Tim Harford The Undercover Economist

Articles published in September, 2008

Business Life: Dysfunctional teams

First published: Business Life Magazine, June 2008

Any corporate mission statement will praise “teamwork” to the heavens. But teams packed with brilliant individuals can be staggeringly dysfunctional; that is something many of us suspect, and economists think they can measure.
Most team performance is hard to quantify, but professional sports teams are a different matter. Games are standardised and results are obvious. That may be why a curious little literature has sprung up on the economics of optimal play in sporting contests.
Economists have discovered that individual sportsmen and women play very well – not just the mechanics of executing a cover drive, but the strategic choices of serving to the forehand or backhand, striking a penalty to the left, right or straight on. Because these choices require a player to be unpredictable, while reckoning on his own strengths and the strengths of his opponent, the optimal strategy is surprisingly hard to calculate.
Nevertheless, economists Mark Walker and John Wooders studied the serve at Wimbledon, showing that Roger Federer, Maria Sharapova, and other top professionals are intuitive economists. More surprisingly, Ignacio-Palacios Huerta of the London School of Economics showed that the same was true of David Beckham and his peers at the penalty spot.
But teams do not seem to be able to tap into the same intuitive wisdom. V. Bhaskar, another economist, studied the declarations of cricket teams and concluded that they did not behave optimally. For example, both teams often agreed as to who should bat first; they couldn’t both have been right.
Meanwhile, Professor David Romer examined the decisions of American Football teams using an exhaustive analysis of play from three years’ worth of top-flight games. He found that teams were dramatically overcautious in a “fourth down” situation. At “fourth down” the team with the ball will usually kick it and win territory or points, while conceding possession. Romer showed that the riskier ploy of trying to retain possession was often a much better bet.
It is not clear why teams make bad decisions, but my guess is that the choice is muddied by wishing to avoid criticism, and trying to appease team-mates. Individual sportsmen focus only on winning.
Perhaps the current “teams are dumb, individuals are smart” consensus will be punctured by new research. Christopher Adams from – of all places – the US Federal Trade Commission, has published research arguing that NFL teams are smarter than Romer thinks. A group of management scientists based in Israel have argued that top goalkeepers would save more goals if they stood up rather than trying to guess which corner the striker would choose.
Nevertheless, for now, the economists’ view is that if you want a brilliant individual to do something stupid, you should simply put him in a team.

29th of September, 2008Other WritingComments off

When it comes to foreign workers, some ideas aren’t so crazy

Shortly after the Soviet Union collapsed, a Russian bureaucrat travelled to the west to seek advice on how the market system functioned. He asked the economist Paul Seabright to explain who was in charge of the supply of bread to London. He was astonished by the answer: “Nobody.”

Fifteen years later, I had thought that almost everyone had abandoned the notion that a committee could plan its way through the unimaginable complexities of an advanced economy. I was wrong.

Earlier this month, the Migration Advisory Committee presented a list of professions that would qualify migrants for entry, broadly on the grounds of UK skills shortages. They include geologists of all stripes, veterinary surgeons (but not other veterinarians), chefs (but only those paid £8.10 an hour), sheep shearers with a British Wool Marketing Board bronze medal (or equivalent) and ballet dancers (but not choreographers, nor other dancers).

At least the old Russian bureaucrat would have had an answer to the question, “Who is in charge of the supply of sheep shearers to the UK?” It is the Migration Advisory Committee.

Perhaps the previous patchwork of immigration restrictions was even worse. Yet nobody now thinks that a government-appointed committee, no matter how wise or diligent, could plan how many memory chips the UK should import, or how much beef, or how many copies of Jay-Z’s latest album. The exercise is no simpler when the imports are workers.

