Megan McArdle on Failure, Success, and the Up Side of Down
Apr 21 2014

Megan McArdle of Bloomberg View and author of The Up Side of Down talks with EconTalk host Russ Roberts about her book. McArdle argues that failure is a crucial part of success in personal life and in the large economy. Topics covered include the psychology of failure, unemployment, and bankruptcy and parole.

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Explore audio transcript, further reading that will help you delve deeper into this week’s episode, and vigorous conversations in the form of our comments section below.


Apr 21 2014 at 10:59am

Losing (ie keeping score) is a part of failure. In this world where failure is being prevented from being experienced how will the unintended consequences of policies of eliminating failure from childrens life’s affect society. Has there been any unintended consequences of the movement to remove score keeping from kids sports?

Brendan O'Donohoe
Apr 21 2014 at 2:45pm

Coming from the military I wanted to comment on one thing, coming from Sales I wanted to comment on another:

Megan’s comment about “after action report” should actually have been called an “after action review,” or AAR. I want to quibble with this because the point of the review is to execute it almost immediately after the action within the unit- not to “report” on it to a higher headquarters. In training this takes place as close to the objective as possible, on a real mission this takes place almost immediately after the mission is over, with all the key roles in both planning and execution taking part. The point is not the report, but rather the process of getting personnel to review what they planned to do, what they actually did, and how the enemy voted against their plans and execution in order for us to improve on both. The AAR is probably the single greatest technique I have shamelessly stolen from the military. I used it relentlessly with my team at Pepsico and with my team now at Salesforce. Megan did a great job in this podcast, I am not trying to quibble with her point, but give a technique to a listener that they can steal as well to improve their organizations. Here’s a link on how to do them:

I am now in Software Sales and loved the comment about Russ’s brother- the quandam encyclopedia salesman. It reminds me of Von Clausewitz’s thought that no matter how technology changes, man is still the center of conflict- and that “everything in war is simple, but the simplest thing is often difficult.” I don’t know if Russ’s brother is still in sales, but I would bet that he would find things eerily similar, but paradoxically, remarkably different. They are different in that the technologies that are out there now multiply a salesperson’s reach. Sales is the place where lines are blurring between real and artificial people. But, inevitably, when you are asking someone to make a decision for or against you, either you or your virtual self will get voted against, and both of me fail a lot. In that, nothing has changed (except that I have virtual versions of me getting denied by virtual versions of my prospects). I think the other big difference between sales then and sales now is the amount of data and outreach that 1 salesperson has, but also how much more noise there is in the system. It reminds me of when I was a platoon leader and being told that my platoon of 30 people was comparable in firepower to a Civil War Brigade. Now salespeople have the statistics of their win rates, what messaging works and doesn’t, whether someone reads their email, how many touches it takes to get a prospect to respond. We now know how many times we have to fail just to get a conversation, let alone a purchase. It’s no surprise that entrepreneurs and CEO’s have usually spent time in sales. What is a surprise is when I went and got my MBA at Harvard, there wasn’t a single class on sales, even though it is the top line in an income statement.

BTW Megan’s book has recently been reviewed in the economist here:

[html for link to The Economist fixed–Econlib Ed.]

Shayne Cook
Apr 22 2014 at 8:07am

This bit of research noted in the NY Times (pointer from Greg Mankiw) seems supportive of Megan’s thesis.

I was surprised at the percentage of people who have experienced both great affluence and great poverty – within their own lifetimes – as indicated by this article/research. (Even though that has been the case in my lifetime.)

Well done, Megan and Russ.

Apr 23 2014 at 3:32pm

Until this week, my favorite EconTalk was the one about Why People Get Fat. This week’s show was the right topic at the right time for me. I’ve listened once and will listen again. For other people who enjoyed this show, I suggest reading the work of Tal Ben-Shahar.

I plan on getting Megan’s book very soon.

Econtalk Fan
Apr 23 2014 at 5:08pm

Interesting show but not too sure about the part about easy bankruptcy. Debt is now enormous in the public and private spheres across almost the whole of the western world. Easy bankruptcy must exacerbate this and in the end someone must pay either with default or inflation. We seem to be favoring inflation (though we don’t acknowledge this officially of course) but can this go on for ever?

Apr 24 2014 at 8:34am

Russ and Megan,
great interview! When you were talking about sales and job hunting I thought of a principle called the Threshold Theory. No, that does not refer to an advanced analytic machine learning algorithm. Its something more mundane.

From Merriam-Webster online: (1)a piece of wood, metal, or stone that forms the bottom of a door and that you walk over as you enter a room or building
2)the point or level at which something begins or changes. Emphasis mine.

The mental image is of a door to door salesperson trudging down street after street with far more doors unanswered or slammed than opened. Few doors open, and still fewer opportunities to come in and do the demo. To make matters worse only one in ten demos result in a sale! But if you want a sale you must do the demo (cross the threshold). To give the demo, you must knock.

As Russ talked about, you can’t directly control the numerator (assuming max efficiency) because it is a function of the denominator. What you can do is bump the denominator up by a factor of 10 or whatever. Simply increasing the number of total attempts- the denominator, the math dictates a corresponding increase in the numerator. Simple but not easy.

Additionally Threshold Theory adds some elegance by assuming that the process will improve efficiency by giving immediate visceral feedback from the prospect.

I cant remember where I heard Threshold Theory from, possibly Zig Ziglar.

john berg
Apr 25 2014 at 11:34am

Accepting employment means accepting risk of failure. Losing the household income constitutes a failure more significant than failing to win a spelling bee, trying out for HS football, or washing out of a program to become a Navy Seal.
One possible step found during the employment risk is the “out placement service.” Has Megan examined “out placement” as a step where her hypothesis is examined closely by different people with different goals and what results they’ve experienced?
John Berg

Daniel Barkalow
Apr 25 2014 at 4:17pm

I disagree with her claim that “Failure is always an option.” I’ve seen plenty of situations where failure is not optional… In fact, if someone says “Failure is not an option”, then it’s probably, in fact, a requirement, and you should adjust your expectations accordingly.

Apr 26 2014 at 5:02pm

The section on bankruptcy is especially frustrating for those us of lifetime indentured servants with $100k+of nondischargeable student debt.

big al
Apr 29 2014 at 6:44pm

great podcast. much to be learned. thank you.


Ron Crossland
May 4 2014 at 4:36pm

Lovely show. I appreciate the effort it took Ms. McArdle to collect, collate, and create an argument for failure. Illuminating stuff.

Couple thoughts occurred during my review of the podcast. Luck plays a more prominent role in most of life’s endeavors. Kahneman’s work, Thinking Fast and Slow, provides insight into this as well as the comments during this discussion. It strikes me as odd, however, that as much as we state the presence of chance in human affairs, it doesn’t often change our world view, whether libertarian or socialist. Both views diminish the role of chance, even when the data may dispute either claim. Comments in this discussion do the same.

The second thought was during the discussion of earning grades and the obsession with detailed planning. The magic wand called the bell curve is over applied we complain, yet little is done to correct it. I have been part of large scale sales forces (to continue this theme) in which it was applied to groups of sales people who all exceeded quota by more than 10%. Yet the curve eliminated from employment those that only did 10% over, because they were on the trailing end of the curve that would not be denied.

Failure and learning from failure are two different things. Educational processes generally do not help us learn from failure. Business assessment processes generally follow this same pattern.

Comments are closed.


