Tim Harford The Undercover Economist

Articles published in March, 2006

Reviews of ‘The Undercover Economist’

Stephanie Flanders writes in the Financial Times,

I take my hat off to Harford for producing 276 pages of lucid prose aimed at convincing a general reader that economics is more useful – and certainly more interesting – than you might have thought.

D. Murali in The Hindu Business Line calls it

an ideal read to start the new fisc. with.

The British, Australian and Indian editions are being published in the next few days.

31st of March, 2006MarginaliaComments off

Three cheers for Big Bird

Dear Economist,
My wife and I can’t agree about how much television to let our sons (aged four and two) watch. She is more tolerant of TV, perhaps because she spends more time looking after them and needs a rest. How can we break the deadlock?
— Paul Mitchell, Wendover, Bucks

Dear Mr Mitchell,

I am not sure that you truly disagree here. You and your wife both wish your children to excel at school. Your wife wants some quiet time, and your sons want to watch the box. There is only a problem if these requirements are mutually exclusive.

They do not seem to be. A new working paper by economists Matthew Gentzkow and Jesse Shapiro of Chicago University looks at the effect of television on children’s test scores and future careers – and finds an effect that is small and positive. For children whose parents do not speak English the effect is stronger.

Previous studies confused the effects of television with the family circumstances that encourage children to watch it. I am willing to bet that the children of fathers with string vests also tend to do poorly at school, but the string vests are not to blame.

Gentzkow and Shapiro look at the spread of television across the US. New York had television in 1940, but Denver had to wait until 1952. Wherever television was available, children would watch for three or so hours a day – with little educational programming and plenty of commercials. So if television is bad for you, the brains of young New Yorkers should have rotted earlier than those of young Denverites. They did not.

Forget your prejudices and settle down for an educational day with Big Bird. You might learn something.

Also published at ft.com.

25th of March, 2006Dear EconomistComments off

The importance of being negative

The British edition of my book, The Undercover Economist, is out soon, so I won’t be able to keep my eyes off Amazon.co.uk. The function of Amazon is to allow people to buy your book, but it also provides a “sales rank” showing how many books are selling, and it collects readers’ reviews. The sales rank changes every hour and it’s a drug. The reviews, whether good, bad or crushingly indifferent, are nearly as addictive.

The Undercover Economist in me wonders why anyone would write a review and, given that people do write reviews, why anyone would pay attention to one. Writing a review takes time and effort and appears to offer no reward. At the time of writing, about one in 500 buyers of the American edition of my book had left a review. The other 499 hadn’t bothered. This is as economic theory would predict.

That fact has implications for a potential customer trying to interpret the reviews. This is a highly biased sample of reviewers, although it’s not clear quite what the bias is: do people review books when they’re especially pleased or when they’re especially disappointed? Either way, Amazon reviewers are not normal people: one of my reviewers calls himself Drool Clueless – perceptively, I think. Another, Compassionate Conservative, wrote 85 substantial reviews of other books in the 10 days after reviewing mine. That doesn’t seem humanly possible, let alone typical.

One thing is clear enough: since only one in 500 of my readers writes reviews, if I round up 10 friends and persuade them to add five-star reviews, the result should be hard to distinguish from the reviews I would get if I had 5,000 delighted readers.

Frankly, nothing could be easier; the smart buyer will tend to discount positive reviews, knowing that negative reviews are more likely to be genuine. Admittedly, they may not be. I could post a review of Martin Wolf’s book, Why Globalization Works, that says: “This is a terrible book. Read Tim Harford’s brilliant book instead.” But the gains from slating someone else’s book are pretty small in most cases. I’d do better with: “If you liked Tim Harford’s brilliant book, you’ll love this too.” Since bad reviews are less likely to be fictional, if a potential buyer sees a bad review, they should give more weight to it than to a good one.

All this is just armchair reasoning, but it turns out to be correct. A couple of hard-working researchers at the Yale School of Management, Judith Chevalier and Dina Mayzlin, have combined the rankings with the reviews to work out whether reviews do indeed boost sales. Their clever method compares the ranking on Amazon.com with the ranking on the other big online bookseller in the US, Barnes & Noble. Both rankings should go up and down in response to advertising, press coverage and so on, but a good or bad review posted on Amazon should affect sales on Amazon but less or not at all on Barnes and Noble.

It turns out that reviews do make a difference, especially bad ones. Chevalier and Mayzlin reckon that a book with four five-star reviews would drop 20 per cent in the rankings if one of the reviews had been a one-star review instead. Drool Clueless cost me a lot of sales. Although good reviews have less impact, they do boost sales.

