Articles published in January, 2008

I have a piece up at Forbes in part inspired by chapter 8 of “The Logic of Life”. It asks why governments are so determined to back losers rather than winners in industrial policy:

There’s a more sinister logic behind the pattern of government favoritism. Namely, firms in emerging, competitive industries have virtually no incentive to lobby for government hand-outs, while firms in aging, shrinking industries have the most to gain. Read the rest of this entry »

First published in Business Life magazine, September 2007

It’s been a long time since the heady days of the late 1990s, when email was enough of a novelty to carry the plot of a romantic comedy. How times have changed: email is now an essential business tool. It is also the source of frustration and controversy. Does email actually make us more productive?
It’s not obvious that it does. First, there is the avalanche of emails offering penis enlargements, stock tips and the odd million dollars from Nigeria. Then – and probably more of a waste of time – there are the interminable work discussions into which you’ve somehow been copied. They’re useless and yet you feel you can’t afford to ignore them. Finally there are the clumsy, slowly-typed miscommunications that could have been handled quickly and more smoothly face-to-face. It is all worth it?
Marshall Van Alstyne, an economist at Boston University, thinks he may have an answer. Van Alstyne and various colleagues have been conducting research based on extremely detailed data from an executive recruitment firm – including 125,000 email messages sent and received over a period of ten months. Rather than looking at simple correlations, such as “does more email mean more work gets done?”, the researchers are looking at the pattern of email networks and the completion of specific tasks.
The first surprise is that an email exchange is often more productive than a conversation, because email helps people to juggle many different tasks. That seems to be because a conversation demands that two people are focussing on the same thing at the same time. Sure, you can do your nails while talking on the phone, but beyond that you need to drop what you’re doing and surrender to someone else’s priorities. Email doesn’t make that demand: the recipient can read it when the time is right.
The second surprise is that email’s real value doesn’t seem to be in communicating with Tokyo or even with someone on the other side of London. The most productive workers are not the ones who send the most email or whose external networks are the largest: they are the ones with the largest email network inside the same firm.
It’s ironic: we are always complaining that our colleagues send us an email rather than walking ten yards and talking to us. Yet it turns out that this apparently-frustrating behaviour is precisely the most productive way to use email. Sometimes common sense and economic sense don’t point the same way.

I was due to appear at The Gladstone Hotel Gallery, 1214 Queen St West, Toronto Thurs Jan 31; 7:30 pm (doors 7pm), but sadly not. The event is cancelled and I’m very sorry about this. I’ve been routed back to New York to do TV there instead & will arrive in Toronto too late for the planned event. I apologise.

While I have been on tour, my UK publishers decided to publish “The Logic of Life” early and not tell me. Do please consider buying a copy.

First published in Waterstones Book Quarterly

Life often seems to defy logic. When a prostitute agrees to unprotected sex, or a teenage criminal embarks on a burglary, or a heavy drinker downs another whiskey, we seem to be a million miles from rational behaviour. None of it makes any sense – or does it?
Using some remarkably clever techniques and imaginative perspectives, a bold new breed of economists is busily demonstrating that life makes more sense than anyone would have thought. Using every clue that comes to hand, from a laboratory brain scan to the hidden patterns in old maps, they are discovering that there is a surprisingly rational basis to the seemingly irrational world around us. Read the rest of this entry »

Dear Economist,
I am perplexed by the enormous publicity devoted to the subprime debacle while micro-credit lenders have been showered with praise. Isn’t Countrywide just a micro-credit lender for the US, except that people are borrowing for homes rather than bullocks? And why are borrowers in developing countries so much better at repaying their loans?
Bombay Beauty

Dear Bombay Beauty,

No problem explaining why it is easier to repay a microfinance loan: the loans are a lot smaller. Beyond that, you have a point. Microfinance loans, like subprime loans, target poor clients in underserved communities, and charge high interest rates.

