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Undercover Economist

Does hosting the Olympics make us happier?

The Rio Olympics close this weekend. Have they been worth it? Financially, surely not — as I wrote in June, host cities tend to pay handsomely for the privilege of providing the Olympic Games, and receive limited benefits in terms of infrastructure and reputation.

But not every expenditure needs to turn a profit. Many of us have just returned from our holidays, without any concern about whether they were financially rewarding. If they were relaxing, engaging or fun, that ought to be enough. Perhaps Rio could justify the expense of hosting the Games in a similar way.

It is not such a strange idea; an opinion poll conducted for The Guardian in the closing days of the London Olympics found that a clear majority of Britons felt that the Games had been “well worth” the price tag. But did the respondents really comprehend what the price tag implied? (It was around £150 per British resident.) And would they have felt differently had the question been asked a few months later?

In itself, that’s not much of a test because people might be having a good time anyway: the Games are held at the height of summer, when the sun tends to shine and people are on holiday. So the researchers tried to adjust statistically for factors such as the weather, which is known to have a large effect on people’s answers to questions about their wellbeing.

An aside: happiness researchers have long known that a bit of rain is enough not only to dampen your mood but also to trigger a gloomy re-evaluation of your entire path in life. A bit of sunshine makes everything better. This basic truth about the ephemerality of our emotions is all too easy to forget.

As well as adjusting for the weather and other factors, the happiness researchers made some important comparisons. They compared the feelings of Londoners with those of the residents of two other big European cities, Berlin and Paris. Berlin might be thought of as a neutral observer, having not bid to host an Olympics since the 1990s. Parisians might compare themselves with Londoners more sharply; having lost out to London for the 2012 Olympics and to Beijing four years earlier, Parisians could be forgiven for being sore losers — or perhaps relieved to have been spared the hassle. And the researchers first approached their survey subjects in summer 2011, repeated the survey with the same people in summer 2012, and again in 2013.

Gratifying as it would be to report an astonishing and counterintuitive result, the central finding of the paper is much as one might expect: Londoners really enjoyed hosting the Olympics but the buzz did not last long. During the Games — relative to Berlin and Paris, and also relative to the same time period in 2011 and 2013 — Londoners felt more satisfied with their lives, although also more anxious. After the Games, the feelings of life satisfaction ebbed away, and Londoners became more likely to feel that their own day-to-day activities were less worthwhile.

This makes sense: Londoners felt proud of hosting a successful Games, a little nervous that something might go wrong on or off the track, and were eventually left contemplating their own navels, buried all too deeply in folds of flab. In short, the Olympics were not much different to any of the other ways one can party and then nurse a hangover.

The findings are more broadly consistent with the developing science of happynomics, which has tended to produce insights that are interesting but often less than astonishing: money tends to buy happiness but good health and good relationships matter more; unemployment is a miserable experience; people do not like commuting but they enjoy having lunch and having sex.

Nevertheless, the field has promise. Consider the provision of goods such as light-rail systems or community playgrounds. A free-market system isn’t well suited to supplying such goods; but if left to governments, it’s hard to have much confidence that public money is being wisely spent. Of course people like it when their children can play safely, and they like brief and reliable commutes — but how much do they like them? Careful surveys of wellbeing are an important tool in figuring out the wisest way to spend public money.

Some philosophers tell us that nothing in life is valuable unless it adds to the sum of human happiness. Perhaps, and perhaps not. But some projects cannot be evaluated as good or bad unless we ask, carefully, whether they have made us happier. The Olympic Games are only the most prominent example.

Written for and first published in the Financial Times.

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Undercover Economist

The meaning of trust in the age of Airbnb

I am on holiday in Bavaria, where, in between the beer and schnitzels, I have been contemplating the nature of trust. A rather old-fashioned guest house happily took our reservation and let us run up a bill of nearly €1,000 without ever demanding more than a signature. Not for the Bavarians the pre-authorised credit card. Our room keys were stored in an unlocked cabinet in a quiet corridor, along with the keys of every other guest in the place. It made me wonder why anyone was bothering with keys in the first place. Nevertheless, our belongings were not stolen and we paid our bill when we left. The trust had been justified.

