From Florida’s Downturn To The Winner’s Curse: How Economics Affects The Markets And Our Lives

Richard Green:

Hello everybody. I'm Richard Green. I'm director of the USC Lusk Center for Real Estate, and it's my pleasure to welcome to Lusk Perspectives today, Daryl Fairweather, who is the chief economist at Redfin. Daryl just wrote a book called Hate the Game, and we're going to be spending most of our time talking about the book, and I will introduce the book in a few minutes. But as Daryl is chief economist at Redfin, and as there's a lot of stuff going on in the housing market right now, I asked her if I could waylay the conversation for about 10 minutes to talk about the current state of the housing market.

So Daryl, if you don't mind, I'm going to start with this very specific part of the country, which is Florida. And when I'm looking at Florida data, currently, it doesn't look good for the housing market. We're seeing big increases in inventory. We're seeing price declines from a year ago. Tell us a little bit about what you think is going on there.

Daryl Fairweather:

Yes, so Florida, for a long time, was one of the strongest housing markets in the country throughout the pandemic. And even as interest rates started to go up in 2022 and 2023, Florida was a real bright spot with people moving in from other states, then building a lot of housing. There was a lot of new construction that started in Florida during the pandemic, but now that wave of enthusiasm has seemed to end. Part of it is that Florida has gotten more expensive, so that cost of living gain that somebody might get from say, leaving Los Angeles and moving to Miami, has been eroded to the point that it's not exactly worth it once you do the math. Also, insurance costs are going up quite rapidly in Florida compared to other parts of the country. And also there's a lot of new construction, there's a lot of inventory. So if you're a seller, you have to compete against this new construction as well, which means it's just more of a buyer's market in Florida in general.

So the housing market looks pretty grim there if you're looking at prices, sales volume also doesn't look great, but the new construction there is helping a bit. I am worried about insurance costs because those probably aren't going to slow down. I mean, the risks of climate aren't going to persist, and the cost of living may increase over time with that as well because it impacts more than just housing.

So part of me is worried that this is the beginning of a much longer trend for Florida, but I know Florida has been through a lot historically. It was one of the hardest hit states during the Great Recession. So perhaps it'll bounce back again once it recalibrates to market clearing prices, but for now, values are going down.

Richard Green:

It occurs to me when you think about Florida's ups and downs. There was a movie that the Marx Brothers made called The Coconuts, which was about the housing market in Florida, the 1920s. And one of the most famous lines from it is Groucho Marx saying, "You can get any kind of house you want. You can get brick, you can get wood, you can even get stucco. Oh boy, can you get stucco." And it reflected the fact that Florida had housing bubbles 100 years ago, and then they go away and they come back again. So it does seem to be somewhat endemic to the state for it to be a very volatile market.

But I want to ask you one thing very specifically, and then I'm going to ask you more broadly about the country. But I talked to real estate agents there and they say what's going on in the condominium market is that HOA fees have risen so dramatically. That is discouraging people. And I'm curious, one, is whether you think that's right, but second, this sort of relates to your behavioral economics background is, well, yeah, as these were undercapitalized. So one way or the other, you were going to pay the HOA now, or you going to pay an assessment something. Are people so myopic that something like an HOA fee increase can in fact have a big effect on the condominium market, do you think?

Daryl Fairweather:

I do think that the HOA fees are having a large effect in the condominium market. The condo market is one of the weaker parts of the market where Valley are dropping. I mean, part of that is because there's been a lot of new construction in condos. So these older buildings have been hit with these assessments because of these new policies because of the Surfside condo collapse, And they're also at the same time competing against new construction which doesn't have these same problems or maintenance issues that the new construction has.

I think it's really interesting though what you brought up about behavioral economics because presumably there's a lot of deferred maintenance in the single-family home market as well, but it's not being brought into the present through these assessments, through these higher HOA fees. If you're a single-family homeowner, you can just continue to defer that maintenance and kind of put your head in the ground about what that's going to do to the long-term value of your home. But now if you're a condo owner, it's not up to you or it's not even up to your HOA. The government has intervened and said that you need to have these reserves to do this kind of maintenance. So I think it's almost a preview of what we could see later on in the single-family home market when doing that kind of maintenance becomes less and less avoidable. But for now, it's causing a real-time correction. Right now in the condo market.

Richard Green:

Do you have any sense of how old houses are? At what age do houses start to have these sorts of problems where they need a lot of capital put into them in order to keep them going at some reasonable level? Is it a 30-year-old house, a 50-year-old house, a 70-year-old house?

Daryl Fairweather:

Yeah, it's not exactly my framework for it because it really depends on how good the upkeep has been. If you're the kind of homeowner who stays on top of everything and repaints your house every single year and you get the new roof on time and all of that, then those costs, they don't come at 10 year, 20 year marks, they're more spread out. But I think most people, they tend to procrastinate, they tend to put off those things. Usually it's I think around the time that a roof needs to be replaced that people start to realize that they have other things wrong with their house that they also need to address. It's really hard to sell a house that needs a new roof. So if you're on the market to sell it, that's going to be one of the most noticeable things. And that's generally, I think what triggers people to do a lot of maintenance for their homes is they're getting ready to sell their home. Typically, people hold onto their homes for about 11, 12 years.

Richard Green:

Yeah. One of my all time favorite papers was by a guy named Jack Corgel, who's a professor at Cornell. I think he's still active, and he showed that, this is a 40, 50-year-old paper. They could still be relevant. And what he showed that is if a house needs a new roof now, the cost of that roof is totally discounted in the price of the house.

But if a house has say a 25-year-old roof on it, which means in three, four or five years it's going to need a new roof, it doesn't show up in the price at all. Which comes back to this whole idea of myopia, right?

Daryl Fairweather:

Mm-hmm. Mm-hmm.

