Tim Harford The Undercover Economist

Articles published in February, 2012

In the long run, there’s logic to Liam Fox

‘The pressing case to cut both taxes and spending’

Title of Liam Fox’s article in the Financial Times this week

I see Liam Fox, the former defence secretary, has emerged from his bolt-hole.

What’s the story? Syria? Iran?

No, he’s published an op-ed setting out an economic strategy for the country.

Excellent, he’s branching out. What’s he saying?

He’s saying that George Osborne should change course. If I understand him correctly, he wants the chancellor to adjust both taxes and spending so the size of the state changes, while the path of deficit reduction is unchanged.

Well, that’s wonderful – thank goodness somebody in the government has finally . . .

He’s not in the government any more. Remember Adam Werritty?

 . . . thank goodness somebody with influence on the largest political party has finally discovered the balanced budget multiplier.

The balanced budget multiplier? What’s that?

At the moment we’re locked in a fairly sterile debate. Mr Osborne’s critics say he has raised taxes too quickly and plans to cut spending too deeply, and is thus damaging the economy. Shadow chancellor Ed Balls, in contrast, wants to cut VAT and take the whole deficit-reduction thing more slowly, but the deficit is already so large that this might jeopardise our ability to borrow money cheaply.

And?

The balanced budget multiplier says there’s another way: you can stimulate the economy by raising taxes and spending the proceeds.

Why would that stimulate the economy?

A temporary tax hike makes people poorer, which will reduce their consumption and weaken the economy. However, they will probably also reduce their saving, or borrow a bit more, rather than take the hit all in one go. In contrast every penny of tax revenue will be spent immediately by the government building high-speed railway lines or schools or some such thing. So government spending will rise by more than private spending falls, stimulating the economy even as the deficit itself is unaffected. Hence, balanced budget multiplier. It’s so good to see Mr Fox proposing this.

But he’s not proposing to raise taxes and spending simultaneously; he wants to see them both cut.

Oh.

That’s the opposite of what you are talking about, isn’t it? A sort of “balanced budget shrinkifier”.

Yes it is.

Is that good?

Not so good, no.

But surely your balanced budget multiplier theory can’t be true? Or the Soviet Union would have been the economic success story of the 20th century.

You’re right. There’s a time and a place. The short-run boost to the economy will have a long-run cost as the household spending cuts are spread across several years. What’s more, most taxes have a distortionary effect, which is wasteful. And on top of that, government spending is often inefficient too.

So Liam Fox is right!

He’s almost certainly right in the long term. The UK government is spending
46 per cent of national income this year; most people will think that’s on the high side. But during a recession the balanced budget multiplier is relevant: there are plenty of slack resources that could be used cheaply by government spending programmes. Is that article demanding that action be postponed?

No, he says we must “act urgently”.

Ah. What else does he say?

He wants labour markets to be deregulated so that it’s easy to fire people. This will increase employment, apparently.

That’s not as stupid as it sounds. If it’s difficult to lay people off, employers will be very anxious to postpone hiring new workers for as long as possible, just in case there’s another downturn.

And is that a problem for the UK labour market?

Not really. Paul Gregg, an economist at Bristol University, recently told an RSA summit on jobs that the UK labour market actually performed very well during previous recoveries and, given the severity of this recession, it was surprising that even more people hadn’t lost their jobs. For Professor Gregg, the key problem was unemployment black spots – both geographically and demographically – rather than some basic regulatory flaw in the way the labour market was organised.

At least Mr Fox published his thoughts in the FT.

Indeed. In that respect his judgment is impeccable.

Also published at ft.com.

A problem shared is one quickly solved

Promoting cross-disciplinary research need not require a mysterious blend of social-networking tools and funky collaborative architectural spaces

Andrew Exum, a senior fellow at the Center for a New American Security in Washington DC, recently blogged about the question of military intervention in Syria. It wasn’t about the pros and cons but about the difficulties in weighing up this kind of decision: “Regional specialists rarely understand military capabilities and options well enough to make an argument for or against, and those who understand military capabilities and options rarely understand the regional dynamics well enough to make an argument for or against.”

This problem is hardly limited to military affairs. One reason the financial sector grew so grotesquely vulnerable just before the crisis was that the knowledge required to spot trouble brewing was distributed across different kinds of people – accountants, psychologists, economists, lawyers, politicians, practitioners and others – who had no reason to talk to each other.