About this week's guest:

About ideas and people mentioned in this podcast episode:Books:


      • Creative Destruction, by W. Michael Cox and Richard Alm. Concise Encyclopedia of Economics.
      • Disaster and Recovery, by Jack Hirshleifer. Concise Encyclopedia of Economics.
      • Crime, by David D. Friedman. Concise Encyclopedia of Economics.

Web Pages and Resources:

Podcast Episodes, Videos, and Blog Entries:



Podcast Episode Highlights
0:33Intro. [Recording date: March 18, 2014.] Russ: Before introducing today's guest I want to mention that we've been adding some new material at to improve the educational experience of listening to EconTalk, or at least to try to. And I'd mentioned that in a recent episode with John Cochrane. So please stop by, check out the recent posts there. And by following me on Twitter @EconTalker or liking EconTalk at Facebook, you can find out when new material is posted. And I'd like your feedback any time about how you find that new material--if you find it useful or interesting.
1:08Russ: Now on to our regularly scheduled programming. My guest is Megan McArdle. She writes at BloombergView and her book is The Up Side of Down.... One of the main themes of your book is the value of failure, which, when you are in the middle of it is often hard to perceive. That is the upside of down. Why is failure valuable? And why is it actually a good thing? Guest: It's valuable because that's how we get information. We like to think that there is some way that we can just plan our way around failure, that we'll just sit down and think it out really carefully and then we'll have a really good theory, and then we'll succeed. And when you see the cover of a business magazine, it's always this genius with his folded arms staring at you and the piece goes through all these brilliant ideas. But in fact when you talk to entrepreneurs, that isn't how they experienced it. Usually how they experienced it was: We had this great idea and then it turned out that didn't work, so we did something else. Or it turned out: It didn't work and we went out of business. And that's just generally true. If you think about how science works, for example, how science actually works through failure, most theories that you test are going to be false, because if you knew that they were true, they wouldn't be worth testing. And so, how do you figure out if something works or not? You don't go out and say, Well, I'm going to go--my theory is that there are 300 ducks in Chicago and I'm going to look for new stories that there are 300 ducks in Chicago. You go out and look for new stories that show that there aren't 300 ducks in Chicago. Right? Because that's actually the fastest way to find out whether you are correct or not, is to see if your thesis can be disproven. And so you have to use failure to learn. There's just no other way around it. The problem is of course that it feels bad. And it has to feel bad. A lot of the books on failure sort of try to talk you into believing that it won't hurt or you can just chew[?] your way out of it. And that's not true. I mean, failure really does hurt. And it feels bad. If it didn't, we wouldn't stop doing things that didn't work. But you can sort of reframe how you react to it to make your reaction the most effective and to learn as much as you can, and to get out of it as quickly as possible. And that's really the substance of the book, is that libertarians, economists, and so forth have long talked about creative destruction, this idea that the economy works by taking an old idea that doesn't work, and it's replaced by a new firm that does it better. Right? And that's absolutely true and right. But it also matters a lot what happens after those people and companies fail. And a successful society is going to be one that helps them get up, learn what they can, and move on rather than sort of staying stuck in what went wrong. Russ: Well, it's an interesting way to think of a distinction between what we might think of as micro-failure and macro-failure. I'm not sure that's the right phrase or whether we want to use it, thought about it a little bit more, but what you are talking about at this level is the virtue of trial and error for the economy as a whole. Guest: Yes. Russ: That you can't really plan stuff. We let people give it a go, and the market decides, consumers decide, investors decide what works and what doesn't work. And things get pushed to the side and things that do work survive and thrive. At the personal level, though, I think challenge always is the less on you learn from that. Right? So I think the case study approach to business school leads to the danger of saying, 'This firm failed because of x; and now I know: Don't do x.' And I think that isn't--I heard an out-of-work CEO (Chief Executive Officer) who had failed terribly; his company had disappeared--a very successful and large company--once tell me that the reason he failed was because he had applied the wrong case study. He was a Harvard MBA (Master of Business Administration), which is very case-study based; and he said, I looked at my challenge and I used the wrong case study. I should have used x and I used y. And I'm thinking, Boy, that's really not what happened. At all. But I think there is a temptation to, the personal part of failure--it's one thing to say for the economy as a whole, failure is great. Which I agree with. I think the challenge is, and you are right about this: When you have a personal failure, the challenge is: What do you learn from it. So talk about what we should learn from our personal failures, not just from a policy perspective. Guest: No, this is a really great point. I'm actually taking right now, sort of for fun I'm sitting in on a policy failures class with Steve Teles at Johns Hopkins, and one of the things that he says is, when you are doing policy you are always reasoning by analogy. And so the problem is if you get the wrong analogy. Right? Russ: Exactly. And I should mention that if all goes well, I have already taped the episode with Steve Teles on kludgeocracy, so that will have come out before yours. So that's interesting. So, carry on. Guest: He says one of the things he wants to do is just give potential policy makers a richer set of analogies to work with, because the more analogies you have--you know. Part of how you have to think of this is really, so one of the most interesting things I looked at in the course of writing this book is what Carole Dweck calls--she's a psychologist and she calls it the distinction of a fixed mindset and a growth mindset. And fixed-minded people think of any challenge as a referendum on them. You are born with a certain amount of talent, ability, and every time you do something, you are taking a dipstick and you are just measuring how good you are. And growth people, on the other hand, are people who think of each challenge as a way to learn. It's something that you are trying and maybe it's not going to work out, but you're going to get valuable information about that. And that's actually true. Fundamentally how you do learn, if you look at how brains work, you make predictions and sometimes they don't pan out, and the connections weaken. Or if they do pan out, the connections strengthen. And so she actually said--I sat through the whole interview with her and at the end I said, I have to confess something, which is I'm a complete fixed mindset person. And she said, Oh, me, too. Russ: Oh, sure. Many of us are. Guest: Right. I was always good in school, and I got the idea that success was about finding work easy. You want to be that naturally gifted person who just kind of tosses it off and it's not that hard. And so when I struggled with things, I would have a tendency to give up. Or at least to procrastinate terribly and put them off until the last moment. And she said, I knew I was changing when I heard myself say: Wow, I suck at this; this is really fun. And the funny thing is that in the course of writing this book I found myself going through that same process. I'd already known this intellectually. Because of my work, you get to be a writer at a major magazine, you have to confront the fact that you're not going to like everything you write and you have to make yourself do it anyway. Russ: And neither does your editor. Guest: Yeah. Indeed. So, I'd already started this process of forcing myself to do it, but I really changed how positive I am about it. About saying, I'm going to do this and sometimes it's not going to be very good, and saying, You know what? If it's gone wrong, I can just pick myself up and do it again. And part of it is just having failed a bunch of my own personal life is having that experience of having done it a few times. You don't get to like it more, but you do get the sense of, Oh, right, I can overcome this because I have in the past. And what you see with people who have succeeded too much is that they are often quite brittle. The first time--the famous example of this is General McClellan, who was the first general in charge of the Union forces. And he was the golden-haired boy of West Point; everyone was so excited that he was going to be in charge. And he wouldn't attack. He just sat in Washington and demanded more troops, more troops, more troops. And the guys who finally won the war were people like Ulysses S. Grant, who had basically sort of failed out of the army and-- Russ: Who was a loser. Guest: Yeah, no. He was working at his dad's harness shop, and he failed about business too. But he wasn't afraid. He was actually willing to go out and try it, to go out and try attacking even knowing that something bad might happen and so forth. Because as my former boss Gina Brown[?] said to me, she said, Once you've failed publicly and spectacularly it's like the best thing that can ever happen to you because after that you are fearless. The worst has already happened. And it's behind you. And that's a really important thing to do, is say, the worst has happened and is behind me. And pick up. And the people who do that--it's not--maybe it might be genetic and so forth, but you can teach yourself to do it. You can teach yourself to be better at it. And you can make yourself do it. Funnily enough, what I've found is just by telling yourself this. Literally, it's not like 10 easy exercises. It's just reframing it to yourself. Reading about a lot of other people failing, as I did. And understanding, oh, right, this is just part of life. This is not some special referendum on me, who has screwed up beyond repair and is probably a worthless human being; that everyone basically has gotten to this point in their own lives. Phenomenally successful and amazing people have gone through this. It's surprisingly helpful in a way that I didn't expect when I started writing the book.