So I’m counting on you, loyal readers, to start the buzz. Of course, since these columns are not extracts from the book, you don’t actually know what it will be like. But don’t let that stop you posting a five-star review in eager anticipation.

Tricks of the trade

Dear Economist,I was wondering if there is any economic law to explain why tradesmen always come to do a job either after or at the tail end of the time slot they initially give to the customer. Whenever they advise “between 9 and 12” they never come at 9am and usually don’t arrive till 1pm. Is there an economic explanation?
Andy Moffat, London

Dear Andy,

I might request more data in support of your theory before I swallow it. Having just moved house, I’ve had four separate appointments with tradesmen or deliveries in the past two days. All came less than an hour after the start of their time slot and one was slightly early. We tend to forget these happy occasions and recall our most severe disappointments instead.

But I don’t want to dismiss your theory entirely. Even allowing for our natural tendency to recall the most egregious tardiness, I agree that tradesmen often miss their promised slot. The reason is simple: they have little incentive to keep their promises.

Most of your interactions with tradesmen are one-shot affairs. You’ve never seen them before, you’ll never see them again, and quite likely you picked them at random out of a business directory because your living room ceiling just collapsed. If their business largely depends on strangers like you, why would they inconvenience themselves to build up a reputation? The few tradesmen with whom you deal frequently are more likely to be punctual.

If you want to solve the problem, the necessary incentive structure is quite simple. Call your man at 9am and tell him he’ll get an extra twenty quid if he stops the job he’s currently on and comes over immediately. If enough other people are doing this that may explain why you always have to wait until after lunch.

18th of March, 2006Dear EconomistComments off

Fire grandad! Hire junior!

The Undercover Economist – FT Magazine, 18 March
Extended version available at Slate.

When I first came to London to seek my fortune, was taken out to lunch by a family friend with about three decades more experience than I. She cheerfully told me that I wasn’t worth the salary that my brand new job was paying me. She was right, as it happens, since I was an extraordinarily bad management consultant, but she was betting against the odds. The typical young person is worth more than he or she is paid. Young people who feel that the odds are stacked against them turn out to be right.

Older workers, on the other hand, tend to be overpaid relative to what they produce. This is not because they are less productive than the young – although many important skills do start to decline at the age of thirty, or even earlier – but because they are paid so much more. Decades of economic studies have produced the conclusion that average wages increase with age almost until retirement, yet average productivity seems to be flat or perhaps even declining after the age of fifty. (The studies are not unanimous, because productivity is very hard to measure and, of course, the averages hide huge variations from job to job and person to person). Perhaps my plain-speaking mentor was paid five times as much as I was, but if she was only three times as productive then I was the bargain basement employee.

I can look forward to a big bag of hate mail for reporting on this research, but I think that subconsciously we know it’s true, because we tend to fret about the problem of age discrimination in the workplace. Age discrimination is much more of a risk if older workers are indeed paid well relative to young ones: it means they’re the ones managers want to sack to save a bit of cash. The government is introducing new, tougher rules against age discrimination in October; if older workers tended to be worth much more than they were paid, it would scarcely be necessary.

This is a puzzle. Young workers can rightly grumble that they are paid a pittance for doing valuable work. Older workers also have good cause to worry: they are being subsidized, but subsidies are expensive and that means they have every reason to fear the sack. Wouldn’t it make more sense for young workers to be paid a bit more, old workers to be paid a bit less, nobody to feel exploited and nobody to fear premature retirement?

The income of self-employed people does tend to track their productivity more closely, which suggests that the odd relationship of underpaying and then overpaying is a corporate phenomenon. One explanation comes from the economist Edward Lazear, who suggested that young employees are often encouraged to perform by the promise of a cushy cruise toward retirement. If it’s hard to measure performance directly, but there is always the chance that shirkers will be sacked, workers will beaver away knowing that if they can hold onto their jobs it will all be worthwhile.

Lazear also suggested that the managing director’s fat-cat salary is designed to motivate the lean and hungry young trainees beneath him, and has very little connection to his own performance. (Much is explained.)

This is all fine in theory, but not so great if the firm goes bankrupt or decides under new competitive pressures that the ‘job for life’ system has to go. But seniority wages are here to stay simply because it is hard to reward good performance instantly and accurately. Meanwhile, Professor Lazear has in his late fifties been nominated to chair President Bush’s Council of Economic Advisors. It is a difficult job; we shall see whether his performance exceeds his pay.