In academia, the challenge of encouraging interdisciplinary research is at least recognised as a problem. The advancing frontier of scientific knowledge forces most researchers to specialise in ever narrower fields and, as a result, collaboration between these silos is essential. I recently visited the Oxford Martin School, a seven-year-old initiative designed to foster cross-disciplinary projects at the University of Oxford. I talked to the school’s director, Ian Goldin, about the challenges of breaking down academic silos.

He thinks these silos are mostly artificial. Academic journals are largely specialised rather than interdisciplinary and official funding bodies shy away from interdisciplinary projects. The result is that academics with interdisciplinary interests have few ways to fund the research and few credible outlets for publishing the results. The Martin School has funding, but most of the researchers are either junior, with some freedom to experiment, or professors so senior they no longer need to worry about their publication record. The mid-career academics are missing. It is nice to hear the tenure system sometimes produces the hoped-for courage and independence, but not so nice that there is no career track for interdisciplinary researchers.

Can we learn anything from the Martin School approach? One lesson is that an important problem can be a great focus for interdisciplinary work. “Problems tend to be interdisciplinary,” Goldin comments. To examine an issue such as migration or the spread of infectious diseases is to create a natural focus for separate specialists to find common ground.

That is all very well for slow-burning problems. Unfortunately, many problems surface without warning and demand action immediately. Syria is, arguably, a case in point. So was the collapse of Lehman Brothers. If there are no pre-existing lines of cross-silo communication at the moment of crisis, it is asking a lot for them to be established in time to share knowledge usefully.

If problems are one focal point for collaboration, tools can be another. An example: systems needed to deal with the gigantic data sets generated in finance, astronomy and oceanography. Such tools naturally bring together computer scientists and the statisticians, economists and scientists who might use the data. Goldin points to “crowdsourcing” as a second example of a cross-disciplinary tool, complexity science as a third and (optimistically, I feel) practical ethics as a fourth.

Perhaps the real lesson is that promoting cross-disciplinary research need not require a mysterious blend of social-networking tools and funky collaborative architectural spaces. All that is sometimes required is a shared problem, or a shared set of tools, and, above all, the money to pay for the job to be done.

Also published at ft.com.

Resources for economics teachers: the Economics Network

I have just agreed to become a patron of the Economics Network. Perhaps the most useful thing I can do in that capacity is to draw your attention to the fact that the Network has assembled a large collection of resources for economics teachers.

If that’s not enough for you, check out Jim and Geoff Riley’s A-Level economics blog.

24th of February, 2012ResourcesComments off

The stand-up economist: sh*t happens

The latest from the excellent Yoram Bauman. Do check out his cartoon guides to economics.

Could we live without cash?

Like euthanasia, proposals to do away with physical currency could remain controversial for a long time to come

I’ve just started to give my daughters pocket money, and it’s fascinating to see how they deal with it – not the income, that is, but the physical cash itself. The younger Miss Harford hasn’t figured out that by tradition, the five [doh!] seven-sided coins are worth half as much as the stubby fat ones. (The swaps that her clued-up older sister proposes have to be monitored with some care.) She has also failed to gain any visceral appreciation of the fact that these metal discs can be used to obtain sweets and toys, useful things. She is fascinated by the coins as objects in their own right.

The visceral appreciation for cash will presumably arrive. Cash, it seems, does strange things to us. Ask people to count money and then subject them to pain, and they are more resistant than a control group who have been asked merely to count pieces of paper. Cash is also a social anaesthetic. In another cash- or paper-counting study, experimental subjects were asked to play “catch” in a group comprised of stooges. They never received the ball. The cash counters were less likely to feel socially excluded. Huge bonuses for bankers are both the cause of, and the cure for, their public humiliation.

Physical cash also makes us cautious relative to spending money on credit cards. Drazen Prelec and Duncan Simester, behavioural economists at MIT, ran an experiment in which two groups of subjects were allowed to bid on tickets to sporting events. One group had to pay in cash within 24 hours, the other had to pay with a credit card. The cash buyers offered substantially less – in the case of the best tickets, less than half as much.

Then there is the idea that cash makes us honest. Dan Ariely, author of Predictably Irrational, has found that people are reluctant to cheat in order to win physical cash, but will gladly cheat in order to win poker chips that can immediately be redeemed for cash. (In a less compelling study Ariely placed either six-packs of Coke or plates with six $1 bills in student dorm refrigerators. The Cokes vanished quickly and the cash remained – perhaps because your first instinct after finding cash in a refrigerator is that you are entering the “twilight zone”.)