10:44Russ: Yeah. I think there is a temptation to--the opposite bad version of that is, Well, you got a D in math but so did Einstein, so don't worry. And I think for some people, I don't think that's the right way to think about it. I think it is a challenge to frame it correctly. The worst version of this is the 'self-esteem above everything'. So, no matter what you do, you are not a failure, because a D is good. And I think the challenge is to figure out what we can learn from it. As well as this mindset thing. I saw myself, unfortunately, in your pages when you talked about this--and I think you may have used this exact example. When I was in graduate school, I'd love it when they'd ask a question that I hadn't studied for or we hadn't covered, because then if I failed, it wasn't my fault. I was okay. My ego was not on the line any more. Easy questions made me nervous, because I had to hit those out of the park. And if I didn't, I'm a failure. And I just couldn't face that. It would be awful. So I do think there is a real value to being able to cope with that. Guest: It's really funny, some of the stuff that people do is amazing to me, to protect their self-image. And I see it in my own behavior when I was in high school, certainly, where I got a lot of psychological juice in finding schoolwork incredibly easy compared to a lot of my classmates. It's this thing called self-handicapping, which can really go to astonishing lengths. So people will--you give them a task and you tell them they did well but they don't know how they did well because the secret is that the test is not actually possible to do well on, because the questions are constructed so there are no right answers. And then you give them the choice of a performance-enhancing or a performance de-hancing drug, inhibiting drug, and people would choose the performance inhibiting drug, because then they didn't try. As long as you haven't tried, it's not really a referendum on yourself. And you see this with kids--I'm sure we all knew them in high school. The kid who gets drunk the night before the SATs (Scholastic Assessment Tests) or doesn't do any schoolwork [?]. And it's a way of protecting your self-image. Or, I was also lazy. I would rather be doing other things. But a lot of it really is, if I'm not trying then I haven't really failed. And it's incredibly destructive. And yes, the object is not telling people that everything they do is okay. And that's really the unfortunate message of the self-esteem event. Some of the book is devoted, several chapters, just to figuring out when you've screwed up, because that's surprisingly hard often. And saying, okay, well that didn't work; we should stop. Not, that didn't work; I'm okay, you're okay. And the distinction to make is between saying that just because this went wrong doesn't mean that I am a bad, stupid person who is never going to succeed. Because that's really destructive thinking. It's probably not true. But then you also, you have to, at the same time, while you are making that distinction, is say, okay, but this thing I am doing is not working and I need to stop doing that thing. Getting a D in math doesn't mean that I shouldn't try harder or try something different. It just means that I'm not hopeless. Don't take counsel[?] of despair, but at the same time figuring out how to move on, not trying the same thing over and over again and hoping you get a different result. Russ: And you talk about that quite entertainingly, about your own romantic life. And when to remember that sunk costs are sunk and it's best to move on. And we can think about that with all kinds of choices we make--career, our romantic life, etc. Guest: Yeah. I thought hard about whether to include that. First of all, it's a little bit embarrassing that I stuck with someone who then dumped me. Russ: You're the first person, Megan. Guest: I'm the first person that's ever happened to. Russ: You shouldn't have written it down. Now everyone will know you're the one that happened to. Guest: Yes. But also because it's the sort of story that most people do not write in books about economics and policy, which is a lot of what this book is about. But you know what? What I thought is, first of all, this is actually for people who aren't necessarily econ-nerds. It's actually a really good way to illustrate very vividly how these effects really matter in real life. It's something that a lot of people are going to relate to. But it's also something where I actually really feel strongly that this is something that a lot of women in that age group, I've watched them do, is stick with a relationship that's not working. And so I thought: Maybe some people need the illustration of sunk costs in terms of this bad relationship that didn't work out. Then maybe some people in bad relationships that don't work out need the concept of sunk costs to get them to stop that and move on. Russ: Sure.
16:04Russ: What about parenting? We'll get to the economics soon. But I liked a lot of what you said about how we treat our children, both, again, in the micro and the cultural way. The micro way is how we parent. But in the macro way, we think about the way that our culture and our society interacts with children. They're no losers. Everybody gets a trophy. Again, part of this is self-esteem; but part of it is also, it's in the air and it's the way we've been encouraged through emergent forces to treat our kids. And you don't think that's a particularly good idea. Guest: I don't. As I say, it really--having failed is an important skill that kids need to learn. And the right time for them to learn it is when they are kids. And when the consequences for that are actually pretty low. One of the book talks that I gave, a 10th grade girl came up to me afterwards and she said, You know, I would really love to try to fail, but I'm in an AP (Advanced Placement) program; only 5% of the people who are in the program are going to get a 4.0; and I just can't afford to take a class that I wouldn't get an A in. And I just thought: America, you are doing it wrong. It's not that kids shouldn't work hard in school. That's not what I'm saying. But the idea that at the age of 15 you have to be so self-protective that you can't take any risks at all is insane. Because when is going to be a better time? When she is looking for an assisted living facility? First of all, it's terrible for the kid. Just to start out with, having a kid who is living with that much terror at the age of 15 in what should be one of the relatively carefree periods of her life, is crazy. And we shouldn't be doing that to kids. But second of all, we need people who are not afraid to take risks. We need people who are not afraid to try something that they haven't done before. Now more than ever. Because, frankly, we are looking at a lot of demographic forces and other forces that are causing productivity to slow down. So, we need more innovation and people out on the frontier than we did 10 years ago. And we are grooming kids to have less of them. And part of that is this self-esteem [?] that nothing bad is ever supposed to happen. And then part of it is this crazy educational system where everyone feels like the only way to get access to a good job is to go to a fairly elite, selective college. And because there are fewer spots at those colleges than there used to be, parents are just hovering over their kids trying to make sure that they can't possibly put a foot wrong because if they do that'll knock them off the college application track and they'll never get back on. And that is, again--like, the parents, you talk to them; they hate it. They don't want it. They see how destructive it is. But they also feel like they can't get off that track. At a social level, I think we have gone badly wrong at how we are raising kids, how we are raising them to handle failure. Russ: I find that fascinating; I think about it quite a bit because I have teenage kids. I look at the parents of my kids' friends and what their attitudes are toward high school and college and grades. It comes back to your earlier point, which I think is really extremely useful to think about, and I think it's not thought about. Which is: we are encouraged to plan; planning is good; everybody agrees with that. It's good to plan. It's good to look to the future. It's good to anticipate things. But that's different from having a plan that you are wedded to and are devoted to and have to keep. So the plan is--and you talk about this in New York where I think it's worse than in many other places, but in New York it's: My kid has to get into a good pre-K program because if they don't they won't get into the good