Richard Green:

Is economists would think, okay, take what's the present value of the cost of a roof in five years and that should be the discount, but we don't see that kind of thing.

All right, let me be a little more parochial. Let's come over to the West Coast where I am and then I'm going to swing up to the Midwest where you are to finish up our discussion of the housing market. But how do you see things in California right now?

Daryl Fairweather:

Well, California, it's kind of in the middle of the pack for the country. A lot of the trends that we see nationally are happening at the same rate in California. One bright spot is San Jose, I think the tech industry, it was in a bit of a slump a couple of years ago at the Silicon Valley Bank collapse and also people leaving Silicon Valley because of remote work. But now that trend is reversing and there's a lot of money in Silicon Valley again. So that market is starting to go up in value rapidly again. But other parts of California, it used to be that California home value is always outpaced the rest of the country. Now, that's not true, it's more in the middle of the pack. And I know you're going to talk about the Midwest and Northeast, that's actually what's leading the pack in terms of home value appreciation.

Richard Green:

And that's why I wanted to finish on that note. So what's going on in the boring Midwest, which forever had pretty stagnant house prices that we are seeing these sharp increases in the region.

Daryl Fairweather:

I think what's happening is that wages have been increasing broadly across the country, and that's true in the Midwest as well, but in the Midwest homes, were already at a price that's close to affordable for somebody making a middle income. So when a middle class person in the Midwest starts to earn more income and prices are still reasonable, they can still afford to get in despite how high mortgage rates are. And a place like California where home values are already above million dollars in places like Los Angeles and San Francisco, earning more doesn't break you into the housing market the way that it does in the Midwest. So I think that's why the Midwest is doing relatively well right now. It's also a place where we didn't see fast price appreciation during the pandemic or before the pandemic. So yeah, it bits a bit unusual for the Midwest to be doing well, but in a sense, it's kind of making up for lost time because we didn't see that appreciation during the pandemic the way we saw it in the rest of the country.

Richard Green:

Well, I think one of the things you said that's so interesting is that wages are going up in the Midwest, which suggests that businesses are returning to the Midwest. And of course, again, we call it a rust belt or many of the cities, the Midwest, the Rust Belt for a reason. What's happening, what's the transformation that's allowing for these better jobs to happen in a place where they weren't happening for a very long time?

Daryl Fairweather:

Well, there are some parts of the Midwest that have been on this upward trend for the last, I don't know, eight years-ish. Like Cincinnati is one that I think of where the quality of life has been improving for a while, people discovered it during the pandemic and then that knowledge about it being a good place to live spreads. Also, I think remote work has enabled some of the smaller Midwest cities to do well. Milwaukee for example, it was one of these rust belt cities that was in decline. But when Chicago gets expensive, that means that more people are willing to live in Milwaukee. It's only an hour train wide away from Chicago. You could presumably do that commute if you're working a hybrid schedule. So I think that has helped a city in Milwaukee, but also I think just the general age of the Midwest rust belt decline is kind of over, I don't know when you might call it for being over, but even a city like Detroit has been going up in value before the pandemic. But I think now it's just starting to look extra strong because it still is affordable to a middle-class person, unlike some of these Northeastern or western cities.

Richard Green:

Isn't it true that Detroit has finally stopped losing population? It actually had a bit of a population gain in the most recent American community survey. I could be misremembering, but this is after decades of population.

Daryl Fairweather:

Right.

Richard Green:

Yeah.

Daryl Fairweather:

Yeah. I think the revitalization is real. I mean, it's not happening at a breakneck pace, but I think that period of decline is, for the most, part over.

Richard Green:

Yeah. Yeah. Okay. Well, Daryl, thanks for very much for that quick overview of housing in the US and we could spend the whole hour talking about it, but I really want to talk about your book, which is Hate the Game. And normally what I would do is introduce you as an author, but I'm going to start by it because the opening of the book where you talk about your path to the PhD program at the University of Chicago is so interesting. I'm going to basically ask you to give you me your own biography. But in the meantime, I want to do something which I did when I introduced our talk together live at USC and talk about One of the things I really like about the book is how well written it is, and one of my favorite writers is George Orwell, and he has six rules of writing from his small book, Politics and the English Language.

And the one is never use a metaphor, similar or other figure of speech which you're used to seeing in print. Now you use metaphors, but they're ones I've never seen before and I'm going to ask you about a few of them. Second, never use a long word where a short one will do. There is nothing pretentious in your book. Three, if it is possible to cut out a word, always cut it out, you do that too. Your ready is very terse in a good sense. Four, never use the passive word. You can use the active. And since the passive voice annoys me to no end, I am pretty sure it is rarely in your book because it never annoyed me. Five never used a foreign phrase, a scientific word or a jargon word. If you could think of an everyday English equivalent. And here one of the strengths of the book is it does use some economic jargon, but it's really is necessary to use it, and you explain it very clearly. So a reader who hasn't heard the word before knows what it means. And finally break any of these rules sooner than do anything outright barbarous.

And so that's a rather long way of saying it's a very engaging book. So when I write books, there's an old joke. I write the sort of books that when you put them down, it's hard to pick them up later. Yours is the opposite of that, is what I would recommend it for is if you're taking a flight from LA to New York, anytime it's the perfect book for a flight of that length. And it has a lot that is personal, but also a lot that's analytical, and so I highly commend it to everybody. So let's get into it now, and let me start by just asking you about your path to the University of Chicago Economics Department.

Daryl Fairweather:

Yeah, so I went to MIT for undergrad. I originally thought that I was going to go to MIT to study engineering. I mean, that's what MIT is known for. But on the way there, I actually picked up the book Freakonomics. My dad gave it to me and I read it and it just opened my eyes to what economics could be. I learned a little bit of economics in high school, but I still thought it was mostly about the stock market or just about money, dollars and cents. I was always interested in people, but I also really loved math. And it was clear that economics bridged those two disciplines. And once I learned that the author, Steven Levitt, had gotten his PhD at MIT IT, I realized that I was already on the way to a great place to study that.