All this and more came to mind on reading David Wolman’s new book, The End of Money. Wolman spent a year largely living without physical money, using a variety of electronic payment methods instead, and he thinks it would be a good idea if the rest of us did likewise.

After a while, Wolman’s cash-free lifestyle begins to look like a compulsive disorder. Offered bills, he would “flick them away like mosquitoes”, imagining “the stepped on, sweat-drenched, and hyper-handled life cycle of that cash”.

To his credit, Wolman also reports that cash is highly unlikely to be much of a vector for disease. A more telling complaint is its use for crime. For all the fuss we make about online transactions and credit card fraud, the simple anonymity of cash makes it irresistible for all manner of illicit business.

Wolman is worried about the $100 bill and simply cannot fathom why Europe has a €500 note – allowing a cigarette packet to contain €20,000. Law-abiding citizens would surely find it more convenient to load cash on to a chip contained in a card, a watch or – most likely – a mobile phone. Mobile phones could easily zap cash to each other, when friends want to split a restaurant bill or repay a small debt.

We probably do not appreciate the huge costs of defending cash from thieves and counterfeiters, and Wolman makes a brave case for the idea that “killing currency wouldn’t be a trauma; it’d be euthanasia”. Like euthanasia itself, I suspect that proposals to do away with physical currency will remain controversial for a long time to come.

Also published at ft.com.

Love is blind, unless you’re an economist

Did you have a good Valentine’s day?
Very good indeed, thank you. After all I am married, and also an economist.

Neither of those attributes immediately points to an enjoyment of Valentine’s day.
Au contraire, many people find Valentine’s day miserable. Single adults have their noses rubbed in cloying faux-romanticism; insecure teenagers count their Valentine cards; dating couples feel under pressure to produce romantic gestures on a day when such gestures ring hollow. It is really only the married people who can view the whole festival with equanimity.

Equanimity is one thing, pleasure is another. Why would you derive joy from other people’s misery?
I have been perusing the happy-nomics literature and apparently I am supposed to feel happy when those around me have less money than I. I am trying to shed my textbook economic rationality and join the human race, and apparently the way this is done is to enjoy invidious situations. I am not sure why.

You may have got the wrong end of the stick. And you have not explained why economists are well-equipped to enjoy Valentine’s day.
My friend, we are masters of the arts of love.

You make it sound as though Keynes’s General Theory should be filed alongside The Joy of Sex and the Kama Sutra.
Well, Keynes’s contemporary Joseph Schumpeter was fond of saying that he had vowed to be the greatest economist in the world, the greatest horseman in Austria, and the greatest lover in Vienna … and that things were not going well with the horses.

Very droll.
Schumpeter is not the only romance expert in the economics profession. Take Hugo Mialon, who just recently published, in Economic Inquiry, “The Economics of Faking Ecstasy”.

Sounds useful.
It isn’t, really, although it’s clever.

Clever but useless? Sounds like, oh, every economics paper ever published.
Touché. But Michèle Belot and Marco Francesconi’s article, “Can Anyone Be ‘The’ One?” is economics you can use, at least if you go speed-dating.

Tell me more.
Belot and Francesconi’s research is based on data supplied from the UK’s largest speed dating agency, based on many hundreds of fleeting conversations, a treasure-trove of information about who wants a second date with whom. To cut to the chase, you are more likely to find a romantic partner if you are a well-educated non-smoker. If you are a man, it helps to be tall and rich. If you are a woman, it helps to be slim.

You’re not exactly shattering stereotypes here.
Perhaps so, but it is good to find out what the data really say. Belot and Francesconi also discovered that dating success is relative to the attractiveness of the other people in the room. In other words, if you want to succeed at speed dating, bring a short ugly friend with you.

All duly noted, but speed dating is a bit of a fad, isn’t it? Surely the real action is online.
Economists have also been studying internet dating. Dan Ariely, a psychologist, alongside a pair of economist colleagues, once published a splendid analysis of what works in online dating by scraping information off dating websites.

Lying, I would imagine, is the way forward.
Well, yes, lying does work – albeit that Ariely and his colleagues aren’t able to see how the dates themselves pan out, merely whether a particular ad is garnering attention. But the they did discover that the typical user of online dating websites claims to be richer, slimmer, blonder and prettier than the rest of the population. It’s a Lake Woebegon world, online dating.

