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Flipping It
How a lawyer and an economist set out to change the world by looking at life upside down and sideways.
May/June 2004
by Richard Conniff '73
Richard Conniff won the 1997 National Magazine Award for his writing in Smithsonian. His most recent book, The Natural History of the Rich, is now out in paperback.
Ian Ayres '81, '86JD, comes to the door of his house, a few blocks from the Yale campus, with medical tape binding the bruised corner of one eye. “I skied into a tree on Sunday,” he volunteers, “and it caused my first episode of memory loss since my dissertation party, though for very different reasons.” He is tall and lanky, in a red fleece pullover and khaki slacks, with a vaguely abstracted air due either to his injury or possibly to his status as an eminent legal scholar. “It reminds me,” he is saying over his shoulder, as he leads the way back to the kitchen, “of a really bizarre empirical study about suicide attempts and how income increases the year after.”
This is not, it turns out, an endorsement of suicide attempts or skiing into trees. What he means is merely that doing really dumb stuff to yourself seems to produce an outpouring of support from friends. “Lots of soup has been brought here, and I am feeling very loved right now,” he concludes. Then, by a series of strange conversational zigs and zags, Ayres, who is white and from Missouri, gallops off on an account of his brief history as a black man. But hold that thought.
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Eating a bagel upside down allows the cream cheese to hit the taste buds. |
In the thick of a filthy snowstorm, Barry Nalebuff is hurtling down Interstate 91 toward New Haven in his black ragtop Saab. He has just come from teaching a luncheon audience of Boston advertising executives methods for shaking off conventional thinking. They have responded with delight to his idea that eating a bagel upside down allows the cream cheese to hit the taste buds instead of the palate, and with something more like muted fear to his ideas for rethinking the advertising industry. (Why not base the economics of a broadcast commercial, he has suggested, on how many viewers actually stick around to watch it?)
Now Nalebuff needs to get home to teach an evening class at the Yale School of Management. In his talks, he routinely depicts himself as an absent-minded professor, and he looks the part, his sweaters often sleeveless, his eyebrows mobile, his wiry black hair thin on top and winging out at the sides. In reality, it’s more like he’s got two or three minds very much present in there, all of them running at once, each on its own discrete track. He steers the car with one hand. With the other, he draws a chart in the dust on the dashboard to help a passenger understand how the work of an eighteenth-century mathematician named Condorcet affects the business of achieving modern-day social consensus. Slush goes spattering across the windshield, and tractor-trailers drift behind in the gloom. The conversation shifts into a discussion about the dismal quality of bottled iced tea in America. But hold that thought, too.
It is the business of a university to bring great minds together, then duck.
Ayres and Nalebuff, both now in their mid-40s, met soon after joining the Yale faculty in the early 1990s. They had plenty in common. Both had studied economics at MIT. Both had young families in New Haven. After a period of scholarly self-examination, each had come to think himself less suited to pure theory than to practical consequences. Above all, both liked to argue, particularly on behalf of ideas that seemed quirky and counterintuitive. Or as Ayres puts it, “We are both connoisseurs of policies that are in some way perverse, but work.” They began to one-up each other with such ideas at faculty parties, or while clambering around the Thimble Islands, off Connecticut’s coast, during family outings. The result is a new book published by Harvard Business School Press, Why Not? How to Use Everyday Ingenuity to Solve Problems Big and Small. Ayres, who is the William K. Townsend Professor of Law, and Nalebuff, who is the Milton Steinbach Professor of Management, now turn up on National Public Radio, where they do a Car Talk-style routine on marketplace issues. The two also have a “Why not?” column in Forbes.
Their book is, in part, a compendium of unexpected ideas. Why not open coffeehouses inside public libraries? Why not market DVDs that let kids see the PG-13 airplane version of an R-rated movie? Why not make being an organ donor the default mode, so people would have to opt out rather than opting in? The United States uses the opt-in method and lets 6,500 people die each year on transplant waiting lists. Spain and Belgium do it the other way and have a donor organ surplus. (“What, they just take people’s eyeballs?” Nalebuff exclaimed on one NPR broadcast, provoking Ayres to remonstrate, “Don’t be a nattering Nalebuff of negativism.”)