While I was at MIT, I worked as an intern for the Boston Fed, a research assistant, and then I also did a little bit of time in investment banking, which I hated and realized that I really wasn't done studying economics at the undergrad level. I just really wanted to learn more. I wanted to just learn everything there was to learn. So I applied and got into the University of Chicago and headed there, which is perfect because that's where Steve Levitt was professor, and he ended up being my thesis advisor once I got there, along with Richard Thaler and some other great economists who were on my committee.

Richard Green:

Yes. And so for the audience that doesn't know, you mentioned Levitt wrote Freakonomics, Thaler is one of the most famous behavioral economists. Among other things. He wrote about the hot hand theory of basketball and showed that people actually don't get hot hands, it's just a random distribution of consecutively made shots. Although actually that has generated a lot of papers that have said, well, maybe there is a hot hand.

So again, only people who know the inside baseball of economics would know that one of the most notorious things in economics is the qualifying exam or preliminary exam that you have to take before your second year at the University of Chicago. And the reason it's so famous is that lots of people flunk it. And one of the things you talk about very compellingly is on the one hand, you passed it, which made you feel good as well, it should have. But when you talk to Steve Levitt about it, he talked about the fact that women had higher failure rates on it even though they turned out to be better researchers. But he also said that, but it's graded anonymously, so it can't be biased, and you're never going to convince the faculty at Chicago that it's biased. Tell us about your reaction to that conversation.

Daryl Fairweather:

Yeah, I mean, I was glad that he was so transparent with the reasoning behind why the test was the way it was, but I disagreed with his logic behind it. Just because the test is anonymous doesn't mean that there isn't any bias involved. Just means the bias might not have happened at the grading stage. But from my experience, if you're trying to form study groups or if you're trying to go to office hours, these are social interactions where people's biases will creep out. And if you're in the minority, it's going to just naturally be harder. And I know that there are a lot of people who come to PhD programs who are in the minority, even though they're not a woman or they're not a US racial minority. I'm sure coming to the University of Chicago from a country where you're the only person from your country must be very difficult. But still, if you see in the end that you're filtering out people who would've otherwise made for good economists, then that to me shows that there is a problem with this filter. The filter isn't doing its job. So I think that there's definitely room for improvement. Hopefully people are looking into that. I saw John List was tweeting about it the other day about whether people still think that the qualifying exams are necessary. So maybe there will be some policy changes there.

Richard Green:

By the way, yet another wonderful behavioral economist who again, and also a really good writer. I haven't seen that particular tweet, but that's interesting.

I think about a couple of dimensions about this though, is your experience with study groups at the University of Chicago. Talk to us a little bit more about that. You talk about it in the book. But then the other side is also the way the exam is written. So we'll come to that in a second too. But tell us a little bit about your experience with study groups at Chicago.

Daryl Fairweather:

Yeah, so I remember pretty vividly after the first lecture, the TA got up and told us that to do the problem sets, we should work in study groups and that we were allowed to work with in study groups of five people maximum and that we would all be graded just on just as a team-

Richard Green:

As a team.

Daryl Fairweather:

In the study groups. Yes, we were allowed to pick our own study groups. You didn't have to be in a study group and you didn't have to be in a group of five, but it was highly recommended because the problem sets are really difficult.

And the first person I asked was somebody who I had bonded with during math camp a bit. We were both from California, so we had that in common, but he had already formed a study group with four other men. And it just so happened that this five-person study group, they were all White, American and male. And then when I actually ran the math on what the probability would be of them all forming in the same study group together, if those factors like race, gender, nationality, were not correlated with who you form a study group with, it would've only been a 1% chance. So below the P-value threshold that most economists hold for there being some kind of an effect.

And I have my own biases, obviously I sought out this person being my study group because we were both from the same state, we had something in common. So I understand that people naturally want to form groups of people that they have something in common with because maybe there'll be good social cohesion if you all share a similar background. But if you're in a minority group, it just is one step where it's going to be a little bit harder for you to maybe form a study group. And there's also research that shows that in general, men tend to view women as not being as good students, even though statistically they tend to be a little bit better. This was from a research paper about STEM doctorates. And also there's research that shows that the more women who are in a doctorate program and in a cohort, the more likely they are to graduate.

So it's an empirical, I think, fact that if you have more women in a program, they're going to do better. And I think that these study groups might be one mechanism for why that is.

Richard Green:

It occurs to me a couple of things. So first of all, I can tell you, having taught for 35 years, that women are better students on average. My N is very large and the means are very different. And of course, so the best student I've ever had was a man. So men can be excellent students. And I write tend to write pretty mathematical, so they are kind of objective anyway.

But the other thing that occurs to me is it's a way that economics really lags because if you look at women as a share of PhDs, economics among the various types of PhDs is always toward the bottom, if not the absolute bottom. And I think about the contrast between that and medicine, and I don't think anybody would say medicine was easy. And my wife was in the medical school class of 1994, which was the first national medical school class that was more than 50% women. It's now I think close to 60/40 in terms of the split between women and men. So you give women a chance and you come up with a mechanism where you are... You're never going to remove entirely, but get closer. It shows up.

And that's where I want to get to the exam itself. You could say things are unbiased, but there is bias built in, and you and I are both data geeks and you like to think data speak, but when it's applied in a certain way, it can lead to continuing biases. So I think about two examples. One is with crime, if you send the cops to places where they're the most crime, and you define crime as arrests and arrests tend to be disproportionately Black folks for the same crime. I'm not talking about differences in crime. I'm talking about the classic difference between crack cocaine and snorting coke is the arrest rate for one was much higher than the other. And then, okay, so you see these arrests, so you're going to send more cops there, which leads to more arrests and so on.