Any practical advice from Ariely?
Posting a photograph is a very good idea. No matter how hideous you might think you are, people will draw regrettable conclusions if you do not supply a picture. Ariely argues that online dating is poorly designed, in any case, because it relies on matching database-friendly categories of “interests”. Actually finding out whether someone is a good match would be much more easily done if, for instance, the dating website showed each of you some conversation pieces – music, art, stories, jokes – and encouraged you share your reactions with each other online. Why not show this article to the next person you date and see what he or she makes of it?

Also published at ft.com.

Nudge, nudge. Think, think. Say no more …

I hear the Nudge unit is in the news again …

I am waiting for the government to establish a Dig in the Ribs unit. Maybe even a Slap and Tickle unit, who knows?

Don’t be silly. Remind me what Nudge is again?

It started as a concept, “libertarian paternalism”, advanced by two American academics, Richard Thaler and Cass Sunstein. The idea was that the government could help people to help themselves without violating their liberty – for instance, by assuming they would like to make pension contributions unless otherwise stated. Then it became a book and the concept got a bit broader and a bit vaguer and more generally about the use of psychology and behavioural economics in policymaking. Then “Nudge” became a fashionable label to be slapped on any policy in search of a headline. Finally, David Cameron set up the Behavioural Insight Team – aka the Nudge unit – to do more research on the subject. The Cabinet Office published some of their findings this week.

This sounds an unpromising pedigree …

Well, the idea of using a popular economics book as a branding exercise certainly smacks of superficiality. But the idea of doing actual experiments to improve policy is a good one and, perhaps surprisingly, that’s what the Behavioural Insight team has been doing.

Why are you surprised?

I am surprised – pleasantly surprised – because these experiments risk failure and take time, neither of which are qualities calculated to endear them to politicians. The Nudge unit has managed to get around this by conducting some experiments on a large scale and examining short-term questions, such as whether people will respond to a letter about tax. This makes it possible to produce results very quickly.

For example?

Let’s say somebody has been fined in court but has not paid. You could send in the bailiffs. Or you could send a text message explaining that if the fine isn’t paid quickly, the bailiffs will be on their way. The Behavioural Insight team and the courts service ran a randomised trial, sending no text message to some people and a variety of text messages to others to see which approach works best. It turns out that text messages are highly effective and even more effective is a text message that mentions the miscreant’s name. The difference between no message and a personalised message is that instead of one in 20 people immediately paying up, one in three people do. That adds up to 150,000 occasions on which the bailiffs need not be called in.

This doesn’t sound like rocket science …

No, and it’s not brain surgery either. But it does appear to work. Sometimes these effects are mind-numbingly obvious. For instance, a letter sent by HM Revenue and Customs to chase up tax from doctors was vastly more effective after being written in a straightforward way with the key messages and request for action at the top of the letter. It was just as effective as an alternative that shoehorned in many fancy behavioural insights.

Why do we need these experiments at all, then?

There are a couple of reasons. The first is that human psychology is full of surprises. The report from the Cabinet Office contains no jaw-dropping discoveries but it does show that some sensible-sounding interventions have no effect, while others have very large effects. The second reason is that credible experiments tell a powerful story. I am told that the phone is ringing off the hook at the Behavioural Insight team office – government departments are queueing up to get some of that Nudgey goodness.

Nice for them, but I thought Nudge was all about persuading us to go to the gym

That has been its reputation, but so far the focus has been persuading people to pay taxes and fines and get a driving licence. A lot of the details are, frankly, pedestrian. But if core functions of government can be conducted more effectively the stakes are far from trivial. These experiments suggest that they can.

Do the experiments really stack up?

Most of them are work in progress. But while the Cabinet Office has obviously rushed to publish early results, they don’t look like a botched job. In an ideal world we’d get peer review, a registry of experiments and eventually systematic reviews. For now, I think we should be grateful that somebody is bothering to ask what works.

Also published at ft.com.

How do you strip down the state?

Government cuts are shrinking the state, but gauging its size in the first place is hardly straightforward

Love this government or hate it, the consensus is that it is rolling back the state with a vengeance. Supporters agree with David Cameron’s pre-election diagnosis: “it is more government that got us into this mess.” Sceptics accuse the coalition of unnecessary cuts, fuelled by an ideologically driven love of small government.

