to a younger consumer trying to be around more around social if you’re trying to create a loyalty program that has tremendous uses digitals the connective tissue between your store on your site that’s more about a loyalty program on a mobile phone in the store. So we’re trying to create a benchmark so it’s a branch can track their strengths and weaknesses relative their competitive set and help them shape to shape their digital roadmap and allocate their human creative financial capital more efficiently because everyone agrees that a better investment in digital is probably gonna get your greater return and then investments in some other areas right now. But they don’t know what they don’t know they really don’t know where to start so the idea is how do you figure out how your digital capital allocation puts your overall corporate strategy and how do you drive stakeholders.

I’m Barry Ritholtz You’re listening to masters in business on Bloomberg Radio my special guest today is Scott Galloway he is a professor of digital brands and marketing at N.Y.U. and I love your conversations by the way the way I found out about you was the Four Horsemen video which is all of the You Tube and some of the conversations you’ve had about retail and the deep dive you do into that space which I find to be absolutely fascinating

So let let’s jump into retail. I love this quote of yours you said retail stores are the new black. Explain

So in the terms in the world of e-commerce. I believe the pure play e-commerce has no future. That almost every pure play e-commerce company is either going to open stores or go out of business. That’s a pretty radical position isn’t it. A defense I think it’s defensible. I would I would challenge anyone to name the pure pally e-commerce company and and let’s talk about whether this is a sustainable business or not. And effectively the consumer always gets what she wants and there’s there’s three doors here. There’s a great e-commerce site that just has an e-commerce offering there’s a great retail concept with just bricks and mortar maybe a weak e-commerce site and then there’s door number three S. A for a Williams Sonoma or Macy’s that have great stores great e-commerce and use digitals the connective tissue around the loyalty program and the consumer wants door number three I think the future looks more like Macy’s in way of snowmen and it looks like Amazon are now to port their guilt and with e-bay fit into that eco system. I would describe as a pure play retail I think of them as a marketplace just between a buyer and they’re not taking inventory. They’re their marketplace.

And speaking of inventory you another quote of yours. We have these incredibly flexible robust warehouses cold stores. So I’ve been a big fan of Amazon and I’m actually going a little embarrassed on it because I think it I think what Amazon has missed a little bit is that in terms of consumer behavior consumers value convenience over speed and that is if you were to order say you decided I’m going to spend more time outside my home in North Fork and I need some sun block. So I’m going to order Laroche per se which is this fantastic sound box you need to order an Amazon and have it delivered to you in a day four hours two hours if they have their way or you could order it it’s a for a dot com and then bomb down the elevator here and take it up to the four two blocks away anytime between the hours of ten and eight P.M. Click can collect or buy online pick up in store is probably the biggest phenomenon retail in the last couple years we didn’t see a company that’s coming it sounds very base but it’s usually convenient to order online and pick up and store and use if it’s in the store why do I have to order online why can I just walk two blocks and do that because people like to get the information they like to do to browse. Sing emotional and intellectual purchasing his move from the store to online so foot traffic to retail down fifty percent in five years buried the man while gazing retells grown two or three percent a year.

But what’s happened is the following. The browsing and buying has moved online. The Fulfillment the transaction in the pick up is still in the store think about cars think about when you and I were a kid we used to go with our dad to that one area town where we look at a car we’d actually kick the tires take a car in its test drive look at those brochures negotiate the transaction the number of people now who’ve actually skip the test drive has doubled just in the last five years we can go online car carnies are prohibited from actually selling online but effectively we buy online now we go to great configurator we start getting served ads by other automobile companies we can go to out e dot com build our eighty sixth out of the leather piping on the seat we can find out how much the dealer paid for it. We can get user reviews and then we go into the dealership armed with the exact car we want the exact price range we know we should pick the car dealerships are no longer selling cars they’re really just warehouses for filling and consummating the transaction that’s a great metaphor for what’s happening in retail browsing in decision making have moved online even at the transaction in the pick up are happening in retail but bricks and mortar plays a great you know a really important role it’s a great way to pick up stuff it’s a great place to learn more about the transaction it’s a great great place to brand these are powerful branding vehicles. These these brick and mortar stores I think the new black in e-commerce the stores a lot of them are opening bricks and mortar.

So you talk about the biggest challenges to Amazon is stores like Macy’s and I’ve noticed over the past few years in terms of marketing and displays within the stores and I know they are on a variety of other stores I think they own Lord and Taylor or Bloomingdale’s or some kind I mean you have but I’ve I’ve noticed that they’ve really gotten very savvy about their online and you shop it. Story I have.

I like this but you don’t have it in black and you don’t have an in a large they’re like oh we’ll ship it to you for free. That’s a new thing from them. Thinking like an e-commerce kind of ANY not like a well will get a delivery in six months and you can come check us out then yeah the most inspiring companies in retail for the last five years have been Amazon an airport it’s been Macy’s and Nordstrom. The crisis is a terrible thing to waste five years ago. I advise hedge funds and large read came to us the fun I was advising and said we want to take a control position and Macy’s or a large position an advocate for them to shut it down and sell the underlying real estate which is worth more than the stock right now. They saw the future was not where they were headed and they made massive investments in leverage their operational competence their capital to cash or to build unbelievably strong e-commerce offerings connected that to their stores and have fantastic multichannel offerings. Macy’s stock has outperformed Amazon over the last one three and five years Nordstrom stock has outperformed Amazon the last several years. These are incredible companies that have embraced the digital future and improve on basically everybody wrong the future really is about multi-channel Macy’s in Nordstrom’s. I would argue most inspirational retailers and have rewarded the shareholders over the last several years.

So much for a first mover advantage at least when it comes to Amazon. Yeah Lennon lottery still are another unbelievable company you know set it the second mouse often gets the cheese if you really look at it. Peter Gold or who was a colleague at Stern and now it’s a call is now as a colleague at Dartmouth as probably the best scholar in the age of fifteen

in the world of innovation we talk about Clay Christensen We talk about that. Peter Gold in my opinion is the kind of future of innovation so it’s academia and the body of his study basically says if you talk about return stakeholders it’s not the first mover it’s the second the true innovator the guy the Gallegos first usually doesn’t serve shareholders that well is the person that comes in second. Apple Apple has been second most stuff they’re not a true innovator in the definition of the word they weren’t the first into. Into object or in computing that weren’t the first M P three player they were first mobile phone but they look at something they improve upon it they wait and they come in and make it more user friendly. The department stores the best retailers have often been the second mover.

So let’s talk a little bit about brand versus product question. You’ve discussed this you know what’s easy to fix a good product with a bad brand or a bad product with a good brand.

I think it’s changed I think and I’ve devoted my life form a majority my professional life around brand I’m in a nice living from it but I think the sun has passed midday on what I call the Arab brand the eighty’s and ninety’s the primary way to drive a lot of shareholder value Berry was to have an average to good product and then hire the best talent around brand and create unbelievable intangible associations are a great brand. An average shoe an average cup of coffee and an average beer and the best man in the world but what do all these technological innovations and platforms allow us to do. They allow us to share great ideas if this show is generally better than other shows. It’s going to spread faster than anything before.

I’m Barry Ritholtz You’re listening to masters in business on Bloomberg Radio my special guest today is Professor Scott Galloway of N.Y.U. Stern School and L two digital.

Let’s talk a little bit about Amazon. What is it that they’re doing wrong with their last mile strategy.

Shu for some incredible company and Jeppesen arguably the best of the last ten years I think there are two primary advantage that has cost them tens of billions of dollars to Iraq have been this last mile incredible last month the structure is such that they can supposedly within twenty four months get about fifty percent of American households fifty percent of everything they buy within two or four hours which is incredible and then one quick thing I think we we overlook what an incredible innovation is to be able to just touch something and know that it’s on its way. How we’re very I would argue that some recent innovations erode those competitive advantages specifically Apple Pay some of the things Google’s doing are going to make one that one click payment. Advantage a road in value I think other people are catching up. I think the most unusual or the think none of us are expecting and there’s still some time to see the plays out is actually believe is going to give a lot of retailers the opportunity to catch up very fast around the last mile without making the same staggering investment Amazon has had to make I think effectively has created a vascular system for business and when you have someone a smart person inside their own car that they have paid for without a union without or without a uniform and by and by the way I’m not sure that’s a good thing without health insurance. You’re effectively giving every retailer and every business in the world that last mile competence the cost Amazon billions of dollars for a fraction of the cost so in some I think the Amazon advantages those two advantages are slowly being eroded by other innovations.

Let’s talk a little bit up of those names. I don’t really see with a big deal about one click is all to make the other side because I’ve been on Amazon for well almost twenty years I want to say in one nine hundred ninety seven or ninety eight

when I go to buy something and I’m an Amazon Prime member I was kicking and screaming finally did it. And since then just love it has had a couple years. So when I buy something it’s Which critical to my paying is beyond this is at home which of the home cards as it is it going to the office is it going to the house is it going to a third destination. So for me one click really never wider value because I always. And what’s the big deal. I select one of these for credit cards I select one of these for destinations it’s not terrible. I love the idea of being that last mile but let’s think about that the closest Bloomingdale’s to my houses I live all in the middle of nowhere on the north shore of Long Island. But it’s still twenty minutes away. If I order something from Amazon and with Prime it’s usually there within two days I don’t know if they’re going to get there all that much sooner. But. You know I need something here is a tan two days there’s nothing I need right now that I can’t drive ten minutes and get so anything I’m ordering I’ll get here when it gets here if I want something from Bloomingdale’s for them to send in a driver to my house if I was going to take an uber ride to my house that would cost you know thirty bucks or so. So is there going to be that much of an infrastructure of deliveries that they’re not just dropping off one package or dropping off ten things and it’s essentially a rounding error to to a store like that. So the short answer is No but I would argue very that the war of shareholder value is going to be won or lost over you I think you’re the anomaly and I think the majority of shareholder wealth creation is going to be around serving people in urban areas because to be blunt that’s where the majority of the wealth is moving towards.