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"We want to be the anti-Dilbert.” |
Why Not? reads like a popular business book, with case studies and cute headlines. But the two authors strike an idealistic note that’s uncommon, to put it mildly, in the business world right now. When they give a talk, Nalebuff begins: “Our goal today is to help change your outlook on the world. We want to be the anti-Dilbert. We want to fight the cynicism and complacency that’s all around us.” So, in their book, they are not content merely to throw out new ideas or recount innovators' war stories. Instead, they set out to devise methods for ordinary readers to overcome nattering negativism and routinely generate new ideas. They also created a web site, www.whynot.net, for readers to try out their own ideas. (Yale launched its own version, www.whynot.net/yale, in February. At this writing, students and employees have posted 80-some ideas for rethinking the university.) Not surprisingly, the four basic “Why not?” techniques for creative thinking sound, at first, counterintuitive, or even perverse:
What would Croesus do? How would you solve the problem if you had all the money in the world? Removing budgetary constraints frees you to dream up a gold-plated solution, Ayres and Nalebuff argue. And once you convince yourself that a solution exists, you can usually figure out ways to get roughly the same benefit at a fraction of the price. Like any parent, for instance, Nalebuff worried about his teenage daughter trudging home from school bent under an overloaded backpack. Croesus would probably buy a duplicate set of textbooks to keep at home. So Nalebuff went online and found used copies at an affordable price, leaving other parents to ding their foreheads and mutter, “Why didn’t I think of that?”
Why don’t you feel my pain? How would it change things, the authors ask, if you considered all the external costs of a product or a decision and then priced them into the original transaction? On one NPR broadcast, they argued that pay-per-mile auto insurance would correct the unfair allocation of costs and incentives in the current system. “Women drive half as much as men,” said Ayres, “they have half as many accidents, but they have to pay the same amount for car insurance.” Why not sell insurance at the gas pump, with the cost built into the price per gallon, so you pay according to how much you actually use? Incidentally, you end the problem of uninsured motorists.
Where else would it work? Ayres and Nalebuff call this the Jeopardy! method of generating ideas: you take an existing solution and look for other questions it could answer. If IKEA can offer babysitting for shoppers, why don’t movie theaters offer it on Tuesday nights for cinema-starved, toddler-weary parents? If car rental companies can offer 24-hour check-in, why don’t hotels try it, too?
Would flipping it work? When they give a “Why not?” talk, the two authors hand out bananas for members of the audience to peel. “But instead of starting at the stem end, turn it upside down,” Nalebuff says. “Bananas ripen this way. So you eat the ripest part first, plus you get a handle, and the stringy things come down with the peel. And by the way,” he adds, taking a bite, “this is how monkeys peel bananas.” Turning conventional methods upside down and inside out also works, the two authors argue, in the marketplace. For instance, 900 numbers allow you to pay per minute for sports updates, psychic advice, or pornography. So why not have reverse 900 numbers, where telemarketers could pay you to listen to their sales pitch? You might even want to listen, if you were trying to figure out, say, which refrigerator to buy.
In its review, the Boston Globe called Why Not? “an engaging—dare we say innovative?—guide to stoking creativity.” It also complained that some of the small problems the authors address are too small, and some of the bigger ideas enjoy “what might be called the 'economist’s luxury' of succeeding in theory while falling short in the face of perspiration and human nature.” But if Ayres and Nalebuff are a little too quick to say “voila, “ it’s better, they suggest, than getting so caught up in the obstacles that you lose the good of the original idea. Occasionally, someone in the audience will tell them an idea just can’t be done, and Ayres and Nalebuff get the quiet joy of saying, for instance, “Well, actually, Virgin tried that idea in Britain and the business later sold for $150 million.” Or if, say, gas-pump auto insurance seems too outrageous, they point to an alternative that gets the idea at least part way there: Progressive Auto Insurance ran a pilot program testing pay-per-mile policies in Texas using GPS devices in cars.
