In an excerpt from his new book, ‘Lucky by Design,’ Wharton’s Judd Kessler looks at the hidden markets that determine who gets what in everyday life, and the rules that underpin them.
In his new book, Lucky by Design: The Hidden Economics You Need to Get More of What You Want, Wharton business economics and public policy professor Judd Kessler pulls back the curtain on hidden markets that determine who gets what in everyday life — everything from scoring a reservation at the hot new restaurant to getting a job at a top company — and explains how to tip the scales in your favor. In the following excerpt from the book, Kessler describes what hidden markets are and the rules that underpin them.
“Rock smashes scissors. Scissors cut paper. Paper covers rock.”
I used both hands — playing both the winning and losing side — as I showed my four-year-old daughter, Natalie, the possible outcomes of the game rock-paper-scissors.
Learning the game of rock-paper-scissors was a rite of passage for Natalie. Her nine-year-old brother and six-year-old sister were already experts.
First, they learned to play just for fun. The remarkably simple game can fill a surprising amount of time while kids are waiting for a city bus. Once they both knew how to play, however, they started to use it for its ultimate purpose: to settle disagreements.
Who chooses which cartoon they watch next? Do we have tacos or pizza for dinner? To the victor — of two out of three rounds — go the spoils.
Natalie practiced the hand gestures and once she seemed to understand the rules, her older sister, Isla (pronounced “Eye-la,” not “Is-la,” as she would confidently correct you), volunteered to challenge Natalie to her very first real game.
The game was over almost as soon as it began. Natalie proceeded to throw scissors on every turn. Her older sister figured this out rather quickly and then won decisively with a few throws of rock.
As I saw the disappointment creep onto Natalie’s face, it was clear that her failure was mine. I had taught her the rules of the game, and I had demonstrated how it was played, but I had neglected to teach her any strategy.
The stakes of her game were low, even if it didn’t feel like it to Natalie at the time. But we all go through versions of this experience with outcomes far more consequential.
We are routinely in situations where scarce resources are allocated in ways that we do not fully understand. Without understanding the rules of the game, you might assume that your outcomes are determined mostly by luck. But there are rules — often hidden and complex rules — that determine who gets what. When you aren’t aware of them, you often wind up just like Natalie: using a suboptimal strategy and losing to people who seem to know tricks that you do not.
People who end up unhappy about what they get conclude that they were unlucky or that the system was rigged against them. After enough of these experiences, they believe that’s just how the world works.
But it doesn’t have to be.
More than two decades before I became a rock-paper-scissors instructor to my third child, I was a student in economics at Harvard University.
While still an undergraduate, I had been encouraged to take a PhD class taught by Alvin Roth, a brilliant and exceptionally kind-hearted economist with distinctive rectangular glasses and a light gray beard.
Al was at the forefront of a new subfield of economics called market design. The subfield excited me in a way that other branches of economics did not. At its core was a big idea that changed the way I thought about the world.
Economists — myself included — think of the world as a set of markets in which individuals try to get the best outcomes they can. Before studying with Al, I associated these markets with prices. Markets were where buyers paid sellers a price and got something in return. At the farmers’ market, I could pay a price for produce. If I was willing to pay the price, I got the pears. If I was not, I left empty-handed.
But the field of market design had a keen interest in different kinds of markets — markets that allocate valuable, scarce resources without relying on prices (or at least, without relying exclusively on them).
Without prices, these markets need some other criteria to determine who gets what, and because the criteria are not always obvious or visible the way that prices are, I call them hidden markets.
Once I better understood what a hidden market was, I started to see them everywhere, hiding in plain sight all around us.
Hidden markets decide who gets the organs available for transplant, who gets the last hospital beds and ventilators, and who gets the earliest access to vaccines. Hidden markets decide who is admitted to the most prestigious colleges and who gets to work at the best firms — and, therefore, who ends up with the most power. They allocate seats in movie theaters and on planes, trains, and automobiles. They even decide who gets to marry the most desirable partners and who must do what within the households they form.
The allocations we observe can seem arbitrary and unfair. But there are rules that dictate how things are allocated in hidden markets, even if we aren’t always aware of them.
Just like Natalie learning rock-paper-scissors, understanding why certain people get the best outcomes requires knowing these market rules. And once you know these rules, you can develop an optimal strategy so the best outcomes start going to you.
Market rules are dictated by whoever controls access to the scarce resource. These rules might be chosen deliberately, or they might be based on historical accident or operational expediency. Market rules can be formalized, or they can be left unstated; they might be enforced by people or coded into software. And they can be designed poorly or designed well.
What does it mean for market rules to be designed poorly or well? If we forgo prices because they introduce inequity or inefficiency or are too difficult, we should strive to make sure that the market rules that we use instead do better on these same three dimensions. We want rules that allocate things in a way that is equitable, efficient, and easy.
In many hidden markets, the stakes are too high for you to go in blind. To others, it might seem like you just got lucky, but by better understanding these markets — and how to play in them — you will know you were lucky by design.