I think we’re creating a set of super cities where the density of income in disposable income is aggregating around a small set of super cities so I think Amazon still works. Quite frankly I don’t work for Amazon and it’s going to be expensive for them to deliver to you. They’re Amazon’s shipping costs were six billion last year that I was amazed at their going up forty percent a year they took three billion in fees. That’s not sustainable even with Amazon’s cost to cost the capital you want to see a celebrity death match wait till this holidays as Wal-Mart has announced a prime my competitor at fifty bucks and they have stores. The thing that epitomizes this battle and advantage Wal-Mart right now will have over Amazon is Amazon. Wal-Mart has a great ad that says free delivery if you pick it up and store and you know a percentage of the population lives within a drive of Wal-Mart a lot. That’s not exactly delivery that’s going to the store and shopping.

Yeah but if it if it’s waiting for you it’s packaged and you can bomb right in and bomb right out my prediction Amazon is going to buy a gas station company as fossil fuels become less relevant in our life we’re used to bombing in an early stage left and right. Just what’s happened in London they took the ticket kiosks that were people no longer sell tickets. People can order their gross. He’s at a Tube station and have them waiting for them at their destination tube station. People don’t mind picking up stuff. Was it a missed opportunity for Amazon not to have grabbed Radio Shack with their thousands of stores.

I think that would’ve been a really interesting combination but Amazon is so smart they have such such incredible access to capital. I think they’re going to do something dramatic I would be surprised by the post office or take a major investment in the post office that’s the problem. Look what’s happening if you see job growth and job declines most of the a lot of the job the clients are coming out of municipal governments and government employees who are under constant pressure. I would be surprised if Amazon strikes a deal with a government to take over their less performing post offices that would be astonishing.

I’m Barry Ritholtz You’re listening to masters in business on Bloomberg Radio My guest today is Scott Galloway He’s a professor of digital marketing and brand at N.Y.U. Stern

I really love the video you did talking about the four horsemen of technology and we already discussed Amazon. Let’s jump right into Facebook. Sure. You call first you know how Facebook has changed the taxonomy of relationships which is very significant for the way people interact socially. But the question that I the statement I really liked was Facebook has pulled off the greatest bait and switch in history. Explain what you mean by that.

Absolutely. Facebook convinced some of the biggest brands in the world to spend tens of millions of dollars to build these communities you know like some fans and these brands did it because the notion was you’ll get to own this community and they’ll be captive What an unbelievable asset. But Facebook then said just kidding put a walled garden around and the organic reach on Facebook I mean the percentage of messages that Chanel puts out to the community that actually reach the Chanel community is now six percent meaning only one in sixteen messages reach them unless Barry they pay and they advertise. So this was an incredible bait and switch. These are not these are not communities owned by the brands they’re owned by Facebook same things happen it gonna happen on Instagram or. Right now it’s one hundred percent organic reach they will figure out a way to put a pay wall around it. But I’m shocked there isn’t more if you will outrage. I admire Facebook for being able to pull this off but I think we forget how important it is to be liked or cute as an organization Steve Balmer Bill Gates were not likable or Q. No sir again Larry more likable more acute but the regulators are getting angry at them. Facebook lean in the hoodie. They have gotten a ton a license from corporate America and regulators in my view that it has given them a lot of leeway I think what they have done is been exceptional in terms of their ability to say one thing and then do another for the for the benefit of their own shareholders and by the way I say that as an and as an admirer of what they’ve done has been incredible and yet there’s been issues about privacy and issues about people’s data. How does that how did they as a company deal with that or do they just shrug it off and say hey man get used to it privacy is a thing of the past.

Anyone is talking about privacy is typically someone like you or me or guy over the age of fifty. Young people don’t seem that concerned of privacy at the end of the day. Consumer behavior indicates one thing that people like to have their privacy violated as long as there’s a coupon no more relevant offering at the end of it. We want relevance and part of our relevance is observing our data stream and then and then responding with a more relevant offer now. The identity war is the secret war taking place online and Facebook is one thing and that is the ability to attach a specific identity with specific action such you can serve more relevant ads and charge more for those relevant ads. Google cannot track specific identity on their core platform the search engine and it makes sense neither you nor I are comfortable the idea of having our name in our picture above a list of everything we have typed into the query box right. All of us have type some crazy stuff in that box we would rather people not know about. However we’re not as that’s what the Incognito window. There you go in this for.

Yeah that’s you know you raise your cookies but with Facebook for some reason we’re not as uncomfortable with Facebook attaching our actions to our specific identity on. Facebook so as a result Facebook is now tracking more identity data than Google and is able to use their platform across the Wide Web to serve more relevant targeted ads. Facebook is winning the identity war now I find. I’ll give you a perfect example of something online that I find creepy and I don’t know if other people find the same thing. So my wife and I were literally in a florist’s nursery recently and we see this hanging chair beautiful hanging chair it’s got cushions it’s really really odd interesting shape and obscene price and I just make a note of who makes it and I say let me look at it online where it’s a third cheaper and so OK so now I just want to get a sense of what the markup was I know it was more or less should go for and I forget about it. Now wherever I go. Ads for that chair are popping up and it’s like no no I am done with that I’m moving on. Why are you following me around the internet if it gets annoying. It’s going to actually targeting if you go to an Audi site you’re going to start you are served out by Lexus a Mercedes because it looks as if you’re in the market for a car. Most consumers actually like most consumers would rather have a relevant ad on the right rail Weathertop that’s the word is Google. Most people most people actually like that embrace it the thing you talked about the other point is showrooming that is going in and trying to find a different price and there’s been a lot of popular press that this is bad for retailers.

The majority the research shows when people pull out their phone in price compare They not only end up buying they often end up buying more because typically what they find except for the retailer you are in they typically find the getting it around the best price for a good price and then they start reading user reviews finding more products actually web grooming being in a store and using your phone is a creative to the host retailer really said estimating. I know that at one point in time Best Buy was a little discouraging.

Yeah I think they’ve since changed their tune. They have an Ali Look at Best Buy that’s a great example of the war how stores a new black if you order. A flat screen T.V. It’s going to be it’s going to get to you faster if you order from Best Buy because they’re going to fill it out of their store in East Hampton or some some store out there. Then Amazon will get it to you because they’re using is unbelievably robust flexible warehouses called stores that that’s amazing. Now let’s talk a little bit about Google and I love your quote about Google. It’s the closest thing to God You ask a question and you get an answer. So how is Google losing if we consider them godlike. Sure so when I say God when what do you do when you pray you send up information or question hoping that a higher source that’s smarter than you will send back an answer right. Is my kid going to be OK. Now you go on to Google and say symptoms and treatment of croup right and it gives you back what’s going on so I think it is somewhat godlike. Now having said that I think that Google’s going to decline in value and influence why because they’re one dimensional company that hasn’t had any success branching out much beyond Android or G.-Mail ninety percent the revenues hundred twenty percent of the profit from the search platform. Also at the end of the day they’re the way to summarize it is that this rapid change to a mobile world is not good for Google on a mobile phone eighty percent of our time done in app we’re less likely to search Wimmer in an app which is not good for Google a lot of competitors popping up a billion queries a day on Facebook twenty five percent of all product searches now start on Amazon sense amazing also. So they were dominant their dominant market share are starting to show some signs of weakness and cost per click is going down and as a result profits and revenues have their good profit and revenue growth if you will have have stalled this is a one dimensional company an unbelievable revolutionary product but I think my prediction is you’re going to see a couple more minutes earnings misses and all of a sudden that company’s going to find focus again. The self driving cars the broadband blimps the wearables are going to go away.

What about this new app called Now

I don’t know how familiar with that. That essentially hovers over the whole operating system and even within. Aps brings up that exact sort of search you discuss I’m sure you could never count Google out there just to be human capital the people the culture are just a remarkably innovative company. But based on where they are now relative their valuation the marketplace I think they have some substantial competitive threats nothing about Google versus an apple or a traditional retailer. If you’re one click away from going to a competitor. So I think Google on a risk adjusted basis has greater risk than some of the other guys and I think they’re going to leak market share to Facebook we didn’t talk about You Tube everybody I just circled a question that everybody talks about You Tube’s going to disrupt T.V. I think Facebook’s going to disrupt You Tube for the first time ever there are now more native videos uploaded to the Facebook platform than links to youtube and you’re going to see Facebook start to garner more and more share of our time. In terms of how we how we watch video I think it’s moving to Facebook.