Since Germany is one of the most successful economies in the world and Bavaria is one of the most successful economies in Germany, the thought did cross my mind that trust might be one of the secrets of economic success. Steve Knack, an economist at the World Bank with a long-standing interest in trust, once told me that if one takes a broad enough view of trust, “it would explain basically all the difference between the per capita income of the United States and Somalia”. In other words, without trust — and its vital complement, trustworthiness — there is no prospect of economic development.

Simple activities become arduous in a low-trust society. How can you be sure you won’t be robbed on the way to the corner store? Hire a bodyguard? (Can you trust him?) The watered-down milk is in a locked fridge. As for something more complex like arranging a mortgage, forget about it.

Prosperity not only requires trust, it also encourages it. Why bother to steal when you are already comfortable? An example of poverty breeding mistrust comes from Colin Turnbull’s ethnographic study The Mountain People (US), about the Ik, a displaced tribe ravaged by Ugandan drought in the 1960s. If Turnbull’s account is itself trustworthy (it may not be), in the face of extreme hunger, the Ik had abandoned any pretence at ethical behaviour and would lie, cheat and steal whenever possible. Parents would abandon their own children, and children betray their own parents. Turnbull’s story had a horrific logic. The Ik had no hope of a future, so they saw no need to protect their reputation for fair dealing.

One of the underrated achievements of the modern world has been to develop ways to extend the circle of trust by depersonalising it. Trust used to be a very personal thing: you would trust your friends or friends of friends. But when I withdrew €400 from a cash machine, it was not because the bank trusted me but because it could verify that my bank would repay the money. This is a cold corporate miracle.

Over the past few years, people have been falling in love with a hybrid model that allows a personal reputation to work even between strangers. One example is Airbnb, which lets people stay in the homes of complete strangers, a considerable exercise of trust on both sides. We successfully used it on another stop in our Bavarian holiday. Airbnb makes personal connections but uses online reviews to keep people honest: after our stay, we reviewed our host and he reviewed us.

To enthusiasts for “collaborative consumption”, the next step is to develop systems that allow users to take the reputation they have built up as a generous and conscientious Airbnb host, and to use it to convey that they are also a prompt and careful Lyft driver or a reliable and honest eBay seller.

But designing such a system is problematic. Science fiction writer Cory Doctorow posited a purely reputational currency in his novel Down and Out in the Magic Kingdom (US). Such currencies, he says, are easily manipulated by con artists and extortionists. We’re misunderstanding the reason that eBay and Airbnb work, says Doctorow. It’s not because of the brilliance of the online reputation system but “because most people aren’t crooks”, an idea any Bavarian hotelier would understand.

Personalised trust has never been fairly distributed. When Harvard Business School researchers Benjamin Edelman, Michael Luca and Dan Svirsky (pdf) conducted field experiments on Airbnb, they found that both hosts and guests were discriminating against racial minorities. Other researchers have found evidence of discrimination in places from Craigslist to carpools. New online tools are giving us the ability to treat faraway strangers as though they were neighbours — and we do, in good ways and in bad.

Trust is as unfairly granted in Bavaria as anywhere else. While browsing for shades in Garmisch-Partenkirchen, I warned my young son not to play with the merchandise: a sign forbade children to touch the sunglasses.

The shopkeeper bustled over and reassured me that the rule did not apply to my son. “It’s for the Arab kids,” she told me, beaming. “They just drop the sunglasses on the floor.”

Ah. My son is adorably blond but he is as capable of snapping a pair of designer sunglasses as any other four-year-old. Trust is sometimes given to people who do not deserve it. And it is often withheld from people who do.

Written for and first published at FT.com

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Marginalia

Summer reading 2016

A few recent recommendations – and old favourites.

CityAM asked me to recommend an economics book – any economics book. So I went for “Thinking Strategically” (UK) (US), which is an all-time favourite of mine.

I wrote, “It’s the book that first attracted me to economics and one that I find myself recommending over and over again. Thinking Strategically is a guide to using game theory to succeed in business and in life. And what is game theory? Game theory was devised by the economist Oskar Morgenstern and John von Neumann, one of the great mathematical geniuses of the twentieth century. It’s a way of thinking through problems where you are competing or cooperating with others: how should Andy Murray decide whether to serve to the backhand or forehand? Where should you try to rendezvous in New York if you’ve lost your friend and your phone is out of battery? When faced with a competitor, should you raise your prices or lower them? Dixit and Nalebuff produced a fun and fascinating guide to a fun and fascinating topic.”