The economist Dean Karlan argues that the difference is largely about spin. We hear about the far-away people whose lives have been transformed by microfinance, and we hear about the subprime defaulters whose lives are in a mess. But Karlan points out that micro-credit borrowers do default, and that subprime default rates are much lower than you would think. And while some subprime borrowers were duped by complicated loan terms, financial literacy is even worse in developing countries.

Karlan also argues that micro-credit “group liability” schemes are overrated. In such a scheme, friends and neighbours have to make up the shortfall if someone can’t pay. But an experiment carried out by Karlan showed that such schemes put off borrowers without increasing repayment rates.

None of this is to condemn microfinance. Rather, it is worth remembering that poor people can benefit from access to credit, even if the credit is expensive – and even if they live in the US.

Also published at ft.com.

Iowa and New Hampshire are tiny states, and they have too few electoral college votes to exert much direct influence over who runs for president. Yet everybody agrees that their indirect influence is vast. The Republican hopeful Mitt Romney was all but written off after failing to win in either state (although Michigan has given him a sudden resurrection); Democratic contender Hillary Clinton went from favourite to also-ran to favourite again after losing the Iowa caucus and then winning the New Hampshire primary. Does it make any sense that such tiny states largely determine the candidates’ fortunes, or does it simply indicate that voters are acting like sheep?

That question poses a false dilemma. Yes, voters are acting like sheep. But, yes, it all makes perfect sense. There are two good reasons why early success matters.

The first is that many donors want to back the winning candidate, whoever that is. Certainly, some donors are true believers, but many others also care about being on the winning side.

“I just got a call from a donor,” one leading Clinton fundraiser told the Financial Times, moments after her unexpected victory in New Hampshire. “If she’d lost, I would not have received the call.”

There’s a parallel here between the emergence of frontrunning candidates and the emergence of new technology standards. (The most recent example is the battle for survival between two high-definition video standards; Sony’s Blu-ray looks like it’s beating Toshiba’s HD DVD.) Most customers don’t care which one triumphs; they just don’t want to be left holding an obsolete format. This is why format wars are miserable for the industry: they encourage customers to stop buying until the fog clears.

Donors who want to back the eventual presidential winner have an easier time. The results from New Hampshire and Iowa often tell them which way to jump. Even if those results are flukes, the donors merely need all to jump in the same direction. That may not be pretty but neither is it irrational.

But voters also matter, which is the second reason early success is important. According to one estimate from economists Brian Knight and Nathan Schiff – who looked at how opinion polls in late-voting states respond to early results – the early voters in US elections each have up to 20 times as much influence as those in later voting states.

That sounds like the later voters are being irrationally passive; it’s passive, yes, but I’m not so sure that it is irrational. The US has such a huge electorate that an individual voter has no influence over the result.

People join in because it’s fun or they feel a sense of duty, but that doesn’t mean they work hard to understand the issues. One would hardly expect the typical voter to scrutinise manifestos as assiduously as a copy of What Hi-Fi? Voting for the wrong candidate will not change the result, but buying the wrong hi-fi would hurt.

So votes cast in Iowa and New Hampshire each carry up to 20 times more weight than elsewhere – and the electoral process seems so much more fun there. Voters go on outings with friends and family, meet the candidates and hear them speak, and in general enjoy personalised politics.

They have a reason to do their homework.

And that’s the implicit deal: America says to Iowa and New Hampshire, “If you do the hard work of deciding for us, we’ll promise to follow where you lead, and the politicians promise to put on a really good show.”

What could make more sense than that? If only the small states could agree to take turns as to who’d be first, the US would have a pretty good electoral system.

Also published at ft.com.

The New York Times has reviewed The Logic of Life. I’m pleased:

The world is a crazy place. It makes perfect sense only to conspiracy theorists and economists of a certain stripe. Tim Harford, a columnist for The Financial Times and the author of “The Undercover Economist,” is one of these, a devotee of rational-choice theory, which he applies ingeniously and entertainingly to all kinds of problems in “The Logic of Life.”…
Mr. Harford has a knack for explaining economic principles and problems in plain language and, even better, for making them fun.

You can read other reviews here.

