Tim Harford The Undercover Economist

Articles published in August, 2008

Is it wise to marry a career woman?

I remember reading that men shouldn’t marry career women because such wives were more likely to have affairs and/or seek divorce. Is this based on research? Not that I am facing an imminent choice of marriage partner.
Eligible Bachelor, London

Dear Eligible Bachelor,

You may be thinking of an article in Forbes, published two years ago, which caused a stir by summarising academic research suggesting that professional women are “more likely to get divorced, more likely to cheat and less likely to have children”.

Tone aside, this makes sense. Children interrupt the careers of women more than of men, and so women with rewarding careers face a high opportunity cost when having children. And a woman whose husband turns out to be a pig will find it easier to leave him if she has an independent income.

However, research by Zvika Neeman and two other economists at Boston University suggests that career women have more stable marriages, in part because they marry late, and carefully.

Even if true, the Forbes piece is hardly a knockdown argument. Or if it is, one might equally counsel against an heiress (too independent) or a beauty (too many admirers).

In any case, remember this is the 21st century. You say you have no imminent prospects of marriage. I am not surprised.

Also published at ft.com.

30th of August, 2008Dear EconomistComments off

Logic tells us we’re Simpsons not Spocks

While marketers and psychologists have long known that you can fool all of the people some of the time and some of the people all of the time, it has taken economic theory a little while to catch up with the idea. Most economic models are populated by decision-makers who have more in common with the cool-headed logician Mr Spock than the impulsive and self-destructive Homer Simpson.

There are good reasons for that. The main argument of my last book was that Spockish behaviour is far more common than most of us appreciate. But unSpockish behaviour certainly exists. Popular discussions of economic psychology tend to start and end with that observation. Yet there is much more to be said, and many economists are now exploring the real-world implications of different brands of unSpockishness.

One useful distinction is between the kind of irrational behaviour so often displayed by Homer Simpson, and that displayed by Odysseus. When Odysseus ordered his sailors to tie him to the mast, it was because he knew that he was weak-willed and would be tempted to his doom by the song of the Sirens. Homer Simpson is also weak-willed, but he lacks the foresight to do anything about it. (Classicists will recall that Odysseus was forewarned by Circe, but Homer is often forewarned by his wife Marge, to no avail.)

Odysseus is sophisticated but “time-inconsistent” – a term that means his preferences change when temptation rears its head. Homer Simpson is both time-inconsistent and naive.

Imagine – I realise this sounds like some bizarre joke – how Mr Spock, Odysseus and Homer Simpson would go about applying for membership of a gym. Spock would choose a suitable contract – a costly payment per visit, or an annual flat-fee for unlimited visits – after correctly forecasting his gym usage. Simpson, wrongly expecting that he would use the gym a lot, would sign up for the expensive annual membership. Odysseus might also choose the annual membership, but for a different reason: he would hope that the “all-the-iron-you-can-pump” contract might provoke him to exercise, despite the foreseeable temptation to stay in bed.

Even if Odysseus and Homer did both choose the same contract, the distinction between them as men still matters. The economists Ulrike Malmendier and Stefano DellaVigna have shown that a government regulator cannot make Odysseus better off. Odysseus will be able to exercise as much as Spock, and for the same price, but will do so by cleverly planning ahead and choosing the contract that will prompt him to do so.

Homer, by contrast, will pay too much and exercise too little, which means that in principle a sufficiently wise and benevolent regulator could save him from himself. Even a clumsy regulator might help Homer by yelling at him not to be an idiot.

The Spocks, Simpsons and Odysseuses of the world face many strange contracts. DellaVigna and Malmendier – whose most famous research paper is titled “Paying Not to Go to the Gym” – have taken inspiration from trying to spot and decipher them. We are all familiar with the odd practice of offering annual gym memberships – and with the naive Homer Simpsons who sign up for them anyway. Subscriptions to worthy magazines and to sophisticated film rental clubs fit much the same mould. In each case, customers are likely to struggle to “consume” as much as they intended, and so prices are front-loaded.

But products priced the other way around are probably more common: credit cards offer “teaser” rates, while customers who sign up for a mobile-phone contract pay nothing for their expensive phone. The companies who offer such contracts expect that customers will binge, consuming more than they expected. That is one reason why they fight with each other to sign up the customers in the first place – and the Homer Simpsons are the juiciest catches of all.

