Tim Harford The Undercover Economist

Articles published in August, 2009

Supermarkets – in for a penny or a pound?

Dear Economist,
I read that supermarkets are abandoning the 99p price point in favour of a “round pound” as this makes the products appear cheaper and reflects a more honest business practice.
I wonder if pricing psychology played any part in this decision – or is it just a cynical cash grab? After all, if they make an extra penny on every product they sell this year, it will mean tens of millions of pounds in extra profits.
S.C.

Dear S.C.,

This particular pricing decision involves three very different sets of costs and benefits, none of which the article you sent me sets out clearly.

The first is to do with the physical task of giving change. This is time-consuming for staff and shopper alike. However, because it requires that the transaction be registered, it also makes it harder for staff to divert money from the till into their own pockets.

The second is psychological. Do “round pound” prices or those ending in 99p seem cheaper? The article cites the same “expert” supporting both views.

The third is simple price-sensitivity. In classic economic theory, when the price goes up, revenues per item rise but sales fall. This is a straightforward trade-off and it is up to individual companies to find the sweet spot.

But your own theory is almost as confused. You seem to think supermarkets have offered customers a penny discount because they were run by kind people. This season the kind people are no longer in charge – and prices have risen.

I would dismiss your thesis out of hand if … I had a better one myself. Our discussion suggests several reasons for retailers using 99p endings, and several reasons for them using round numbers. It is not at all clear, though, what has changed. If you want my guess: some marketing bright spark tried “round pound” pricing and was surprised to find that it worked.

Also published at ft.com.

29th of August, 2009Dear EconomistComments off

The credit crunch: bad for your pocket, worse for your psyche

It will soon be a year since Lehman Brothers filed for bankruptcy. And two years since the queues began to form outside branches of Northern Rock. The Financial Times felt obliged to pen a defence of markets, before soliciting views on the future of capitalism.

Now that we are no longer staring over the precipice, wasn’t this all just a little excitable? Perhaps not. New research suggests that the crisis may shape the psyche of a generation, even if the crisis now passes quickly.

The evidence comes from economists, Paola Giuliano of UCLA Anderson School of Management and Antonio Spilimbergo of the International Monetary Fund. Giuliano and Spilimbergo rely on answers to the General Social Survey, which has been conducted in the US almost every year since 1972. Because each survey participant has an identified home region, Giuliano and Spilimbergo can compare survey answers with the economic performance of the region in question. (The regions are large: the US is divided into nine.) Regional economic performance can be choppy, so the researchers looked for outliers: when regional growth fell into the bottom 5 per cent of all regions and all years in the sample, the researchers counted this as a severe regional recession. This turned out to be a year in which the regional economy shrank by 3.8 per cent or more.

The question is: what impact did these severe regional recessions have on locals’ answers in the General Social Survey? The results are striking. Recessions do alter perceptions – or more correctly, they alter the perceptions of a certain group of people. Broadly, the recession experience pushed these people towards the left of the political spectrum. Recession-influenced respondents expressed a stronger preference for government redistribution, and they also tended to believe that success in life was more a matter of luck than hard work. (Separate research by the economist Thomas Piketty has shown, unsurprisingly, that people who believe that luck plays a big role are more comfortable with higher taxes – no wonder the FT felt moved to defend markets.)

In another answer, the recession experience seemed to push people towards the right: recession-influenced survey respondents also lose confidence in government institutions. Reading the political tea-leaves is a difficult business.

Giuliano and Spilimbergo regard their research as a contribution to social psychology as well as to economics because one insight to emerge from the work is that most people are not influenced by the experience of a recession. What counts is how old they were when the recession hit. People who are 18-25 when they experience a severe regional recession are influenced by that experience for the rest of their lives. Others are influenced much less; those under 17 or over 42 when the recession strikes do not seem to be changed by the experience. Whether the recession happened recently or many years before the survey also makes no apparent difference. This supports what psychologists call the “impressionable years hypothesis”.

The research also bolsters that of California-based economists Ulrike Malmendier and Stefan Nagel, who have discovered that the stock market returns experienced in early adulthood seem to influence investment decisions for decades afterwards.