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Ayres & Nalebuff are borderline promiscuous about new ideas. |
In truth, Ayres and Nalebuff are not merely indulgent but borderline promiscuous about new ideas, and entirely prepared to try out odd ideas, provocative ideas, even dumb ideas, on the chance that every now and then they’ll get a gem. And this is surely the subtext of the upside-down bagel-eating and other outlandish props they use to promote their agenda for changing the world: if a couple of eminent Yale professors are willing to look like lunatics in the pursuit of new ideas, surely the rest of us can risk it, too?
The way Ayres tells it, counterintuitive behavior has always come a little too easily to them both. One night early in their friendship, he recalls, as the two of them were sitting around the kitchen talking, they discovered a common element in their teenage years—“a certain brashness,” he calls it. “One can even see temporary fraud.”
Ayres grew up in a Kansas City family active in civil rights and social justice issues. They belonged to an interracial club called the Fellowship House Bridge Group, in which the best bridge players were Ayres’s dad, who was a corrugated box salesman, and John Pace, an “analytic genius” who was black and stuck in a variety of low-paid jobs. The experience clearly shaped Ayres, who eventually became the main expert witness arguing in the courts for affirmative action on behalf of the Clinton administration. His first book, Pervasive Prejudice? Unconventional Evidence of Race and Gender Discrimination, was dedicated to Pace.
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A Princeton alumnus deemed Ayres the most obnoxious applicant he had ever interviewed. |
But as a teenager, Ayres became a devout follower of the “rugged individualism” espoused by Ayn Rand. He argued with his father that advancement ought to be based strictly on merit, and even that “only productive people deserve to live.” He started studying Russian, he says, the better to understand the enemy. Taking his PSATs, he came to the check-off box for people interested in being considered for an award as the nation’s top African American student, and he thought, “Why not?” When he actually won it, his school declined the honor without consulting him. But more than 200 colleges recruited him. Ayres, concerned now about misrepresenting himself, included in his college application an essay he had written for his school paper under the title “Black Like Me,” in which he made his case, as a white student, against reverse discrimination. Word got back to the family from a Princeton alumnus that Ayres was the most obnoxious applicant he had ever interviewed.
Yale apparently saw something else, and it graduated Ayres summa cum laude in 1981. At Yale Law School, he sided with workers during one of the university’s perennial strikes. He also filed a class action suit against the university for unjustly enriching itself on student fees during the strike. (“I didn’t think I would be coming back as a member of the faculty,” he muses now.) By the time Ayres undertook his first major research project, after earning his economics doctorate at MIT, he had circled back to his Fellowship House roots. With a characteristic blend of economic methodology and legal analysis, he demonstrated that car dealers consistently made blacks and women pay more than white males. It wasn’t necessary, he argued, to show that this resulted from deliberate policy or racial ill will. The pattern of “disparate treatment” by itself constituted illegal discrimination.
Nalebuff’s teenage “fraud” was comparatively minor. On a dare, he entered Yale’s sophomore oratory contest and won, despite being the only contestant without a prepared text. He also happened to be the only contestant who was not actually a Yale student, but merely a high school applicant on a campus visit. The ensuing tempest made the newspapers. But Nalebuff’s mother Marcia would like to interject here that her son was never a troublemaker. He was simply the sort of child who leaves a parent “stumped” and “frustrated” by refusing to accept easy answers. “‘Why not?’ was his modus operandi, “ she says. “I suppose you can call him a troublemaker for that, because he makes waves.” But then, invoking a mother’s right to spin, she adds, “I prefer to call it dogged persistence.” Other kids schemed to get into the professional tennis tournament in their Boston suburb every summer by climbing over the fence. Nalebuff figured out instead that he could pass an exam. Without telling anyone, he simply showed up at courtside as a paid linesman.