So you say you're using data-driven policing, but you're really reinforcing tendencies that started before there were data. And in the world of real estate, of course, if you have neighborhoods that were devalued for years because you had black people who happened to live in them, and then you use automated valuation models in order to look at values of these neighborhoods that's going to be baked in. Do you think those sorts of biases are also endemic into the sort of exams that we write in economics departments or maybe not so much and it's not something to be so worried about?

Daryl Fairweather:

Well, I think that what the qualifying exam measures is how well you can absorb the existing world of economic thought, and that's probably stopping 10 years ago because it's not like during the core exam they're teaching the cutting-edge papers. It tends to be the older textbooks that people are teaching. So I think what it would reinforce is people who are really good at understanding the existing framework for economics. But I think what you actually want to select for in a PhD program and the people who are going to expand the realm of research, who have really novel ideas and are going to take economics in a really interesting direction. I mean, those things might be correlated, but I think there are probably people who might do a little bit worse on some of the more esoteric aspects of economics, but have really good research ideas that are relevant to this moment and to future moments moving forward. Because I see things maybe from a more forward-looking perspective. So yeah, I do think that the test itself is probably just going to get you PhD students who are good at taking tests but doesn't really say much about the research that they will do.

Richard Green:

So let's move on to talk about you've used economics to make a lot of important decisions in your life. That's really what the book is about. And it's also a book of giving people advice about how to use economics to make decisions in their own lives until the very end of the book, and we'll come to that. But let's start with your decision to instead of doing what most people do when they get a PhD, which is pursue an academic career, to not pursue an academic career, what was your thought process that led you to make that decision? Because, Daryl, I will tell you, if you had wanted a successful academic career, you could have had one. So it wasn't that your choice set was limited.

Daryl Fairweather:

I think what it came down to is I just wasn't willing to do the amount of work. I think my marginal costs were getting higher and higher from pursuing research, just in terms of my own enjoyment of the research. And the marginal benefits, I just didn't believe that they were going to come. Maybe that's a very jargony way to put it. So I'll try to put it in simpler terms. Basically, I realized that I wasn't going to be the kind of economists that I admired so much like Steve Levitt or Richard Thaler or if I was going to try to pursue that, I was up against a very tough road because the kind of research, at least when I was coming out of the PhD program, it was leaning more into stuff that was really technical. Structural economics was becoming more and more popular, just the kinds of research that I wasn't all that interested in.

So I was faced with dilemma. Do I try to do the research that was being most rewarded at that time, where people were getting the best kinds of jobs? If I did that, I probably wouldn't be as good at it as the people who are just naturally inclined to do that research in the first place because I didn't have the natural passion for it. Or would I keep doing this kind of research where maybe I would get a job, but it probably wouldn't pay very well. I probably have to live in a city that I didn't want to live in. And to me, it just wasn't worth it.

I know that a lot of economists would really look down on me for saying that basically because economic research is supposed to be the goal of being an academic economist, and it shouldn't matter what institution I was at or where I would be in the academic hierarchy, but it just wasn't worth it to me. And at that point, I just wanted to see what other options were available to me. This field of economics and tech was growing and I was really interested in it, but I didn't know how to break into it. There wasn't a clear career path into that just yet, but I had to have faith that if I just went into the private sector, I would figure out a role for me that fit. And luckily, I did. It took some time, but I did.

Richard Green:

So tell us about, so one of the things you talk about is using what you know about economics and salary negotiations, and I'm sure many of our audience is really curious to hear about how you can use economic thought in order to know how much to ask for when you are in the process of negotiating your salary.

Daryl Fairweather:

So for these parts in the book, I drew a lot from the work of Abhinay Mathieu who studied negotiations as an economist out in the UK. I believe he's at Cambridge or London School of Economics, I forget. But anyway, he has this great framework for negotiations and what determines the outcome of a negotiation and includes what the outside options are of each party. It includes the cost of waiting, essentially the discount rate. How willing are you to wait for the negotiation to end, but also has to do with your beliefs about the other person, what their outside options are. So when you're going into negotiation, the things that I advise is to know what your own outside options are. Take an educated guess at what the person you're negotiating against, what their outside options are. Like if you're negotiating against a boss, what would they do if you quit? Would they promote somebody else? Would they go out and hire somebody else? How hard would it be to hire that other person? How much would they have to pay? And that way, how far you can push it with the person that you're negotiating against. And if you know your own outside option, you also know how far you're willing to be pushed as well. So gathering a lot of information is definitely key to having a good negotiation outcome.

Richard Green:

Do you think we have all these data available to us now? Who does that favor? Again, we didn't prepare this particular question, but it occurs to me to ask you, is the proliferation of websites like Glassdoor and Indeed and so on, does that help the employers more? Does that help the employees more, that sort of increasing transparency about what compensation is? Do you think that's influenced the playing field between those doing the hiring and those wanting to be hired?

Daryl Fairweather:

I think for a long time it was the employers who had more information. HR departments would go and do their own surveys of other companies to figure out what the going rate was. It used to be that companies were allowed to ask you your current salary. I believe that's changed. I forget if it's only changed in California, it's changed more broadly.

Richard Green:

Yeah, in California, you may not do that. That's right. So now actually in California as an employer, you have to post a range of salary.

Daryl Fairweather:

Yeah, you have to post too. A range of salary. So I think in general, the information it's becoming more even. And websites like Glassdoor are also contributing to workers having better information about how much they could be paid. And I'm actually really curious to see what AI does that for well. Because it used to be that if you wanted to have a negotiation coach, you could hire some consultant who would take some fee out of whatever they were able to negotiate for you. But now you could go on one of these generative AI platforms and have it write a whole negotiation script for you and have it tell you what you should ask for and answer your questions. And I think a lot of times in negotiations, people fail just due to a lack of confidence. They just get scared emotionally, even if it's not valid, and that's why they don't ask for enough. So perhaps these tools will instill more confidence into people to just ask and to not back down.