If you want to know more about Von Neumann and the history of game theory, you could do much worse than William Poundstone’s excellent book, “Prisoner’s Dilemma” (UK) (US). (Poundstone has a new book out, “Head in the Cloud” (UK) (US).)

I enjoyed Manu Saadia’s “Trekonomics”, but would have enjoyed it more if I was really into Star Trek. It’s smart but I think it’s best suited to real Trekkies who want to learn new economics, rather than economists who want to learn about Star Trek. (UK) (US)

I read a lot of books about improvisation while researching my new book “Messy“. There’s Keith Johnstone’s classic, “Impro” (UK) (US) but the book I enjoyed the most was Patricia Ryan Madison’s short, simple and wise “Improv Wisdom” (UK) (US). If you’ve any interest at all, try them both.

Finally, a boardgame recommendation: “Thunderbirds” (UK) (US). Great cooperative game, by the designer of and inspired by Pandemic. But of course it’s better, because it has Thunderbird Two in it.

Or if you fancy reading one of my books, try The Logic of Life.

 

 

 

13th of August, 2016MarginaliaComments off
Undercover Economist

An algorithm for getting through the To Do list

Can computer scientists — the people who think about the foundations of computing and programming — help us to solve human problems such as having too many things to do, and not enough time in which to do them?

That’s the premise of Algorithms to Live By (US link) a book by Brian Christian and Tom Griffiths. It’s an appealing idea to any economist. We tend to think of everyday decisions as a branch of applied mathematics, which is what computer science is.

To be clear, using computer science is not the same as using computers. Computer scientists have devoted decades to problems such as sorting information, setting priorities and networking. Many of the algorithms they have developed for computers can also work for human beings. An algorithm, after all, is not a computer program. It’s a structured procedure, a kind of recipe. (Algorithms are named after a 9th-century Persian mathematician, Al-Khwārizmī, but they predate his work by thousands of years.)

So, what is the optimal recipe for working through the to-do list? Perhaps it is simpler than you think: do all the jobs on the list in any order, as it will take the same amount of time in the end. There is a touch of brilliance in this advice but it also seems to show that computer science will never shed light on the stress and wheel-spinning that we feel when we have too much to do.

Or so I thought. Then I read a 1970 paper by the computer scientist Peter Denning, which describes a problem that computers can have when multitasking. Most computers do not literally multitask; instead, like humans, they switch rapidly between one thing and another. A computer will flit between updating your screen with a Pokémon, downloading more videos from the internet, and checking to see if you have clicked the keyboard or moved the mouse, among many other processes. But even a computer cannot do an unlimited number of tasks and, at a certain point, disaster can strike.

The problem stems from the use of readily accessible “caches” to store data. To understand caches, imagine a pianist playing from two or three sheets of music in front of her. Those sheets are in the fastest cache. There are other sheets behind them, accessible in a few moments. Then there are larger but slower caches: music in the piano stool; more up in the attic, and yet more in a music shop. There is a trade-off between the volume of information and the speed with which it can be accessed.

This set-up is no problem if the pianist only plays one complete piece at a time. But if she is asked to switch every minute or so, then some of her time will be taken retrieving a piece of music from the piano stool. If she must change every few seconds, then she will be unable to play a note; all her time will be taken switching sheet music between the stand and the piano stool.

It is the same with a computer cache: there will be a hierarchy — from super-fast memory in the microprocessor itself all the way down to a hard drive (slow) and offsite back-up (very slow). To speed things up, the computer will copy the data it needs for the current task into a fast cache. If the tasks need to be switched too often, the machine will spend all its time copying data for one task into the cache, only to switch tasks, wipe the cache and fill it with something new. At the limit, nothing will ever be achieved. Denning described this regrettable state of affairs as “thrashing”.

We’ve all had days filled with nothing but thrashing, constantly switching focus from one task to another but never actually doing anything. Can we borrow a solution from the computers? The most straightforward solution is to get a bigger cache; that is easier for a computer than for a human, alas.

