Articles published in September, 2009

The Economist’s Guide to Happiness

First published in the Sunday Times, 9 August 2009

Spend less time with your children. Don’t underestimate the benefits of a divorce. Never serve dog food at a dinner party. These are some of the unexpected revelations to have emerged from an unlikely combination: happiness, and economists.
You might think that the “dismal science” has done enough damage for now. Economists have hardly emerged from the banking crisis with their reputations enhanced. But forecasting financial meltdown was never going to be easy, so perhaps it is best of economists stick to simpler questions, such as “how can we be happy?”
A growing number of economists have been attempting to answer this question. Not only are the statistical tools of economics surprisingly well-suited to unlock the secrets of happiness, but the research topic is good box office, too… and these are economists we’re talking about.
Some of the results sound as though they come from hippies rather than economists. For instance, economic growth does not seem to make the citizens of a rich country such as the UK any happier. A good job too, considering the current prospects of any economic growth seem slim.
Other discoveries are less intuitive. For instance the economists Andrew Oswald and Nattavudh Powdthavee has discovered that teenagers and the elderly are actually rather happy. “Your late 30s are the most unhappy period of your life,” Oswald cheerfully tells me. Thanks, Professor, from a grateful 35-year-old. Learn More

The Unexpected Advice Columnist

Published in The Globe and Mail in Canada, and ABC Unleashed in Australia:

Think of the ideal advice columnist, duty-bound to help correspondents with their problems at home, at work, and in love. What kind of person comes to mind? Caring? Honest? Wise? Whatever your answer, I’m guessing it didn’t involve the phrase “professionally trained economist”. Whatever: here I am, the only economist in the world to run a problem page – “Dear Economist” in the Financial Times – dedicated to making my readers’ personal lives better.

I’ll admit that it is not immediately obvious what an economist might have to say about parenting, the intricacies of etiquette or the dark arts of seduction. Even at our best, we economists seem too perfect, too rational, to understand mere human weaknesses. You might as well consult Mr Spock for dating advice as ask an economist. And at our worst, we appear hopelessly naïve, emotionally tone-deaf, and bordering on the sociopathic.

And let us be honest, at times my advice column persona has lived up to that caricature. When a woman wrote to me confessing that she enjoyed the dating game but was afraid she might leave it too late to settle down, I didn’t offer a sympathetic ear, but a handy explanation of the theory of optimal experiments. When a dinner party guest wondered how much he should spend on wine, I reached straight for the Journal of Wine Economics. Every advice columnist needs a persona, and for “Dear Economist” it was blunt, rude, and rather fond of the latest economic research.

As “Dear Economist”, I was never supposed to offer good advice. The whole thing was a joke, with a predicted shelf-life of about six months. Six years later, my inbox is still full of readers’ queries, and I am still handing out advice. Hopefully it still makes my readers laugh. But – and here’s the strange thing – I am starting to wonder whether some of it is actually pretty good advice, too.

There is something about the cold eye of economics that lends itself, quite unexpectedly, to the advice-column format. Economic theories are ruthlessly reductive, cutting away complexity to reveal some hidden truth. If we’re honest, most advice columns are reductive, too. And economists have an advantage over most advice columnists, because we have access to the most bizarre (and yet carefully peer-reviewed) research, based on the latest data.

Some of it falls under the category of “nice to know”. Imagine: your marriage isn’t working out and you’re seriously considering divorce. What should you do? Well, research from the British economist Andrew Oswald helpfully points out that most people tend to be happier a year or two after their divorce than immediately before it. (This is not true for bereavement, by the way.) So perhaps you should go ahead.

Some of it we can file under “can’t make it up”. The American Association of Wine Economists just published an informative research paper entitled, “Can people distinguish pâté from dog food?”. Sadly, they can: even if puréed to look like chicken-liver pâté and served chilled with a parsley garnish, dog food tastes terrible. A shame, but useful to know if you were thinking of cutting corners at your next dinner party.

And some of it? Well, some of it turns out to be important. One young man wrote to me to ask if he should switch high schools. He provided a long list of good reasons to switch but was still hesitating. I diagnosed “the endowment effect”, a tendency to stick with the devil you know that is well known to economists, and told him to switch. He did, he then got into Cambridge University, and recently wrote to me to thank him for changing his life. (Better yet: he’s studying economics. A bright future awaits him explaining to lonely singletons how to compose attractive internet dating ads, as I have done.)

Nowadays, I don’t mock the life-changing power of economics. I reckon it’s as good as any other source of personal advice, and funnier than most. I’ve even taken economic advice myself: the timing of my (successful) marriage proposal was calculated using an option valuation formula. My poor wife, you might think. But it’s a triumph for economics.

