Transcript: How Dan Ariely Applies Behavioral Economics to Investing

Dan Ariely is one of the most famous behavioral economists in the world. And in his latest act, he's attempted to apply his research to investing. His five-year-old firm Irrational Capital searches out companies that foster human capital: the belief that companies which do a better job of nurturing their employees see stock market outperformance. You can find the episode here. Transcripts have been lightly edited for clarity.


Joe Weisenthal:
Hello, welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.

Tracy Alloway:
And I'm Tracy Alloway.

Joe:
So Tracy, something I've noticed before is we talk about ESG investing sometimes. And of course, as we've discussed in the past, you know, it's become this huge industry. The thing that I always think about in ESG is the ‘E’ — the environment. There is a lot of talk about climate and so forth. And it really is like, I don't really know anything about what the ‘S’ or the ‘G’ are all about.

Tracy:
Yeah. That would be the social governance part of the equation. And it's absolutely true. When you think about the ESG space, most of the action tends to be on doing things to combat climate change. There's quite a bit, but not as much, about things like gender equality, but beyond that, the sort of social aspect you just don't hear about that much.

Joe:
Yeah, exactly right. And this sort of like connection between these social aspects and returns is always interesting. And it's always sort of one of the central questions of all the sort of ESG is how much is it about investing with one's values? People want to invest in companies where they feel comfortable with the values of the company, versus searching out sort of ESG signals that can actually deliver alpha and somehow generate higher returns?