The obvious alternative is to switch tasks less often. Computers practice “interrupt coalescing”, or lumping little tasks together. A shopping list helps prevent unnecessary return trips to the shop. You can put your bills in a pile and deal with them once a month.

But we often find it difficult not to flit from one task to another. Computer science says there’s a reason for the pain: there is a trade-off between being swiftly responsive and marking out chunks of time to be productive. If you want to respond to your boss’s emails within five minutes, you must check email at least once every five minutes. If you want to go off-grid for a week to work on your novel, your response time must slow to a week.

Any solution should acknowledge that trade-off. Decide on an acceptable response time and interrupt yourself accordingly. If you think it’s perfectly fine to answer emails within four hours — fine by most standards — then you only need to check your email once every four hours, not once every four minutes. As Christian and Griffiths advise, decide how responsive you want to be. If you want to get things done, be no more responsive than that.

Written for and first published at FT.com

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Radio

Two new radio series

Simon Evans Goes to Market

The second episode of the four-part Simon Evans Goes To Market airs Thursday 4 August at half past six UK time, on BBC Radio 4. This series, Simon and I are looking at the economics of big life stages – birth, coming of age, marriage and death. I love working on this series – Simon and the writing team are very funny, yet also actually interested in the economic ideas. Check it out (and you can catch up online).

Also: the summer series of More or Less on Radio 4 has also started. Every Friday afternoon at half past four, with a repeat (plus bonus material – it’s slightly longer) on Sunday evenings at 8pm. Or you can subscribe to the podcast feed.

Enjoy!

3rd of August, 2016RadioComments off
Undercover Economist

Fossil fuels have had an aeon’s head start

Will we ever stop using fossil fuels? The question matters because fossil fuels are the largest contributor to climate change. Although finding better ways to produce cement, combat deforestation or even reduce the flatulence of cows and sheep would all be welcome, our only hope of dramatically cutting greenhouse gas emissions is by finding cleaner methods of generating power.

This won’t be easy. Coal, gas and oil are wonderfully concentrated sources of energy, neatly synthesising aeons of solar radiation. The late Professor David MacKay, author of the remarkable Sustainable Energy — Without the Hot Air (2008), underlined that truth with the book’s pointed dedication “to those who will not have the benefit of two billion years’ accumulated energy reserves”. The concentrated nature of fossil fuels means that alternative energy sources are competing against a formidable head start; the head start is lengthened by the fact that our entire existing energy system revolves around fossil fuel.

Despite all this, there are two obvious scenarios in which we might replace fossil fuels with alternative energy sources for purely commercial reasons. The first is grim: we begin to run out of fossil fuels and they become too expensive to use as a source of bulk energy. The second, more benign possibility, is that alternative energy sources become so cheap as to outcompete coal, gas and oil at almost any price; as the former Saudi oil minister Sheikh Yamani once commented, the Stone Age did not end because we ran out of stones.

The grim scenario is unlikely, because we are unlikely to run out of fossil fuels any time soon. According to the BP Statistical Review of World Energy, we have used up all the proven oil reserves that existed in 1980, yet have more than we started with. Gas reserves aren’t falling either. (Coal reserves are but from immense levels.) This shouldn’t be too surprising: “proven reserves” are resources that have been identified, measured, and look profitable. As old reserves are exhausted, new reserves are sought to replace them, and so far we have had little trouble in finding more fossil fuels whenever we wish to.

Another way to observe this is to look at economic behaviour. If the supply of oil was limited and known, owning an oilfield would be like owning any other investment. Producers would have to decide when exactly to sell their finite barrels of oil, and the only logical path for the oil price would be a gentle upward trend, matching the rate of return on other assets such as shares or bonds. (Any other price-path would be self-defeating: a lower price tomorrow would provoke a rush to sell immediately; a sharply higher price tomorrow would mean no oil was sold today.) This well-known theory, demonstrated by the economist Harold Hotelling in 1931, is, of course, in contradiction to the actual behaviour of oil and gas prices: fossil-fuel producers are clearly not treating oil and gas as though they were non-renewable resources.