I recently argued that many of today’s school-leavers and graduates will have their careers shaped for a decade or more by the recession. Perhaps it should be no surprise to discover that this is also a generation that may spend future decades firmly convinced that success in life has everything to do with luck.

Also published at ft.com.

Should a lost glove be added to my ‘deficit’?

Dear Economist,
My husband and I are following a tight budget, whereby he is using an Excel spreadsheet to plan our gas usage, spending of store card loyalty points, and so on. (I name just two of the 12 columns.) He has also plotted our petrol use on a graph. However, I became somewhat concerned when I lost a glove and its value was inputted into the “deficit” column – aptly titled column 13 – of the spreadsheet. I challenged this, as the glove was singular and therefore half the cost. It was also actually a gift – or two gifts. Are we down £15 (the approximate price of the pair of gloves), down £7.50, up £7.50, or quids in? This has become a sensitive issue in our marriage.
Mrs, soon to be Miss

Dear soon-to-be-Miss,

That the gloves were a gift is no longer important: the question is whether you are worse off for having lost them. And you are.

Nor are you worse off by a mere half-pair of gloves. Your gloves are, in the jargon, perfect or near-perfect complements. This means that the odd glove is worth little, unless you are holding down a career as a Michael Jackson impersonator. Just as important, the missing glove will be difficult to replace. Your husband is therefore quite right to claim that you have, in effect, lost the full pair of gloves.

But your husband’s competence ends there. His “deficit” column makes no sense in a spreadsheet designed to track expenditure. If you buy a replacement pair of gloves (or a single glove – good luck with that) then that is the moment to make a note in your spreadsheet, not before. You may not feel the need to replace them; it is August, after all.

Let’s be honest, though. This isn’t about the gloves, is it? It’s about your husband’s infuriating attempt to control you through a spreadsheet. Tell him either to put it away, or to add column 14: divorce expenses.

Also published at ft.com.

22nd of August, 2009Dear EconomistComments off

Why millions of the world’s poor still choose to go private

Imagine that your daily earnings were less than the price of this newspaper. Would you consider buying private education and private healthcare?

Before you make up your mind, here are a few considerations: government healthcare and primary education are free; the private-sector doctors are ignorant quacks and the teachers are poorly qualified; the private schools are cramped and often illegal. It doesn’t sound like a tough decision. Yet millions of very poor people around the world are taking the private-sector option. And, when you look a little closer at the choice, it’s not so hard to see why.

Take the doctors of Delhi, who were studied carefully by two World Bank researchers, Jishnu Das and Jeffrey Hammer. These doctors are busy people – the average household visits a doctor every two weeks, and the poor are particularly likely to visit. And, surprisingly, three-quarters of those visits are to private practitioners – despite the fact that public-sector doctors are better qualified. Why?

Das and Hammer tested the competence and the practices of a sample of doctors by sending observers to sit in their surgeries. They discovered that “under-qualified private-sector doctors, although they know less, provide better care on average than their better-qualified counterparts in the public sector”. This is not particularly mysterious, because private-sector doctors don’t get paid unless they can convince their patients that they’re doing a decent job. Public-sector doctors draw salaries and, if they are held accountable at all, it is through indirect channels.

There is a similar story to be told about education – and it is well told in a new book, The Beautiful Tree, by James Tooley. A professor of education at the University of Newcastle, Tooley first encountered private schooling for the poor while exploring the slums of Hyderabad, again in India. It took little more than Tooley’s curiosity to unearth a network of 500 private schools, typically charging less than $3 a month, and providing an education of sorts to thousands of children from very poor families. Many of the poorest children were on scholarships, educated for free by school owners with an eye on their standing in the local community.

Tooley has since gone on to catalogue cheap private schools for the poor across the world, and has also tested their quality. His research team discovered more committed teachers, and better provision of facilities such as toilets, drinking water, desks, libraries and electric fans. Most importantly of all, the children were learning more.

It is hard to be sure quite how widespread these cheap private schools are, but Tooley and his colleagues have found them in west Africa, east Africa, China and India. In the areas Tooley has studied, private schools are educating at least as many children as government-run schools – and sometimes up to three times as many.