Paying not to go to the gym

Dear Economist,
My new year’s resolution was to get more exercise, so I joined a gym. I’m embarrassed to say that I’ve hardly been. I have the option to cancel the membership, but perhaps I should keep it as an incentive to get fit?
Janet Taggart, Glasgow

Dear Janet,

Many health clubs offer three types of membership. There is the option for the infrequent visitor – a pass entitling you to, say, 10 visits. Then there is a monthly membership that continues indefinitely until cancelled. This is handy for regulars who may have to move or travel and so want the option of cancelling. There is also annual membership which lapses if not renewed: this is cheaper per month, but less flexible.

Different contracts suit different people, but we almost invariably pick the wrong one. For example, the monthly contract is favoured by people like you, who don’t actually show up to the gym. Worse, those hapless suckers are too lazy even to cancel the contract, meaning that many of them would have been better even had they signed up for a year and never gone.

(This insight comes from an excellent paper titled “Paying not to go to the Gym”, by economists Stefano DellaVigna and Ulrike Malmendier. Bridget Jones features in the bibliography.)

My recommendation is for you to see if you can switch to a pay-per- visit pass. This will work out cheaper unless you experience a startling change of willpower. (If you do you can always get annual membership later.) If you’re looking for financial motivation, why not instead make a bet of £1,000 that you will go to the gym every day for the rest of the year? I’m ready to take your money any time.

Also published at ft.com.

11th of March, 2006Dear EconomistComments off

Bitter medicine

The Undercover Economist – FT Magazine, 10 March

Ann Marie Rogers is in a tough spot. She has an aggressive form of breast cancer, albeit at an early stage. It may kill her, and so she has been through surgery, radiotherapy, chemotherapy and a legal battle which, so far, she is losing. The battle is to get the National Health Service to pay for the cancer treatment her doctor has prescribed, the drug Herceptin. Last month the High Court ruled that the local NHS trust was within its rights to refuse to pay for the drug.

These are uncomfortable cases, but they can’t be avoided in a system where the government pays for healthcare. The NHS has limited funds and someone has to decide the most effective way of spending them. The buck stops with the National Institute for Health and Clinical Excellence (Nice), which regularly makes the headlines after refusing to recommend some treatment or other, most recently for brain tumours. (Nice will issue guidelines for Herceptin only after the drug is licensed for early-stage breast cancer by the European Medicines Agency.)

Nice is responsible for making the following sort of decision: given an extra GBP20,000, should the NHS spend it on a year’s treatment for breast cancer or on laser treatment for 22 people who are going blind? The trade-offs are not phrased like that, but they are real. More money can make today’s trade-off go away but there will always be another.

Nice needs to take a view not only on whether the treatments work well, but also on how serious some conditions are. Would it be better to prevent blindness, or paralysis from the waist down? These are hellish choices to make. Nice makes them.

There is another way. Women such as Rogers, advised by their doctors, could choose and pay for their own treatments and decide their own priorities. It may be impossible for the NHS to decide how much to spend on an unproven therapy, but Rogers has a firm view.

Should we, then, disband the NHS completely and let people buy healthcare the same way they buy food or housing? The problem is that illnesses, and the need for expensive treatments, are unpredictable. It is not fair that as well as being sick, Rogers must find the money to help her recover.

Normally, when we are exposed to big risks, we turn to insurance. But private health insurance works poorly: the US system is not only inequitable but vastly expensive – because heavily insured people are sensitive to quality but not to price.

Ideally we should have a system that would cocoon Rogers from the cruel unpredictability of illness without removing her autonomy. That’s possible, at least in principle: when Rogers’ condition was diagnosed, the government could simply have written her a cheque for GBP100,000 – or whatever was the likely cost of a standard treatment. She would have discussed with her doctor how best to spend it on the open market for healthcare – guided by advisory books, magazines and websites. Nice could concentrate on the easier (if still hugely difficult) problem of how big the cheque should be.

I can think of half a dozen objections to this utterly untried idea; I am not sure they are more serious than the objections to our current system. We don’t need health insurance to take the form of free healthcare any more than car insurers need to cover the cost of petrol; we can, with our doctors, take responsibility for our own healthcare. Rogers may not get what she wants from the NHS, but that will not stop her. She has borrowed the money to pay for the first three months of her course of Herceptin.

Valuing the kid

Dear Economist,
I cohabit: dual career, equal partnership. My partner has a child from a previous marriage who lives with us. We co-own our home, and we contribute equally to a joint account for paying the bills. We have had to hire a housekeeper, since he does not want to clean the house and I do not want to do all the housework. Should I be paying for the food and utilities consumed by his child? Should I have to pay the same amount towards the housekeeper that he does?
Troubled in Paradise, via e-mail

Dear Troubled,

You need to work out whether the net benefit of the housekeeper is positive. You will tend to exaggerate the value of a clean house while your partner pretends not to notice grime. So you need a clever technical procedure called a Clark-Groves mechanism, which will give you and your partner an incentive to tell the truth about how much you value the housekeeper.