That’s interesting since since you mentioned Apple as the fourth horseman Let’s talk a little bit about Apple which you call a luxury brand not so much a technology one hundred percent

it’s been the worst it’s been the worst or the best house in the worst neighborhood for a long time that’s tech hardware that’s just about business low margin and very Dell who else is in that space. You know I was on the board of Gateway computer I mean it’s a difficult our margins our margins a gateway were six percent China operated business on six percent margins it says computer hardware just really difficult. They have effectively moved down the torso we only do three things in business we’re very we appeal to the brain rational decisions low margin transportation food basic shelter we appeal to the heart choosy moms choose to have P. and G. figured out that we’re social animals. The biggest predictor of life expectancy is how many people in our life we love it’s not how fat or how skinny are we how much we smoke. You take if you’re new to a new mother you’re going to live if you’re taking care of your parents you’re more likely to live P.M.G. figure that out plus one or two and said if you wash your kids’ clothes in Tide detergent you love them. More we have a need to love and see B.G. perms tapped into that and then is moved out of the Torah so you go to the second most powerful instinct in the world that’s reproduction. The self expressive benefit the watch I’m wearing cost eight hundred bucks I paid a lot more to wear it because I’m trying in a vain attempt to intimate Italian masculinity the rest the world and our very base level and I don’t like to admit this I think I’m trying to signal to the opposite sex that if you mate with me your kids are more likely to survive than if you mate with someone who’s wearing a Swatch watch and I don’t think in the business world we’re very honest or open about how strong self expressive benefit is.

Tesla was not an environmental car as an attempt to signal to the opposite sex you can afford one hundred forty thousand dollar car. Women wear ergonomically impossible six hundred dollars shoes because they’re trying to solicit offers from the same men. I realize how base and how awful that sounds but it’s the core of evolution and it’s what has driven the best sector in the world buried the luxury sector Reshma larger market cap and Deutsche Telekom Estee Lauder larger market cap and W P P.

Apple is decided we want to be in that business and they have they are the only company in history that has successfully migrated down the torso. A better computer rational decision saying to our hard emotionally with songs and now they are the ultimate self expressive benefit you no longer signal with your watch or your hoodie you signal with your I.O.’s if you own an Apple phone you are saying to the world I am smarter better educated and have more options in terms of who I meet with the transaction is complete to the Apple Watch. Apple is now the ultimate luxury brand it defines what it means to be a luxury brand in the going to be the first trillion dollar market cap company on the back of their successful transition down the torso and it become a luxury brand.

Scott where can people find your work what’s the best way for them. I know you have a You Tube channel. Yup for L. two

how do people find out whether than punching in Scott Galloway into You Tube Thanks for asking Elle to inc dot com Most all radios are there. All right that’s great.

And be sure to check out my daily column. I’m on Bloomberg View dot com Follow me on Twitter at results Scott your Twitter handle is Prof Galloway. Prof Galloway at Twitter

I’m Barry Ritholtz You’re listening to masters in business on Bloomberg Radio. Welcome to the podcast portion of our show where I take my earpiece out and don’t worry about time although I’m getting better at kind of pacing that I used to be so awful that you have no idea how thinking about how much time do we have. It’s really a distraction and a disruption.

So anyway Scott thank you so much for doing that. I’m really I’ve I’ve fallen in love with your videos. My wife is a teacher and there’s one thing I want to ask you about you know so I First I showed her some of the video she really she was like oh that’s kind of interesting. Passing interest in her husband’s life. But then the letter the e-mail got on the students and she’s like Who is this guy this is awesome. She’s a teacher and she has all sorts of headaches with kids like everybody else does. Tell us the derivation of the Get your ass together letter which we can’t cross over the airwaves. How did that come about.

You just never know when your fifteen minutes are going to go ahead and this was an e-mail I got from a student walked into my class late and then I kicked him out of class as if it were your last rule not something in general and or out of school we coddle students too much and as a clinical professor our you know our mission is to try and prepare kids for the work force on in part of that is giving them a sense of what the workforce is actually going to be like and trying to impose some standards on them. And one of those is if you’re late to my class at all U.N. and I didn’t how can you show up two minutes late five minutes later on time you know it’s hard hard military right. I have a theater seating for the kids who work part time because I realize sometimes I can’t get downtown in time at six fifteen we let people in for a theater seating meaning I meaning it outskirts of the class and I know I had exactly six fifteen we let in late comers for the part timer.

OK And we’re all united and after the first part of that is this like a man I kicked him out and then he wrote a long snarky e-mail to me about how we checked out three other classes anyways I got equally snarky back and then it got forwarded and then within and then Deadspin the sports blog places picked it up and got about half a million views and one point I think the dean of the school was getting an email either wildly in favor or wildly against what I had done about every seven or eight seconds. One of those kind of blew up and it tapped into a van because one a lot of people feel as if OK this millennial generation is entitled and were very supportive of my response at the same time a lot of people were said look these kids are paid six thousand bucks to take your class if they show up a few minutes late. You just need to suck it up and deal with it. So it like anything that goes viral I think it tapped into a bit of a controversy at the time it was about five or six years ago and every two years ago it’s fired up again but that is not what I had hoped or expected. Would you know is is the piece of literary work that I would be known for.

Well you know this generation and the offspring of the baby boomers who you and I are really just on the other edge of the wood betwixt and between Gen X. and boomers you know but you know they get participation awards for showing up and I think my wife tells me that they come to school with that attitude hey I’m here with my trophy. No no you got to do something to earn a trophy it’s a double edged sword. About eighty people at L.T. right now it’s a the average age is around twenty six so work a lot of millennia off and the downside is they are more entitled. Remember when we went to work if you can imagine why Can your boss or your first job so I have a career talk I mean I would’ve said OK work your work your ass off career talk over go back to work and now these kids are very focused on their lifestyle balance things that we just wouldn’t have had the guts to bring out. Having said that I was not till ten twenty years and you know we had currency tomatoes some divorces something all of those things but the flip side is there’s a lot of media attention on the net. There’s someone else but the reality is the more talented than you and I our religion. Oh yeah the tools I’ve grown up with the skills they have garnered some of these kids are exceptional. We would put up with this otherwise these kids would have trouble going is up the reason they are and can demand more a balance in life the reason they can demand more talks around their career. The reason they can demand wanting to know what is the larger role that their job plays in the world is because a lot of these kids are outstanding than some of the some of the skills they bring the ability to pull together information. You can’t force maturity so that’s still the same you know but millennial that are the most talented generation I’ve ever worked with hands down and I’m going to be ever heard anybody say going to be an fascinate. It’s going to be inspiring to see what they’re able to build over the next ten or fifteen years you know the debate that that has been circulating about technology and robotics and what it’s costing in terms of jobs.

I speak at a lot of schools like you know a lot of speeches around and one of the things I’ll never forget we went to a wedding. My wife’s cousin in Virginia and we meet not only so I know the groom from he’s this tall to now he’s getting married we need some of his friends in the groomsmen one of the groomsmen created this perfect for college an Apple i Phone case the dumbest thing in the world. He has built into the back of it a bottle opener so you could pop a beer. You always have a genius right. Right like so obvious and I’m like oh that’s interesting how you going to manufacture this is like oh we have a company in China they drop ship it was down about forty thousand units a month. There’s a kid who’s twenty in college. Like every time I go to a conference with young kids with college students that sort of insane experience. Yeah they understand forget well and loyalty forget company loyalty. The company is going to be loyal to you. They have no loyalty back. Yeah. And they know that they’re essentially

they. Our independence day there you know contract players and they are aware of it. Yeah we get it we get angry at him for because most of us now are in principle positions where we want to talk about loyalty because it serves our advantage. But at the end of the day I wonder if they figured it out and you’ve talked about this in your blog The Big Picture and we’ve talked about this a lot. There are a lot of well publicized cases of these kids who can tap into global markets and have extreme wealth or success really quickly. There’s a dark side to that though and that is I think it’s getting harder and harder for these kids just to be solid citizens say they’re not geniuses say they don’t get lucky and it’s getting harder and harder just to punch out an average living. And and you know this gets an income inequality and I I like a lot of the work that you’ve done on this and a lot of the work that your past has Henry Blodget has done on this but I would when I look at my class versus fourteen years ago I got one hundred forty kids on every Monday night. I think it’s never been easier to be a billionaire I think someone in my class will be a billionaire you with wrong turn of investments or starting a tech company at the same time it’s never been harder to be a millionaire. What I mean is to be aggregate a million dollars just be a middle class guy or gal that aggravates some semblance of a living over ten or twenty thirty years the top the most talented people are going to aggregate wealth faster at a velocity we’ve never seen before. But the rest it’s going to be harder and harder just to be a solid citizen. When you when you look at the State of the recovery as to what’s been going on.

Yeah you know I love the William Gibson quote The future is here it’s just not evenly distributed. The same is true for the recovery and it depends on what industry you’re in where you live in the country you mentioned super urban centers. So we travel around the country and as a client. D.C. is house of fire you go to Boston and that’s New York obviously that this ghost Seattle. People tell me are there recovery stably. Have you been to Seattle Seattle Austin is a little smaller I think Austin is the fastest growing city in the country but Seattle is number two and it’s a big city with a lot of industry and a lot of talk about traffic it even passes. Just amazing. They’re still actually fairly reasonable at least compared to San Francisco and Silicon Valley and Napa that that whole run of an hour north and an hour south of the city of San Francisco is utterly insane and it’s lost its mind. We’re creating a small a small number of at least seem like environments where the life is just incredible there if you can afford access and the opportunities but most people can’t afford it. In Europe it’s London where you can’t write it’s London in the seven doors if you’re an unbelievable systems application developer say and become any earlier and Mariella you end up in Milan within twelve months and you’re in London within thirty six months. Really there is going to.