Again, the outperformance of the private schools – in spite of low budgets and teachers with sometimes doubtful qualifications – is not a surprise when one looks at the weaknesses of state-run schools in some developing countries. Tooley toured Lagos, in Nigeria, with a BBC film crew and found teachers sleeping in lessons in the public schools – even though the film crew had given notice of their visit.

The lesson here is that a little accountability goes a long way – and fee-paying customers are in an excellent position to hold schools and clinics to account. By all means let’s work out how to make government facilities more accountable, in order to provide better education for the world’s poor. But we should also investigate how low-cost private services could be nurtured.

Also published at ft.com.

Business Life: How we act in recessions

First published in Business Life, March 2009
Amidst gloomy economic news, there’s always entertainment to be found seeing what gets blamed on the credit crunch. According to one British newspaper, people are seeking inexpensive ways to have fun: sales of aphrodisiacs, designer lingerie and maternity dresses are all said to be strong. My own employer, The Financial Times, reckons that physiotherapists are in demand thanks to an excess supply of stressed investment bankers.
Whether or not these tales have anything in them, they do highlight an important truth: many products, businesses and people sail through recessions completely unscathed.
This basic truth – everyone’s different – is easily forgotten amidst all the discussion of “how we behave in hard times”. Good question, but when it comes to a recession, there is no obvious “we” – there are winners and losers.
The economist Simon Burgess has been looking at a survey that tracks thousands of individuals, returning year after year to see how they’re doing. One of the surprising conclusions is that many people are tipped into poverty when unemployment rises, not because they lose their job, but for other reasons, which can include pay cuts, reduced hours, or hard times for those who own a small business. Others – those with secure jobs or pensions – do as well as ever. Individual circumstance is determined more by luck and skill than what’s going on in the broader economy.
Businesses, of course, will still want to know what the “average” consumer will do. Here, there is good news and bad news. The good news is that when consumers suffer a temporary drop in their income, they usually try to compensate by borrowing more or saving less until things pick up. So while the size of the economy falls, consumption falls less dramatically.
But the bad news is that this is no ordinary recession: it’s one that was kick-started by a banking crisis. If the banks can’t or won’t lend, consumers can’t borrow more no matter how much they may want to. That’s the theory, and history says the same thing. Looking at previous recessions across the developed world – as economists at the National Institute for Economic and Social Research have done – if a recession is also combined with a banking crisis, then consumer spending slumps.
Intriguingly, customers who want to borrow and can’t may find the next best thing is not to cut down on luxuries but to make necessities last longer. Your winter coat, shirt or socks might be due for replacement, but they can always last another month; and another; and another. Good news for sellers of needles and thread, at least.
The challenge for businesses, then, is to work out which consumers will not buy unless there’s a bargain, and who are the consumers who still have money to burn. That takes careful marketing and deft pricing. In some ways, then, business as usual.

15th of August, 2009Other WritingComments off

How can we lure election donors?

Dear Economist,
I am assisting a friend who is contesting an Indian election as an independent candidate. We would like to raise campaign funds by getting common people to chip in. One of the problems I foresee is people arriving at a contribution website or collection booth and then not knowing how much to contribute. We could suggest predefined contribution amounts, but we wouldn’t like to see large contributions lost because our suggestions are too small. Neither do we want to turn away micro-contributions from large numbers of people. How should we proceed?
Regards, Gaurav Roy

Dear Gaurav,

Rachel Croson, an economist, and Jen Shang, a psychologist, have been asking themselves a similar question. Croson and Shang teamed up with fundraisers at two American public radio stations to stage a couple of experiments. In each experiment, when listeners called in to donate, the fundraiser casually mentioned a previous donation.

In the first experiment, the donation was either said to be $75, a typical donation, or $300. Callers who were told about the $300 donation tended to give more – more than 10 per cent more, on average. In the second experiment, the donation was said to be either $600 or $1,000. Here, the $1,000 hint raised less money than the $600, perhaps because the amounts were too large to seem relevant.

I have three suggestions. First, make your suggested contributions optimistic but realistic. Second, offer a spread of options to catch different types of donor. Third, experiment if you can – perhaps you can program your website to make different suggestions and see which combination works best. An election is not a radio station, and India is not the US, so this is an area where a little extra research may tell you a great deal.