But the cheerier scenario, in which low-carbon energy sources become very cheap, may be unlikely too. At first glance the signs seem promising — Denmark, Germany and Portugal have all reported occasions this year when their entire electricity grid was fuelled from renewable energy sources. And photovoltaic solar power, in particular, has become dramatically cheaper, largely for the simple reasons that China has over-subsidised production of the panels, which now come in easy-to-install kits.

But it is too soon to declare victory. On a commercial basis, renewable energy sources must do more than outcompete fossil fuels on price. Solar and wind deliver power when the sun shines or the wind blows. Fossil fuels deliver power when people need it. That is a big advantage.

And because fossil fuels pack a lot of energy into a small space, they’re ideally suited for transport. Electric cars are not competitive. A recent survey in the Journal of Economic Perspectives by the economists Thomas Covert, Michael Greenstone and Christopher Knittel estimates that current fuel cells would only be cheaper than gasoline at an oil price of $425 a barrel, eight times current levels. Fuel cells will fall in price, of course, but that figure gives a sense of the scale of the challenge.

And nuclear energy? Economist Lucas W Davis, again in the Journal of Economic Perspectives, concludes that there is little prospect of a nuclear renaissance because nuclear power stations simply cost too much to build. It would require a large upward shift in the price of fossil fuels, not to mention a change in the political winds, to see the technology return at scale.

Overall, there is little prospect of running out of fossil fuels, and it seems unlikely that alternative energy sources will outcompete them. And yet we must make the shift, or risk catastrophic climate change. Our reserves of fossil fuels may be no constraint but the atmosphere’s capacity to safely absorb carbon dioxide is.

There is some space for optimism. Renewable energy sources are no longer impossibly costly. Nor is nuclear power, even though the costs have moved in the wrong direction. We cannot wait for the market to make the switch unaided — but the gap is no longer so wide that sensible policy cannot bridge it. The centrepiece of such a policy would be to raise the price of carbon dioxide emissions, using internationally co-ordinated taxes or their equivalent. Such a tax would make renewable energy sources more attractive — as well as encouraging energy efficient technologies and behaviour. Market forces can do the rest. Low carbon energy is not free — but it is worth paying for.

Written for and first published on FT.com.

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Undercover Economist

Metropolitan myths that led to Brexit

The Eurosceptic myths that fuelled hostility to the EU are obvious enough. We were told that the NHS was being destroyed by immigration, when more than a third of UK-based doctors qualified overseas. We were told that the EU is a fat bureaucracy, when it employs about as many people as Lancashire County Council. And we were told that the UK was being buried in red tape, when the OECD reckons it is one of the least regulated economies in the developed world.

It is easy (and useless) to sneer. Yet the metropolitan elite that voted so enthusiastically to remain cherishes its own myths, and those myths did plenty to undermine the cause of remaining in the EU.

Here are four tenets of the trendy centre-left of British politics: first, soaring inequality means that ordinary people haven’t shared in the benefits of economic growth; second, rich people and big companies don’t pay taxes; third, gross domestic product (GDP) is a statistic that misses what really counts; and finally, economists are reliably wrong. Flip through The Guardian, browse the popular economics books in your local bookshop, and tell me that these ideas aren’t taken for granted among the chattering classes.

Before the referendum, Anand Menon, director of the “UK in a Changing Europe” project, was speaking at a town hall event in Newcastle. He explained that most economists thought Brexit would depress the UK’s GDP. “That’s your bloody GDP,” yelled a heckler, “not ours”.

Look again at the four articles of centre-left faith. If they are true, then surely the heckler was right. But while there is a little truth in each of these four beliefs, there is less than you might think.

It is true that income inequality in the UK rose very sharply during the 1980s. But by most measures it has been pretty flat since 1990. The top 1 per cent continued to pull away in the 1990s — although not this century — but, counterbalancing that, the gap between people at the 10th percentile and the 90th percentile actually fell between 1990 and 2013-14. Broadly, income inequality is a problem that emerged in the 1980s and has not worsened since. (The Institute for Fiscal Studies report Living Standards, Poverty and Inequality in the UK: 2015 was my source; the 2016 version has been published since this column went to press.)