All of which made me wonder: how big is the British state? It’s not a straightforward question. One could consider measures of regulation, or public sector employment. Then there are tax revenues, which since the mid 1990s have never been less than 36 per cent of national income, and never more than 39 per cent.

An alternative is to look at government spending. I prefer this as a measure of the size of the state, because – barring a default – all spending must eventually be paid for by taxes (or inflation). By this measure, the state is much bigger: total managed expenditure is more than 46 per cent of national income this tax year.

What’s more, according to “Green Budget 2012”, recently published by the Institute for Fiscal Studies, expenditure would have stayed near that level indefinitely without action. That action was pencilled in by then-Chancellor Alistair Darling as the impact of the recession became clear, and has since been amplified by George Osborne. The coalition’s austerity measures – four-fifths of which are spending cuts rather than tax increases – will eventually push spending back below 40 per cent of national income, which is where it was for most of the time that Gordon Brown was chancellor of the exchequer.

So assuming Osborne gets spending back down to 40 per cent of national income, would he have succeeded in producing a small state?

That spending includes pensions and benefits – in other words, redistributing money to the unemployed, the retired and the fecund from childless people with well-paid jobs. Then there’s free healthcare, free education, the army, the police, the courts, and infrastructure such as roads.

This is a lot. Is it worth £40 of every £100 that you earn? You can be the judge of that. Many people would regard it as good value for money. But it certainly does not look like a vision of a stripped-back, “night-watchman” state to me. If the austerity is motivated by libertarian ideology, true libertarians will be unimpressed with the results.

This is not to say the austerity is timid. Many economists would prefer more of the spending cuts to be deferred for a year or two until the economy is stronger (that said, according to the IFS, the cuts are not well advanced: 12 per cent down and 88 per cent to go). And spending 40 per cent of GDP will feel like a smaller state in 2015 than it did in 2003 or 1995. This is because, thanks to an ageing population and a rapidly growing national debt, the cost of providing pensions, paying interest and funding the National Health Service will all rise substantially.

Is there an alternative? A Labour government would have cut more slowly and perhaps would have cut less, but it is hard to imagine closing the deficit through tax increases alone – that would require tax revenues as a percentage of national income to rise by about a quarter. Imagine VAT up to 25 per cent, income tax up to 25, 50 and 65.5 per cent, and 14p on the price of petrol, and you get a rough-and-ready idea of what sort of taxes might be needed. Such taxes could be paid, but would be a huge departure from how we have grown accustomed to organising our society.

There are good reasons to object both to the timing and the details of the spending cuts. But the idea that they will produce anything like a stripped-down state looks far-fetched.

Also published at ft.com.

Five steps to an organised inbox

Here are a few microeconomic analysis-tested tips to get your email under control:

I always liked Keynes’s view that it would be splendid if “economists could manage to get themselves thought of as humble, competent people on a level with dentists”. Time, then, to apply the power of microeconomic analysis to the important practical task of getting your email under control.

Step one: take advantage of free disposal. Simple textbook economic problems assume that you can never have too much of a good thing – at worst, you can always throw away the stuff you don’t want. We economists call this the assumption of “free disposal”. Of course, free disposal does not apply if you’re talking about visiting relatives, a tatty sofa or a breeding population of yoghurt pots at the back of the fridge. It is remarkably easy, however, to get rid of email: all that is needed is the “will to delete” – ideally the deletion should be swift and without remorse.

Step two: take a data-driven approach. A long-running question is whether you should organise your email into folders or not. Over the past couple of decades, our computer filing systems have trained us to think in terms of folders, but an alternative is to find old email by searching for it – or even just scroll through a big fat unsorted inbox. Steve Whittaker, a computer scientist at IBM Research, with four colleagues, has conducted a study to figure out the effectiveness of these different approaches. It’s called “Am I wasting my time organising email?” and the conclusion is “yes, you are”.

Searching for email tends to be quicker and no less reliable than filing it. I’d suggest that if you must file, choose something simple – for example, a file called “Not Done Yet” and a file called “Archive”. That should handle most contingencies. This conclusion is interesting but so too is the research method: look at what people do, quantify how effective it is, and let the data speak.