Also published at ft.com.

15th of August, 2009Dear EconomistComments off

Complexity is the mother of invention

A brief history of innovation: In the beginning, there were lone inventors who changed the world. John Harrison was one of the most prominent – the clock-maker became famous and (eventually) rich in the 18th century by building a clock so accurate and so resilient in the face of changing temperatures and constant rocking that it could be taken on board a ship and used to calculate the ship’s longitude. In doing so, Harrison pitted himself against the might of the Royal Observatory, which had been established in 1675 by King Charles II in order to solve the longitude problem with an astronomical method. The loner got there first.

As science and technology progressed, innovation became more and more industrialised. Thomas Edison set up perhaps the world’s first industrial research laboratory at Menlo Park, New Jersey, in 1876. Edison set the tone for the 20th century, with expensive research projects carried out on a colossal scale. Among the most famous were government efforts such as the Manhattan Project, to create the first atomic bomb, and the Apollo moon landings.

And then, towards the end of the last century, the tide seemed to turn in favour of the innovation minnows once again. Companies such as Microsoft and Google were set up in spare rooms and garages. Large companies seemed to be abandoning in-house research and buying start-ups. Powerful computers became cheap enough for most pockets.

The culmination of this process is the likes of Facebook, whipped up in a few days by a Harvard student. Soon after Facebook’s launch, Mark Zuckerberg said: “I think it’s kind of silly that it would take the university a couple of years to get around to it. I can do it better than they can, and I can do it in a week.”

But are Facebook and Google symbolic of a new trend towards micro-innovation by individuals or small teams? Or are they exceptions to the implacable march of technology towards ever larger and more expensive research efforts, requiring multi-billion-dollar tools such as the Large Hadron Collider?

An economist at the Kellogg School of Management, Benjamin F. Jones, has been trying to look beyond the eye-catching denizens of Silicon Valley to test this question with some meaningful numbers, based on patent citations. Jones is worried about what he calls “the burden of knowledge”. Facebook may have been easy for a young, talented creator to produce, but Jones fears the general trend is in the other direction. If he is right, scientists will have to master an ever greater body of knowledge before they can make a contribution – or specialise earlier and join teams of other specialists. Technological progress will become ever harder.

The evidence suggests that Jones is right to be concerned. The trend away from the lone inventor has continued, with the size of teams listed in patent citations increasing steadily since Jones’s records began in 1975. The age at which inventors first produce a patent has also been rising, and specialisation seems sharper; lone inventors have become less likely to produce multiple patents in different technical fields. “Deeper” fields of knowledge, whose patents cite many other patents, attract larger teams. Compare a modern patent to one from the 1970s and you’ll find a larger team filled with older and more specialised researchers.

All this suggests that innovation is, broadly, a more complex and expensive process than it used to be. Isaac Newton once told his rival Robert Hooke, “If I have seen further it is only by standing on the shoulders of giants.” The climb up the giants’ backs appears to be becoming more and more arduous.

Also published at ft.com.

Dear Economist: The readers respond

Tim HarfordEconomists might not be an obvious source of advice on parenting, the intricacies of etiquette or the dark arts of seduction. Even seen in the most flattering light, the economist can appear a remote figure: resolutely rational, untroubled by indecision or weakness of the will, a Spock-like creature too wedded to theory to be able to relate to mere human concerns. At worst he can look like a social naïf, if not an outright sociopath; a man (or occasionally a woman) who knows the price of everything and the value of nothing.

At least such is the traditional image of the economist; and who is Dear Economist to demur?

He is not, it would be fair to say, as sympathetic as more traditional agony aunts. He is blunt. He is rude. He loves jargon. When confronted with a woman who enjoys the dating game but worries that she might leave it too late to settle down, Dear Economist offers not a shoulder to cry on but a frank explanation of optimal experimentation theory. When a dinner party guest wonders how much to spend on a bottle of wine, Dear Economist ignores the Good Wine Guide and reaches for the Journal of Wine Economics.

But – and this is the crucial question – is the advice any good? In the six years since the Financial Times entrusted me with the awesome responsibility of answering letters to Dear Economist, I have happily donned the persona and issued my instructions. But I have not asked too closely how they were received – until now.

