Articles published in January, 2008

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.