If anything, the opposite is true. Many products can be ordered, sight unseen, from a description (“512Mb, 184-pin DIMM, DDR PC3200 memory module”). But people are not commodities. Skilled workers are usually hired with the help of referees, a CV and an interview. A committee cannot predict if a particular hiring decision will make or break an enterprise. Nor would a government committee fancy admitting unqualified immigrants, no matter how remarkable – migrant equivalents of a young Richard Branson, Alan Sugar or John Prescott would not have made it in.

This is not an argument about what the limits on foreign workers should be; it is an argument about how laughable it is to rely on a centrally planned list of what sort of work foreigners should be allowed in to do.

Here’s a crazy alternative: the government could restrict immigration simply by auctioning the right to work in the UK. Permits would have various durations (a month, a year, in perpetuity). Citizens would get a free lifetime permit; non-EU residents would have to pay, or persuade their employers to pay. The price of the permits would depend on their scarcity, a decision that might just be within the competence of the state.

As well as allowing employers and migrants to decide for themselves whether they would get enough out of the match to justify the price of admission, the auction system would raise money to help pay for the public services migrants are so often blamed for clogging up.

It would have other advantages, too. Migration hawks would have a constructive way of expressing their xenophobia: they could buy permits and “retire” them, thus demonstrating that they really did value the absence of foreigners more than others valued what the foreigners had to offer. Citizens who wanted to leave could sell their permits on the way out.

Politically impossible, of course, and perhaps impractical, too. But it cannot possibly make less sense than that list. If nothing else, the high price of permits might remind those of us lucky enough to have been born in a wealthy country how fabulously privileged we are.

Also published at ft.com.

Do Olympic judges need a profit motive?

In the women’s individual gymnastic competition at the Olympics, there were a couple of controversies over scoring that experts believe cost the US gymnast a gold. The problem is that officials from the top countries cannot be judges if a citizen from their country is in the competition, so the remaining judges are from countries with no gymnastic tradition. Is there an efficient way to solve this problem?
Doney Joseph, Los Angeles, CA

Dear Doney,

In a sport whose entire aim is to win the approval of the judges, error is unavoidable. Yet (as the sports economist Stefan Szymanski reminds me) there is a trade-off here between two sorts of error: bias and variance. The decision to use disinterested but inexperienced judges should reduce bias but increase the variance of the outcome. That is a painful trade-off.

National pride is not the only source of bias. Judges have friends; they may know athletes, or their coaches. It was for this reason that the great US orchestras began to introduce “blind auditions”, where musicians performed behind a screen. The idea was to eliminate favouritism towards the students of particular teachers. The unexpected result – shown by the economists Claudia Goldin and Cecilia Rouse – was to disarm sexism as well as favouritism: many more women succeeded in the blind tests.

Alas, gymnasts can hardly perform behind a screen, although I suppose they could compete in balaclavas. All I can recommend is an alternative reward system for judges. Each should assign scores in isolation, and then be paid only if the other judges agreed. The judges will need to co-ordinate on a “focal point” if they wish to be paid, and the obvious focal point is their honest opinion of a gymnast’s performance.

This is surely worth a try. If the judges cannot agree, of course, they will be paid exactly what they deserve: nothing.

Also published at ft.com.

How can I make my children behave?

Disciplining children seems simple enough. Reward them when they do well and punish them when they misbehave. They should respond to incentives, right? Am I missing something?
Tom Cookson, Berkshire

Dear Tom,

You are right up to a point. Children do respond to incentives, but there are limits to this strategy, the most obvious being that children are impatient. If you cannot help them to become pleasant people without rewards and punishments, you will find that both carrot and stick must be brandished with alarming frequency.

A second problem is credibility. Will you really carry out your threat to subject four-year-old Billy to waterboarding? It seems unlikely, and since Billy will not always respond to your threats, he will soon discover if they are hollow.