Richard Green:

So tell us a little bit... So that's sort of when you get the job, now you're at a job, and let's talk a little bit about the time you were at a very well-known tech company before you were at Redfin, and how did the internal negotiation process go while you were there?

Daryl Fairweather:

Well, when I first got the job at this tech firm in Seattle, I didn't really do a great job of negotiating. I was just desperate to get out of my last consulting job. And so I made the mistake of telling them exactly how much I made. It was a bit high because it was consulting, going from consulting to tech. So at least I was able to keep the salary I had. But because I didn't do a good job in negotiating upfront, I had to then work for a promotion in order to get a raise, which was very involved. This is a company where it's very difficult to get a promotion. There's all these levels of bureaucracy that I had to go through with every level of executive having to approve of it. But because I understood backward induction, I was able to figure out what were the actual phases that my promotion would need to go to. And-

Richard Green:

So tell us a little bit about what backward induction is.

Daryl Fairweather:

Yeah, so backward induction is this concept and game theory where you start at the end and work your way back just to figure out what decisions to make in the beginning. So at the end of my promotion process, I knew that the person who would have final say would be the vice president. The second to last phase was that in order for it to get to the vice president's desk in the first place, the directors would have to approve of a batch of motions across the entire department. And in order for the directors to approve of it, they had to have a reason for me to be on that list because they're all competing against one another to have their own employees on that list. And even before that, I would have to make sure that my manager was willing to put me up for promotion. Luckily, she already was.

So the real phase I was worried about was like, how do I get on this list from the directors over to the vice president? And I realized what the vice president really cared about was knowing that his directors were not trying to bullshit him. Hopefully, I can swear a little bit on this podcast. Because his job from observing him I understood, was trying to hone in on people who were giving him false information so that he had the best information possible because everybody was always trying to spin things in terms of results. Even during visits to office sites, people would always put on their best face. It was really hard for the vice president to discern what was actually going on, and he would always hone in on people who were trying to pass something off that wasn't up to snuff.

So what I did is I focused on impressing the vice president, making sure that he would think that I was worthy of being on this promotion list, but also do it in a very public way where the directors would see that happening. So the directors would know that if they didn't have me on this promotion list, that the vice president would be looking at them a bit more closely, which is not what they wanted to happen. So by doing this, I was able to get through the promotion process.

There was this final state step that I talk about in the book where that was, out of nowhere where I had to also get approval from the econ department within this tech company. But in general, I was able to foresee what all the steps were and I was able to focus on what actually mattered. Whereas I think a lot of people who are up for promotion, they only think about how do I get my manager to put me up for promotion, when really it's not up to the manager, it's up to somebody above them who actually ends up with the promotion.

Richard Green:

So one thing that occurs to me is one of the ways you differentiated yourself, and you talk about the importance of that, and this is not how you describe yourself, but you showed a kind of courage because you were willing to use data and your understanding of sensor data to say things that some managers didn't want to hear. Tell us about that story. I think it's a great story.

Daryl Fairweather:

Yes. So the first big project I got at this company, it came directly from a senior vice president because he went to this office in India and heard from the employees and this office that they really didn't like the scheduling. They hated that they were assigned overtime at random, and it was mandatory. And so they complained when they had a chance to see the senior vice president on this visit, but he came back to the office and no decision was made at this company without actually having data to back it up. And I was the economist who was working on employee satisfaction. So this came to me to research whether this mandatory overtime policy was in fact hurting employee satisfaction.

And when I went to look at the data at first, the top line results showed that the people who had been assigned mandatory overtime were actually more satisfied in their jobs. But then when I dug into the data, realized that their tenure at the company was much shorter because they had all been quitting more often. And obviously if people are quitting more often, they're probably doing it because they're unhappy. And then once I controlled for their tenure at the company using selection correction, it was obvious that the people who were being assigned over time were both less satisfied and quitting more often.

But when I took this to the team, I was immediately taken aside by the team that was responsible for staffing, and they wanted to dig in on this research because it was going to affect them directly. But they were super skeptical. At first, I wasn't sure, did they just not understand the research that I was doing? Was I not explaining it well enough? So I took the meeting and they wanted me to go get more data. So I went to their analyst and got more data, and I reran the results, and it was exact same. And I presented it to them. Again, and they still weren't satisfied.

And I told my director about this, and she really was quite blunt with me and said that they don't believe the results because they don't respect you. Because I'm a woman, because I'm young at the time, whatever reason it was her interpretation was that they did not respect me. And she was a very accomplished woman at this company. So I took her opinion seriously. I think she'd probably been through something similar in her own career.

So when I had to confront these two guys, again, I went in just knowing that my job was to stand up for myself and to not let them ignore the result. So I just held firm and I was stubborn, and at one point they wanted me to go get more data again, which if you're an economic researcher, this is very bad to pursue more data in pursuit of the result that you want.

So that really pissed me off just in terms of you're corrupting my research now because you keep asking me to go get more data, which is going to in turn bias my results. And also you just don't care about what this research is actually about. We're trying to help people be more satisfied in their jobs, and you more concerned with just not creating more work for yourself. So I stood up for myself. It really off one of the guys. He slammed his fist during the meeting and started yelling at me, which was mortifying, but probably more so for him in the end because it just showed that they were just trying to strong arm their way into getting me to concede, but I didn't. And I ended up showing the result to the senior vice president and he eliminated the mandatory overtime policy and they had to redo all the schedules, so. [inaudible 00:38:08] employees won.