And you talked a lot about this you know the top top one percent aggregating ninety five percent of the wealth. But this isn’t a one percent thing this is really like twenty percent of the professional’s technology at work. There’s a whole separate that the middle class has really shrunk and the top one percent. What’s so different today is the top one percent in the top one tenth of one percent are so far ahead of anything we’ve seen previously. If you if you hold that aside put put aside the G. fives and the hundred million dollar properties you have just normal insane wealth on a millionaires that sort of top one percent top ten percent top twenty percent in this recovery. I actually left out the most significant factor if you have a graduate degree if you have any specific technical skill and degree that goes with it. This recovery has been very very graphic like right really good if you come out of college with an English literature degree and you don’t have a skill set that you can take to one of those urban super centers. Yeah this is been a really terrible recovery we’re talking about Facebook. Look at the innovative companies of the past Unilever one hundred fifty doing our market cap has about one hundred twenty five thousand families. It’s being supported by you know we were intel more efficient but one hundred thousand people hundred fifty billion dollar market cap Facebook two hundred twenty five billion dollar market cap nine thousand people. That’s amazing. So you have more and more spoils going to fewer and fewer people and Facebook’s a good company. It’s great if you own a Ferrari dealership in Palo Alto It’s great if you own real estate in San Francisco it’s great if you’re serving the eco system of Facebook but I think these companies have so dramatically outpaced wealth creation these companies the Four Horsemen Apple Amazon Facebook and Google have the population of Lexington Kentucky or Corpus Christi Corpus Christi and they have the G.D.P. right the value of the G.D.P. of Spain or Australia some when you talk about and they’ve effectively I think legislatively and and operationally done it to the US what the South can do militarily I think they’re seceding from the nation bury their ultimate their incredible tax avoiders it’s all legal right but they’re licensing their IP overseas in avoiding taxes. When looking for an automobile accident that can offer convenience and a high quality service, check out Maryland car accident lawyer for more derails.

They’re telling women they’ll pay for them to freeze their eggs are telling people that they’ll do better D.N.A. testing they’re giving them their own municipal transportation back and forth from work. They’ve effectively seceded from the nation they’ve said we’re smarter we’re better we can create more wealth we’re going to create a society outside of the normal boundaries of the sovereign the US and we’re going to operate in the Netherlands I think they were effectively seceding from the US and it will only look at Google as an example in San Francisco a lot of the complaints about the Google boss you would think Who cares if a bust is that much more room on public transportation but that’s not the attitude in San Francisco is it you have a lot of frustration I think a lot of the civil unrest that’s taken place is a lot about the individual acts of violence but it’s about frustration that there’s just a if you’re in this class you have the right skills the right work ethic. It’s never been a better time. But if you’re that ninety eighty percent below that it’s harder and harder to be the average Joe the heirs to the Wal-Mart fortune the wall nairs where you have a very decent people who have more wealth than the boy. Out of forty percent of America if there’s going to be a revolution in this country it’s probably going to start on aisle five or Wal-Mart. I mean it’s just that if you have the right skills it’s never been a better time. But that that quote unquote population of people the right skills is getting smaller and smaller and more and more fruits have have are created to those people. The good flash bad news is whenever this is happened in history usually self corrects in the form of war revolution or famine. That’s the self correctional that’s not very encouraging it isn’t encouraging. So and the funny thing is you know post World War two you could raise a family on a job as a postman or a fireman or you know or even a teacher or hey if you were an accountant or a lawyer you were in the upper crust you were doing really well now that whole low skill jobs have have slid to the bottom of the middle class and what used to be considered high skilled jobs or lawyers or accountants maybe accounts are doing better in the lawyers

I think we cranked out too many lawyers some time ago but it seems like the alignment and the strata has really changed and it comes back to the educational attainment. If you have the right degree in the right focus the right the Right Sector. Hey these are great times everybody else is I’m not going to challenge what those fruits are increasingly only being able to be picked by people who are either exceptional or come from wealthy families the bottom decile of households eight percent of the kids who go to college the top decile eighty eight percent and this is there’s a real point of personal passion for me I was raised by single mother who lived and died a secretary we didn’t have a lot of money but we had a nice life and I was able to go to public schools all the way through undergrad U.C.L.A. grad school Berkeley you know if I didn’t have the big hand of government and and very generous forward looking visionaries in the form of the founders of the University of California I just wouldn’t be here with you right now is the bottom line. And those that same access you know my tuition was easy all in Berkeley was twelve hundred bucks a year. Now I want to SUNY Stony Brook. You know the joke was the Berkeley is the Stony Brook of the West. And my tuition was four fifty a semester and a look at us to look at what it is now is a little house and it is a lot more and kids are taking on student debt more student debt than than credit cards. It’s hurting the housing crisis it’s giving them a huge a huge headwind before they get out and I’m worried that you know you know kids just aren’t going to have the same unbelievable opportunities that I had because it doesn’t seem as if the bottom line education is the lubricant of upward mobility. My class and I at this the man in the mirror test very we charge kids six thousand dollars to take my class at one hundred twenty kids one hundred forty kids on a Monday night. Every time I walk into class we’re charging kids sixty thousand dollars that night for one class and the majority of it is being paid for in debt. Something is wrong here. We have to figure out a way and now I’m really on my soapbox. We have to figure out a way to give middle class kids with single mothers the same opportunity to be in this chair and you know I and public about this I give ten percent of my holdings in my company to the University of California Berkeley sandals and N.Y.U. because they’ve been so incredibly supportive. But I really worry that our economy is under a huge threat that the same number of people are going to have access to the unbelievable education that you and I had at the same price and the amazing thing is a lot of these schools have enormous in down hands and it’s not just the Ivies. If you look at Harvard Yale Stanford that’s a hundred billion dollars and endowment just amongst those three that’s astonishing underbid. So if they do nothing else that’s thrown off somewhere between five and ten billion dollars a year in revenue. That’s insane and how do they manage to charge so much but the same thing is happening there. So winner take all economy it’s the same things happening in education and use the operative term there was hundred billion dollar and Ahmanson three schools the schools the top five or seven endowments are growing at a much faster. Then everybody else and education more right to be disrupted we’ve tripled our tuition in the last fifteen years. Inflation is kind of two or three percent here we are so right to be disrupted. So people are looking for a tech player to disrupt us you know is going to disrupt education on our learning. Oh really. Harvard and MIT did the Open Open course the great A few years ago the same effect that’s taking place across the economy the top the top top guys are going to create more power than it was Harvard or said they could double their incoming freshman class without sacrificing any quality. We’re going to take some of that endowment they’re going to take some technology and I’m predicting they’re going to say Harvard MIT Stanford and Berkeley at some point the top schools and I say here’s here’s the deal. Free and we’re going to triple quadruple quintuple And then what does Indiana do what tell us what this forum do. What does the University of Miami do what do they do when the best ten or twenty percent of the population has access to the best schools for free. And every every company worth its salt only recruits at those few schools so how does Harvard with this much physical space triple their entering freshman class is it. Online only or people literally are tripling the number of students in Cambridge.

I think it’s going to be a hybrid I think they’re going to be able to double the size of their class in the next five years and triple it over the next ten to twenty years because they’ll make people more efficient let them take a lot of their lectures right we talk about flip classroom the actual teaching takes place online and we come together to discuss every university including ours is is now building satellite campuses for all the talk about online we just open the campus now Dobby we opened a campus in Shanghai Wharton’s opening in Singapore. So we’re opening all over the world. But it’s like every other category where there used to be fifty players seeking out a good living. There’s going to be two or three capturing one hundred twenty percent of the profit that’s unbelievable. That’s interesting let’s talk about some other sectors of the economy that that’s right for disruption and I know we mentioned television earlier.

Do you watch. This Silicon Valley on H.B.O.

love it do you.

Such a whole it’s a great show. It’s just it’s just you know Mike Judge has done some interesting oddball stuff in the past. This seems to be the first thing I’m trying to remember the future. The name of the future show everybody the movie he did. Idiocracy Yeah. Was it in a way everybody just a blob sitting around T.V. watching or on a couch watching T.V. and it was really sophomore achin goofy and when I first saw the previews for this I’m thinking hey is this guy grown up enough that this is really going to be a serious and he seems to be has the tone perfect I mean it’s just every time I speak to anybody on the venture side in the private eye what is an elder dismantled a totally totally dead on. And it’s amazing to think that there’s a whole part of the country where for a hundred miles up the coast that’s half of what’s going on. Yeah it’s just I mean obviously it’s an exaggeration but I love dearly though it’s barely it’s people and everything good in Riyadh really in reality it’s an exaggeration but it’s not like a gross parody of this slight exaggeration. You see some crazy stuff but the other show I was of do what I love. So I come out and I watch girls I love so I come out because I can relate to it so much and I love girls because I can’t relate to it anyway and I’m confident in is this what young people are really like and I find so fascinating because I don’t know if you’ve ever watched girls but I’ve tried desperately and I just can’t tolerate. It’s literally Wow Is this where kids are like in the honest answers I think it is and so it’s fascinating it’s almost like being a voyeur. But Silicon Valley it really shows how some of the sausage is made and there’s a series of well publicized entrepreneurs but what people don’t do is they don’t realize we have a tendency to romanticize entrepreneurship.

