Tim Harford The Undercover Economist

Articles published in September, 2007

Study Leave

Dear Economist,

My economics tutor says that I should be studying harder if I want to do well in my exams. I think that he is basing his advice on purely theoretical assumptions, and that there is no empirical evidence for his assertion. Who is right?

M.W., Cambridge

Answer at ft.com, subscription free.

Who shares wins

Armed with their theories and their statistical models, economists are increasingly marching off to occupy distant intellectual territory: marriage (Gary Becker), racial segregation (Thomas Schelling), obesity (David Cutler) and whether it matters whether your child goes to school with bright kids (Caroline Hoxby).

The practice – which has been around for a while – is often termed “economic imperialism”, perhaps because of the less-than-heartfelt welcome the natives usually extend to the economic explorers.

I am all in favour of economists venturing into new territory – and receiving incursions from outside – but the practice isn’t quite as productive as it should be.

Take the experience of Emily Oster, a young assistant professor of economics at Chicago with a big reputation. One of her celebrated articles is an analysis of the Aids epidemic in Africa: she offers her own epidemiological model and concludes that the virus is best fought by treating other sexually transmitted diseases. The research was published in the prestigious Quarterly Journal of Economics (QJE) in May 2005.

But Oster’s conclusion is probably wrong. Epidemiologists embraced the idea of treating other sexually transmitted diseases a long time ago, but it has been discredited (to their deep disappointment) by a series of rigorous clinical trials. Oster says that the most convincing evidence came out after her paper was written; still, she has repeated her recommendations more recently in Esquire magazine.

Oster also made a mistake in handling her data. The error – which she has acknowledged, and which makes a modest but noticeable difference to her calculations – was quickly spotted when I asked two epidemiologists to review her research. The QJE will be publishing a correction.

Oster quite reasonably says that her article has other merits. But it might have been much better if the epidemiologists had taken a look long before the FT got involved.

The problem is that the economists couldn’t get the epidemiologists to take the research seriously enough to comment. Oster tells me that she tried, but she couldn’t name an epidemiologist who was familiar with her QJE paper. And Larry Katz, the QJE editor who published Oster’s paper, acknowledges that the epidemiologists would not typically agree to review papers for the QJE.

Different academic disciplines should talk to each other more – but that is easy to say. “Every discipline develops a different set of things they care about,” says Michael Kremer, a Harvard economist.

Kremer has studied the impact of aid on the performance of schools, and that meant working with education experts. He focused on the statistical robustness of the research; they were worrying about whether the tests being given to students were valid. “Both are right, but the difference in areas of concern means that it takes a lot of work to communicate.”

It is not just the economists who struggle to collaborate. I recently read a book by the physicist Neil Johnson who believes physics is a better tool than economics for understanding financial markets. I was disappointed to find no evidence that Johnson cared what economics actually said about financial markets, which would have been helpful if he aimed to refute it.

Still, there are reasons for optimism. Princeton economist Alan Krueger is working with the psychologist (and winner of the Nobel prize in economics) Daniel Kahneman. The “neuroeconomists” talk to the neuroscientists, if only to beg the use of their brain-scanners. And Gary Becker, another Nobel laureate and the economic emperor himself, also holds a sociology professorship.

It is not so easy for younger economists to be taken seriously by others. Something tells me that is not going to curb their ambitions.

PG mating

Dear Economist,

I am worried that if my children receive sex education at school, it will make unwanted pregnancies more likely. Should I take them out of class?

Protective Parent

Dear Protective Parent,

You are right to be worried. It is easy to see why information about contraception might encourage sex by lowering its costs, but the effects might be more dramatic than you would think. In a nutshell, fixed costs are your problem. These are obvious when it comes to, for instance, producing software. The first copy may cost hundreds of millions of dollars to produce, the second very little. But losing your virginity is like that too: the first sexual experience comes with a psychological cost, but, once paid, future experiences are easier. (Economics students will recognise the implication: sex has economies of scale, so it is efficient to either have lots or none at all.)

Within a relationship, too, the first sexual experience probably has a fixed cost.

In both cases, access to contraceptives makes it likelier that the first experience will be chosen; having crossed that barrier, it may become so attractive to have sex that teenagers will do so even when the contraceptives are not available.

The economists Peter Arcidiacono and Ahmed Khwaja, of Duke University, with Lijing Ouyang of the US Centers for Disease Control and Prevention, believe that this is the way teenagers do, indeed, behave.

Yet, I would not advise you to shield your children from sex education. That might be wise if prevention of pregnancy and disease were your goals, but that is too extreme. Your children will know that sex has benefits as well as costs. Perhaps you should refresh your memory about these?

Originally published at ft.com.

Right on queue

As the queues formed down the street outside branches of Northern Rock this week, it was obvious enough to a game theorist what was going on: people had decided to hunt rabbits. Bear with me – this will make sense in a moment.