The challenge, then, is to make sure that you have punishments available to you that you are willing to carry out. You may be able to rise to that challenge by building up what Joshua Gans calls “punishment capital” – not to be confused with capital punishment. Professor Gans, author of a new book called Parentonomics, points out that if you are the source of a steady stream of money or sweets, that gives you a negotiating position. Threatening to remove the carrot (or rather, the flow of chocolate coins) is more credible than threatening to wield the stick. What one parent sees as junk food, Professor Gans sees as an “incentive opportunity”.

I have written before about the research of economist Bruce Weinberg, who finds that children in richer families are much less likely to be spanked, yet more likely to have allowances withdrawn. That makes sense: poor families lack all kinds of capital, and that includes punishment capital too.

Also published at ft.com.

Will the price of oil put a brake on globalisation?

Very few of us remember globalisation in retreat: the last great wave of globalisation swelled in the late 19th century and broke spectacularly with the onset of the first world war. After a rash of protectionism, the great depression and the second world war, the process of expanding trade (and cross-border investment and the flow of ideas and of people) resumed and has continued ever since.

Some economists now wonder if the current wave might also be about to break. The problem is not so much the rolling farce of the Doha round of trade talks, or protectionism in the US – although neither is helpful – but what the price of oil is doing to the cost of shipping goods around the globe. While oil prices have fallen in the past couple of months, they could hardly be described as low. Shipping costs may rise yet further if, as expected, the International Maritime Organisation bans the use of cheaper, dirtier fuel oils by container ships.

There is some anecdotal evidence that this is having an impact on trade: for example, some container ships are reported to be slowing down to save fuel. But there is no sign anything is amiss in the latest World Trade Organization statistics – which, admittedly, date back to 2006. The volume of merchandise trade defied high and rising oil prices to grow at more than 6 per cent a year in 2004, 2005 and 2006.

If that is surprising, perhaps it shouldn’t be. Trade has been bolstered by lower tariffs – China became a WTO member late in 2001 – and by economic growth in general. The economists David Jacks, Christopher Meissner and Dennis Novy argue that much trade has been fuelled by economic growth, rather than by a fall in the costs of trading. They also point out that those trading costs include currency risks, tariffs, customs inspections and informational barriers: transport costs have tended to comprise only a third of trading costs, and of course fuel costs are only a proportion of transport costs themselves – probably just under half, even at current oil prices.

Still, at such dizzy levels, oil prices will surely have some impact on trade. Trade may shift to low-weight, high-value products. The fuel costs of moving steel or timber are large relative to the value of the product; the fuel costs of shipping perfume or memory chips are less significant. We might also expect to see more trade in services. And trading partners closer than China – eastern Europe for the EU, Mexico for the US – may benefit. Some analysts argue that this is already happening.

This is some comfort to protectionists and to those whose jobs are directly threatened by trade, but not much comfort to the majority who benefit from cheaper products and a larger market into which their own employers may export. It is probably particularly bad news for China, which is squeezed twice by transportation costs: once while importing large quantities of raw materials, and again when exporting the finished goods.

There is a more subtle way of measuring the integration of global markets. Rather than looking at the raw volume of trade, we can check the price of similar goods (light bulbs; apples; a T-shirt) in different parts of the world. If prices are very similar across the world, markets are highly integrated. If “price dispersion” is high, then the world is not flat after all.

The economists Paul Bergin and Reuven Glick have done this exercise, and what they find is a shock: for all the globalisation rhetoric of the past decade, international price dispersion has been rising since 1997. Oil prices, of course, have also been rising since the late 1990s. Perhaps fuel costs matter after all.

Also pulished at ft.com.

Why it’s dangerous to be a witch in a recession

Why did people murder suspected witches in renaissance Europe? And why do they still do so today in sub-Saharan Africa? As someone whose main source of information about witch trials is Monty Python and the Holy Grail, I was fascinated to learn that witch-burning has its own grim economics.

Clearly, some of the fervour for murdering women – typically elderly widows – had cultural and religious origins. In the early medieval period, the Catholic Church dismissed the idea that witches had supernatural powers, and some Church documents argued that it was heresy to believe in witchcraft. Without Church support, it’s easy to see why witch trials were not popular.