Kids come to me because I’m an entrepreneur and so I want to start a business and I will say if you have the skill set to go to a platform like a Bloomberg like a Facebook like a Google and navigate the politics there be be affective as opposed to just being right something I struggle with. My whole career is the difference between being right and being effective. Then on a risk adjusted basis you’re better off going to work for a platform.

Entrepreneurs are people who have no choice like being a doctor is a terrible job now but some people have no choice they just have to be doctors right they were taking temperature since the age of six. Some people have to be in fashion entrepreneurship the same way and I think that show gets across just how difficult scary insecure and sometimes you can kill yourself for seven or eight years or ten years or longer and end up with not only nothing but less than nothing you know in your parents your family your credit everything and we don’t talk a lot about that but it happens more than it doesn’t happen. Well that’s the reality is that the vast majority of startups the vast majority of new restaurants of new retail stores and new businesses hate to use out most of them are gone. That’s just the simple numbers of it and I’m glad the show isn’t glorifying hey hang out a shingle and everybody get I.P.O. Is it a billion dollars They are really making it clear that you could lose this company with one wrong decision.

Yeah anywhere along the way the litigation was really an insightful device because you know that happens all the time. Yeah I just kind of called full body contact hardball that takes place I worked with a lot of these suits who are very some are outstanding Some are super aggressive some of the stuff the city was really really rapacious it’s a it’s a it’s a full body contact sport in terms of a startup especially a venture backed startup. So so they

There’s one episode where they’re doing their second round and suddenly they start getting they become more obnoxious to the vcs thinking making it look like they already have funded and everybody starts throwing money at them. Yeah and that leads to an interesting plot point but it raises a question what do you think about the valuations among start up these days is that something you look at and here we are in the market where people have been talking about valuations being too rich. Which I don’t for two years in the market just going to go. Well the economists called the dot com crash perfectly they just called in one nine hundred ninety seven and I’m on the board of several startups and what I’m telling them is raise raise money right now and you can’t. Yeah I don’t know if it’s I don’t know if this is the best time to raise money but I’m pretty confident it’s not a bad time and in general I think asset prices across the board because the low interest rates and things you understand a lot better than I do are really high and my sense is you raise money when you don’t need it because when you really need it it’s typically pretty hard to raise money.

So everybody anybody who owns something. I’m saying if you’re in a position of whatever is need to sell and sell. But because I think it’s a great time to sell almost anything and if you’re in a position to raise money or you think you might need to raise money. I’m of L. to the venture backed company. We have fantastic venture capital firm called General Catalyst but we’re even thinking we don’t need the capital. But it’s not a bad time to put another five ten twenty million bucks in the tank right now because you can get really solid valuations to say the least and I’ll tell you what my theory is what’s driving it. It has nothing to do with interest rates it has nothing to do with the Fed.

I’m a car guy. I’ve been a car first whatever said was current car buff and my whole adult working life there are a series of cars I would like to own and they’re now starting to creep up as I know I can afford to buy a two thousand five hundred G.T. you know or a two thousand two B.M.W. Z eight costs when they were seventy five thousand dollars and I was making sixty I can afford. Yeah but the problem is the Z eight is up to one seventy five the G.T. is up to three hundred you know as my income goes up. These cars go up and the reason for this to bring it back to you know start up valuations. There are only so many of them and as we discussed before with the top one to ten percent there are so many people with so much money who desire those. When was that they don’t care they’ll bid one fifty for a car that’s really worth one hundred thousand dollars or they’ll bid fifty billion for Ober because they have to show over in their fund in order to make their limited partners happy and so there’s a limited number of of these goods a limited number of these companies that at least appear to have some shot at at being a home run. And so everybody piles into the same Look at the Ferrari market is gone insane. Yeah like I’ve always thought the Ferrari two seventy five was a gorgeous car from one nine hundred sixty one and later in the sixty’s the dino you could picked up the dino fifteen years ago for fifty thousand you are a car guy fifty thousand dollars there half a million dollars and why there aren’t ten million of them they made a few thousand. Half of them were wrecked on the track and the other half of been lovingly restored and they’ve just completely but it’s I see the same people buying those two seventy five going to the art market and picking up the job committees get sculptures or Brent Kuzio or whatever happens to float your boat and piling into these private equity the best returns the best industry in the world the last five ten years as this market surges it’s been a vanity economy the vanity economy Ferrari’s anything that makes you more attractive or makes you feel more safe knowing to the opposite sex even even in a lot of people say Well Scott that’s not true. Happily married I’d like I just really like this Ferrari and I bought and I kept in my garage The question is why was I made to feel good or people so women will say you know I wear the pearl under my work clothes and no one’s ever going to see it I’m happy I’m in a monogamous relationship I’m not trying to attract anybody. The question is Well why do you feel so good it’s because the last ten million years it’s been pounded into us that we have this job to be more attractive to the other sex that so we can find someone stronger smarter and faster than us to mate with. So to the next generation is smarter stronger and faster and this vanity economy the most successful people. There’s a limited number of these objects because scarcity is what are scarcely values would give us the sense of it. Most were really successful when you can only only so many people can buy and along and then watch this. Believe all East German was watched by Richmond and the prices have just gone just gone nuts and it’s totally irrational that’s where you want to be in business you want to be in an irrational part of the eco system because that irrational translates into great margin. I love the work you do on the signaling in the value of these different things. Thanks my my biology my favorite biology discussion of what beauty is my favorite rationalization is or description maybe not rationalization is. Well beauty is a function of symmetry and symmetry is a function of health and that means that they’ll be better able to reproduce to their children’s right and so you are attracted to the supermodels not because they’re so special but because they meet all of the sub conscious instinctual indicia of health and ability to procreate. And I don’t know how solid the science is behind that but I just love that rationalization it makes so much sense. Along the signaling of the watches and all that other stuff it really when you put things in terms of evolutionary biology suddenly a lot of irrational behavior starts to look less irrational. Yeah becomes highly rational anything about how important it is that the next generation be better that’s Darwin whatever you call it. The looks. What we’re trying to know so it’s I do think it bifurcates

So I think there’s basic certain types of looks a so are more associated with infection or disease and we have veered away from people who have those common characteristics and I’m always worried I’m going to I’m going to say something off color here and that’s a quick end of my career so I want to thank sceptically are the second thing though I do think it’s manmade and I think clothes look better on people who are built like hangers who are unearthly thin Absalom because great organizations like Vogue have consistently wanted to make clothes look fantastic. I think there has been a manmade a manmade training towards some unnatural body types. It’s not like the days of the Reuben S. window which will win. Ruben asked women which were a signal of wealth that you can actually you can be a little overweight right. Which signaled Hey I have more do well. Yeah you know I’m across there are enough to become one of those cross watches always. Yeah there you go. Actually my knees are killing me but I think that’s more a function my age but anyways you know I think they don’t have to and I think they tapped into this under-served marketplace and that is women who don’t necessarily want to be thin if you look at the the the the workout industrial complex. It says The guys be ripped to be big and I don’t think that’s always healthy but I think there’s benefits to being strong but I think what it says to women is be a naturally and I think that’s an healthy process that by the way sixty percent across voters are women and said to women is be strong and being strong as a woman can mean that you can be five five one hundred fifty pounds and you can still be really strong and celebrated that and it has tapped into this wildly underserved population of women who are normal and strong.

Did you see the Times article about the new brands of Cross Fit clothes so women who do cross that they can’t wear off the rack clothes if you doing it strong enough so you have these big muscular thighs and you a little ripped on the shoulders and arms. Traditional women’s clothes don’t fit I think was the New York Times Wall Street Journal I want to say times about this whole new run of clothes that are designed for the Cross Fit female body and women. It was invented by a woman who was across that enthusiast and it’s become wildly successful. A real solid Cross Fit or female goes to the regular department store. No financing or where you started so I wrote one that one of the best returns in retail been plus size clothing but you’re also starting to segue into something that’s a tectonic shift in the world of retail and one of the reasons why that Nike is just kind of a boom than real and oh my gosh what is athletic apparel or utility you know they are right we’ve had a tectonic shift in the third largest consumer market in the world then us for the first time ever. Two thousand and fourteen people are spending more money on sweat pants than on denim. Really you now believe in a lawyer of the Dan Miller Denon generation plus the regular old in my office are not way radios rugrats the technology reporter for a very fashionable woman you know it’s us every day had to tell Nike really people are spending more and more money the most the most the most popular brand among young wealthy millennialists is Nike in apparel. Real people are showing up to work the fabrics it does and it’s not just a bad pair of sweatpants that says juicy on the butt.

These are interesting fabrics to look good. You’re going to see athletic wear. Boom Under Armour blue Nike they are going to they’re going to boom the next ten years and it’s going to be and God help Levi Strauss and company diesel any denim based company is going to be is going to be pushing a rock uphill the next world is clearly far too many denim companies you know for this happen. Now that this going to happen will be interesting to see what sort of what sort of consolidation there is so so let’s talk about another signal out there. Twitter you know followers etc You know I may be a little overweight but I get seventy thousand Twitter followers solarium privately that’s worth thirty pounds we have to lose thirty pounds or that’s good. But you’ve talked about how far Twitter is behind Facebook yet again for you and I I would bet you’re much more of a Twitter user than you are of you and I were talking about this you and I don’t get Facebook I would like to put a banner across my Facebook page that says there’s a reason we haven’t stayed in touch. I just don’t like it I don’t get it. But as you know there are about your big Pook on doesn’t interest on it. But as Yoda said you have to forget what you know if you look at the numbers. Facebook’s the most successful product in the history of mankind centered on belittling God or Allah. Coca-Cola communism whatever you want to call relationships meaningful relationships with two point four billion people across Instagram whatsapp and Facebook Twitter. By basic rap is on Twitter and I love Twitter. No doubt it’s a great company no doubt. I think they’ve got a great management team the question is are they were worth more than Coach Tiffany and and you know through an Abercrombie or Clorox combine I think it’s wildly overvalued and if you look at the user base it appears a flat line and I would argue that their product innovation hasn’t been nearly as robust as Facebook’s or even seen a way about.