Game theory is the study (by economists, mathematicians, biologists and others) of situations where what you do may affect what I choose to do, and what I do may affect what you choose to do. The theory is big on catchy stories with memorable names, but ultimately it is all about mathematical representations of interactive decisions, called “games”. The most famous game of all is the “prisoners’ dilemma”, in which two prisoners must each decide whether to plea-bargain by giving evidence against the other.

But another game, the “stag hunt”, languishes in relative and undeserved obscurity. In the stag hunt, two hunters must each decide whether to hunt the stag together or hunt rabbits alone. Half a stag is better than a brace of rabbits, but the stag will only be brought down with a combined effort. Rabbits, on the other hand, can be hunted by an individual without any trouble.

There are two rational outcomes to the stag hunt: either both hunters hunt the stag as a team, or each hunts rabbits by himself. Each would prefer to co-operate in hunting the stag, but if the other player’s motives or actions are uncertain, the rabbit hunt is a risk-free alternative.

Northern Rock’s customers have decided to hunt rabbits. If they had confidence that other depositors would stay with the bank, there’s not much doubt that their money would be safe. When they lost that confidence, the stag hunt was abandoned. And despite all the talk about panic, it was abandoned for perfectly sensible reasons.

The stag hunt is inspired by an anecdote originating with Jean Jacques Rousseau about a deer hunter abandoning his post to chase a hare. Yet it is more than an offbeat parable about cooperation. In the hands of economists, it becomes a mathematical object that can be pulled apart and tested to see how it works. One worrying outcome of that research is the discovery that it is very hard to move from the low-trust situation, in which each hunter chases his own rabbits, to the more trusting situation, in which both team up to bring down the stag. Any move to the high-trust equilibrium is going to require its own, possibly costly, attempt at coordination.

Perhaps we should not be surprised that trust is difficult to regain once lost.
Human society is full of stag hunts, but richer societies have become very good at formalizing the cooperative outcome. I can walk into a shop, pick up something expensive, and then walk out with it without handing over any cash. I use a credit card: The shop assistant does not know whether to trust me, but she trusts the credit card company, and they trust me.

That is a formalized form of trust, based on institutions that dramatically expand our ability to interact with those beyond our immediate neighbours. Economists who study such things—such as the World Bank’s Steve Knack, or Paul Seabright, author of The Company of Strangers—argue that the difference between countries that have successfully formalized trust and those that have not is, basically, the difference between rich countries and poor ones.

That is why the stag hunt is so important, and the fragility of the happy, cooperative hunt is so worrying. Britain is not about to collapse into anarchy, even if the experience of Northern Rock’s depositors is profoundly unnerving. But the episode is a reminder of how many conventions in our society—from lining up to showing up for work—only succeed because everybody expects that they will. That cannot be taken for granted.

First published at ft.com.

Dog’s life

Dear Economist,

I’ve been dating someone for a few months and the relationship is now quite serious. There’s just one problem: his dog. I’ve no strong feelings about dogs, but he’s had this mutt for years and seems to love it more than he loves me. I could swallow my reservations and see where the relationship goes, or I could opt for the old “either the dog goes or I do” ultimatum. What should I do?

Yours, Canophobic in Kettering

Answer at ft.com, subscription free.

Antiquities roadshow

I am writing this column in one of my favourite London haunts – the Great Court at the British Museum. I’ve just been to see one of the museum’s most famous and controversial exhibits, the Parthenon Sculptures – also known as the Elgin Marbles. These carvings were taken from the Acropolis in Athens more than 200 years ago by the Earl of Elgin. But while there’s a predictably long-running argument over whether the carvings should ever have been removed, the trade in antiquities remains very much alive today.

This trade is almost inevitable. In a poor country, such as Mali or Cambodia, foreigners are likely to be willing to pay more for artefacts than the locals would.

The logic of the market would pull the choicest objects into foreign collections and foreign museums. Many see this as undesirable, and so most countries maintain some form of ban on trading antiquities.

But such bans have some unpleasant side-effects. They replace the logic of the market with the logic of the black market, which means that smugglers would try to conceal the locations of new archaeological sites, to erase or forge the historical records surrounding objects, and to excavate and ship objects without the care that could be lavished on an operation that was legal. Beyond these purely archaeological considerations, illegal objects are less likely to end up in the top museums and may be relegated to private collections, which is in itself a shame. It’s enough to make an archaeologist weep – and an economist too.

Michael Kremer, a Harvard economics professor with a track record of inventive ideas, and Tom Wilkening, a graduate student at the Massachusetts Institute of Technology, published a possible solution earlier this year. Instead of flatly banning the export of antiquities, why not ban their sale but allow them to be rented?

Continued at ft.com, subscription free.