Also published at ft.com.

Is behavioural economics a big deal? Prospect debate

Not that much of a debate: Pete Lunn says it is a big deal, and I agree. (Prospect originally asked me to debate the proposition “Is behavioural economics a revolution?” and then changed the motion after the debate was finished…)

Still, we have plenty about which to disagree. An extract: Learn More

30th of August, 2008HighlightsOther WritingComments off

Business Life: The bidder’s curse

Armed with a jar full of coins and an attentive audience, economists have long known a reliable way to raise some beer money: offer to give the coins – or their cash value in a more convenient form – to whoever bids the most for them. The winner will almost always overbid, often by a hefty margin.
This isn’t because human beings are naturally incompetent at the task of guessing the number of coins in a jar. Most people do it rather well, and the average bid is usually a bit lower than the value of the prize. Fortunately for the auctioneer, auctions do not close with the average bid, but when all but one bidder has given up. It only takes a couple of mistaken bidders to generate a fat profit for the seller.
Economists call this “the winner’s curse”. It was discovered by three rueful petroleum engineers who had observed the tendency of oil companies to overbid for licences to drill in Alaska in the 1960s.
The winner’s curse is nothing to do with getting carried away in the heat of the moment. It simply reflects the fact that when a prize’s true value is unknown – be it a commercial property, an oil licence or a jar of coins – most bidders do not adjust for the fact that auctions select whoever has the most optimistic estimate.
Of course, getting carried away is also a risk of bidding in an auction, and thanks to a curious feature of the online auction site, eBay, it is now possible to catch people in the act of doing just that. Because eBay allows sellers to make fixed price, take-it-or-leave-it offers as well as to auction products, there is a clear symptom of irrational exuberance: whenever an auction bidder offers to pay more than he could have got through a simple search on the same website, he is clearly getting over-excited.
The economists Young Han Lee and Ulrike Malmendier recently realised this and decided to look closely at eBay auctions of a particular product, a popular board game. Over-exuberant bidding was astonishingly common: in nearly three quarters of cases they examined, the winning bidder paid more (after shipping) than he could have paid in a fixed-price sale. This is despite the fact that the quality of the auctioned goods was no higher and the reputation of the auction sellers was typically lower.
Most bidders, admittedly, were much more sensible. A small minority were responsible for bidding up the auction prices to irrational levels; that, happily for the sellers, was all that was needed.

First published, Business Life Magazine, May 2008

29th of August, 2008Other WritingComments off

What will the Olympics ever do for us?

At tomorrow’s closing ceremony, the Olympic flag will be handed over to London; the next Olympic Games are to be hosted just down the road from the Undercover Economist. Should we east Londoners expect great things?

A wonderful sporting spectacle is assured, but that will be available to anyone with a television or a tourist visa. Not that the world necessarily queues outside the Olympic stadium: fewer people visited Barcelona in 1992, its Olympic year, than in 1991.

If a sporting spectacle was all that was promised, the games would be an unproblematic affair. The Los Angeles games in 1984 focused on the sport, using existing facilities and renting student dorms instead of building an athletes’ village. It turned a huge profit.

Yet few Olympics since then have followed that model. Most aim to leave a legacy, and it is there that the prospects look a bit shakier.

One possibility – emphasised by Lord Coe, the chairman of London 2012’s organising committee – is that the Olympics inspire the nation to spend less time in its collective armchair. No doubt that will happen, but whether the money might have been better spent on grassroots sports (or, indeed, paying off the national debt) is unclear.

Two economists, Stefan Szymanski of City University and Georgios Kavetsos of Imperial College, London, recently surveyed more than 750 managers of sports facilities across the UK, and found that while they were generally bullish about the power of the 2012 Olympics to inspire people to take up sport, almost half of them expected no effect or a negative effect at their own facilities. It seems that while it is easy to be impressed by an abstract feelgood factor, it is harder to pin down specific benefits. Tomorrow’s Olympians may be inspired by today’s, but casual exercise is inspired by easy access to decent local facilities – the sort of local facilities that may be squeezed out by Olympic spending.

Beyond the sporting legacy, there is the much-vaunted economic regeneration of east London. Such regeneration will, of course, do nothing to help Cornwall or Belfast, but that is a red herring. Most government projects are local, and many are paid for by tax revenue from London. Frankly, it’s our turn.