Richard Green:

How did you feel when that happened at that moment? You must have felt pretty great.

Daryl Fairweather:

When they rescinded the policy or when I got yelled at?

Richard Green:

No, no, no, no. When they rescinded the policy.

Daryl Fairweather:

Yeah, I felt like I won. I felt like, haha, like the results speak for themselves. You can't just get rid of me because you don't like what I'm saying.

Richard Green:

Well, I mean they needed a little... By this, I don't mean in any way you were massaging the data, but they did need your analytical capacity to see what was there in the data. So one of the reasons I love this story beyond it being a really nice reflection on you is just this whole idea that we really can learn from data. This is not an academic exercise, is knowing how to use data properly leads to your company being better. You have a better business as a result of it. And so to me, a lesson of economics is when you have a data and you know how to analyze it properly, you're not always going to get it right, but you're going to be right more often than if you don't use data and analyze it properly. So I now want to move on to the other thing that you did in Seattle, which is bought a house. And you talked some about how you used your knowledge of economics to buy a house. So tell us a little bit about that.

Daryl Fairweather:

Yeah, so one of the things that I knew going into buying a house is that's a very emotional decision. It's a rare occurrence. And usually that's when behavioral biases creep in. When people are very experienced at things, they tend not to make as many mistakes as when it's a one-off situation. And also there's just a lot of emotions involved in picking the right house. It's like the American dream. There's all this stuff wrapped up into it. So I wanted to identify my own biases during this process and make sure I didn't fall for any of them. One way I did that was by just doing a lot of planning in terms of understanding what my budget is up front so I know the maximum that I'm willing to spend, understanding what my must-haves are versus just my nice-to-haves. So that allowed me to identify a home that I felt confident about that was within my budget, that met the needs of my family, but I still had to decide exactly how much to bid.

So one thing that's unique about buying a home as opposed to buying another good is that's both an investment and a consumption good. So if you're going to sell it again one day, you have to think about, well, am I buying a home that's going to be valuable to somebody else? I don't want to pay my maximum willingness to pay when it's not somebody else's. I don't want to have the winner's curse as they call it in economics for selecting a home. So I also tried to analyze what are homes going for? Is this market going up in value? What are the potential renovations that I will have to make? Can I afford those? What's the worst-case scenario? How likely is the worst-case scenario? Really trying to do that expected value assessment of the home and make sure that it was coming out ahead for me.

Richard Green:

Since you talk about winner's curse, it is one of my favorite concepts in economics. Tell us a little bit, what is that? Explain what-

Daryl Fairweather:

Yes, I think the original concept was about oil fields, but I'll just use a housing example instead. During the pandemic, for example, there were homes and a place like Austin where you would have dozens of people bidding on the exact same home. And when you have a dozen people bidding on a home, what happens is the person who puts in the most ridiculously high bid is going to be the winner. But when you have 12 people, chances are that is the person who's in the 90th or above percentile in terms of being optimistic about home value appreciation in the area, or they are the least knowledgeable of the home. Maybe they're the one person who didn't read the inspection reports, they didn't see that there's this glaring issue. Whatever it is, there's some reason why that person put in the highest bid, and it's also necessarily the farthest away from the median bid. So this happened in Austin where homes were going for way above what even lenders were assessing them at. So people had to put in even more cash to get loans to afford them. And shortly after that, once interest rates went up, we did see a decline in home values and people who bought at the peak ended up being down 10, $20,000 in terms of what they paid.

Richard Green:

So I think also at the importance of hard and soft information. So we've been talking a lot about hard information, but soft information really matters too. And one of the things we know in real estate that's true, irregularity in data is out of counters, overpay. And it's probably because they don't have the soft information that in towners do, right? Is people know that say that street kind of smells bad some of the time, whereas if you come into town and the prevailing winds are just right, it smells just fine and say, "Oh, that's a nice house and I'll buy it." So how do we, in everyday life, think about the limitations of data in decision making and acquire the soft information that's necessary in order to make good decisions, so we aren't the person who is cursed in the end?

Daryl Fairweather:

Yeah, I mean, one way around this, at least in the real estate industry, is to work with an agent who is knowledgeable about the area. So having somebody who can guide you and fill that information gap. But in absence of that, it's asking around, talking to locals, doing the research as much as you can online, going to see the home in person, getting an inspector, just getting as much information as you can. I mean, this is also prevalent in the lemons problem in the car industry that people who are less knowledgeable about cars tend to overpay, whereas people who can bring in an auto inspector are going to be less likely to run into that situation. So having more information is always powerful. It can be costly to acquire it, but at least you have it.

Richard Green:

Yeah, you're making me also think about, it was James Baldwin who wrote that being poor is expensive.

Daryl Fairweather:

Yes.

Richard Green:

And if you think about it, if you're just scraping by, you're too tired to get the information that you need. And since you bring up the car industry, one thing we know is that people like you and I, when we buy a car, we get good deals, because we shop and we go look at Edmunds and Blue Book, and we walk into the dealer and we know how to negotiate because again, we have information. Whereas when you look at how poor people buy, they tend to just take whatever payment the dealer offers them, and they don't sort of ask beyond that. And credit cards are the same way. You look at who the most profitable customer is in the automobile industry, it's poor people, surprisingly. And they make almost no money off of more affluent people because they know how to... I know what the invoice price is, and I understand they need to make a profit, but they don't need to make any more than the profit I think they need to make, and you're done from there. So I don't know how we fix that problem, but it is... I think there are social costs involved in that.

Daryl Fairweather:

I think part of the solution should be better economics education, because I mean, most people don't take economics when they're in high school, and they don't go on to college and they're just never going to understand these things like opportunity costs or how interest rates work and all of that. It always baffles me how many of my colleagues do not sell their company stock. This happens to my current company, this happened to my previous company. And it's just one of the most basic concepts in economics that nobody seems to internalize or they haven't heard about it or they don't understand the diversification benefit from it. But that's one that always, if you took an economics class, there's no reason that you would hold on to the stock of the company that you work for.