Nalebuff went to MIT and later, as a Rhodes Scholar, to Oxford. His enthusiasm for problem-solving naturally led him to game theory, the science of “gaming” any situation to develop different scenarios and strategies. Invented by the British navy in World War II, game theory often leads to an unexpected or counterintuitive course of action. This is particularly true when Nalebuff adds his ideas for “changing the game.” In a class he teaches about bargaining, for instance, he describes how a company named Holland Sweetener built a $50 million factory to challenge Monsanto’s Nutra-Sweet monopoly in the late 1980s. A bloody price war predictably ensued, and Coke and Pepsi, the major buyers, grabbed the chance to cut their costs for the sweetener by a combined $200 million a year. But they did it by renegotiating their contracts with Monsanto—leaving the upstart company out in the cold. How could game theory have produced a better outcome? Having played out the likely scenarios, Nalebuff tells his students, Holland Sweetener should have recognized that it held the most power, paradoxically, when it had made the least investment. Before lifting a shovel, it should have changed the game by going to Coke or Pepsi with this offer: we’ll get you your savings, but you have to pay us to build our factory, and also guarantee us a share of the market. Business isn’t war, after all, Nalebuff argues. It’s about making money, not just beating others. It’s the art of finding mutual advantage in a shifting landscape of cooperation and competition. (Hence the title of his previous book, Co-opetition, with co-author Adam M. Brandenburger.)
As an economics professor, Nalebuff’s gaming passion has led him, among other things, to demonstrate the strategic importance of “bundling theory” in modern business. Other economists had discredited the idea that selling products in a bundle, rather than a la carte, gave the seller a strategic advantage. But Nalebuff showed that bundling can also serve companies as a tool for freezing out potential competitors. If Microsoft, for example, sells Word and Excel for $300 apiece, there’s plenty of room for a competitor with a word processing or database product to enter the market. Once the products are combined into Microsoft Office and sold as a bundle for $320, a competitor must be able to sell a stand-alone product for less than that $20 increment or, more likely, go out of business. Nalebuff’s revival of bundling theory has proved influential in antitrust law. In 2001, the European Commission blocked the proposed $42 billion merger between General Electric and Honeywell and based its reasoning on Nalebuff’s economic model—to his dismay. He ended up working for GE and Honeywell to make the case that bundling is not a problem in the aviation industry, because deals are all negotiated rather than done at a list price.
Ayres has made his reputation in the legal world for two unusual traits. Unlike most legal scholars, he develops his own statistical evidence about how legal choices play out in the real world. For instance, in a study of the Lojack, a concealed radio transmitter that alerts police to the location of a stolen car, Ayres and a colleague demonstrated that the device can produce a dramatic drop in a city’s auto theft problem, even if only one or two percent of motorists actually install it. Professional thieves quickly get into trouble because they cannot tell which cars are protected. “It’s not subtle,” says Ayres. “In Los Angeles, it closed down 60 chop shops.”
Ayres’s other key trait is a willingness to look at the evidence, and the law itself, both upside down and sideways. As a student, he was frustrated that professors rarely discussed what the “default mode” should be when a contract failed to explicitly state some term or condition. While this may seem like an arcane legal debate, the real-world effects can be substantial. Because of Ayres, every discussion of contract rules now also includes a discussion of what the default should be. If a customer breaches a contract to purchase a car, for instance, the default is that he is liable for the car dealer’s lost profit. Moreover, Ayres argues that, unless the car dealer explicitly tells the buyer what the profits on the deal are expected to be, the default damages should be zero. This kind of thinking leads Yale Law School colleague Bruce Ackerman to call Ayres “the leading lawyer-economist of his generation.”
Both Ayres and Nalebuff have gone beyond the “economist’s luxury” of theoretical success to test their unconventional ideas in the real world. Ayres has played a key role in recent lawsuits charging that car dealers routinely jack up finance charges on loans to minority buyers. Nissan settled the first such case last year with a rate-cap deal that will save minority buyers an estimated $60 million to $90 million in borrowing costs over the first five years.