And there’s one more reason to applaud the use of economic theory in personal problem-solving: it’s less dangerous than using it to run banks.

Must I live abroad to win a puzzle prize?

Dear Economist,
I send the FT the Polymath crossword solution on a fairly regular basis, but I notice that a greater than expected number of winners hail from overseas. Would I have a better chance of winning were I to send the solution to my friends in Sweden for them to post in an envelope with a foreign stamp?
Tony Waldron, UK

Dear Mr Waldron,

You are not the only one to notice that Johnny Foreigner appears to win with alarming regularity. Still, we must be statistical.

You say that a “greater than expected number of winners hail from overseas”. But you do not say what you expect. The British make up about 1 per cent of the world population. Accordingly, there should be a British victor approximately 1 per cent of the time, or once every two years, on average. I believe the British victory rate is higher than this.

Another basis for forming our expectations is to look at subscribers. Many UK-resident FT subscribers fail to realise that they are outnumbered by overseas subscribers. If the British won Polymath half the time, this would be “more than expected”. The informal estimate of the Polymath team is that the proportion of foreign winners is roughly in line with the proportion of foreign subscribers.

After discussion with the Polymath administrator, I have concluded that her method for picking winners is reasonably random. However, she takes no extravagant precautions to ensure this is so. Perhaps foreign stamps do attract her magpie-gaze.

Even so, you must weigh the fractional additional chance of winning against the time and expense of routing your entry via Sweden. Surely the costs outweigh the benefits, unless you are motivated chiefly by the glory of having your name published in the Financial Times. If so, I believe I have solved your problem.

Also published at ft.com.

The price America paid for the September 11 attacks

When the planes hit the twin towers eight years ago this week, I wasn’t a journalist at all, but a business economist living in London. It was my job to look at what was happening to the economy and figure out what it might imply and what might happen next. Alongside the shock experienced by anyone watching the television coverage, I felt bewilderment. It seemed that the sheer physical destruction and the deaths of so many highly skilled people would have to disrupt the running of the US economy – one of Osama bin Laden’s declared objectives. But with no close precedents, it was hard to say by how much.

Early estimates suggested that the economic cost alone might be grievous. The International Monetary Fund’s World Economic Outlook, published three months after the attacks, thought that losses to the US economy could total $75bn. Others thought the economic damage would be greater. Robert E. Looney, a professor at the Naval Postgraduate School, estimated in 2002 that direct costs exceeded $27bn but the effect of the disruption might total $500bn. A study by the New York City Comptroller’s Office estimated that the city alone would lose a cumulative $58bn between 2001 and 2004 as a result of the attacks.

Some attempts to untangle the question were ingenious. Alberto Abadie of Harvard and Sofia Dermisi of Roosevelt University looked not at New York but at Chicago to estimate one consequence of the attacks. Chicago, after all, suffered no damage and enjoyed no reconstruction boom. But as the home of the Sears Tower, the tallest building in the US, Chicago might have suffered a psychological blow as a possible target for a future attack. Sure enough, vacancy rates in and near the Sears Tower and two other famous Chicago skyscrapers rose sharply relative to rates elsewhere in the city.

With the luxury of hindsight, a new issue of Peace Economics, Peace Science and Public Policy attempts to work out the economic impact of the September 11 attacks, publishing a range of studies that approach the problem from two directions. One approach is to look at the entire economy and try to figure out what damage was done by the attacks – no easy task given the fact that the dotcom bubble had been deflating and the economy was entering recession at about the time the terrorists struck. The other approach is narrower, looking at – for example – the impact on New York City rents and wages.

Both approaches struggle to deal with the echoes of the attack. Air travel suffered, for instance, but teleconferencing, holidays at home and road transport might well have prospered. Then there is the problem of the policy response: President Bush quickly pledged $20bn to rebuild New York City. That reconstruction spending would act as a counterweight to the attack. No wonder the journal’s editors write of “unscrambling the eggs”.

Reading the full range of studies, I have concluded that the direct physical effects of such a horrific attack had been smaller than most people expected. Perhaps $25bn of buildings were destroyed; the lifetime wages of the victims would have been about $10bn, which is a crude way of calculating the narrow economic impact of a mass murder. But beyond that, there seem to have been few immediate economic consequences for New York City. The additional costs to the country as a whole were largely psychological: job losses because of a loss of confidence, for instance. There is a reason such acts are called terrorism.

The polity of the US was placed under severe strain by al-Qaeda’s attack. Its economy was more resilient than most observers expected.

Also published at ft.com.