The pressing issue for the UK has not been rising inequality but weak growth that has affected most people not only during the recession of 2008, but in the five years before and after it. The problem is not that income growth benefits only the rich. The problem is that there’s been little income growth to benefit anyone at all.

The second article of faith is that rich people don’t pay taxes. If true, it would hardly matter to ordinary voters if Brexit hurt the rich or drove them away.

But the richest 1 per cent of taxpayers pay nearly 28 per cent of income tax. And, with about 9 per cent of post-tax income, they presumably also pay about 9 per cent of VAT, which is close to being a flat tax. Of course, some other taxes are grossly regressive — most notoriously the council tax, which the European Commission did urge the UK government to reform — but the rich certainly pay enough tax that the public purse would sag if they disappeared. London, too, generated more than 25 per cent of UK taxes, and that proportion has been rising, according to Centre for Cities, a think-tank. After Brexit, who knows?

What about the idea that GDP itself is flawed? Well, yes. It is flawed. It measures things that do not matter and misses things that do. But a sharp hit to GDP will also be a sharp hit to our everyday wellbeing: people will lose their jobs; schools, hospitals and public services will be squeezed as tax revenue dries up.

Consider an alternative measure: the Social Progress Index, an attempt to measure what matters in global human development with more than 50 different indicators — including access to nutrition, healthcare and schools. The SPI explicitly excludes financial indicators. Yet there is a very high correlation between the SPI and GDP. (For my fellow nerds: Michael Green, director of the SPI, tells me that the correlation is 0.88 when GDP is measured on a log scale. That’s high.) As a measure of human welfare, GDP completely fails in theory. In practice, however, it is not such a bad yardstick.

Finally, there is the low reputation of economists, the result of a global financial crisis that only a few in the profession warned us against. But the institutes that analysed the risks and rewards of Brexit can hardly be blamed for that. The Institute for Fiscal Studies is full of experts on tax and household income; the Centre for Economic Performance studies globalisation, technology and education. Blaming these people for not foreseeing the collapse of Lehman Brothers is like blaming a brain surgeon for the spread of obesity.

Many of the people who rightly scorned the myths put around by Eurosceptics should examine their own fond beliefs. The lesson of the referendum campaign was that emotion trumps rational analysis — and that is not just true of the Leavers.

Written for and first published at FT.com

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Undercover Economist

Brexit and the power of wishful thinking

‘We are quite capable of clinging on to our beliefs by picking whatever facts support them’

So what happens now? As the aftershocks of the Brexit vote rumble on, people keep asking me to predict the future. I am not sure that is a useful exercise. But there’s a lot to be learnt from examining the recent past. The unexpected result has important lessons for anyone who wishes to see what might be ahead.

The first is that wishful thinking is surprisingly powerful. A few years ago, the economist Guy Mayraz conducted a simple experiment at Oxford university’s Centre for Experimental Social Science. Mayraz ran sessions in which the participants were shown 90 days of “wheat prices” (actually based on historical price data) and asked to predict the price of wheat on the 100th day. In addition to being paid for accurate forecasts, half the experimental subjects were told they were “bakers”, who would profit if the price of wheat fell, and half were “farmers”, who would make money if the price of wheat rose.

Logically, a farmer should make the same forecast as a baker, since the forecast does not change the outcome, and both of them are paid for accuracy. If people want to hedge even these small bets, farmers ought to forecast a lower price so that if the unwelcome outcome happens, at least they’re rewarded for their forecasting.

But that’s not what Mayraz found. Instead, nearly two-thirds of farmers predicted higher-than-average prices, and nearly two-thirds of bakers predicted lower-than-average prices. People tended to predict that their dreams would come true.

The same seems to have happened to Remain supporters — a group that included most of the British and international political and business establishment. Months before the vote, betting markets suggested that the chance of a Leave vote was about one-third. Given the likely consequences of such a vote — including the collapse of the pound, the resignation of the prime minister and a prolonged period of rudderless uncertainty — a one-third chance was worth taking seriously. Yet most of the elite seemed unwilling to countenance it. That is wishful thinking at its finest.