Both of you should pay a few thousand pounds into a “trust fund for honesty”. Then write down the net benefit to you of having a housekeeper and paying half the cost; your partner writes down the net cost to him of the same arrangement. If the benefit exceeds the cost, hire the housekeeper and share the cost equally, but you must also pay the figure he wrote down to the trust fund. He receives the figure you wrote down from the trust fund. (They will not be the same, which is why you need the fund.)

Neither of you will benefit from lying because what you pay or receive is not a function of what you write down.

This is a tremendous fuss, of course. But it will be interesting to see what happens when you use the procedure to see how much he values the kid.

Also published at ft.com.

4th of March, 2006Dear EconomistComments off

Fried chicken versus fresh air

Family Harford is now safely installed in one of the grimmest parts of Hackney. Just outside the back door is a “massage parlour”, a kebab shop, a jerk chicken joint and a betting shop, not to mention flowers for the young man who was recently shot dead outside a local nightclub. At the front is a row of abandoned cars, courtesy of the garage just across the road and the other one just round the corner. Delis are there none.

Cities are agglomerations of bright lights and skyscrapers, but also of sharp elbows and grime. Technically speaking, they are collections of “externalities”. An externality is a cost or a benefit that affects bystanders. Aficionados of economics lectures will recall the quintessential example of the pollution from a factory that damages the business of the fish farm downstream.

My simple humble neighbourhood shows that externalities come in all shapes and sizes. I asked the estate agent Anne Currell to tell me what would really bring down the value of my house. She sounded like she was reading from my neighbourhood yellow pages: pubs with late licences; takeaway food; garages; tyre shops; massage parlours; and betting shops. She didn’t mention crack dens, but I think they’re not good for property values either.

House prices are great measures of these externalities because the house price is a summary of everything potential buyers think is likely to make them happy or miserable. That judgment is, as many of us know from experience, a complicated one. Currell told me of one case where a beautiful Islington house lost several possible buyers when it became clear that the pub two doors down might gain a late licence. A similar home three doors down seemed to be unaffected, so local were the effects. The loss to the nearer seller might have been about 5 per cent or so – for a £1m house, that’s about £50 a week forever. Meanwhile people in the next street paid more, not less, for convenient access to a pub.

Economists have proposed two solutions to the problem of externalities. The first is a tax to discourage the unpleasantness. The idea behind a tax, rather than a prohibition, is that if the fried chicken shop can stay in business despite having to pay an additional tax, its customers clearly value fried chicken more than I value fat-free air in my back bedroom. The second solution is negotiation. I could pay the garage to move the cars, or the “massage parlour” to become a real massage centre. The buyer of the Islington house could have offered the pub landlord £50 a week to close at 11pm. The landlord would accept if the benefits to him of late opening were modest, and rightly reject the offer as nimbyism if the benefits were large. Private deals would lead to the greatest good for the greatest number.

Neither of these solutions seems to work well. Taxation is too clumsy, especially when wielded by unresponsive local governments. Bargaining is fine in the textbooks but unappealing in reality. No wonder city life grinds you down.

The surprise is that externalities in cities are on balance positive – people-watching, being close to friends, enjoying the buzz of a lively culture. We know this because city wages have not kept pace with city prices: do the same job in the countryside and you will be able to buy more stuff even with a lower wage. If cities truly were such miserable places, we should all have moved out by now. It turns out that people flock to London not to seek their fortune but to enjoy the things that money cannot buy.

Why poor countries are poor

Reason Magazine, March 2006 – Extract from ‘The Undercover Economist

They call Douala the “armpit of Africa.” Lodged beneath the bulging shoulder of West Africa, this malaria-infested city in southwestern Cameroon is humid, unattractive, and smelly. On a torrid evening in late 2001, I was guided out of the chaotic Douala International Airport by my friend Andrew and his driver, Sam, who would have whisked us immediately to the cooler hillside town of Buea if Douala were at all conducive to being whisked anywhere. It isn’t. Douala, a city of 2 million people, has no real roads.

A typical Douala street is 50 yards wide from shack to shack. It’s packed with street vendors, slouched beside a tray of peanuts or an impromptu plantain barbecue, and with little clusters of people, standing around a motorbike, drinking beer or palm wine, or cooking on a small fire. Piles of rubble and vast holes mark unfinished construction or demolition work. Along the middle is a strip of potholes that 20 years ago was a road.

Continued at Reason Magazine – no subscription required.

1st of March, 2006MarginaliaOther WritingComments off

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