Tim Harford The Undercover Economist

Articles published in January, 2008

Rewarding losers

The Logic of LifeI 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. Learn More

Business Life: Email

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.

29th of January, 2008Other WritingComments off

Toronto event cancelled

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.

29th of January, 2008MarginaliaComments off

UK edition of The Logic of Life is out

The Logic of LifeWhile 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.

29th of January, 2008MarginaliaComments off

Waterstones Book Quarterly: The Logic of Life

The Logic of LifeFirst 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. Learn More

Credit where credit’s due

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.

26th of January, 2008Dear EconomistComments off

First things first

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.

Logic of Life in the New York Times

The Logic of LifeThe 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.

25th of January, 2008MarginaliaComments off

Cash for answers

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. Learn More

The Logic of Life in the Times

The Times (London) has published two nice extracts from the Logic of Life, plus me reading from the book. Learn More

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