Yet when the trial and execution of suspected witches surged in the mid-16th century and throughout the 17th, it was a cross-cultural phenomenon. Trials took place in many countries and were conducted by both Protestants and Catholics, and in both secular and religious courts. Perhaps a million women were killed across Europe after being accused of witchcraft, and most of them died during this period. Why?

The historian Wolfgang Behringer has one possible explanation: temperatures dropped sharply around the time that the trials gained in popularity. The “little ice age”, in which average temperatures fell by about 1°C, was enough to freeze the Thames on many occasions.

Emily Oster, an economist at the University of Chicago, has tried to gather systematic data on the link between witch trials and the weather. The results look striking: between 1520 and 1770, colder decades go hand-in-hand with more trials. The link may be simply that witches were often blamed for bad weather. Or there may be a less direct link: people tend to lash out in tough times. There is some evidence, for instance, that lynching was more common in the American south when land prices and cotton prices were depressed.

Such deaths are, sadly, not a historical footnote. In Meatu, Tanzania, half of all reported murders are “witch-killings”. Such murders have been documented elsewhere in Africa, in Bolivia and in rural India. The difference between the historical executions and modern attacks are that a Tanzanian “witch” typically dies at the hands of her own family. The machete is the weapon of choice.

Edward Miguel, an economist at the University of California, Berkeley, and co-author of Economic Gangsters, a book about the economics of crime, corruption and war, has studied the Tanzanian situation. He argues that there is a direct economic motive for the attacks. Tough times in a Tanzanian household may well result in starvation, and the elderly – especially women – are at risk of being sacrificed to free resources.

As evidence, Miguel points out that victims of witch attacks in Meatu district – almost all old women – tend to be from the poorest households. The murders are much more common during years of drought or flood.

If the problem truly is an economic one, the solution might be, too. One possibility is to give the elderly generous pensions. Witch-killings all but stopped in South Africa’s North Province after such a pension scheme was introduced in the early 1990s. Unfortunately, such pensions are probably too expensive for Tanzania.

A grass-roots alternative has emerged in another Tanzanian district, Ulanga, where traditional healers “cure” elderly women of witchcraft by shaving their bodies and smearing their pates with “anti-witchcraft paste”. Miguel does not think it’s a coincidence that the healers also provide the women with food and shelter during famines, in expectation of payments from their families in better times. Spiritual ceremony meets social insurance: it is a solution, of sorts.

Also published at ft.com.

Should I move from Florence to the UK just for a job?

I’ve been offered a job in the UK. The job, the salary and the possibilities are beyond my expectations. However, trying to think in pounds instead of euros (and changing them every time I visit my family) and in miles rather than kilometres, having to change the plugs and learn to drive on the other side, and – why don’t I say it? – facing the weather and food, all make me feel a bit uncomfortable, especially since it would be for at least five years. Am I right to worry?
Anna, Florence

Dear Anna,

Do not worry about adjustment costs such as currency, driving on the left and changing plugs. In the context of a five-year visit they are trivial.

More serious are the lasting compromises you must make. You are right to mention the food. You will also be far from your family. Who is to say whether money and a good job outweigh these concerns?

Since the price and quality of goods is different in the UK, your consumption bundle should also change. You would be wise to drink tea instead of coffee, and to seek out daring new art rather than hoping to find British Renaissance masterpieces.

Think of this move as an experiment. Your time in the UK will open up new options: the younger you are, the more valuable those options, because you will have a lifetime to take advantage.

So your age counts: being British, I am too much the gentleman to ask what it is.

Also published at ft.com.

How should I incentivise my son to excel?