elementary school that's the feeder to the elite high school, so if they don't do that they are not going to get into a good college; and if they don't do that they are not going to have a good job and they won't have a good life. And that's bizarro. That makes no sense whatsoever. To me. But that's just me. And I raised my kids accordingly. But it's interesting to me that so many people think that's a good way to lead their lives. Maybe they are right. It just doesn't strike me as what life is about. As you point out, life is about the twists and turns and the surprises. [?] They're not counting on them; they're not ready for them. Guest: The weird thing is that I think that most people don't think this is a good way to live their lives. It's just that they don't feel like they have any power to buck--we're so desperate for the race for a sure thing. What you know from con men is that the easiest way to cheat someone is to convince them that they've found a sure thing. And what we know from the financial crisis is that people who thought [?] sure thing, that was the most dangerous place we've been in as a society, economically, for the last 70 years. We all thought we'd found a sure thing. Russ: That's like the warning--if you learn nothing else from our conversation out there, sure thing is [siren sound effect]--you know, warning flags, alarms; your foot catches on fire. It should be some abrupt immediate sign that: Run away. Guest: So we feel the opposite. It feels so much safer. And part of it is status, right? Everyone loves telling[?] their friends that their kids went to Harvard, and so forth. But a lot of it really is just the feeling that we want our kids to be safe: I want to guarantee them what I have. Russ: I think that's what it is. Guest: And that the only way I can do that is to put them through this insane lottery. And it may make them miserable but at least he'll have gone to Harvard. Russ: Yeah. I don't know. It's a weird thing.
22:00Russ: But let's talk about a place where there's a different culture, which you write about, which is entrepreneurship. And in America failure is honored there. Guest: And to an amazing extent. Really, if you think about--I was talking for example recently after I wrote the book to a guy who had been in 1999 the CFO (Chief Financial Officer) of a web startup. And when the inevitable happened, he was really worried, because he wasn't really an entrepreneurial guy; he hadn't been through this process before. He was really worried about what was going to happen and trying to find another job. And instead he was shocked, because people were like, 'Oh, that's great. You must have learned a lot and you learned on someone else's dime, which is even better. And I want that person.' I've talked to people who say they only hire people who have failed, who have been through that, because they figure that person will have seen it before and their Spidey sense will go off when they are doing something risky. And that's actually--it really is out there in a way that it's definitely not in a lot of other countries, where you talk to them and they view failure much more as a sign of personal inadequacy. And so if you are in that position it's hard to get another job doing something else. Whereas in America it's viewed as a resume booster. And that really is--especially in Silicon Valley--it really is unique and it really is a secret strength of that system, because you are taking people who have--there's a huge amount of information in failure. One of my favorite examples is Vernon Smith and Bart Wilson's lab at Chapman, they've done experiments on asset markets. And so they get students in a lab and they run it and its basically a kind of artificial security, but a real payoff with these kids, and they are trading. And every time in these markets they see asset bubbles. And the only way to get rid of the bubble is to have the same people trade together two or three times. Because after that second or third time, people start getting the Spidey sense, that says, Oh, wait, I've seen this before. This is a bad idea; let's not do that. And it's not even necessarily at the verbal level that people get the senses. But it's really important because that's the information that you need in the market. And the really interesting thing is if you change people in the market, if you take some of them out and put new people in, you get the bubbles again. So, having that experience, that experience of having been through it, it's really valuable. And if you are a country that sidelines those people, well then all of the information you've got out of trying something and having it not work, you just lose that information. Russ: Let's talk a little bit about what information actually does get gained, because obviously you can learn the wrong lessons. We suggested before you can draw the wrong analogy. Some of the lessons of failure are just that it ends, you can get out of it. What we're really talking about here is if you constantly insulate people from failure, if you constantly insulate people from risk, when things do go wrong they are remarkably unprepared to cope with it. There's no Spidey sense, as you say, to start with. And then when they fail they don't know what to do, because they don't have any practice at it. How much of that is part of what you are talking about, versus the actual knowledge that's gained? Guest: That sort of thing is hard to quantify. We can look at studies of entrepreneurs and what they do but it's harder to quantify exactly how much is each piece. But I will say is what you see in serial entrepreneurs is this incredible resilience. And again, part of this may be their innate personality. But it's also a hard-won lesson of, oh, right, it didn't go wrong [probably should be it 'went wrong'--Econlib Ed.] and that felt really bad. But then they did it again and it was okay. Once you've lived through it a couple of times, it no longer seems so terrifying to have something go terribly wrong. And, like the military is very good at this. They are very good at putting people through after-action reports and actually dissecting in minute detail exactly what went wrong. Doctors do this when you have an adverse event--they put you through, there's a conference and everyone in your department sits around and talks about what you might have done wrong. And it's really difficult; and obviously it's not anyone's favorite activity. But it's really valuable for two reasons. The first is that obviously you are looking at what went wrong; you are getting information there; you are learning about it. But the second thing is that because everyone has gone through this--there is no one who is a successful doctor who has not been through a Morbidity and Mortality Conference where people talk about what they could have done differently to make the patient live or be healthier. Because everyone has been through it, it normalizes the idea that error is obviously something you try very, very hard to avoid and we have all these procedures and so forth; but that having made a mistake, even a very bad mistake, is normal and something that in order to do better, you need to confront it. And not to just sort of shun failure and pretend that it was some sort of terrible aberration of that bad person who is no longer with us. And that's an incredibly useful thing to have institutionalized. Russ: I'm going to give you a different interpretation at the entrepreneurial level. I know you can't quantify it. But it's interesting to think about. It was a trick question; good job. Russ: So, I'm thinking as you are talking about Steve Jobs, who failed famously a couple of times, both inside Apple and outside of Apple. And when I read his biography by Walter Isaacson, I was struck by how close he came to not making it, both through his personal choices--early in his career, he was a very outside-the-box kind of person. He had a lot of strange habits; he made a lot of strange decisions. They could have come back to haunt him. Most of them didn't, although I think some of them maybe affected his health. So he made a lot of personal decisions. But at the professional level, he had a lot of neuroses that we celebrate. His attention to detail. Some of those things, some of that attention to detail was bizarrely obsessive. You know--how beautiful the inside of a product had to be, that no one would ever see, for example. And he spent a lot of resources--or what the factory had to look like, etc. And he spent a lot of resources. And those decisions--it turned out great for him. But he could have failed. And I mean really failed. Not become a great icon. I don't mean, oh, the iPhone might not have been as good. I mean, never gotten a job back at Apple, never done anything that was significant other than the early things he did with the Mac. Guest: Right, and had he not gotten that job back, Apple probably also would have failed. Russ: Disappears. When you look at it, again, on the outside--you can't really know what happens inside to a person's psyche--but on the surface, he does come across, at least in the biography that Isaacson wrote, as an introspective person who learned from failure. He was very self-confident. And very little shook his self-confidence. So an alternative view of this serial failure in Silicon Valley is these are people who are so self-confident that no matter how many times they fail, it doesn't change their self-perception. And there's a value to that. If they fail again they get thrown out again, and that's okay--the system is pretty good at dealing with trial and error that way. But I wonder how much of it is actual learning versus persistence and grit. Guest: Some of it definitely is, just, you look at CEOs, they