Feature story, FT Magazine, 26 January 2008

In 1737, John Harrison, a self-taught clockmaker from Yorkshire, stunned London’s scientific establishment by presenting an idiosyncratic solution to the most important and notorious technological problem of the 18th century. He was hoping to win a then-fabulous prize of £20,000 (about £5m today) for anyone who could devise a way for a ship’s navigator to determine its longitude and therefore its position at sea. Harrison’s approach was to build a clock that would keep Greenwich time faithfully; by comparing local time (measured using the position of the sun) with the time in London, the navigator would know how far east or west the ship had sailed. The theory was sound, but given the rolling of ships and changing temperature and humidity, the leading scientists of the day – including Sir Isaac Newton – reckoned that a sufficiently accurate clock would be impossible to build. Harrison proved otherwise.

The longitude prize, sponsored by the British government, was not unique. Prizes were also offered in France for a functional water turbine, and for a method of preserving food for Napoleon’s armies. The latter prize quickly inspired the tin can, more of a blessing than food snobs might acknowledge.

But such prizes then fell out of fashion. For commercial innovations, we now rely on patents to encourage and protect innovators. Basic research is funded not by prizes but by grants.

And yet two centuries after tinned fish hit the market, the way we look for solutions has come full circle. Governments, private foundations and even corporations are rediscovering the value of offering prizes for good ideas. Rather than paying for scientific and engineering effort as they have done for the past 200 years, idea-hungry patrons are returning to the 18th century, and paying for results. Read the rest of this entry »

The Times (London) has published two nice extracts from the Logic of Life, plus me reading from the book. Read the rest of this entry »

Over the next few weeks I’ll be touring the US, Canada, Ireland, Singapore, Australia and New Zealand, and will also be giving talks in several UK cities. Please drop in and say hello! Public events, many of them free, are now listed here.

Update: More talks added in Washington DC, Wellington and Singapore.

As a columnist (which is fancy for “journalist in jammies”), I ought to personify the conventional wisdom that distance is dead: All I need to get my work done is a place to perch and a Wi-Fi signal. But if that’s true, why do I still live in London, the second-most expensive city in the world? Read the rest of this entry »

Feng shui is all very well, but the next time you decide to redesign the layout of your office space you might consider calling an economist. That’s because an astonishing new set of data from Google – where else? – has allowed economists to track something that had been utterly ethereal: the flow of information around a physical office space.

The data come from Google’s trials of something called an internal prediction market. Prediction markets are most famously used to forecast presidential elections. If Barack Obama is trading at 35 cents on the Democratic nomination market, that is what punters are willing to pay for a ticket that will pay a dollar if and only if he wins the nomination. In that case the market is giving Obama a 35 per cent chance.

Prediction markets aren’t perfect, but they often beat alternative forecasting mechanisms. That is why some companies have started to experiment with them by asking their own employees to bet on sales and revenue figures – the alternative being to rely on the bureaucracy’s own forecasts, which are often made by people with a vested interest in sitting on bad news.

Google is not the first to try: according to Bo Cowgill, of Google’s economics group, and academic economists Eric Zitzewitz and Justin Wolfers, other pioneers include ArcelorMittal, Chrysler, Eli Lilly, General Electric and Hewlett Packard.

The markets seem to work quite well. But that is not the most interesting thing to emerge from the analysis by Cowgill and his co-authors. By looking at which Google employees trade in which markets (betting on, for instance, how many users Google’s Gmail service will attract by the end of the quarter) and on which side of the trade, they have a good idea about who has what information. And by looking at who else makes similar trades, they can draw conclusions about who has similar information at similar times.

If this was an ordinary company, the researchers might try to correlate information with the organisation chart, and that would be about all there was to say. But this is Google. Cowgill, Zitzewitz and Wolfers had the precise GPS location of each desk (Google offices are open-plan). They had information about which employees were on the same e-mail listings, such as the poker group. From a survey, they had a list of each employee’s friends. They knew which bosses they worked for, which projects they worked on, and where they went to college. All they lacked were the names of the employees, which were stripped out of the database.

