Tim Harford The Undercover Economist

Articles published in October, 2009

Research assistant: situation vacant

I am looking for a research assistant, or assistants. This could be a fun position for someone studying for a degree and the work would be flexible enough to accommodate that. The work would be freelance and would likely be a few hours a week on a flexible schedule. I’m based in London but the successful candidates need not be.

The job description is likely to evolve over time – the main aim is simply to take some workload off me, whether working on columns, speeches or my next book – but is likely to entail:

– Tracking down and summarising relevant research and statistics;

– Fact-checking, proofing or editing my articles and new book;

– Occasional work on slides.

The ideal candidate would have a strong grounding in economics, good writing skills and an attention to detail. Interest in the economics of innovation, climate change, development, conflict or banking would be an advantage, as would a knowledge of PowerPoint.

Please apply with CV and covering letter – contact details at the bottom of this webpage –  by 31 October 2009.

15th of October, 2009MarginaliaComments off

Talk about Dear Undercover Economist at One Alfred Place

For those who haven’t been able to get tickets to my talks at LSE last week or Cass Business School tomorrow, here’s yet another chance! I’m speaking about the ideas in Dear Undercover Economist at One Alfred Place on Thursday, 6.30pm for 7pm.

One Alfred Place is normally members only, but they have agreed to open the talk to non-members.

13th of October, 2009SpeechesComments off

How an inconvenient economist upset the cool crowd

At a recent conference on experimental economics, John List, professor of economics at the university of chicago, shared a beer with other delegates and opined, “I think I used to be the most hated guy in this field.” His drinking companions jovially assured him that he still was.

So why the sharp elbows from his colleagues? Quite simply, List’s attention to the nuts and bolts of experimental method has demolished some of the most cherished results in the cool field of behavioural economics.

Consider a class of experimental games much cited by those who dispute the classical model of rational economic choice. There is the “ultimatum” game, in which player A (Anna) is given $10 and asked how much, if any, she proposes to offer to player B (Bernard). Bernard can accept the offer, but if he rejects it, neither Anna nor Bernard get anything. If Anna and Bernard were rational income-maximisers, Anna would offer one cent and Bernard would accept it as better than nothing. This never happens, so Anna and Bernard are not rational income-maximisers.

Then there is the “dictator” game, introduced by Jack Knetsch, the Nobel laureate Daniel Kahneman and Richard Thaler, co-author of Nudge and perhaps the world’s leading behavioural economist. In the “dictator” game, Anna divides the $10 as before, but Bernard cannot reject her offer, so Anna can’t lose. Nevertheless, Anna will often throw Bernard two or three dollars. A third game, “gift exchange”, begins with Bernard offering Anna a payment. Anna then decides how to respond – effectively, an initial peace offering followed by “dictator”.

The results are astonishingly consistent: these games seem to demonstrate a taste for fairness. People offer more than they have to, reject unequal offers and reciprocate generosity. This has been a thorn in the side of conventional economics for more than 20 years.

List’s contribution – well described in the forthcoming Superfreakonomics – has been to show that these results stem from the experimental set-up. In one set of experiments, he gently varied the rules of “dictator”. Anna, in addition to dividing up the $10 between herself and Bernard, was given the option to take a further dollar from Bernard. This option should be irrelevant. Because most Annas offer money to Bernard, they should hardly be tempted to pick his pocket. But in fact, when offered the chance to take money, far fewer Annas decide to give Bernard anything and one in five actually took Bernard’s dollar. Another experiment showed that Anna’s willingness to take from Bernard was dramatically less if she thought Bernard had earned his money. As the experimenter, List found he could nudge his subjects into being generous or mean with small variants in the set-up.

Another round of experiments, which List proudly describes as his best, were conducted at a baseball card convention. (List is a long-time baseball card collector.) List set up a baseball card trade to mimic the “gift exchange” game, and showed that baseball card traders behave just like laboratory subjects when they know they are in an experiment. But many traders didn’t know they were being watched, and they behaved far more selfishly.