The betting markets, influenced as always by the weight of money, may have been displaying some wishful thinking of their own. Even during a mid-June run where nine out of 10 polls showed the Leave side ahead, the markets never gave Leave much more than a 40 per cent chance. With hindsight that seems odd.

The second lesson is that confirmation bias is everywhere: we are quite capable of clinging on to our beliefs by picking whatever facts support them. Remain voters now see the catastrophe they expected; Leave voters see a gratifying shake-up that will turn out fine in the end. Contrary evidence is easily dismissed. Eurosceptics claim that a drop in high-street footfall, a drying-up of job adverts and the emergency lockdown of property funds are not because real economic damage is in prospect, but because of gloomy Europhiles talking Britain down. The convenient thing about this argument is that it can never be falsified: recessions can always be blamed on the lack of faith of unbelievers.

I’m as guilty as anyone of confirmation bias. Like most economists, I expected that the consequences of a Leave vote would be ugly. The immediate collapse of the pound and the FTSE 100 made me feel I was right, although really they demonstrated nothing more than the fact that traders shared my view. Yet when the FTSE 100 recovered, that did not reassure me at all. I recalled that the index contains largely global companies and says little about the UK’s economic prospects. I accepted bad news when it chimed with my beliefs, and dismissed good news when it did not.

Perhaps the most important lesson is that we spend too much energy trying to foretell the future, and too little trying to be resilient whatever happens. The referendum result was unpredictable but the likely short-term consequences of a Leave vote were perfectly clear. Former deputy prime minister Nick Clegg, aka “Mystic Clegg”, outlined them in an article on the eve of the referendum that now seems clairvoyant. But most of what Clegg wrote could have been foretold by any well-informed observer who bothered to think through the consequences.

Perhaps Clegg learnt the trick of thinking things through from Vince Cable, his former colleague. Cable and I briefly worked together in the scenario planning department at Shell, a fascinating place to think about the future. Rather than making forecasts, good scenario planners sketch out different possibilities and bring together people with different perspectives to work through the details. The end result will be several plausible, internally consistent and emotionally compelling stories about the future. The scenarios will highlight hidden connections and make distant consequences seem real. But, importantly, the scenarios will also contradict each other.

It’s time for more serious scenario thinking about the UK’s future in Europe. Because scenarios are persuasive stories, they can help us face up to uncomfortable prospects and think clearly about possibilities we would rather ignore. And because scenarios contradict each other, they force us to acknowledge that, in the end, we cannot actually see into the future. As a result, we move from a sterile question to a fertile one — from “What will happen?” to “What will we do if it does?”

Written for and first published at ft.com.

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Undercover Economist

Did economists fail us over Brexit?

‘Most economists think the British public shot itself in the foot, and did so against expert advice’

You may have heard the jokes about economists equivocating and squabbling. Ronald Reagan had the best one, about an edition of Trivial Pursuit designed for economists: “There are 100 questions, 3,000 answers.”

But mainstream economists did not disagree on the EU referendum question. A fortnight before the British public voted by a slim-yet-definite margin to leave the EU, the Centre for Macroeconomics, a research group, polled a group of expert economists, asking them what they thought the overall economic consequences of such a vote would be. The response was unanimous, and the only point of contention was whether Brexit would be bad, or very bad.

Leave voters did not seem to take this unprecedented warning very seriously; nor were they moved when nearly 200 economists signed a letter to the Times; nor were they dissuaded when three of the country’s leading economic institutes issued a sober analysis in a joint statement. All these were independent views, separated from the sometimes-political world of the International Monetary Fund or the Treasury. Yet they were ignored.

In short, most economists think the British public shot itself in the foot, and did so against expert advice. So should the profession have done things differently? Or would further expert views have been drowned out in the media maelstrom?

Most newspapers had a strong preconceived view, for or against. The BBC attempted to be impartial, but many critics complain that the corporation gave too much airtime to the fringe views of a few pro-exit economists, and failed to challenge obvious falsehoods. (I should declare my own BBC role: I presented a short radio series fact-checking the referendum campaigns.)

But Paul Johnson, head of the well-respected Institute for Fiscal Studies, thinks economists have a case to answer. “It is always a mistake simply to look at the media as a scapegoat. The real failings were with my profession.”