The results were striking. Clear correlations existed between the trading behaviour of certain groups of employees. But they were not explained by shared interests or by social connections. Having the same immediate boss only explains a little about information flows.

No, it is the office layout that matters: people who sit near each other tend to know the same things, as evidenced by making similar trades on the prediction markets. Social and professional proximity matters very little for the flow of information: physical proximity is almost everything.

Specialists in organisational behaviour have known for a while that people tend to interact much more with those who sit nearby, but it has never been clear whether that was just social grooming. Now we know that real information is flowing.

We keep being told that because of cheap, ubiquitous communication technology, distance is dead. But if there was ever a company that we should expect to exemplify that idea, surely it was Google. This research suggests that it is as important as ever to be sitting in the right place.

Also published at ft.com.

Dear Economist,
I frequently extract large sums of money from Bozzer, my flatmate, in our regular poker game. He’s convinced variance is to blame for his losses; in truth, however, he’s simply terrible – and I’m simply delighted with my new watch. Am I right to exploit him in this way?
R. Casablanca

Dear Mr Casablanca,

Unless you are holding poor Bozzer’s family hostage in the basement, this is a voluntary transaction between consenting adults. Presumably, he knows that he is losing money, even if he is not smart enough to work out why. And poker is lots of fun: even if he recognises that he is outclassed and the game is costing him, it may still be worth his while. After all, no customer makes a profit from going to the cinema either, but we rarely worry about that.

On that basis you have no case to answer.

However, I cannot wholeheartedly give you the absolution you seem to be seeking. You must first establish whether Bozzer is a poker addict. I’ll spare you the technical details – let’s just say that they probably involve hyperbolic discounting – but I can recommend an approach for dealing with a rational addict. If, away from the card table, Bozzer says that he wishes he could quit the poker habit, you must help to discourage him. Perhaps you could enlist a third party to hold on to cheques from the pair of you. She would post the money to a charity if you are ever caught gambling together.

I must also warn you that things may not be as they seem. Is Bozzer, perhaps, playing the long game?

If one evening he suggests raising the stakes, beware.

You think he’s the “fish” – but he may be reeling you in.

Also published on ft.com.

Slate is publishing two excerpts from “The Logic of Life“. Here’s the second one:

Perhaps a more positive way to express the trend is that women’s entry into high-powered careers has given them the option to get divorced if the marriage isn’t working out; and the recognition that that option is important is one of the factors encouraging women’s entry into high-powered careers.
That may sound a little abstract, but economists Betsey Stevenson and Justin Wolfers discovered a chilling example of the way that the increased availability of divorce empowered women. Read the rest of this entry »

Slate is publishing two excerpts from “The Logic of Life“. Here’s the first one:

Ever since John von Neumann’s game theory promised to help us understand love and marriage, economists have been interested in how people choose their partners and how relationships work. Read the rest of this entry »

In late February I am visiting Singapore, Australia and New Zealand to talk about “The Logic of Life”. Here are some of the Australian events. Further details to follow as I have them:

PERTH Friday 22 February

Read the rest of this entry »

Dear Economist,
I feel guilty because I paid £200 to co-host a birthday party for my five-year-old with another mother, but got at least £300 of gifts in return. As a guest, I don’t like these parties because you take two gifts in return for only one party bag. But co-hosting is surely a rational thing because you pay half and get a full complement of presents?
South London Mum

Dear SLM,

Congratulations on your move to more efficient birthday parties. It seems to be a happy accident, since you have failed to realise the true scarce resource here. It is not doggy bags or disposable toys, but time. By hosting a joint party with a friend, you are saving time for many parents who would have had to attend two such parties in quick succession. The children may feel hard done by, but then again they may not. Even five-year-olds do not want a party every day.

As for making a profit on these parties, an economist understands that gifts need not be exchanged instantly and with exact accounting for value. You hosted a profitable party but feel exploited when others reciprocate – perhaps you should see these events as two sides of the same coin. It will not take long before these profits and losses even out. Surely the credit crunch is not so severe that you cannot wait a month or two for a return on your gift giving?