Rather than re-establishing the primacy of rational choice theory, List’s experiments show that psychological factors are important – but far more subtle and complex than previous experimenters seem to have appreciated. If he undermines hard-earned reputations elsewhere in the field, tough. Nobody ever said academia was an altruistic profession.

Also published at ft.com.

Can we stop football teams ‘buying’ wins?

Dear Economist,
Should the football authorities put a cap on the total value of players, based on their transfer cost, that can play for a Premier League team in any given match? For example, although a squad might have cost a team £150m, the cap would mean that they could only use players in a match up to a value of £75m. This would create a level playing field and prevent wealthy clubs from “buying” silverware through purchasing the best players.
Keith Bates

Dear Mr Bates,

Your proposal sounds reasonable, but it is muddled on three counts. First, think of the unintended consequences of your rule. It would favour wealthy clubs with expensive established training academies, because they have a stable of young players who carry no transfer price. You would also discourage clubs from trading players if one club’s academy discovers three great goalkeepers. And would music fans be better off if Mick Jagger and Keith Richards were forced to take it in turns to play for the Rolling Stones?

Second, transfer payments are not in fact associated with success on the field. The economist Stefan Szymanski, co-author of Why England Lose, has used a statistical analysis to show that while a club’s wage bill is correlated with success, its transfer spending is not.

Finally, fans do not actually want a level playing field. Arsenal’s “invincibles” season, 2003-2004, saw them win 84 per cent of league matches and lose none. Every game was a sell-out. More rigorously, Szymanski has shown that more unequal seasons attract more fans. And why not? The big clubs have lots of fans and those fans want to see victories.

In short, you have the wrong objective, suggest the wrong rule to achieve it, and are blind to the side-effects. Any banking regulator in the world would be proud to give you a job.

Also published at ft.com.

10th of October, 2009Dear EconomistComments off

Malcolm Gladwell: Novel thinking

Q&A with Malcolm Gladwell, in Waterstone’s Books Quarterly

Malcolm Gladwell uses the techniques of a fiction writer to make his ideas persuasive, as he explains to Tim Harford

What the Dog Saw, your forthcoming book, is a collection of writing for the New Yorker. You describe it as an attempt to understand the contents of other people’s minds. What do you mean?
One of the great continuing source of mystery and excitement for human beings is the understanding we reach at a very young age is that other people’s minds are different from our own, and what we think is not what the world thinks. I think in one form or another the fascination that the world looks different through the minds of others continues indefinitely. In my writing I’m often trying to put myself into the mind of someone who has some kind of specialised perspective.

My favourite article is about Million Dollar Murray: it’s both an unforgettable story and a powerful idea about the statistics of social problems. When you’re writing this kind of essay, what comes first – the story or the theory?
In that case it was the theory. I had been chatting with homelessness advocates and came across this argument they were making that it costs more to neglect homelessness than to cure it. Now it seems obvious, but it had never occurred to me. Once I had that extraordinary fact it was just a matter of finding Murray. But since almost all chronically homeless have the same problems as Murray, finding Murray was no great feat.

You’ve become famous for your public lectures. How do the lectures and the writing influence each other?

The lecture is a great laboratory for storytelling. The lessons you learn fit beautifully in your writing. I recently gave a lecture in Glasgow and it didn’t quite work; then I gave the talk in Brighton and I fixed it. There’s no way that if you’re writing you can do that. If I was writing I would just have handed in the Glasgow draft and never had a chance to improve.

To read more, follow the link.

7th of October, 2009Other WritingComments off

Should I reveal my colourful past?

Dear Economist,
I have been divorced since 2007 and decided to start dating three months ago. I am not terribly shy of men, but I am very insecure about me. I recently met an artist whom I find extremely HOT! I am curious to know how much information about myself I should divulge to him. I have made some bad decisions in my 42 years. I am stable now, but fear some of these things may affect his view of me. What would be the benefit of opening up to him before we hit a home run?
Sincerely yours,
Seeking

Dear Seeking,

It seems to me that this is all about switching costs, a concept formalised by Paul Klemperer, an economist at Oxford University. If breaking off this relationship will be painful for you but easy for him, you had best get the skeletons out of the closet immediately and hope he doesn’t run a mile. It would be worse to have loved and lost than never to have loved at all.