Over the past few weeks, I’ve been writing to some of my correspondents to ask them what they made of my advice, whether they took it and how things worked out. Here, for the first time, are their responses. Learn More

8th of August, 2009Dear EconomistHighlightsComments off

Outside Edge: Learn to love that statistical feeling

First published in the Financial Times, 8 August 2009

Maligned and misunderstood, statisticians have at last found a spokesman: the Chinese author of a poem celebrating a life swimming in data.

“Why is it that statistics/Put a calm smile on my face?” the poet writes, responding to a morale-boosting campaign dubbed “Statistical Feelings” organised by China’s National Bureau of Statistics. “Because of statistics/ I can rearrange the stars in the skies above.”

Hmm. Slightly awkward, that one. In a week when China’s economic statistics have earned more scepticism than usual, it might not be wise to talk about astronomical manipulation.

Even the state-controlled Chinese media have admitted that 91 per cent of citizens do not believe official Chinese statistics. Statistically speaking, that may not be too bad. Another survey, published in Insight China, reckoned that 7.9 per cent of respondents think prostitutes are trustworthy. This figure seems low, but places prostitutes as the third most trusted group in China, well above politicians and scientists, let alone what China Daily describes as “the least credible category which consists of real estate developers, secretaries, agents, entertainers and directors”.

If you are following the statistical argument, Chinese statisticians are more trusted than its sex workers. Or perhaps I am relying on one of the 82 per cent of statistics invented on the spot. Or one of the 46.79842 per cent of statistics that claim an unjustifiable level of precision.

China’s official statisticians are not the only ones facing scepticism. In the UK, only 36 per cent of people believe that official figures are generally accurate. This is, however, an official figure, so 64 per cent of us would hesitate before placing much confidence in it.

“Some mock me for doing statistics/ Some loathe me and statistics”, writes China’s poet-statistician, but our relationship with statistics is more complex. We feel that no argument is complete without a gesture towards the data, yet few of us understand how they are compiled. We sense – rightly – that statistics are often abused through ignorance, or manipulated.

I am a non-statistician who deals with statistics and statisticians frequently, and in my view statisticians are unsung heroes. Statistics are essential to understanding the world, but statisticians get little credit. We accept the numbers in the news as fact, without considering the skill in producing them from small, non-representative samples.

The most striking statistical story I came across this year was that adding statistical information to a charitable appeal reduces donations. It seems that merely reading a statistic makes us meaner.

This is the kind of obstacle statisticians must overcome. So sing out, poet-statisticians of China. Bean-counters of the world, unite!

8th of August, 2009Outside EdgeComments off

Can I win the tussle for Christmas leave?

Dear Economist,
In the bunfight for Christmas leave, it’s never too early to start. I work in middle office, where there is an operational requirement to be staffed to a minimum of 50 per cent at all times. This year there are three working days between Christmas and New Year, and nobody wants to work them. What is the fairest way of divvying up the Christmas leave?
Middle Office Minion, London

Dear Minion,

It is an outrage that you and your colleagues have been placed in this absurd position. Let’s review the facts: you place a higher value on your time between Christmas and New Year, but your company’s annual leave policy does not place a higher price on these days. Given this pricing policy, everybody wants leave at Christmas, and so a bureaucratic bodge job is duly handed down from on high.

It is as though the company had offered each staff member a Christmas gift of either a bottle of champagne or a can of lager, and then started inventing rules on discovering that there was not enough champagne for everyone. The idiots who foisted this system on you should scrap it at once, and instead offer sufficient overtime pay at Christmas to ensure that there are enough recruits.

Failing that, the sensible solution is to arrange side-payments among yourselves. The people who value the break least (those with different faiths, or infuriating relatives) should be the ones doing Christmas duty, while the rest pay them compensation. Arrange a quick auction in which the amount of compensation rises over time; when enough bidders have dropped out of the auction, the remaining bidders pay the volunteers to hold the fort. Perhaps the compensation should be suitably seasonal: the bidding could open at one partridge in a pear tree.

Also published at ft.com.

8th of August, 2009Dear EconomistComments off
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