are optimistic people. And they are more optimistic than, say, I would be. Which is one reason, one of many reasons, that I am not a successful entrepreneur. But I do think if you look at the story of Steve Jobs--this is actually really instructive--because after Apple, for listeners who aren't familiar with what happened next, he went and founded another computer company, and it didn't work. And in this computer company, because, despite the fact that he'd been publicly fired, he had a lot of money. And so he spent an enormous amount of time fussing with this computer trying to make it absolutely perfect. Russ: I almost bought one. I came very close. It was beautiful. I loved it. It was the Next, was the name of it. It was beautiful. But I didn't. It was incredibly expensive. Guest: Your experience was replicated by many, many people. Russ: Yes. It was very expensive. Guest: It was very expensive, it was beautiful, and because he'd spent so much time getting it perfect, it kept getting superseded by things that would happen. And if you go back--so it took much longer than it was supposed to. And I think he did actually learn from that. I think he did learn that he had an overwhelming tendency to do this, to be obsessive and try to make everything perfect. And he did dial that back a little bit, not a lot, but a little bit when he went to Apple because he saw how it had come out in Next. And so I do think that even with Steve Jobs--you are right, part of this is really a bull-your-way-through attitude. But that said, you look at someone like Colonel Sanders, one of my favorite stories, and he's a little bit crazy. He keeps going out and trying to get people to make this fried chicken, and finally he finds the one, after he's talked to about a thousand people. And it was something in his character. But at the same time he had come to that through a series of personal failures, economic failures. He was really an amazing serial failure. And he had gotten better at identifying what was likely to work. And so, even these guys, who are extremely optimistic and get knocked down and just get back up again, they do learn from those failures and what they learn often turns out to be one of the hinges on which their later success depends.
32:39Russ: So, let's talk about survivorship bias, which is something that I thought of while reading your book. The book is very inspiring at many, many different levels, personal, policy-wise, etc. We'll get to the policy stuff next. But the thought I had when you talk about these examples is it's very easy to romanticize failure if you are not careful. So, Colonel Sanders gets beat up, knocked down, but eventually becomes fabulously successful. Same with Steve Jobs--fired, failed new company, looks like his story is over but he persists and he makes it. And let's be optimistic--let's say he did learn and that was part of the reason he made it. What we don't see are the people who get beat up, give up, fail, try again, fail, and never learn enough to succeed. And so these stories about the virtues of failure are very unrepresentative of what failure really does. Failure is not good. It's awful. It's demoralizing. You don't learn that much, because a lot of it's luck. And as a result, failure is--you are making it sound like there's this great learning experience; actually, it stinks. And we only think it's good because we see the ones who survived it somehow. What do you think of that? Guest: Well, let me make a couple of points about that. I think that's a completely fair question. And I really tried hard to avoid that, actually. I tried to avoid saying, oh, this is just, learn to love failure and it will be fantastic. Failure doesn't feel good. Right? I went through it. It's terrible. It really is terrible. It doesn't just kind of, you know, sometimes feel terrible. It always feels terrible. And even people who are optimistic don't like it. It's not like Steve Jobs enjoyed getting fired. He was pretty beat down about it. And then he got up and founded Next; and angry and so forth. But he didn't like it. So it's not about learning to like failure and think that it's just a walk in the park and a garden of roses all rolled into one, because that's not true. And the second thing is it really is true that it can be phenomenally difficult to recover. And some people don't. And I try not to say otherwise. And the third thing is that yes, luck--in fact I wrote one of the chapters about this, about the way that we tell stories in retrospect and we say, oh, well, I can describe the Mona Lisa and the things that make it the Mona Lisa, and we leave out things like the fact that it wasn't very famous until it got stolen in the early 20th century. And what Duncan Watts, the sociologist, says is we are telling a story why we think the Mona Lisa is famous, but what we are actually doing is just describing the Mona Lisa. And all of those things are true. But here's what is also true. First is that, I love those movies where they say: Failure is not an option. Like, failure is always an option. There's no--um. Second is the price of admission to success is the willingness to fail. That, being willing to fail does not guarantee that you will you succeed; but not being willing to fail guarantees that you won't. And the third thing is that after you recognize that, right, after you've recognized that the only possibility for me having the kind of success that I wanted is taking some pretty big risks, is that you need to first of all plan for that and try to minimize the downside. It's not about taking stupid risks. It's not about saying, well, we'll do anything. Because there are lots of things that, you know, don't try to sell a meat-flavored ice cream. It's--that's not going to be a good business plan. Actually, I make bacon-flavored ice cream, which is pretty good. But, in general, right, not like a whole restaurant that's going to be flavored ice cream. But once you've done that, you should be trying to minimize the down side. You should be planning for failure. When I bought my house--I talk about this at the end of the book--when we bought our house, we said, Well, what would happen if we both lost our jobs and had to take jobs that paid half as much? That's how much house we can afford. Because the economy, since 2010 the economy has done certain-- Russ: Journalism is uncertain. Guest: Let's just [?] the down side. Journalism is uncertain. Ad revenue is tough and getting tougher every year. So let's minimize our downside. And that enabled me to say, okay, well maybe I can try taking a new job. Right? We can try doing more things because we don't have this mortgage that keeps me awake at night. But also that personally and socially that you need to tell yourself when somebody has failed, especially if that person is you, Okay, this was always possibly in the cards. This happened because I was doing something that had never been done before, or that I had never done before. And there was no way to know in advance. So I tried it, and that was great; and it didn't work; and now I have to move on. It's not just about saying that [?] anyone can be Steve Jobs. Steve Jobs had a lot of special things that made Steve Jobs. But anyone can feel better. Anyone can try. Anyone can take a risk. And we should; but on the personal level and on the social level, you are looking to do more of that, not less. And I think we're often moving in the wrong direction. Russ: And I think part of that is--it's a great way to sum it up--I think part of it is our desire to sometimes learn the wrong lesson. Which is: if something went wrong, it must have been a mistake. Whereas that's not true. Guest: Right. Russ: And similarly, things that go right doesn't mean that I'm a genius. I may have been lucky; I got the right ball in the urn; and that's why it turned out okay. And your point that if you take some risk in life, you should expect failure. That's the level of planning that's certainly the right level, right? You are realistic, and it's very much, as Nassim Taleb says, you want to be antifragile. That doesn't mean you want to take no risk. It means, put yourself in a position where, inevitably, when things go wrong it doesn't hurt so much. Guest: Exactly. As I say in the book, the opposite of failure is not safety, it's nothing. Success and failure are the same process. If you're not trying something, especially in this economy--we think that because this economy is more risky that means that we should hunker down. But in fact that strategy--that's what the workers at GM (General Motors) did. They hunkered down in their solid GM jobs that couldn't go anywhere because it was GM. And then when the whole company went away, there was no backup plan. You live in Michigan and the only thing you are trained to do is be an auto worker. That often, taking risks is safer in the long run than trying to hunker down in what you think is some archipelago of safety. Because when that archipelago gets overcome by the tsunami, there's nowhere to go.