Richard Green:

There are a couple of behavioral things like that. Once I remember, and this is a long time ago, because I was still teaching at Wisconsin, so that was a minimum of 23 years ago. We had a CEO of an industrial read-in to talk to my class, and he was great, except he said, "I so believe in my company that other than my house, my entire net worth is invested in..." I'm not going to say the name of the company. And I thought, okay, I don't want you running my company. If you are that financially... And I mean, I appreciate he's trying to get across a message that his fortunes are tied to the companies, and I do like that incentive alignment. But had he said 60% of my net worth, I would've said, okay, his incentives are aligned, but he also understands something about how to invest properly.

The other thing that's just mind-boggling to me is here at USC, like a lot of universities, our retirement plan is a 403b, which is such 401k, where the university will match up to 5% of your salary. If you put in 5%, they put in 5%. And it just amazes me that university faculty don't do that because it's the only 100% rate of return guaranteed of investment that I can think of. Can you think of another one, Daryl?

Daryl Fairweather:

No.

Richard Green:

I don't think there is another one. And yet you do see that behavior among incredibly smart people. So yeah, everybody needs more economics.

Let's move on to, okay, your last move. So both from Seattle to Wisconsin and that tech company to Redfin. So tell us how economics informed or maybe didn't entirely inform that set of decisions.

Daryl Fairweather:

Yeah, so moving on from the tech company to Redfin. Well, one thing that I was concerned about was that I had just gotten promoted, and because I had gone through promotion process, I knew how difficult that was. I knew it was only going to get more difficult the higher I went up at the company. So I reasoned that I would have a better shot at moving to a new level if I left this company for a new company. And getting the role as chief economist, I went from senior economist, at this company, chief economist. So that was proven when I actually went out and got the job offer that I was better off moving to another company than trying to stick it out and go through the process again and get promoted. It would've taken me much longer, I don't know, decades perhaps still at reach that equivalent level at the company I was with, but I was able to do it and just one fell swoop by switching companies.

But when I went back to my current manager at the tech company to tell her that I had this new job offer and it was going to pay a lot more, and that was at this higher title and there's really nothing she could do to keep me, I thought that that was just going to be the end of it, that I guess she would be sad, but she'd be happy for me. But she actually tried to convince me to stay, and she tried to get into my head that I was going to fail as chief economist at Redfin, so I would be better off staying safe at the current company where I knew what to expect.

Richard Green:

So how long have you been in your job now, Daryl?

Daryl Fairweather:

I've been almost seven years.

Richard Green:

Yeah, so I think you've... Okay.

Daryl Fairweather:

Yeah. Yeah. But I think she was using a tactic, which was just to try to make me feel... She was trying to tap into uncertainty aversion, which is why a lot of people stay in their jobs because they're afraid if they go onto something new that it'll be scary and it will necessarily be worse. But luckily, I knew about uncertainty aversion. I also knew enough about myself and my ability to go into a new situation and figure things out and learn that I wasn't concerned about failing at this new job. And also, I just didn't want to work for a manager who would try to manipulate me that way. After that, I wasn't sure before, I was certainly sure after getting that reaction from her.

So I moved on to Redfin, and then two years into Redfin, the pandemic happened. It got sent to work remotely, and Redfin had this policy where if you wanted to leave the Seattle area, they were accommodating of that. So I moved to Wisconsin. The thing that actually got me to move, I had been kind of mulling over it for a while. Do I really want to stay in Seattle? I don't have any family that's really tying me there. I hadn't made a whole lot of friends, but I didn't know where to move. But then there was a wildfire in California, I believe at the time that was blowing all the smoke into Seattle, and I had been through, that was my third summer and just four summers of having wildfire smoke so bad that you can't go outside for a whole entire week, which is just miserable. I know that people still endure that almost every summer. So I definitely feel for them, but it was just too much for me. So we got in the car and we drove to Wisconsin, which is where my husband's from.

And once I actually got there, then I didn't have that uncertainty aversion or status quo bias. I was already there. And I realized that it was really easy to live in this village in Wisconsin where my kids walked to school and they walked to the park, they walked to the library after living in Seattle for so long with such bad traffic and everything getting more expensive, and the city just didn't feel like it was improving. It felt like it was degrading. And I know a concept in behavioral economics too, is that people usually feel changes, not levels, and it is kind of demoralizing to live in a place that's getting worse. And it was nice to move somewhere where it felt like it was getting better, and it has been getting better with better restaurants and better amenities since I moved here. So I'm happy with the decision.

Richard Green:

Despite the winter.

Daryl Fairweather:

Yeah, the winter. I mean, I did go to University of Chicago for grad school, so I knew what I was getting myself into for the winter.

Richard Green:

Having lived in Wisconsin and having had a daughter who has lived in Chicago long, Chicago's better than Wisconsin in terms [inaudible 00:52:12].

Daryl Fairweather:

Oh, I'm pretty close. It's like the same climate where I'm only two hours north. So it's about the same. The snow is cleaner than in the city. I think one of the things that makes snow hard in the city is how dirty it gets, but at least it's nice and pristine here.

Richard Green:

Well, that's true. That's true. But one of the things... And because last time you said don't spoil the end, so I'm not going to spoil the end. So folks, get the book and read the last chapter. So I'm not going to talk about in the specific, but you had an opportunity to do something really special and you made a decision not to do it. And I'll let people read for themselves what that opportunity was. But here you are, uber rational economist, you had an opportunity that most people would've jumped at. I don't think I'm exaggerating when I say that, and yet you didn't do it. So tell us about your thought process there.