Perhaps. But the campaign left little room for subtle analysis of the difference between a single market and a free-trade agreement, or the “lump of labour” fallacy that each immigrant worker deprives a local of a job. Even the baldest falsehoods could not be expunged.

The Leave campaign’s most prominent claim — “We send the EU £350m a week, let’s spend it on the NHS instead” — was untrue and exposed as false repeatedly by the head of the UK Statistics Authority. Yet, if a recent Ipsos Mori poll is to be believed, 47 per cent of people came to believe it.

John van Reenen, the outgoing director of the LSE’s Centre for Economic Performance, doesn’t think the profession should be too down on itself. “I’m proud of what we did,” he says, and had economists engaged more “in my frank view, it would not have made a jot of difference.”

Van Reenen has a point; there is a limit to how much experts can achieve by simply presenting the facts.

Dan Kahan is a Yale law professor who studies the way we debate controversial political issues such as climate change and gun control. He points out that our reasoning about such issues is often bound up with passionately held emotions and values. For example, people who oppose government regulations are often instinctively sceptical about climate change, fearing that it is a Trojan horse for state control; alternatively, people who distrust large corporations instinctively embrace the scientific evidence on climate change, yet tend to dismiss scientists who say that genetically-modified food is safe. Giving people evidence that threatens deep beliefs is often counterproductive, because we start with our emotions and trim the facts to fit them.

A possible solution, argues Kahan, is to recruit experts who confound people’s stereotypes — a sharp-suited City economist explaining that EU laws protect workers’ rights, perhaps. Another possibility is to acknowledge people’s values before presenting the evidence — for example, the desire to preserve a community’s character in the face of immigration. And Kahan and his colleagues have also found that when evidence is presented by a diverse group of experts, people receive it with a more open mind. Perhaps the problem is that economists don’t seem very diverse.

Ultimately, there is no substitute for sustained public engagement — a lesson scientists have learnt the hard way. After years of bruising anti-scientific backlashes, they realised they were being ignored on issues such as genetically-modified crops or vaccines because they shied away from media appearances. Charlatans and activists stepped into the vacuum.

So, in 2002, the Science Media Centre was established, with a mission to ensure that when science or pseudoscience hit the headlines, respected scientists would be available to speak to journalists. “It’s a long slog,” says David Spiegelhalter, a statistician and risk-communication expert at Cambridge university. But he says the SMC has led to better science reporting.

Should economists do likewise? Perhaps. But the conduct of the campaign will not make that easier. Economists who did step forward to explain the issues were dismissed as corrupt or incompetent in the crudest terms. Nobody could be blamed for wishing to duck such mud-slinging. But if the events of the past few weeks have shown us anything, it is that public life is too precious to be entrusted to politicians alone.

Written for and first published at ft.com.

Marginalia

What I’ve been reading in June

In between all that Brexit, I’ve read some cracking books of late.

TED Talks by Chris Anderson. I wrote a piece about the book here; as a person who devours books about public speaking, this is by far the best I’ve seen. Bravo. (US) (UK)

The Shock of the Old by David Edgerton. (US) (UK) Fascinating take on the history of technology, pointing out that the innovations that make the headlines aren’t necessarily the ones that really make a difference. All hail to concrete and the bicycle!

On a similar topic but a more upbeat vein, How We Got to Now by Steven Johnson is jolly good. Much I did not know here. (US) (UK)

Other People’s Money by John Kay is a magnificent book – witty, penetrating and wise. All about the gap between what the financial sector does and what it could and should do – but by someone who really understand the sector in some depth. (US) (UK)

Algorithms to Live By by Brian Christian and Tom Griffiths. (US) (UK) This one is very good too: using computer science to help understand how to get a date, how to sort a bookshelf, how to find an apartment, how to tidy your desk, etc. etc. You learn a lot about computer science and a fair bit of self-help too. It’s not quite as good as Brian Christian’s The Most Human Human (US) (UK) but since that’s perhaps the best book I’ve read all decade, no big deal.

Or if you fancy reading one of my books, I’m rather proud of The Undercover Economist Strikes Back.

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11th of July, 2016MarginaliaComments off
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Tim Harford is an author, columnist for the Financial Times and presenter of Radio 4's "More or Less".
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