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Nalebuff’s Honest Tea positions itself as “the anti-Snapple.” |
Nalebuff’s strategic thinking has also involved him as a consultant in complex corporate deals. But his real passion in business has to do with bottled tea. For years, Nalebuff taught the Coke-Pepsi rivalry in class and occasionally voiced his lament that the entire soft drink industry seemed geared to teenage sugar freaks. What he thirsted for was a lightly sugared drink. Then in 1998, a former student, Seth Goldman '95MBA, pushed him to act on the idea, and together they launched a company called Honest Tea, which has positioned itself as “the anti-Snapple,” after a competing drink the book likens to “liquid candy.” Nalebuff clearly loves Honest Tea, and it is difficult to catch him now without a bottle of the product in hand or an entrepreneurial word on its behalf at the tip of his tongue.
Nalebuff is chair, chief strategist, and occasional brewer for the company. When customers complained not long ago that its Black Forest Berry drink wasn’t tasting right, he flew down to company headquarters in Maryland, where he and Goldman spent the day in the kitchen mixing test batches. Goldman also calls on Nalebuff when he needs “a good bad cop,” most recently to straighten out a tea packer who was causing price and quality issues. Nalebuff sat the packer down in the middle of a trade show and made him sign handwritten terms of performance. Now Goldman says he sometimes brings the packer back in line with six magic words: “If you want, I’ll call Barry.”
Like the Why Not? book, the company has unabashedly set out to change the world. It sells organic products, was the first company to offer “fair trade” bottled tea, and buys some raw materials directly from farmers' coops. After five years in business, the company sells ten million bottles a year and is breaking even on annual revenue of $6 million. Inc magazine recently named it one of the nation’s fastest-growing small companies. The two founders, who own 45 percent of the company, have also pledged one percent of their equity to the Yale School of Management. At the company’s recent valuation of $17 million, Yale’s cut is currently worth about $80,000. “A lot of people have the idea that if something hasn’t been done, it’s not worth doing,” says Nalebuff. “Honest Tea greatly increased my confidence that there is no reason why not.”
At the campus recording studio, Ayres and Nalebuff have just finished their latest NPR recording and moved on to the problem of the moment. Several days ago, someone stole Ayres’s cellphone, and he wants it back. It’s not worth it to the phone company to investigate, he says. “But for me, I have a hundred numbers in memory, and there’s also the sense of feeling violated.” Ayres wants to call the numbers that have been rung up on his account since the theft and explain to the recipients, in the nicest possible way, that they have been receiving stolen calls.
“You want to embarrass the thief,” Nalebuff agrees. Ayres suggests that investigating the crime on their own could become the topic of their next NPR broadcast. Nobody mentions that the notion of a couple of middle-aged professors turning detective on the streets of New Haven sounds, to put it diplomatically, naïve. Anyway, when did anybody ever get back a stolen cellphone?
The phone company doesn’t make it easy. But Ayres persists and eventually finds a friendly soul willing to reactivate his account just long enough for him to download his billing record. Then he pays another company $85 for the names of the people whose numbers have turned up on his account since the theft. (“Why not just automate the process?” he wonders. As soon as a customer reports a theft, a phone company computer could phone recent numbers to say, “You have just received a stolen call. If you do not wish to identify the caller, we will bill your account.”) Then Ayres gets on the phone: “Please help me. I’m a Yale professor.” One person, who has received 30 calls from Ayres’s phone over the weekend, says, “Oh my God.” The caller appears to have been her teenage daughter.
“I’m not interested in prosecuting anyone,” Ayres explains. “Would you help me get my phone back?”
They arrange a rendezvous at what seems like a safe location, a McDonald’s just off Interstate 91.
“That’s not safe at all,” Nalebuff interjects. “It’s full of cholesterol, and lots of saturated fats.”
At four on a weekday afternoon, Ayres rolls into the parking lot and finds a car already waiting for him, with an adult male and a teenager in the front seat. When he walks up to the car, the window rolls down, and a hand reaches out holding a small black object. “Here you go, buddy,” the driver says.
“Thank you,” Ayres replies, as he pockets his phone. There is no anger or irony in his voice, just a trace of satisfaction at another “Why not?” idea brought to its small, improbable fruition. He smiles and adds, “You’ve made my day.”  |
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