The more important question is whether the area’s regeneration will prove a wise investment or a waste. Time will tell, since government regeneration projects can work well, or badly.

The regeneration plans are uncontroversial enough. London needs more houses. Better transport links in London are long overdue – although Stratford, the Olympic site, is already very well connected to Europe’s richest job market. What divides Stratford from the City will not be bridged by adding a few trains.

But this is nothing to do with the Olympics. Why are the games supposed to have some magical regenerative effect? More likely, the regeneration will be rushed to meet games-related deadlines, while the games will shift bureaucratic priorities in favour of east London. That is hardly helpful.

The only advantage in bundling the games with a regeneration project is that expectations of regeneration can become self-fulfilling. Any serious urban rebirth is going to be built on private housing and private business. In part that is a confidence trick: if everyone expects regeneration to happen, it will. And perhaps, just perhaps, the lustre of the games can create confidence where government proposals merely to spend a few billion pounds will not.

Regenerating east London is thoroughly worthwhile – if only we could work out how to do it. But as far as the games are concerned, why all the fuss? One wise Olympic official complained of the “exaggerated expenses” incurred in staging them, reminding us that “temporary structures would fully suffice”. That was Pierre de Courbertin, founder of the modern Olympics, writing in 1911.

Also published at ft.com, subscription free.

Nudges are for markets not nations

There is no idea so good that it cannot be spoilt by politicians, and such a fate is now befalling libertarian paternalism – recently rebranded as “nudging”. Libertarian paternalism is a conscious effort to help people make better choices without forbidding anything. It embraces anything from assuming that you would like to contribute to a company pension unless you say otherwise, to placing the doughnuts in a quieter corner of the supermarket.

The concept, courtesy of two US professors, Richard Thaler and Cass Sunstein, deserves attention because it is a thoughtful response to a deep policy problem. It has been seized instead by David Cameron’s opposition Conservative party in the UK as a free lunch, sound bite and flag of convenience all rolled into one. Learn More

27th of August, 2008HighlightsOther WritingComments off

When should a July-born child start school?

My four-year-old son has a July birthday, which would make him one of the youngest in his class at school. I am thinking of keeping him back a year so that when he does start school, he’ll be bigger and more confident. Is this a good idea?
Sarah Goldberg, by e-mail

Dear Sarah,

Other parents think it is. The economists David Deming and Susan Dynarski have found that the percentage of six-year-olds not yet registered at school has quadrupled in the US over the past 40 years, largely because parents are holding back their children.

Being older seems to convey lasting benefits in sports: an unusual number of international footballers are old for their year, for instance. That is surely because the older children are more likely to be selected for the most competitive games with the best coaches. Academic streaming may create a similar effect.

An influential piece of research, from Kelly Bedard and Elizabeth Dhuey (also economists), found that the oldest in the class tended to do better not just when five or six but even as college students.

Not every study agrees, and Deming and Dynarski also point out that starting school late has its costs. Still, one thing is certain: since your boy has a mother who is fussing about this sort of stuff, he’s going to do fine no matter what.

Also published at ft.com, subscription free.

27th of August, 2008Dear EconomistComments off

Why are friends such plonkers about fine wine?

As a wine evangelist, I always bring a bottle of something really decent whenever I visit friends. The trouble is, their thanks rarely reflect my expenditure. Should I make more of a fuss about the cost of fine wine, or just bring plonk?
Gabriel Elliott, London

Dear Gabriel,

Either plan would work just fine. Several pieces of research by wine critics and “neuro-economists” have found that most wine drinkers pay more attention to price than they do to taste.

Research published by the Journal of Wine Economics shows that inexpert wine drinkers actually prefer cheap wine in a blind tasting. More skilled oenophiles do prefer pricier booze, but only a little. That suggests you should buy plonk with a nice label and a clear conscience.

The alternative is to point out the expense of the wine. This is crass, but should encourage people to rate it more highly.

Or you could bring plonk but claim it is expensive wine. The “neuro-economist” Antonio Rangel has found people enjoy wine more if they are told (truthfully or otherwise) it is expensive. Not only do they rate the wine more highly, but their brains seem to process the experience differently.

Your friends probably can’t tell the difference between expensive and cheap wine. Exploit that information as you wish.