39:25Russ: Let's talk about unemployment, it's a good segue to that. You talk a lot about how to deal with it. You were unemployed for quite a while after getting your MBA at the U. of Chicago, which should have been this great, easy life. Which it didn't turn out to be right away, right? And you write very eloquently and movingly and informatively about that. But you talk about what it's like to be unemployed. What are some of the lessons both you personally and the research on this has suggested for people who don't have a job? Because, a perfect example, I think, inevitably people who lose their jobs blame it on themselves. Most of the time it's not their fault, obviously. And yet they don't have a job. So they can't say--they look at their friends who do have jobs and they get depressed. So, give some of your advice for coping with that. Guest: The first thing is like being unemployed is like the worst thing that can happen to you in a modern society except for death or dismemberment. It's really bad. It feels terrible. And people treat you differently. It combines economic security with rejection. Which is like the worst two things that happen to you. And so it like, first of all, I would say, My sympathies. Because I've been there and felt terrible. And the second thing is that when you look at economic research, what it tells you is incredibly banal in a way. What it tells you is that for example, who finds jobs faster, people who lower their reservation wage. Which means they are willing to work for less than they did before. And people who spend more time on their job search. And then people who move. Labor mobility enhances the ability to find a job, because, for very obvious reasons if you are looking country-wide you have more potential job openings than if you were just looking locally. So, it seems really obvious, but people don't do it. If you look at what happens with when people are doing job search, their job search activity falls off pretty quickly. They exhaust their initial wave of contacts; and then they stop. And it's not surprising that they stop, because if you look at surveys of job seekers, and also just completely intuitively obvious, they report that job search is like the worst thing they do all day. It makes them anxious and depressed. And so they don't do it. And this to me is an explanation for why unemployment, extended unemployment benefits, seem to increase unemployment: is not that people--there are people who abuse the system; I've met them. They wait. They just basically sit on their benefits until their benefits are exhausted, and then they go find a job. But for a lot of people that's not what's happening, I think. I think what's happening is that that anxiety and depression is so terrible that they want to avoid it. So they put it off. And when you have extended unemployment benefits, it enables them to put it off. Because it's not so completely urgent you have to go out and get a job and do something. Or take a job that pays less than you are used to, or is it a lower level, or in a different industry, or whatever it is--it enables you to put off making really hard decisions. Unfortunately especially in this job market what we see is something called 'labor scarring,' where people who are in the job market for, it looks like about 6 months, there's a radical drop-off in their ability to get people to call them in for an interview when they send in their resume. And so you are enabling someone to make what is a completely rational and understandable short-term decision because again, it really does feel awful, but a terrible long-term decision. And so what I talk about in the book is thinking about systematizing it: taking the decision to do that job search out of your own hands. Because that's where you are going to fall down. So, make a system[?] and focus on the process, not on the outcome. You can't control when you get a job, but you can control how much time you spend doing things you really don't like doing. Like calling people who you don't know and asking them for an informational interview, or a job, or calling people you don't like and doing the same, or doing want ads, and so forth--is that you set those goals up, you write down the goals and tick off the goals. And you focus on that and you give yourself those little wins, saying, okay, I did this. And then go out and find other people who are in the same boat. Because they are the only people who understand your misery. And get support from those people. Because it really is tough that the most important thing you do the minute you get laid off is go straight into gear and just keep doing those hours of job search. Every day. Even when you don't know what to do. Being focused on doing job search and thinking of something to do is a much better use of your time-- Russ: You make the analogy of cold-calling and sales. Guest: Yes. Russ: Which is--my younger brother is a phenomenal sales person, and spent a summer selling encyclopedias door to door in strange cities. By the way, another great example of how failure made him a great salesperson. Because, strangely enough, most people do not want to give a stranger--first they don't let you in the house, and then once you are in the house they don't really want to give you money. And you're not going to give them the book. You're going to come back at the end of the summer and bring them the book. It's a hopeless task. So, you are set up to fail. And he failed relentless, but he was extremely good at it by the end of the summer. But as you point out, one of the things that salespeople do in that situation is they have a routine that they don't deviate from. And one of the things that was amusing about his summer is that his boss would constantly be calling him. And if he ever was not selling--which was always tempting: sleep late, do other things--the boss, that was the only thing the boss cared about. That you were on the street, knocking on doors. You want to give a good sales pitch, too. But he knew that the main thing that counted was the denominator. Get the hours in. It's hard to do. But that's a great analogy. Guest: And I use that analogy, because I spent a summer canvassing. Which is similar except it's nonprofits. It's a very similar thing of mostly talk to you or just not going to give you money. And some don't want you there; they would rather you hadn't knocked on your door. And I turned out to be surprisingly good at it, which was not necessarily something you want to know about yourself, that you're really good at selling door to door. But it really is that focusing on your speech, on your tick sheet of how many doors you are going to knock on--that is the numerator; and taking that decision to go up to the door or what to say out of your hands, systematizing it, is the only way you get through the day. And the funny thing is at the end, you don't need it so much. Because you've done it enough that you are not so terrified of that door. But I still remember the first door I knocked on. This is more than 20 years later. And it was a guy--I was canvassing for [?] which is an environmental group--and it was a guy who worked for DuPont and started yelling at me. And by the end of the summer you are not afraid of that guy, because you've had like 20 of them. But those first ones it's really, really important just to have the [?] just to make sure-- Russ: You want to go home after that. Guest: Oh, my gosh, you have no idea. I was just a chipper, 19-year-old, kind of leftie, really believed in the environment; it just never occurred to me that anyone would yell at me. They sort of downplayed that in the recruiting. So it's huge. It's huge to have this. And that's why I went to that. And you talk to salesmen, too, because I'm always in awe of what good salesmen do. And the funny thing is that most of them--there are some of them that are just freaks and will enjoy cold-calling. But 99.99% of them tell you they still hate cold-calling. When they go to a new company, when they go to a new beat--whatever it is--they hate it. They hate getting on the phone and trying to get someone--but they learn to do it. And the way they learn to do it is usually by setting numerical targets: Okay, I'm going to do this many. Because they know it really is the single best predictor of how many you sell. That's what they'll tell you, is just how many people do you talk to. And so it's obviously by far not the only thing, but it's the start. If you don't do that, there's definitely not any second or third step. Russ: Yeah, and the camaraderie part is also very important in both those groups--getting employed and the sales people. Because they are going through the same thing. And no one else appreciates it. And it's hard. Guest: Yes. Definitely no one else appreciates sales people. Even though they are really important. They are the oil that lubricates the economy. But they feel outside-- Russ: I meant nobody appreciates what they are going through. I didn't mean that nobody appreciates them. Guest: That's what I mean. No one is really sympathetic when you are, like, Well, I had to call this stranger; and you're like, I hate it when strangers call me. Why did you do that?