As for the party bags, they are truly immoral: to quell your feelings of guilt, you dose up other people’s children with sugar and additives. Is this a generous act, or a craven one? I commend your move to halve the supply of party bags; my only complaint is that you have not eliminated them altogether.

Also published at ft.com.

Roughly five years after internet users caught on, the bookshops are suddenly full of books about the user-generated content that “Web 2.0” makes possible: the blogs, Wikipedia, Facebook and the rest. Well, you can forget them, because easily the world’s most profitable enabler of user-generated content opened the doors of its first superstore 50 years ago, in Almhult, Sweden.

It is now hard to imagine life without Ikea. A folk statistic would have you believe that one in 10 Europeans is conceived in an Ikea bed. But isn’t it pushing it a little to compare Ikea to Facebook?

I’ll admit that the similarities are not apparent at first sight. But a defining idea behind Wikipedia, Facebook and blogging platforms such as Wordpress is that if you give people the right tools, they’ll use them to create wonderful things in collaboration with each other or with the organisation that provides the catalyst.

Ikea’s success is not so very different. Ikea keeps its costs and prices low by enlisting its customers – their time, their cars, their ambitions as interior designers, and their inflated ideas of their carpentry skills.

The management experts Rafael Ramirez and Richard Normann pointed this out in the Harvard Business Review back in 1993. Ikea, they argued, was a success because it enabled “value co-production”. This infelicitous term partly refers to offering consumers a discount to build their own furniture. But it means much more: Ikea recruited its customers to the idea that they could not only put up shelves but they could design their own stylish living spaces, equipping them with tape measures and printing almost 200 million catalogues that also serve as design manuals. It also devoted huge energies to helping its suppliers and designers play their part, rather than passively buying what these people offered and then re-selling it.

We all know that the formula works. But most successful formulas are easy to copy; this one is not, and that is the genius of it. In many ways Ikea seems to be offering yesterday’s business model: surely we have less time than we did 20 years ago, while having more money to spend on our homes. When a typical London home costs £300,000, why are cheap sofas to put in it still such a tempting offering?

Yet Ikea continues to thrive, proving how hard it is for competitors to muscle in on a business that has placed itself at the centre of a web of economic actors, all striving for the same goal: a funky sitting room for Steve and Alice from Croydon.

Not many technology companies have succeeded in mobilising an army of “value co-producers” in the same way. Microsoft is the most important exception, creating a platform that supports – and is supported by – the efforts of countless other software companies. Games console manufacturers live or die with the companies that produce the games. And eBay is an old-school dotcom company that has created a near-unassailable position: the buyers go there because the sellers go there, and vice versa.

Such a market position brings inevitable temptation to exploit it. Microsoft’s tangles with the competition authorities are notorious. Facebook’s new advertising system, “Beacon”, tells your friends about commercial sites you’ve visited; the project triggered a mini-rebellion among Facebook users. Ikea is an old hand at herding customers through a labyrinthine store layout. Customers don’t like it but lacking a good enough alternative, we tolerate it.

Or we tolerate it up to a point. My love affair with Facebook was brief and bland. And Ikea? Let’s just say that my children were not conceived in an Ikea bed, and leave it at that.

Also published at ft.com. 

Late last year, Neill Denny of The Bookseller wrote a nice profile of me. You can read it all if you’d like, or here is an extract:

“Rational choice theory is the way most economists see the world; the interesting bit is when they use that and they say: ‘Let’s talk about drugs, let’s talk about marriage’, in the same way that they would talk about buying a cup of coffee,”he says.

The chapters have alluring titles such as “The Dangers of Rational Racism”and “Is Divorce Under-rated?”Each is pretty self-contained, stuffed full of some big ideas, but they link together to form an overall whole.

At long last, the moment has arrived. The Logic of Life should be available in bookshops across the US and Canada with a few days, and shipping from online retailers. The book tour starts next week – wish me luck! You can also order it here, read early reviews here, and find out more here.