Also published at ft.com, subscription free.

16th of August, 2008Dear EconomistComments off

Harvesting the fruits of your labourers

For many business owners, getting the most out of staff is a perennial problem. In the case of fruit farmers, perhaps perennial is the wrong word: workers show up only for the summer harvest. In a couple of weeks they will be heading home, usually to a university course somewhere in eastern Europe.

Tough work for the fruit pickers, the business is also a headache for the owner, who must offer a pay scheme that both satisfies minimum wage laws and motivates workers in an industry in which slacking is an understandable temptation.

The owner of a large fruit farm business, “Farmer Smith”, was pondering the problem one Christmas, when he discovered that the connection between pay and performance was also an area where economists were scratching around for solid evidence.

And so an unlikely alliance was formed between Farmer Smith and the economists Oriana Bandiera, Iwan Barankay and Imran Rasul. The economists would design and administer pay schemes, and in exchange for that (and for confidentiality) Farmer Smith would let them treat his business as a gigantic laboratory for researching the nexus between pay, workplace friendships (which they mapped out) and workers’ productivity.

The owner had been paying a piece rate – a rate per kilogram of fruit – but also needed to ensure that whether pickers spent the day on a bountiful field or a sparse one, their wages didn’t fall below the legal hourly minimum. The owner tried to adjust the piece rate each day so that it was always adequate, but never generous: the more the workforce picked, the lower the piece rate. But his workers were outwitting him by keeping an eye on each other, making sure nobody picked too quickly, and thus collectively slowing down and cranking up the piece rate.

Bandiera and her colleagues proposed a different way of adjusting the piece rate – one that workers could not influence with a collective go-slow – and measured the result. By the time the experiment was over, Farmer Smith’s initial scepticism had long evaporated: the new pay scheme increased productivity (kilograms of fruit per worker per hour) by about 50 per cent.

The next summer, the researchers turned their attention to incentives for low-level managers, who would also be temporary immigrant workers, but who would be responsible for on-the-spot decisions such as which workers were assigned to which row. The researchers found that managers tended to do their friends favours by assigning them the easiest rows. This made life comfortable for insiders, but was unproductive, since the most efficient assignment for fruit picking is for the best workers to get the best rows.

The researchers responded by linking managers’ pay to the daily harvest. The result was that managers started favouring the best workers, rather than their own friends, and productivity rose by another 20 per cent.

Small wonder that the economists were invited back for another summer. They proposed a “tournament” scheme in which workers were allowed to sort themselves into teams. Initially, friends tended to group themselves together, but as the economists began to publish league tables, and then hand out prizes to the most productive teams, that changed. Again, workers prioritised money over social ties, abandoning groups of friends to ally themselves with the most productive co-workers who would accept them. In practice that meant that the fastest workers clustered together, and again, productivity soared – by yet another 20 per cent.

The series of experiments provided a fascinating confirmation that financial incentives can trump social networks, with some precision and much detail about the mechanisms involved. Bandiera and her colleagues have now stopped the experiments, in the belief that there is nothing more to be gained from this particular seam of inquiry. The owner does not seem to agree: he’s hired a consultant to keep on hatching new performance pay schemes.

Also published at ft.com, subscription free.

Should she have danced all night, or sat down

While at a recent Elton John concert, I observed a heated altercation between two ladies. The younger lady wanted to stand up, dance and sing along with Elton. The older lady, seated directly behind her, wanted to stay seated, watch the band and enjoy the music. The older lady asked the younger to sit down, but was told that she should also stand up and dance. An argument quickly broke out. Any thoughts on how they might have resolved the conflict without swinging handbags?
David Walker

Dear David,

I blame Elton John himself, since he apparently did not clearly define property rights, contrary to the recommendations of the great economist Ronald Coase.

Should a concert seat come bundled with the right to get up and dance, the older woman could have offered to pay her tormentor to sit down. Conversely, should a seat come bundled with the right to an unobstructed view, it would have been the younger woman offering the bribe. Either way, the dance would have continued only if the dancer’s enjoyment outweighed its victim’s frustration. Perhaps the bargaining might also have involved swapping seats?

Sadly, with no clear property rights, there was no basis for a deal. No wonder the night turned out to be all right for fighting.

Also published at ft.com, subscription free.

9th of August, 2008Dear EconomistComments off
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