Published on the 6th of May, 2006
The World Series of Poker in Las Vegas in 2000 attracted a record 500 players. Over four days, contestants were gradually eliminated until just two men were left to face off in poker’s flagship game, Texas Hold ‘Em. The more experienced player was a living legend named T.J. Cloutier, a 62-year-old Texan road gambler who was regarded by many as the best in the world. His opponent was a 37-year-old computer scientist from California named Chris Ferguson who had only been playing World Series games since 1996, never finishing higher than fourth place.
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Published on the 6th of May, 2006
The Undercover Economist - FT Magazine, 6 May
On a recent trip abroad, a reputable international car rental company tried to make me an offer I couldn’t refuse. For just 110 a day, I could protect myself from the frightening-sounding insurance deductible of 1900 - a sum I risked being charged if anything happened to the car. I bravely turned them down.
This was a strikingly overpriced offering. For each day’s rental I was being asked to pay 110 to protect me from the risk of paying 1900. The mathematics are hardly difficult: the insurance is fair only if I crash into something every 90 days. If I believed that, I wouldn’t get behind the wheel at all.
There is plenty of overpriced insurance around, always bundled with some other product. A popular mobile phone retailer will insure your £50 phone for 92 pence a week - nearly £50 a year. The fair price of the insurance is probably closer to £5 a year than £50.
Economists are rarely tub-thumbing consumer rights activists. We tend to believe that people are smart enough to fend for themselves. But the commercial success of this kind of insurance is perplexing. The pricing is grotesquely inflated, but something more fundamental is also going on. A rational consumer should scarcely look at this kind of insurance, even at a fairer price.
Most people like insurance because they dislike risks. Economists used to think that this tendency was rational: your first million pounds is worth more to you than your second million pounds, so you should be reluctant to wager your first million on a coin toss. What you might win (your second million) is worth less to you than what you might lose (your first million).
You might protest that not all of us are millionaires. But the average worker, who earns roughly £25,000 a year for 40 years, makes £1m in their lifetime. Since they can borrow or save to spread the cost of windfalls and disasters across the years, the £1m is the relevant figure.
Few of us see risks that way. Matthew Rabin and Richard Thaler pointed out in 2001, in a paper that surprised even their fellow economists, that anyone who pays even slightly more than the fair premium to escape from a risk on a £50 phone or a 1900 insurance deductible must be making a mistake. The stakes are too tiny: in the context of a £1m lifetime income, even 1900 is a small enough risk to swallow.
Continued on ft.com or, subscription free, at Slate.
Published on the 5th of May, 2006
FT Comment - 5 May
Plagiarism is in vogue, but is it efficient? William Swanson, chief executive of Raytheon, has been censured by his own board after his free booklet, Unwritten Rules of Management, turned out to overlap with W.J. King’s 1944 work, The Unwritten Rules of Engineering. Kaavya Viswanathan, the young chick-lit sensation studying at Harvard, has made the headlines because her novel has been alleged to plagiarise not one but five other novelists. Her publishers, Little, Brown (who also publish my book), have withdrawn the novel. Alas for the plagiarisers: they are being punished for victimless crimes.
Far more sensible, at least to an economist, is the treatment of the novelist Dan Brown. Mr Brown is not a plagiariser, merely a judicious borrower. His novel, The Da Vinci Code, owes an intellectual debt to an earlier work of non-fiction, The Holy Blood and the Holy Grail. But in a famous ruling last month, a British judge, Mr Justice Smith, ruled that this was the only thing Mr Brown owed, because The Da Vinci Code did not infringe copyright.
Intellectual property protection is a high-wire act. If ideas are protected too aggressively by the law, they will not be widely used. But if ideas are not protected at all, then who would waste effort creating them, knowing that their rewards would be stolen? All debates about protecting ideas should keep this balance in mind. Most do not.
Whatever the legal and moral merits of the judge’s decision, it made perfect sense economically. By acknowledging Mr Brown’s right to draw inspiration from other sources, the ruling smoothed the way for the release of a film based on The Da Vinci Code – a film that is likely to bring pleasure to millions, if not to the critics. The Da Vinci Code itself has sold nearly 40m copies and so, presumably, has made the world a better place…
Continued at ft.com.