The aid industry faces a dilemma. On the one hand, countries are more likely to grow rich if their citizens are provided with some important basics, such as a legal system that works, or protection from corrupt officials. Such basics might seem the priority for aid money. On the other hand, it is much easier to measure success in simpler projects, such as building roads and laying pipes.

If development agencies focus on pouring concrete, they may be spending money on infrastructure that will never be used – and perhaps never even be built – because of corruption in the background. But if they focus on the broader stuff – democracy, corruption, human rights – they risk trying to do everything and achieving nothing. William Easterly, the World Bank’s most prominent apostate, argues that development agencies love big agendas because their contribution cannot be measured and found wanting. It is a bitterly cynical view, but that doesn’t mean he’s wrong.

I once gave a talk to a delegation of Danish students in which I advocated careful measurement of results, on the grounds that a lot of development spending is faddy and based on sketchy evidence. The Danes replied that their government concentrated on promoting democracy. “That sounds good,’’ I said. “Does it work?’’ They didn’t know. Nor do I.

But some young economists are changing the terms of this debate.

They argue that it may be possible both to focus on broad issues such as corruption, and at the same time measure results very rigorously with a randomised trial – the sort that would be used to test a new medical drug.

Esther Duflo, a French economics professor at MIT, wondered whether there was anything that could be done about absentee teachers in rural India, which is a large problem for remote schoolhouses with a single teacher. Duflo and her colleague Rema Hanna took a sample of 120 schools in Rajasthan, chose 60 at random, and sent cameras to teachers in the chosen schools. The cameras had tamper-proof date and time stamps, and the teachers were asked to get a pupil to photograph the teacher with the class at the beginning and the end of each school day.

It was a simple idea, and it worked. Teacher absenteeism plummeted, as measured by random audits, and the class test scores improved markedly.

Another young economist, Ben Olken of Harvard, used a similar randomisation technique to work out whether corruption in Indonesian road-building projects was best fought top-down, using audits, or bottom-up, soliciting comments from local villagers about whether money was being embezzled. One challenge was to work out how much embezzlement was taking place. Olken enlisted engineers to take samples of the road’s structure and to estimate how much it should have cost to build; he compared that estimate with how much spending was claimed in the project’s accounts. The missing funds were a rough guide to the amount embezzled.

In contrast to Duflo’s results, Olken found that the bottom-up monitoring was not effective – it shifted the embezzlement from something the villagers cared about (wages) to something they did not (building materials). The threat of a guaranteed audit – a threat that was later carried out – was much more effective, reducing the estimates of missing funds by a third.

It should not be surprising that it took different approaches in different situations to reduce corruption. Economics development is a process full of special cases. All the more important, then, to discover that big goals can be addressed in little steps – and that it is possible to find out whether the little steps are steps in the right direction.

Also published at ft.com. 

Dear Economist,
In restaurants my husband always picks something better than me. It’s boring to choose the same as him. What can I do?
Sarah

Dear Sarah,

The behavioural economists Dan Ariely and Jonathan Levav speculated that we all tend, like you, to alter our choices to fit in with those around us – and they decided to put the theory to the test.

They came to an agreement with a local bar, dressed up as bar staff, and offered unsuspecting groups free samples from a choice of four tempting local beers. (One of the customers recognised Professor Ariely and assumed that his academic career had run aground.)

Sometimes the experimenters took the orders in conventional fashion; at other times, they made each person’s order confidential by asking them to write their desired beer on a piece of paper. After bringing the samples, Ariely and Levav noted how much the recipients had enjoyed their beers.

You will recognise your predicament in their results. First, when orders were called out publicly, people tended to avoid duplicating the choices of others. Second, that mattered: the people who chose first were significantly happier with their choices than those who felt obliged to choose whatever beer was left over. (This survey was done in the US. When transferred to Hong Kong, people instead tended to emulate the first choice. But, again, those who chose first were happier.)

The implication is obvious. You should make a mental note of what you wish to eat and not change your mind when your husband announces his selection. If that is too “boring’’, the solution is even simpler: order first.

Also published at ft.com.