We tend to do as Americans think of ourselves as being the home of innovation actually if you look at the product roadmap of a lot of the social media platforms in Asia we chats in a way about calc I’ll talk line in South Korea and Japan respectively. Their product roadmaps actually more innovative than what we’re seeing here. I don’t think Twitter quite frankly is innovated and if you will that you no doubt will see that’s exciting. I’m hedging because quite frankly I don’t know a lot about it I think it’s exciting realtime I know loves it uses it all the time now really.

He’s on the air a couple a couple days a week and he’ll pull up periscope. I have it on my phone I have yet to set it up. They’ll pull a periscope and say I we’re about to go on the air we’ll do a quick ones around the studio and then bang that’s it and he gets real time back and forth another one is mention we’re sitting here in Bloomberg and we’re seeing on the screen these headlines come across his big beautiful screens we just saw the Pinterest announces you can now purchase directly from fans. I think that if Instagram tomorrow releases pentagram and says look if you’re going to say this curated pages of specific topics that you can pin your images to.

I think Pinterest is going to decline in value eighty percent I think Pinterest probably development has been almost zero the last twenty four months and is wildly overvalued. Granted I said that they were at five billion. They do you have essentially a social media is basically

Facebook in the seven doors right now and then you’re going to see Facebook and we said this during the break. I think Facebook’s going to be the most valuable company in the world within five years. Granted I said that five years ago when I said Say ten years. If I take a long breath I said of five years ago to face what was going to become the Internet twenty percent of all time online is spent on Facebook it goes to fifty one in the internet says the underlying technology in Facebook has been around. But when you look at two and a half billion people meaningful relationships dominating funnel up and down. I just think they’re an unbelievable jargon and then to start to take share from Google in every other social media platforms including Twitter. So that’s really fastening some of their advertising stuff. It’s going to be interesting to see how they integrate it because they have the ability to do wondrous things. You know their A B. testing and I don’t know if we’ll get to that we will circle back later about that but some of the things I’ve been seeing that they do and hearing about that they do are astonishing and I don’t know how other marketers slash advertisers are going to be able to match the infrastructure because they have more. You alluded to this earlier. They have so much information about you who you are what you do you know I love this story and this is where maybe there’s some competition with Facebook. I love that story about target marketing to the pregnant pro water and dad goes into the store and yells at the manager and how dare you you know throws a paper how dare you do that and then a month later shows up to apologize Hey you guys were right based on what her purchase history is through her credit card they can track or if other retailers can do that do they stand a chance against Facebook or is it going to be Facebook and everybody else. So I think it’s I think it’s apples and oranges I don’t think Facebook’s in the retail business is a matter of fact social commerce it’s been one of the biggest head fakes in business the last five years there were

what do you mean by that.

Well buncha retailers in two thousand and twelve about seventeen retailers that we track open stores on Facebook you could buy stuff really doesn’t by two thousand and thirteen there were three. When you’re in a bar you don’t want to buy when you’re looking to talk to friends you want to buy but it doesn’t matter if even if even if these are platforms retail advertise. It is a huge market and Facebook is going to start to take share and market cap from every other media vehicle in the world are going to take it from E.S.P.N.. They’re going to take it from W P P. They’re going to take it from Petrus. This is back to the notion of a winner take all economy but you have top of the funnel with Instagram which you could argue is already the most powerful platform in the world if you look at a community size times the level of engagement that it inspires. Top of the funnel brand based image based awareness then with Facebook you have unbelievable targeting in the mid funnel at scale and then at the bottom you have whatsapp which by the way is strong in every market the Facebook wasn’t strong and right it was very very complimentary acquisition. They’re jumping the silos they’re starting to figure out what images you’re looking at on Instagram and then in entirety you on Facebook with more relevant ads and at some point are going to be able to target you locally based on where you are on whatsapp. We have never seen we have never seen anything like this Barry this is this is the most successful product in the history of mankind. It’s not an income it’s a scene from Minority Report. Yeah. Where Tom Cruise walks into the store they know who he is they know what he shopped it. The ads pop up specifically for Han. Yeah Facebook is approaching that one and look how smart they’ve become

Remember all the grief that everybody gave Mark Zuckerberg for buying Instagram one thousand people for a billion bucks. Now they say it’s worth twenty to forty billion dollars fantastic acquisition

Meanwhile Yahoo goes and buys time or from one point one billion they never mention in earnings calls again. Right best acquisition in tech the last five years Instagram worst acquisition in tech the last five years. Tumblr and then whatsapp perfectly complementary every market they weren’t strong and this is been this has been the most nimble company in the world zero zero revenues for Mobile thirty months ago now two thirds of the revenue and that’s amazing on the whole that’s the huge shift once they cracked mobile because I was skeptical about Facebook’s valuation very mobile. I did a reversal once they basically said hey here’s how much was seen and that was a huge huge game change for unbelievably nimble who’s made their acquisitions. When Facebook who’s been able to retain talent better they’ve also got the benefit of being seen as benign.

So regulators are coming after them. I think the most top most valuable company in the world. That’s that’s incredible That’s We’ll see if they can actually bypass Apple.

And which raises the question How dependent is Apple on their next hit I know that we’ve had a long run of really successful products are they a hit driven company or can they afford the watch the i Watch to be a little or maybe not an i Phone or even an i Pod for that matter. Yeah I think they have an exit product and I don’t think they want something with the i Phone sex. No really I don’t know if you’re an i Phone guy but which one do you have I got to say oh you got the sly wife has the big one. Yeah I run the big one is too big to put in my pocket. Sheila now by the way not a tech person like getting her to return. Voice mails like she texts she so totally loves this phone. It’s easy to read it does everything it’s the pictures. So she teaches at the top of the class the pictures that you do on that phone are just astonishing. Yeah. Does the Apple Watch is the Apple i successful I think it is the car for me I don’t think it matters. I think the i Phone six is such an incredible product and by the way who loses Samsung. Oh my gosh that’s a Samsung killer and you are talking about Android there were more Apple watches sold on the first day of the apple Watson every android device combined for the previous year.

Really. Oh my gosh. Very unbelievable realize that Apple Store on Fifth Avenue with one blow the General Motors Bill Young is going to do more sales in year just that store than the entire wearables market by the way everybody thinks the Apple Watch is evidence that the wearables market is thriving the wearables market is dead except at except for the Apple Watch and you have a watch isn’t a wearable it’s a second screen for your phone that’s going to take all the discretionary income. Out of the wearables market fit the job on never going public. No way. The wearables market is done Ask any time you’re with a hundred people or more in an audience. How many people bought a wearable they all raise their hand how many people are wearing a wearable you got what do you wear which when you have it

it’s OK I don’t love how poorly it stands with the phone some you know does sometimes doesn’t the battery lasts three days. I don’t like the way this closes. If I have a better if I die I have zero brand loyalty I’ve been using it. Truth be told I meant nine thousand steps hey I’m going to make it ten. Yeah and there are days when I’m doing fifteen and eighteen and you know the only reason I’m not three hundred pounds is because I’m so I’m running around constantly. What’s your idea of rivals for that idea. Macy’s float for for Thanksgiving I thought but but I will tell you the fascinating thing about Apple and the phones is that you know you see the Android market share and how much Samson is Apple’s capturing about ninety percent of the profits in the phone space for the first time in the history of South Korea. As long as the mobile phones you can have a mobile phone from a non-domestic carrier the number one market share and that’s the i Phone China for its wasn’t Samsung which row is a great company and you can count them out I just think they’re I mean they’re appliances they do an amazing job. So diplomatic. I work with all these guys.

But you look at the i Phone there’s going to be more i Phones sold in China this year yeah. Then in the U.S. And then this coming up in the elevator here I realize the upgrade cycle has such dramatic potential as everyone has an i Phone but they still have the five. So two things the i Phone the successful migration to a luxury brand Apple’s going to be a trillion dollar market cap company. You have NEVER do you realize that one of the course the core pieces of IP in the world of academia and academia spree how out of Chicago this notion of core competence find one thing you’re really good at then do everything in industry standard that’s how the majority of great companies operate it. What is Apple’s core comp. So the best retailer in the world to the best retailer in the world this isn’t if you stored the numbers on a square foot basis there’s nothing even close to it. They’re number one in retail in the world on a per square foot so it’s an eighty five thousand dollars per square foot the number two is hitting at three thousand. There’s a new number to worry Parker at about thirty five hundred is granted small base but there they sell the glasses. Barbaro Sure sure but then design who’s a better you know the hardware I mean this is a company with five or six core comp and it’s blown out the traditional notions of a go to market strategy around business that we’ve ever had we never seen a company like this. Google has one public company search search and search right nothing else could be taken public a google. You probably have four to six fifty billion dollar plus companies within Apple that are distinct of each other you know. I Tunes could go public the hardware company could go public the i Phone You have so many companies operating on twelve cylinders in that company we’ve never seen anything like that. It’s amazing so. So let’s there’s a question I had for you about Apple earlier. How do you how do you compare Tim Cook to Steve Jobs How good is Tim Cook. He may be one of the most underrated C.E.O.’s in the country. I think just I think it’s fantastic and you’ve run a company I’ve run a company you just see how damn hard it is to create value and how and what both Steve Jobs who has deservedly riz you know kind of attained icon status. Tim Cook I my God what unbelievably big shoes to fill and he slipped right into him. So every year one Buffett auctions off the launch it goes for three or four million dollars crazy. Tim Cook does one each year and I was like I would love to do that I can I can piss away two million dollars on a launch.