Hogwash

Dear Economist,

I am contemplating writing a popular book on the use of economic tools to explain everyday aspects of modern life, but have grown concerned that there is a growing pile of highly successful books in this vein already in circulation.

I cannot decide whether the success of these forerunners means that the public appetite for such subjects will already be satisfied by the time my work appears, or whether it indicates that my efforts are more likely to find a receptive audience. Please can you advise me how to decide whether I should embark on this enterprise.

Would-be Author

Dear Would-be,

You are confusing demand with supply. Do not worry about the public appetite for popular economics; worry instead about the number of competing titles that may arrive in the market just as yours does. (Given that you are hoping to write an authoritative book, you might also ask yourself why you are asking the questions about economics and I am answering them.)

Your economic training should have covered the notorious “hog cycle”. High profits for pig farmers lead them to rear more pigs. When the glut of pigs hits the market, prices and profits collapse. Farmers decide to rear fewer pigs. Later, when the pig shortage hits the market, profits rise again.

Books, like pigs, take time to reach the market, and so you need to try to place yourself out of sync with the cycle. If I may offer disinterested advice, you should curb your authorial ambitions until after my next book appears in early 2008. Better yet, may I instead strongly recommend a career as a pig farmer?

First published at ft.com.

8th of September, 2007Dear EconomistComments off

Sheepish response

I intend to break a record with this column, and publish what must surely be the FT’s longest ever correction. It’s not that I enjoy self-flagellation in public. But the manner of my error offers a lesson about economics as well as journalism.

First, the error. In the “Dear Economist” column, I recently described the research of Harold Hotelling. But I attributed to Hotelling an anecdote that is widely used but was probably never used by Hotelling himself.

Ron Johnston, a geography professor at the University of Bristol, was kind enough to point out my mistake. “You are, I fear, by no means the first person to incorrectly cite Hotelling’s classic 1929 paper as using the example of two or more ice-cream sellers locating on a beach. [It] did not: his much more prosaic example was of two ‘places of business’ serving ‘buyers … supposed uniformly distributed along a line of length 1, which may be Main Street in a town or a transcontinental railroad’.”

So why did I slip up? I know Hotelling’s model fairly well, but I wrote my answer while travelling and unable to access the Economic Journal of 1929. Wondering whether the ice-cream anecdote really was Hotelling’s, I checked accounts of his model on the internet and found the anecdote attributed to him again and again. (As Johnston correctly pointed out, I am by no means the first to make the mistake.) The stakes in this case being rather low, I drafted my column and then forgot about my doubts.

I was a victim of what economists call “informational herding”. Imagine a series of perfectly rational but somewhat lazy economics professors posting accounts of the Hotelling model on the internet. Each professor is unsure of whether the ice-cream story is true or not so each makes his best guess rather than taking the time to make that trip to the library.

If the first two professors are wrong, and include the ice-cream anecdote in their course notes, they set a precedent that it is irrational to ignore. The third professor may recall that Hotelling did not mention ice cream, but rationally doubts his memory when he sees what his colleagues have written. Since he is unsure and reckons that two heads are better than one – and also prefers not to trek to the library – he also includes the anecdote.

Despite the errors and the laziness, everybody involved has behaved rationally. The third professor is correct to believe that his two colleagues are more likely to be right together than he is to be right alone. But the curious thing is that any number of professors may now follow suit, suspecting that the anecdote is bogus but deferring to the collective wisdom of their predecessors.

The same reasoning could apply to people responding to a fire alarm in a large office. Seeing that nobody else is moving, each person is likely to suppress their doubts and stay put. Once the exodus does begin, everyone may pour towards the same exit.

Or consider the success of books such as the Harry Potter series. Millions of people buy such books because millions of other people have bought them. The assumption is that all these other readers can’t be wrong; but the theory of rational herds suggests that only the first few of those readers made an informed decision. Everybody else was relying on the early adopters.

Yet rational herds can quickly change their minds. Everybody knows that the early movers effectively decided the behaviour of the entire herd, because nobody who came later felt confident enough to depart from their decision. That means that if a single commentator did his homework and felt confident enough to dissent, all future professors, book-buyers or office workers would feel similarly confident in following that lead. Just one FT columnist could correct a long-standing myth – if he did his homework properly. SorryFirst published at ft..com.

Hands up if you hate Bono

My colleague Gideon Rachman wants to know what you think of Bono. He’s not a fan. I think Gideon’s being harsh. Of course, Bono is no Tom Waits. But then, neither is Gideon.

7th of September, 2007MarginaliaComments off

Performance Related Pay

Dear Economist,

My boss swears that compensation in our corporation is based upon pay-for-performance. Is that an economic reality?

Bob, Texas

Answer at ft.com, subscription free.

1st of September, 2007Dear EconomistComments off
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