Daryl Fairweather:

Yeah, it was the kind of job where I had told myself when I was back in college if this was a possibility I would've been just so ecstatic and done everything I could to get it. But after going through my career process in the private sector, like leaving academia and going to the private sector, making the decision even back then that I wasn't going to try to conform to the standards of academia, I was going to go into the private world and figure out a role that actually suited me. I didn't want to go back into a job where I was told where I had to live. I would be told that I would have to go into the office nearly every day. I would have to wear a suit. I wouldn't be able to speak so freely as I do on social media.

Richard Green:

This particular job, you would not be able to say much of anything at all.

Daryl Fairweather:

Yeah, I wouldn't be able to say much of anything at all. And also none of the choices I had made up to that point were in pursuit of that. So why would I all of a sudden change? I think at that point I had... Early in my career, it really mattered to me to having a prestigious job, having a job that other people would value, even if it's not the highest paying job, still being in this class of, I don't know, top tier workers. But after actually going out into the real world and going through the career process and all of that, I realized what's really important is actually finding a job that's right for me, not right for what everybody else wants. And I'd already gone through that transformation, so it was just too late to pull me back into that rat race of trying to get something prestigious.

Richard Green:

Well, I guess the reason that part of the book was so important to me and learning about you is there are limitations to thinking like an economist. And I think actually economics has improved and I would say within the last 10 years it's improved. But the de-emphasis on human relationships is it is as if we are molecules bouncing around and trying to survive as a molecule. That's an exaggeration. It's unfair. But just to make the metaphor, which I don't think is a common one, is connections to other human beings really matter. And I think about personally, how this sounds corny, but my friends and family are more important to me than anything else. My job is really, really important to me, really, really important to me. But my friends and family are more important. And economists, particularly the Chicago, Gary Becker view of marriage, for example, where it's an economic unit and there's division of labor. I mean, there's some truth to that. But in the end, love is a real thing. And so given the framework in which we operate, how do we think about things like policy? Using the tools of economics, but not forgetting that these human interactions are so important to human wellbeing.

Daryl Fairweather:

Yes. I think that we manage what we can measure, and the thing that we typically measure is economic output in terms of dollars. There have been people propose a gross happiness index instead of a gross domestic product because that's maybe the thing that we actually want to be maximizing. I think it would still be pretty challenging to measure that, but I think it's good to have a recognition that people care about more than just money. The Chicago style economists would just say that it's fine, just put it in a utility function that people care about their spouse and their children and all of that. But I think because you can't measure it doesn't get studied as much and it doesn't get prioritized as much. And it's so interesting that you talk about social connection because I am really interested in that topic in general. I'm actually [inaudible 00:57:21] a book right now that I've been reading social and economic networks.

I think the next thing I write, I do want to dive more into just the concept of networks and how important they are. It's really hard to wrap your head around them though. I think the tools of economics are not well suited for them because we tend to think about things like in terms of just two agents interacting. It's really hard to get into these big complex models, but maybe we'll be able to tackle that more in the coming decades as we get more and more data where we can actually study how these network effects work and how important these social connections really are.

Richard Green:

Well, I think about the fact that economists are at their nadir of influence over the political process right now. And I say that not just because of the current administration in Washington, but if you look at the progressive politicians in California, they generally have no interest in what economists have to say about things. I mean, the way I put it is you have tariffs on the one side, you have rent control on the other, and economists don't like either one of those things.

But I think the roots of that are, you do look at these communities that have been harmed, and the economist's answer has always been. Well, if you have no economic opportunity there, move ignoring, for example, that people have mothers. And so you say to somebody, "Well, if there's no job in West Virginia, moved to Atlanta where there are jobs." "Well, my 77-year-old mother is in West Virginia and she needs my help. I'm not leaving her." That's a legitimate thing. And so yeah, you could say, put that in utility function, but that's not a... And then you're sort of indifferent. |Well, you made that decision, your mother's more important than having a decent job." But I think people don't want, rightfully so, people don't want to confront those sorts of choices. And so I think we need to figure out how do we allow people to maintain these ties while still having a fulfilling economic life.

Daryl Fairweather:

Yeah, I agree with that. And yeah, somebody living in Los Angeles, for example, when their rent goes up and you tell them, "We'll just move back to the suburbs." Well now they're farther away from... Not even moving to another city, they're just moving miles away. And now every time they go visit their mother, they're imposing a $10 gas tax on them to do it. So yeah, I think better urban policy would probably help a lot. It would help in terms of understanding how people actually operate. I think politicians, actually, before they listen to economists, I would encourage them to go over and listen to the urban studies people, the city planners. It feels like we've just ignored them for way too long. And even economists, I think they could learn a lot from their colleagues over in the urban planning schools. And I know that the real estate schools at the intersection of that. So USC has the right idea.

Richard Green:

So before we close, are there any last words of wisdom or thoughts that you want to convey that we haven't talked about yet?

Daryl Fairweather:

Well, yeah, you talked a little bit about how economists are losing influence in policy and politics and just culturally, but I think that there could be a return because I feel like what younger people, younger generations don't quite understand is that economics is not what they have been told that it is. There are so many economists who understand things like inequality, who understand things like social utility and the value of these connections. And there's a lot of research that's happening in these fields where people would think that that's not happening, that's happening somewhere else. It wouldn't be happening at an economics department, but it is. So I think that there, hopefully we can bridge this gap and people start to learn about how far economics has progressed, and that begets even more progression in the field with more interesting people coming in and studying interesting problems that have been ignored before.

Richard Green:

So with that Dr. Daryl Fairweather, thank you again for spending a little more than an hour with us today. It's always just such a pleasure to talk to you and read our book.

Daryl Fairweather:

Thank you. Thank you so much.

Richard Green:

All right, take care.