You need that Ferrari Ferrari two hundred thousand dollars you can have lunch with Tim what a deal to raise money. For charity for two hundred. How is that pot talk that’s what I mean by great that’s the most underrated C.E.O. running the biggest company in the world how is that not a million dollar lunch trays and I want toys for them. Crazy. That’s exactly right. So we talked about the design and brand with Apple so what else do they need to do to move the needle or is there installed platform is their installed base so big that just set that upgrade cycle is enough to keep them going for a few years until the next hit comes along my sense is between the watch which is really a second screen for the phone and anything you could do with a phone whether it be you know continue to encroach on media they announced their streaming service today we’ll see what happens with that. But there’s so much opportunity there other every every one of these companies moving towards one place they all want to be a global operating system like our gosh they all want to control more time of your screen time of your eyeballs near Ted’s than any other firm and Apple isn’t probably the best position to do that. Among the people that matter most and that’s a fact we higher income households if you did a heat map of the I O. S. mobile system it’s basically a wealth map if you’re in Manhattan. You own you own an i Phone i Pad and an i Pad if you’re in on the island in some of the lower income areas or out in Jersey in some of them areas your Android and your P.C. So Apple is a factor we said. And Apple’s tapping into this. They’re getting in front of this way when we talk about Unfortunately the wealthy are aggregating more and more income. You know Apple only has what about fifteen or twenty percent market share with an eighty percent share of mobile commerce because only wealthy people right now are shopping on their mobile phones. Wealthy people have i Phones So who owns an i Phone Everyone A matters and when I say everyone a Matters I mean everyone that has a lot of this was more income and is comfortable buying online and comfortable buying high margin products online so I don’t think I think all they need to do is keep improving the eco system for the i Phone and they’re going to add. Hundreds of billions of dollars market cap. That’s amazing you know in one of your videos you show the heat map of operating system and exactly what you described. So you could see in Manhattan proper and Park Slope and Morristown and parts Nassau County its i Phone and all in the lower or or even middle income spaces. It was the Android system.

You also mentioned the purple areas that are Jurassic Park.

Yeah let’s talk about that you know we in fact we call Midtown which is purple light purple dress a park where we’re all the dinosaurs of their Blackberries are and I know about you but I miss my Black Berry I absolutely salivate when I see those Kitty a lot of our Creator created a lot of value why. Because my first the i Phone comes out and it was eighteen T. only and I went I got the i Phone i Phone one was this beautiful useless glass brick. It was just it was great. Unless you wanted to make a phone call. Yeah and back then supposedly eighteen G. is much better today. But back then it was utterly worthless in this part of area a part of you know New York and as a county you could make a call within New York State allows you thirty days to return a cellular contract do you you don’t miss your Blackberry. So so’s the i Phone went back and I swapped it for a Blackberry and of the same and for two or three years I use the Black Berry and I had the worst I’m a mac guy since my classic in one nine hundred eighty eight so I’ve been I’ve been a fan boy for a long time and I had the worst i Phone lost but it was unusable for me. And the the what you call it.

The basic concept of gee I really want this i Phone If only it would work for me was really really you know frustrating and then when finally it showed up on the horizon that was it was get rid of the Blackberry. Every time I use the Blackberry. It’s just reminded that it was in an i Phone. Yeah I was very very frustrated. Yeah it’s been. I’m still I’m still envious of people who have their Blackberry missed the tactile keys

to talk about what’s interesting is basically you know in a two percent global growth economy when a company’s increasing market cap the way Apple is increasing market cap the question is Will who’s on the losing end of that and we know they basically sucked all the all the all the life in the blood out of ram. They’re doing the same thing to H.P. they’re about to do the same thing with Samsung. The question is who’s next. I think Apple is going to start to suck market cap out of the L V M H and caring for the world really. In the J. Cruz of the world because there’s only so much disposable income in the eco system to go to products a cost between three hundred and a thousand dollars and teen retailers who’ve been racks the last five years from a stock market perspective staring at the Naval it’s a product problems or brown problems or brand promise product it’s neither it’s an apple problem and that it’s kids are now expressing their identity through their phone specifically their Apple phone specifically their i Phone versus a hoodie the hoodie. So the Abercrombie to the world in the longer it so let me show you why I don’t really care about the Blackberry anymore. So the speech to text feature which we have awful in the first year. Yeah and then it was pretty good in the second year. Take a read of what I just did. It’s picture perfect for perfect. I hardly type anymore. You do that unless I’m on a subway. So it requires connectivity because it’s basically checking it. It takes what I say converts it to a formula to Maff essentially sends it up to the cloud brings it back down compares it against of the jillion versions of this find out exactly what I’m saying and the quality is it’s so much better than it was. It’s pretty usable. Yeah typing on glass not my favorite thing. It’s it’s I will say that the Android this thing where you can drag your fingers around. I think it’s a period in the individual but that the text dictation is now so accurate. The only problem is it’s a different part of the brain to speak and then to write. I find what I write is much better than what I say it’s a different lobe yet it’s well to look at the stories of different F one S area Broca’s area the different aphasia people who lose the ability to speak but can sing or can’t read but can write that you can’t read back what they wrote. That sort of stuff is really fascinating to me. And look when I wrote my first book I thought I’ll just dictate it will take no time at all. And suddenly I discover oh no that’s a very different part of it but the very different part of the brain and it doesn’t work nearly as well if I write something out and then integrate it into my speaking process.
It sounds much better than what I’m just doing the sort of the what is that quote if I had more time I would have related to your earlier that’s the thing about writing I do think you try harder and you’re more thoughtful about what you’re actually communicating.

So we never got to talk about the fifth horseman let’s let’s talk about that a little bit. So what we attempted to do was look at what are the common the underpinnings of the Four Horsemen that’s enabled them to build these multi hundred billion dollar market cap companies and we found several things one a truly differentiated product. I mean something that surrounded by you couldn’t replicate easily you couldn’t replicate Google search engine is where you cannot replicate the i Phone easily you can replicate Facebook’s primary platform I mean these are protected really unbelievably differentiated products then visionary capital and then to some with a big vision a Jeppesen has said we’re going to be the world’s biggest retailer and then some progress against that vision that allows them to access capital at such a low cost that they can launch a phone spend a couple billion bucks on and have it be done and it doesn’t really matter. They have so much capital to go play in traffic and innovate.

I think control of the end user experience vertical. On a fifty percent a luxury products are now sold to control challenge your ability to control the end use product and have your brand in front of consumers really powerful. Vanity self expressive benefit a brand that people want to associate with so there’s all these different factors maternal the become is about of the most market cap treat their employees really well. They’re great places to work so if you did all those things and applied them to a bunch of great companies who comes up as potentially could be the next big big thing and some of the companies we came up with that have some potential.

We talked about a couple of them Nike has a lot of potential and I think Ali Baba when you look at sixty percent of all packages being shipped through China are coming from Ali Baba when you get the product roadmap you have a company that you know is is that kind of the best digital company in the fast growing market in the world that’s a pretty good combination.

A company that most people might not think of as potentially being in that same breath but I think is an amazing company. Starbucks was a twenty something thousand stores now two stores opened every day for the last twenty seven years. Unbelief Also I would argue a technology company that serves beverages the largest mobile payments company in the world I was about to say yeah yeah the Starbucks at well five Love wanted five dollars coffee the mobile app now that’s unbelievable more sedate household and I’ve been using it for God knows how long it’s flawless. The more that I was in the my password more than any other company in the world right now and also incredibly maternal they spend more money on employee benefits and it’s not coffee Balcer college nosewheel tasks and not nine dollars and twenty three cents average order value if they can figure out a way to get into food and other things and get to twenty or thirty bucks per transaction you’re probably looking at a company that’s three to five hundred billion Amaria kalau Starbucks is an on believable company that has had in my opinion just made I haven’t time said would come is that we’re not attack company where we’re never going to take a message. If Starbucks can be a tech company or can use technology to drive tens of billions of dollars in market cap.

Those Asian what’s your excuse. No one would say oh Starbucks is a tech company. Yeah they are. That’s how they’ve had it. Tens of billions of dollars in market cap the number one company of the company based on what I’ll call the subjective algorithm we’ve applied against it in my view if I was to say OK what company now is trading at less than one hundred billion dollars but could be worth three to five hundred billion dollars in five to ten years I would think or I think it’s become the vascular system for business we’ve never seen anything like that. It’s it’s adopted this strategy when you look at the other things companies have had in common they have added hundreds of billions of dollars market cap last year as is their parasites and that is they’re they’re feeding off another organism. Someone else is creating the content you create the content for Facebook. We create the content for Google.