Being a considerate father, I am planning a monetary incentive scheme to improve my 18-year-old son’s marks at school. Instead of executing a relative’s bequest as decreed, I intend to spend the €7,000 rewarding good results. During three semesters, he will have to pass 48 preliminary tests, then the main exams in the fourth and last semester. How should I divide up the capital?
Robert Saverin, a grateful father

Dear Mr Saverin,

Start by promising more than you can deliver. If you offer €10,000 for a perfect score, you will only need to apologise after your scheme has succeeded. That may seem to undermine your credibility, but the real risk lies the other way: your son may expect to get the money from his doting dad anyway. Discourage this view or your plan will be in vain.

You must also pitch the stakes just right. Research in behavioural economics suggests that trivial rewards are worse than no rewards, but also that performance suffers when too much is at stake.

Finally, focus on the early exams, because success breeds success. Promise your son €200 for every excellent result in these: that should engage his interest without throwing him into a panic. If things go well, the money will run out before the high-pressure exams. But by then he will have mastered his subjects anyway.

Also published at ft.com

6th of September, 2008Dear EconomistComments off

Houses cost more in the summer. Here’s why

It’s a miserable year to be selling a house, on either side of the Atlantic. In the UK, for example, house prices fell by 1.5 per cent in April, according to the Halifax index.

Except: they didn’t. The Halifax’s own figures show that house prices rose in April, albeit by less than 0.2 per cent.

The 1.5 per cent fall, widely reported, is the result of “seasonal adjustment”, an attempt to strip out predictable calendar patterns and report just the underlying trend. House prices usually surge in April, and this April the surge was disappointing enough to be reported as a fall.

House price indices are presented in seasonally adjusted form by researchers, and reported that way by the media. That makes some sense. For anyone trying to understand the big picture, predictable seasonal gyrations just get in the way.

But for anyone trying to buy or sell a house, predictable season gyrations can’t be ignored. Nobody pays a seasonally-adjusted price. If you spend £500,000 on a house in a typical February, you might expect to have paid £530,000 had you waited until August. That £30,000 is money in your pocket, seasons or no seasons.

That raises a fairly big question. If house prices systematically surge in summer and stagnate in winter – and they do, in Belgium, France, the US and especially the UK – then why do so many people buy in summer? Why don’t we make more of an effort to buy earlier, or to wait for a few months until the market cools again?

It’s true that summer is a convenient time to buy a house. It is the season of weddings, and the time when families prepare to send their children to new schools. These are two popular reasons for moving home. House-hunting is nicer in the sunshine, too. But surely these conveniences aren’t worth tens of thousands of pounds?

Another possibility is that summer house-buyers save on expensive summer rents, or that mortgage finance is cheaper. But no: neither rents nor mortgages fluctuate with the seasons.

A new research paper – still at a preliminary stage – by Rachel Ngai and Silvana Tenreyro of the London School of Economics, offers a solution to the puzzle. Start with the observation that, unlike a car or a laptop or a share in Coca-Cola, every house is a little different. Any particular house may match a family’s needs awkwardly or perfectly. Finding out just how well a given house suits you is also a costly and time-consuming business.

That means that buyers like to house-hunt in “thick” markets, when lots of houses are for sale, and a very good fit is likely to come up quickly. It is no fun to house-hunt in a “thin” market, where the meagre crop of houses is unlikely to offer up the dream home.

If Ngai and Tenreyro are right, then the housing market dynamic is something like this: buyers slightly prefer to buy houses in the summer, so house prices are slightly higher in the summer, so sellers prefer to put their houses on the market in the summer, and with more houses on the market, the market is thicker. That means that buyers are more likely to find the exact house they want, and so are willing to pay more; with prices higher, more sellers are attracted into the summer market, and fewer will contemplate selling in the winter. And so on. The self-reinforcing process can produce a large gap between summer and winter prices.

So by all means, wait until winter in the hope of getting a cheaper house. But remember, a cheaper house is not necessarily a better deal – unless you are not very fussy about how well it suits you.

Also published at ft.com.

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