If, on the other hand, your own switching costs are low, there is every reason to keep your mouth shut. Enjoy a few “home runs”, and if he later discovers that you are a former prostitute, a recovering alcoholic or a fan of Boyzone, at least you had your fun while you could.

The case for discretion is even stronger if your new beau has his own switching costs. In this case, once he has committed to the relationship he may find himself stuck with you even if he later learns the stark truth. Keep your secrets to yourself, give him a taste of what’s on offer, and wait until he’s hooked.

Come to think of it – my own wife has confessed to a few former indiscretions recently that might have given me pause for thought earlier in the relationship. I am reasonably confident that she was never a call girl. But when it comes to Boyzone, I wish I could be that sure.

Also published at ft.com.

3rd of October, 2009Dear EconomistComments off

Dan Brown and the mystery of the lost profit margin

According to his publisher, Dan “Da Vinci Code” Brown’s latest book, The Lost Symbol, sold more copies in its first 36 hours than any other adult hardback sold in total. (A certain boy wizard is excluded by the artful qualifier, “adult”.) The sales of Brown’s book were given a boost by an unprecedented price war. According to The Bookseller, an industry magazine, Waterstone’s offered a mere 50 per cent discount – £9.49 instead of £18.99. Tesco asked £7 and Asda £5. Asda’s book buyer celebrated “fantastic” sales, despite the fact that the store is thought to be losing £4 a copy. The old joke is made real: losing money on every sale, but making it up on volume.

Asda’s price wasn’t even the lowest available. The Book Depository, an online retailer, grabbed headlines with a price of £4.99 – whereupon Amazon quickly cut prices to match. These prices have prompted many people in the industry to feats of rhetorical self-flagellation. Industry insiders complained to The Bookseller about “ridiculously aggressive discounting” and asked “how can the book trade take itself seriously?”

To an economist, of course, this all makes perfect sense. Muddled thinking tempts us to speak of “the book trade” as a single sentient being. If it were, discounting a sure-fire bestseller from £18.99 to £4.99 would make no sense at all. But, happily for Dan Brown fans, the book trade does not have a single voice in charge and it would be illegal to appoint one.

Instead, the booksellers, like many other retailers, rely on unspoken conventions about the prices of their goods. Every retailer has to charge a mark-up to cover overheads, and faces a tension between the immediate pressures of competition and the need to stay in business. Every item sold, even at the tiniest mark-up, is better than no sale at all. Yet if the mark-ups are too thin, bankruptcy will not be far away. Such is the everyday tension of business, and companies tend to find a suitable level for prices where most of them can make a living. Occasional grabs for market share, or the threat of aggressive new entrants, usually prevent prices rising much above that level. Usually, but not always: from time to time an industry manages to agree a cosy arrangement that benefits everyone but the consumer.

Economists also have a clear theory about when such arrangements will tend to break down: they collapse when any future benefits from an accommodating attitude pale into insignificance compared with the prize on the table. Slow-burning bestsellers such as Jim Collins’s Good to Great seem to be sold at full price; indeed, Good to Great is still not available in paperback in the US as it nears the eighth anniversary of its publication. The book is likely to sell strongly for years to come, so why rock the boat with a price war?

Brown’s offering, by contrast, is selling hundreds of thousand of copies right now, so there is an overwhelming temptation to break ranks and offer a low price to grab a bigger slice of a smaller pie. The second puzzle is why anyone would cut prices so far as to make a loss. But that is not too hard to figure out. Asda and Tesco hope to tempt a few grocery shoppers through the door – and a £4 loss on a Dan Brown book is small change compared with the value of a shopping trolley. The Book Depository, a company I’d never heard of before the Dan Brown book launch, is presumably keen to promote itself as a cheap and efficient alternative to Amazon; Amazon is determined to discourage defectors. And why would Waterstone’s not join in the deep discounting game? Presumably because it only sells books – and the likelihood of selling quality books to Dan Brown readers is slim.

Also published at ft.com.

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