Uber is basically set X. U.P.S. without unions without Cap Ex They buy their own car without a uniform without the right to strike. Flexible labor meaning cheap labor. It’s sort of a it’s Ayn Rand Darwinian dream from a shareholder standpoint. And they could potentially get into all sorts of businesses. I don’t think Goober is a private drive a private car company I think LIBOR is effectively a last mile solution for millions of businesses that all are struggling with last mile.

That’s fascinating when you put Netflix into that eco system unbelievable company I mean but it’s already it’s already almost there right. What’ll be interesting is this is a great lesson and it’s something that in my industry we failed to learn if you want to understand how likely you are to be disrupted it’s pretty easy you just look at what is our prices relative to inflation you know where prices are going to be way more in inflation when there’s no underlying innovation cable massive price increases no innovation everybody gets into it. Netflix My sense is it could be one of the scummy thing that’s scary about Netflix is the dumb pipe or cable writers they still have a lot of power and so even with net neutrality moralists passing better. New F.C.C. rules but they still on the pipe. Yeah they still own the pipe right so they can raise prices. I don’t so I wonder if Netflix Netflix in my opinion has one big hurdle that the other guys the four horsemen don’t have and that is they are not totally vertical They don’t control their distribution. They still have to go to someone else’s pipe

but only how familiar are you with the history of the Apple Store since you’re talking about controlling the vertical you just made me think of something from back in the one nine hundred ninety S. when it looked like Apple wasn’t going to survive. Are you are you plugged into the Best Buy Apple Store I’m not. So the first Apple stores were this ghetto in the corner of the P.C. section of Best Buy because Apple had a real hard time getting people to pay more money for computers that the staff wasn’t really all that familiar with. Everybody knew how to sell a Windows machine everybody notice or sell a Compaq or an H.P. And so Apple cut a deal with Best Buy They set up these little I call them the Apple get all the mac ghetto. Yeah and so it was four or five machines some of which work some of which were hooked up improperly they were dusty it was just ignored. And my thesis is that Steve Jobs walked into one of these places and said you know what I make a gesture that we can’t discuss and yet I’m going to do it myself and I’m tired of being dependent on these you know retail bombs who don’t want to sell my product but what you’re describing is the evolution of luxury in general because a factory where you had Rolex or you had to be ta’en is a better example Taniguchi going into a bullock’s or Macy’s and saying you know they do a good job or not a great job someone start opening my own stores and I know so when did the coach doors open up when did the believe it’s on stores open. Well Coach has been has had more control the distribution all the sort of the dirty secret occurrences that the majority the retail sells computer our it’s an. A majority are profits but and there are outlets isn’t the same stuff. That’s And I believe it’s a custom product at a lower price point and there’s a lot of brand to do that if you’re trying to ban it’s a balance but with luxury what you have last year’s for the first time or luxury goods or control are sold through controlled vertical channels if the way to summarize it is a brand building is moved from broadcasts in other words pre-purchase advertising print trade shows it’s moved from there in terms of affecting this to the store and the guy that discovered that and created tens of billions of dollars in value for shareholders is making Draxler and I get absolutely and royally large apparel company in the world one thousand nine hundred seven Levi Strauss and company at seven billion basic model is best advertising the world then stuff Army Navy stores with pile highs of five aunts and they had the best ads the world and make a doctor said we can’t afford to go toe to toe so we’re going to put all of that money and branding into the store bleach one word more intelligent attractive sales associates bigger bigger dressing room scented stores better real estate the branding he said is moving to the store. Levi Strauss and company exploded from seven million to four billion in that time period the gap went from something like two billion a billion it’s a huge if we don’t give enough credit to him for that branding is we from pre-purchase into the store Starbucks took advantage of that and luxury has seen that you see Reshma making these staggering investments in stores so high end distribution

the Achilles’ heel for Nike being Coming up one of the four Four Horsemen they have to control more of the distribution they have a decent amount of stores but it seems like his one store pr City Temple Seattle has one in San Francisco I think is will I know there’s one here every now and then we see one pop up but it’s not like a giant chain. Yeah I believe they only control about ten to fifteen percent of their distribution so it’s if they’re going to do one thing you see in common among these four horsemen is that they control the end experience whether it’s Google Apple Facebook and Amazon they have vertical control and that’s that’s why in my view that’s a prerequisite to become quote unquote. Part of the trillion dollar possible club. That’s quite fascinating.

All right I know I only have you for so many minutes left so let me get right to my favorite three questions or four questions that I ask all my guests and we’ll get you out of here at a reasonable time. First we have yet to talk about some of your mentors. We have not talked about any of your favorite books. You know what what sort of books do you really do you really enjoy.

I’m embarrassed to say this I don’t read as much as I would like or as I should as an academic as I’m reading all the blogs like yours and other people’s. Some of the books I’ve had you know the basics like the alchemy has had an impact on me I love. Now I’m saying like I’m seventy or eighty but I love reading books on military history I find them fascinating. Guns nearly why Herman works with the winds of war and then in terms of business my father introduced me to Peter Drucker the young you know shallow observations of a bystander. I find that stuff really interesting vital timely still relevant today. Oh gosh I think so I think as a father modern management stuff is more relevant than it is and say I also love some of the stuff from John Irving you know. You know really the world according to Garp I think it’s I think it’s just a lot of fun into so strange it’s kind of fundamentally right away.

So say next question. So you deal with a lot of millennial should get with a lot of people at the start of their career you know what sort of advice do you give to somebody starting out in your space today.

Find find a great platform find a place or going to learn and it’s not aspirational but find some You’re good at and work really really hard at it and if you don’t find yourself on a path you know you’re not if you’re not fortunate to find yourself on a path toward something you love or you like. People say find something you love find some you like I was the way I would say because you like or you can be good at it. Think about graduate school for all that for all the noise about and all the publicity about people dropping out of college. I still think school. Good plan B..

The Peter Thiel thing you’re not a fan.

I think that is so frightening and so scary. I just you know I’d love to pick ten kids a great public universities to match up against the ten he look if you know they were Save Jobs or Bill Gates. Granted they’re exceptional and God love you if you’re one of those one of those rare people that can you know take a calligraphy class and drop out and start the start the Mac.. But for the rest of us you know college is a pretty good plan B. So as we’ve seen in this recovery to say the least get a get a great find a great platform find something you think you like or you’re good at work your ass off and if it’s not working out in your mid twenty’s think about graduate school and you know good karma the really successful people you find in the trade is they do spend a lot of time thinking about how can I help other people because it will come full circle people do remember that.

What are you seeing that have changed in your industry in branding and marketing. What are the big shifts over the past decade.

Oh gosh I don’t say the death of creativity but it’s definitely Revenge of the pocket protectors and we talked about Don Draper’s dad created to be he’s not not a commodity but you’ve had you’ve had it’s more important to understand how to operate sales force in a database in C.R.M. than to necessarily come up with the right copy or the most beautiful inspiring creative ad so it’s moving more much more towards the zeros and ones than it is from TAC it’s the guys who are cool and where black are making less money. And it’s it’s it’s the math in the chess club and now at the same time we have to produce people understand have the maturity and management skills in E.Q. and play with the right toys to manage those people and it’s hard to find them in the same body but it’s definitely headed towards technology in the world of marketing and branding. We talked about branding Smoove from pre-purchase to purchase now it’s moving the post purchase C.R.M. context are we targeting taking behavioral data. But it definitely seems. Like Tek is just eating eating the world so I’m not a technologist but I like to think I know enough about it to be dangerous and I try and stay on top of stuff. So if you’re you know if you’re starting your career. They are guys like us right who are trying to stay relevant. You’ve got to be on face but you’ve got to figure it out.

You’ve got to go on Pinterest and start painting stuff. See at least get it or at least get it enough to hate it. Right and because most people just dismiss it and when they dismiss when they dismiss is something or when guys are age or dismissive of stuff it’s basically their way of saying I don’t get it and scares the hell out of the con and I always get is like I don’t understand what do you do with Twitter and My answer is always hey here’s here’s what you do find five hundred of the smartest people in the hall and in areas that you’re really interested in I don’t care if it’s beer burgers and baseball. But follow those people and you will know more about stuff that you like and have access to more interesting stuff. It’s like hiring a full time mens a research team.

What could be bad about that and the final question my final question I ask all my guests. What do you know about your field that you wish today that you wish you knew when you were starting out.

When I know that I feel that I was you know I started out I would focus more on how to learn how to build stuff or learn how to code. I would have learned more about industrial engineering and design. I think the world the future belongs to the builders not the brown there’s the the people who know how to actually make stuff that can be making a website that can be figuring out how to edit radio show but the people who build things as opposed to my focus was always on the intangible associations and creating a theory. I wish I’d learned more about how to build things.

So we’ve been speaking with Scott Galloway a professor at N.Y.U. Stern and founder of L. to digital. Let’s once again tell people where they can find you on Twitter. Prof Galloway Prof Galloway and your Web site go to inc dot com L two Inc dot com Scott thank you so much anger you bearing around for Santa Claus. Thanks. This was this was really. Yes And I think people are really going to enjoy this. If you enjoy this conversation and I can’t imagine anybody did not look an inch upward or down on i Tunes and you’ll see the other forty seven or so such conversations be sure and check out my daily column on Bloomberg View dot com and on Twitter follow me at results. I’m Barry Ritholtz you listen to masters in business on Bloomberg Radio.