48:26Russ: Let's talk about bankruptcy. Talk about what's unusual about American bankruptcy; for our American listeners, we don't know anything else. For our non-American listeners, you maybe live in a country with a very different set of rules about bankruptcy. You write about that. Talk about what's different about America versus other countries and why you think that's a good thing. Guest: So, America has the most generous bankruptcy system in the world. Which is something a lot of people don't know, and quite a lot of people are surprised by. They tend to assume that well, if you are in Scandinavia, well, it's just much more friendly to people who borrowed money because Scandinavians like the underdog and they take care of that guy. But in fact in Scandinavia it's much tougher. And I talked to a Scandinavian entrepreneur who had gotten caught in that vine of being unable to declare bankruptcy even though he had a lot of debt, it was crippling him. So, in America we're so much laxer that I was interviewing an expert on a completely different topic, on Russia, and it was this Scandinavian guy, and in the middle of the interview he started making fun of the American bankruptcy system. And he said, 'So you can just go into a judge and say, I want free money, and the judge says, Okay, don't pay, then. And that's it?' He thought this is ridiculous. And it is surprising. If you stop and think about it, the fact that we allow people, in Chapter 7, only for consumers, not businesses. But to just walk in and say, You know what? I borrowed all this money, and I don't have any money, so here's the $.37 I have in my wallet and I would like to be discharged from all this debt. And we do it. That's a really remarkable invention. And the history of this is a little bit weird. We didn't even have a bankruptcy code until 1898. And then when we did, there were a lot of small farmers in the West who owed a lot of money to bankers back East, and they liked easy bankruptcy. So they got it. And then that's grown over the years. So, the United States' system really is unique in that way. Also in how we handle corporations. We are much more likely to try to reorganize a firm than to let it liquidate. And the funny thing is that the American bankruptcy system is a neat little natural experiment. Because the law is Federal; it's in the Constitution that the Federal government has the right to establish bankruptcy code. But the exemptions, how much you can shield from your creditors, that's local. That's by each state. And so what we can see when we look at different states, the states that have more generous exemptions also have higher rates of entrepreneurship. And this is actually not shocking, again for some of the reasons I've been talking about. First of all, prospectively, it's easier to start a business if you are not terrified that the bank is going to take your house and your kids are going to be on the street. But also, if you look at what's happened to people afterwards. And that's why I went to Scandinavia--or I didn't go, but I talked to a Danish entrepreneur, talking about what happens to someone who was an entrepreneur and has failed. In his case, he didn't fail, but he had a serious setback. What happens to them if they don't have bankruptcy. Because what happens is they get shackled to that debt, and they can't grow their business and they can't do anything except struggle to pay off the huge debt. And that is something that America ended up doing really well; and not intentionally--we didn't start off saying, Hey, this would be great for entrepreneurship. But we discovered this little Secret Sauce for making entrepreneurship easier and better. And it's one of the hidden strengths of the American economy. And unfortunately, it's something that we've been backtracking on, or did in 2005. So I actually went to Memphis, which is the bankruptcy capital of America; and since America is the bankruptcy capital of the world, probably the bankruptcy capital of the world, to look at what is the downside of this. Because there's always a down side to any policy. But the downside when you look at it is so small compared to the upside of entrepreneurship-- Russ: Talk about the rates. Because it's informative of--Memphis has--and by the way, I was born in Memphis. Guest: Oh, really? I did not know that. Russ: I have a lot of family there. So I don't want to say anything too horrible about it. Guest: I loved Memphis. I had barbecue every night. Russ: It's a nice city. It's okay. I mainly like it because my family is there. But it's okay. I have a running joke with my brother about whether it's as good a town as where I live, where I happen to be living at the time. He lives in Memphis; I don't. But anyway, what's interesting to me is that the rate in Memphis is very low. But it's much higher than elsewhere. Which is probably what you are saying. So talk about what the magnitudes are, if you have them at your fingertips. Guest: So, it changes every year, but it hovers in Memphis around 1%. And that is enormous. It doesn't sound like that big a number, but it's 1% every year. Russ: Of? One percent of the population? Of adults? Guest: Of the population in Memphis. There's bankruptcy. Russ: It seems like a big number to me. Guest: It's a huge number. It sounds like, oh, 1%. But cumulatively, if you [?] that over a lifetime, it would mean that if this were true it would mean generally that most of the people you know would have declared bankruptcy. And it's a little misleading because Memphis has a lot of Chapter 13s, which instead of Chapter 7--which is the 'I don't have any money; Judge, discharge my debt'--it's a payment plan. And so, payment plans, you can imagine more people flunk out of them. And then they'll often try to re-file and reinstate it. So it isn't true that every single--that 70% of the population of Memphis over a lifetime declares bankruptcy. Russ: Deadbeats. You're telling me they're deadbeats. Guest: But it is true that a very high percentage of the population of Memphis has declared bankruptcy. And it shows up in the availability of finance there. Forbes went down and looked at this in 1997, and I went back and talked to the bankruptcy judges, and indeed they say, still you get a lot of what are called 'Tote the Note' lots, which are basically the dealer will lend you money at very high rates of interest, like credit card rates of interest, but the down payment they require is basically the wholesale price of the car. They buy up huge numbers of cars at auction for very little money. And so you are paying an astronomical fortune, but they won't lend you--the down payment has to be what they paid for the car, because the rates of default are so high. And you see a lot of that in Memphis, she said, that the local finance system ends up being. But on the other hand, a lot of people in Memphis are really poor. The average income in the city is in the low 30,000 range. And it's a poor city; it is disproportionately black in an area that means not just low incomes but black families often have a lot less wealth and savings than white families do, because you've got the whole legacy of low incomes percolating through generations. And so over all you would expect to see higher rates of bankruptcy. And mostly what it ends up looking like is that this is the price we pay for free availability--for easy availability of credit. And that's a pretty good tradeoff. Not always a perfect tradeoff. But it's a pretty decent tradeoff. And most of the people in Memphis benefit from the system. Including, funnily enough, the creditors. I asked them about--there was this provision that was designed in the 2005 law; it was designed to prevent re-filing bankruptcy. And judges aren't enforcing it. And so I asked her about it, and she said, I'm not enforcing it because no one is complaining. She would much rather have these people in a payment plan and have the trustee collecting the check than to have to go chase after this guy and garnish his wages themselves[?]. It's a funny sort of win-win.
56:25Russ: We don't have time to talk about it at length, but I want you to mention similar--part of what we are talking about here is responsibility, second chances, moral hazard. All these things tie in to these decisions that we make at the policy level. And it's interesting to me that you profile a parole system that is relentlessly unforgiving, remarkably successful, and actually reduces the problem in an interesting way. So, talk about that briefly. We're low on time, but it's such a great story. Guest: It is a great story. So, it's a judge in Hawaii who looked at the normal parole system. Basically, you've got sort of a suspended prison sentence. And you have to show up for your probation appointments, take regular drug tests, and so forth. And what happens in a lot of cases is that people violated their parole a bunch of times. And then eventually after 10 or 20 times the probation officer gets fed up and says, Okay, that's it; you are going to prison; you are not complying and we are going to send you. The judge looked at this, Judge Alm. He said, this is crazy. He said, what we should do is what you do with your kids: every time you violate, we punish you. Instead of nothing, nothing, nothing, nothing, Bam!--5 years in prison. And so that's what he did: he said, every single time you violate, you are going to jail. But only for a few days. And it has cut the rate of people who end up with prison terms in half. They save the taxpayer money. And the probationers love it. It's one of the rare kind of win-win. And I think this actually goes to why bankruptcy is great, and why this works better than traditional probation. Which is, you think about punishment--failure should not, as I say--it should hurt. Which is how you say, Don't do that. But you want it to hurt in a very specific way. And how do you think about that? First thing, the pain should not be crippling. Right? Second, it should always happen. It should follow from things that don't work. Or in the case of probation often are things that are morally wrong. It happens every time. And then the third thing is that it should enable you to move on. Right? And that is actually what this is focused on, is keeping you out of jail, keeping you connected to the labor market, to your family, not prisoners where you can learn more about being a criminal. And it's phenomenally successful at focusing people on the future instead of focusing on their past. Because they are still in the community and they are still learning to be functioning members of the community. So, it's a phenomenally powerful. Because it does hurt. And it hurts immediately. Over the past 50 years we've been struggling with this crime problem. The answer, though, has been harsher. Three-strikes and you are out laws. Harsher prison sentences. And what Judge Alm said--and what Mark Kleiman, from him I learned about this and who has written a great book on this called When Brute