Dan Ariely on How To Win Big by Betting on Human Capital

Joe Weisenthal (0:10)

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

Tracy Alloway (0:16)

And I'm Tracy Alloway.

Joe Weisenthal (0:19)

So Tracy, something I've noticed before is we talk about ESG investing sometimes, and of course, as we've discussed in the past, it's become this huge industry.

The thing that I always think about in ESG is the E, the environment. There's a lot of talk about climate and so forth. And I realize I don't really know anything about what the S and the G are all about.

Tracy Alloway (0:42)

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, like the sort of social aspect, you just don't hear about that much.

Joe Weisenthal (1:06)

Yeah, exactly right. And the sort of like the 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 like, 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 could actually deliver alpha and somehow generate higher returns.

Tracy Alloway (1:35)

Yeah, I think that's a really good way of framing it. And it's sort of unclear at this moment of time whether or not you would expect outperformance of a good company because more people hopefully are interested in participating in a stock of a company that's doing good things, or if the company itself is sort of outperforming because it's more conscientious on things like the environment or gender or wealth inequality and things like that.

Joe Weisenthal (2:04)

Exactly right. So let's just get right into it. I'm really excited today. We're gonna be talking about the S in ESG.

And we have a world famous guest that I'm excited to be speaking with. We're gonna be speaking with Dan Ariely. He is a famous behavioral economist at Duke University. And he is also the co-founder of a firm called Irrational Capital. It was formed five years ago. And it pursues the idea of looking at a company's human capital factor as something that could drive out performance in an investment. So I don't even know what the human capital factor is, but I'm excited to hear Dan talk about it and what he's learned in five years. Dan, thank you so much for coming on Odd Lots.

Dan Ariely (2:50)

My pleasure, nice to be here.

Joe Weisenthal (2:52)

Well, first of all, I love the name Irrational Capital. It's perfect, but I'm curious, what is the founding story of this firm?

Dan Ariely (3:00)

So the founding story is I'm a university professor. I do research on a few things, but among them, human motivation.

And in my academic career, from time to time, I go to a company and I change things around. I change bonuses, I try to increase productivity, try to get people to care more about work. And my experience has been that it's always been very easy to come and improve what people do and how to increase motivation because most companies just don't think about it very carefully. You know, if you think about HR, HR is usually a function that is about legal issues and I don't know, training modules.

But it's not really a function that says, let's just get the best out of people. Let's just think about how do we motivate people? How do we get people to come happy to work? So I've been doing this for a long time and it's easy to do and it's helpful. But when I met David, my partner, he asked me whether I think that we could also look at something broader, that instead of one company at a time, whether there's some way to look at companies, see how they treat their employees, see how the employees feel about the company and whether this could predict stock market return.

And I said, I don't know. That's what academics answer. I don't know that's the standard answer, but we can try it out. So we went on a hunt for data to see whether this hypothesis would hold or not. And it turns out it holds very well.

Tracy Alloway (4:33)

So can I just press you on one point, which is what exactly is the definition of human capital? What are you looking at as you undertake this exercise?