Force Fails--is that this is exactly the wrong way to think about it. The thing is not to make the punishment more terrible. It's to make it more consistent. And it's just remarkably effective. And I wanted to put this in the book, because I end by talking about forgiveness and how important forgiveness is, and how much cheaper it is than we usually think. We usually spend too much time worrying about abuse and too little time worrying about the people whose lives are affected when we punish them. But that in this case, you do need to punish people. But then how do you do it so that you maximize the chances of rehabilitation and minimize the damage to both society and the person? And this is why it's such a great story. Because you don't report on a lot of policy stories where there genuinely seem to be very few tradeoffs. But this is one of them. Russ: Yeah, I thought it was fascinating. It reminds me of a thing that I find strange about the Law and Economics literature, which is the focus on expected punishment. So, expected punishment is price times the outcome. That's the expected value. It's on average. So, if you fail a lot, that's what the average outcome will be--if you commit a lot of crimes. But of course any one crime you might get away with, and pay nothing. But sometimes you get caught. And so some economists have said that the ideal punishment is therefore a low probability with a very high, rare cost--punishment--imposed. And that has two problems. One is, it's not fair. It doesn't jibe with our sense of fairness. But the other is, it sends a terrible signal to a person who is maybe not so good at probability theory about what the odds are to getting caught. Which are: Oh, I got away with it; I'll do it again. And so we care about how much of it there is, not just the, obviously--the expected punishment isn't the right thing. And this is really saying that it's not so much the expectation; it's the probability that matters more, as much if anything. And I think for parenting it is the exact same lesson, which is consistency is overwhelmingly the key to good parenting. That when you suggest a punishment to your child, a consequence, that you carry it out. And therefore it tells you: Don't set a consequence you can't carry out. Like those probation officers saying, well, it's only his third violation, it's not really that big a deal. Instead, you are relentlessly consistent. Which is a pain in the neck. But it means you get less violation. Guest: Exactly. And criminals in general--crime does not pay very well. The average wage is pretty low. Which means that the people who go into crime in general are people who are not necessarily geniuses at math. And so expecting them to have this kind of elaborate--in fact, what we know is that a lot of them have an impulse control problem. And so expecting them to do this elaborate probability calculation, it works really, really well for upper middle class people who are pretty good at probability theory. But you know, like, I went into one of those holding cells. I was there for a minute, and they closed the door. I would have done anything not to go into that cell again. But clearly that has not been enough for some people. And so you have to think about it in terms of what works for them--for people with low impulse control problems and maybe not going to calculate their probability of getting caught for armed robbery. You need to think about the things that are actually going to work on that population. And that's what Judge Alm did. And the amazing thing, too, is the first thing he says is: Everyone in this room wants you to succeed. So, what it does is it puts it, instead of in this adversarial cops-and-robbers thing where I'm trying to catch you, it gives them control. Puts it in a context where everyone is trying to help you succeed. And they control the outcome. 100% you can control whether you test dirty in a drug test. You can control whether you show up for probation. And if you do those things, the outcome is completely certain. And that's something that they usually haven't had in their lives. And so in a way it really is giving them a kind of framework that most middle class people grew up with, that most people in the criminal justice system don't. Russ: Yeah. I think most middle class people, upper middle class people, are bad at probability theory, too. Guest: Better, though. Russ: Maybe. But I think the real lesson is, the additional application, is teaching, where I think it's very easy to think, I'm testing you and I'm the teacher; I'm giving you a test and my job is to make it so hard that you do badly. Some of you do badly. And really the goal is everybody gets an A. If they earn it. My wife is a high school math teacher. And I think when you come to your students with the attitude, We're all in this together; I want you to thrive and succeed--you get a very different response than, I'm the toughest teacher in town and I give lots of Fs--because that's going to motivate them. Well, it does. It motivates some of them. But the better motivation is to say, as that judge does: We all want you to succeed. It's a bad situation when you fail. We will catch you when you fail--meaning we'll find out. We'll try to find out. That's part of the deal. But we'd love for you not to fail. Guest: Yeah. It's a really different mentality than we've had. It's more of what we had in the 1950s and 1960s. But unfortunately the end result of that in the 1950s and 1960s was not, we're trying to help you succeed and not being criminals, but more, we're just going to stop punishing you for committing crimes. And that was obviously a very bad approach. I went in there to[?], and I'm basically a libertarian, and I was expecting just a lot of nonviolent drug offenders and so forth. And that wasn't what I saw. Everyone--something like 70% of the people I saw--were in fact on drugs. Because they ask them. They say: We're going to give you the first drug test; you need to tell me now if you are going to test dirty because you used before this hearing. And like 2/3 of them raise their hands. And so I'd been expecting a lot of nonviolent drug offenders. But it's stuff that's pretty unarguably wrong. Assault and robbery and burglary and child abuse and so forth. They are not really things that we are very conflicted about. And so it is in the context of saying, we don't want you to do these things; not, we just don't want to punish you and hope that you stop doing them.
1:05:44Russ: Last question and then--we're out of time. But I just want to ask you: You are now an expert on failure, because you've written a book on it--that's the definition of an expert in our culture--and you chronicle your failure, both, again, romantically and professionally. I wish we had more time to talk about it. You'll have to read the book out there. But I'm curious. Now that you are an expert, do friends come to you for advice about how to deal with failure? Guest: It's really--a friend whose husband is going through a tough time with the job market said, 'I'm buying it for him.' And I had this moment of: you know, it's such an intimate thing to have someone tell you that. And I'm used to strangers, because I write finance columns and so forth; I'm used to strangers saying these things. But I've never had a friend say it, like, I'm having my husband go to you for good job advice. The chapter in the book on unemployment really is the state of the art on economic research, drawing on a very good paper by Alan Krueger, who was the head of the CEA (Council of Economic Advisers) for a while. But it is a little terrifying when you think, wow, my friends are relying on me and I'm now in this relationship with them that I never had before. But it's also really nice. I mean, the number of people who are friends who have shared stories that I didn't know, the number of people who are strangers who have shared stories about their own failure--and that was the other thing I was thinking. When I had this bad breakup, I decided to tell people that it had happened. And not be like--you know, 97% of the people you ever meet, somehow they all initiated the breakup. So I was like, no, I'm just going to say what happened. And the thing that you are afraid of is people saying, Oh my God, you loser. Right? And that wasn't what happened at all. What happened is people shared their own stories. And said, oh yeah, that happened to me, too, and I got over it; this is the endgame. It's not nearly as bad as you are afraid of. And you'll be glad this happened. Which turned out to be true. And really astonishing--one of the things I talk about in the book is the astonishing number of things that get attached to the words 'the best thing that ever happened to me.' Like, cancer and prison. Russ: Yep. You read it all the time. Since I've read your book I've noticed it at least twice, where people talked about their company failed, they lost their job, or they got sick; and they said it's the best thing that ever happened to them. Guest: And they mean it. They are not just putting a smiling face on it. I'm really glad that that breakup happened. Because I met my husband and he's great and we're very happy. It's a really scary decision to go out there and tell the stories. But when you do tell the stories and people tell their stories back, it's really this incredible powerful bonding moment. And I wish more people would do it. I wish more people would be honest about their failures. It's hard to get people to talk about them because they are ashamed. But when we do, my experience has been at least that it's inevitably a moment when you get closer to someone, and someone who you thought you knew very well. So it's been really rewarding in that way.