Step three: invest wisely. A complex file structure may be a wasted investment, but other up-front efforts can pay dividends in the long run. About two months ago, I began to be quite fastidious about hitting “unsubscribe”, or blocking people who sent unsolicited junk. Without wishing to tempt fate, I think I am winning this battle – the inbox is beginning to look almost human, filling up at a genteel pace with genuine email from friends and acquaintances rather than mailing lists and unknown publicists. On most email programmes such filters are very simple and quick to set up; at first they might seem more trouble than they are worth, but trust me, they can pay dividends.

Step four: remember that, in extremis, bankruptcy can be your friend. From time to time individuals or companies can find themselves in a situation where the shadows of the past are simply unmanageable. We’ve found it helpful to introduce procedures for bankruptcy, whereby a line can be drawn under unpayable debts and everybody involved can figure out where they stand. Email bankruptcy can work for you, too.

Simply craft a short email explaining that you have become overwhelmed by your email and are not going to respond, and inviting them to send the email again if it’s really important. Email bankruptcy, like real bankruptcy, is probably not as much fun as it sounds – and easier for arty types and high-status individuals. But for some people, it beats the alternative.

Step five: never forget opportunity cost. Opportunity cost is the idea that what you’re paying for something – anything – is whatever you have to give up in order to get it. Email has a cost: every hour spent wading through the inbox is an hour that isn’t being spent doing something more useful, such as reading a book, relaxing with the family or even writing a handy column about how to manage your email.

Also published at ft.com.

Everyone’s a critic now – or are they?

‘The ASA has banned TripAdvisor UK from claiming or implying that “all the reviews that appeared on the website were from real travellers, or were honest, real or trusted” on its UK site’

Financial Times, February 1

The ASA?

The Advertising Standards Authority. They don’t like the fact that TripAdvisor, a company that operates websites providing travel advice, has been claiming that reviews on its UK site are written by real people.

Who else might they be written by?

Well, they could be written by automated software. Or by real people who are nevertheless not genuine customers – for example, the owner of the restaurant in question, or the owner of the restaurant across the street from the restaurant in question. Or they could be written by customers who have been offered bribes. It may well be that such abuses are rare – TripAdvisor is at pains to assert that they have various safeguards. Still, it cannot prove that dishonest or fake reviews are impossible, hence the ASA ruling.

But it’s not really news that people do dubious things online, is it?

No. And online reviews aren’t new either. But they seem to have been more of a sore point on TripAdvisor than reviews on Amazon or ratings on Ebay. Partly it’s about the stakes: from the customer’s point of view, buying a substandard romantic novel is trivial, whereas a ruined weekend tryst in Paris is a minor tragedy. It’s also about the possibility of malicious reviews. I could post grim reviews of Freakonomics and Outliers in the hope of boosting my own book sales, I suppose, but even if my reviews were taken seriously it is not clear I would benefit. On the other hand, if I ran a gastropub in a picturesque village with a single rival, it’s fairly clear that I might benefit if I could persuade potential visitors that my rival left a trail of disgusted customers in its wake. So both the customers who read reviews on TripAdvisor and the businesses being reviewed have a lot to lose if the review system is corrupt.

Full of sound and fury, signifying nothing?

Signifying $4.4bn, if TripAdvisor’s market capitalisation is anything to go by. And people do take online reviews about as seriously as they deserve to be taken.

How seriously is that?

The limited evidence we have suggests that people are drawing quite sensible inferences from the reviews they read. Ebay auctions have been studied by the economist David Reiley and a number of his colleagues. Reiley finds that positive ratings for a seller push up the prices she receives, but that the effect is small and not statistically significant. On the other hand, negative ratings have a much larger and statistically significant effect in depressing prices. This makes sense: sellers might go to some lengths to round up friends (or “sock-puppets” – online aliases that they control) and ask them to post positive ratings. But who bothers to post negative Ebay ratings for the sheer joy of it? Negative ratings are also rarer and so might be regarded as more informative.

Seller ratings aren’t the same as reviews.

No, but we also have evidence on Amazon reviews, thanks to work by Judith Chevalier and Dina Mayzlin. They compared books for sale on the Amazon and Barnes & Noble websites, observing both the reviews and the relative popularity of any given title on each site. This is a nice statistical tool. Obviously one would expect good books to earn good reviews and lots of sales, but when a book has particularly notable reviews on one site, Chevalier and Mayzlin were able to use that fact to track the effect of the reviews on the book’s sales.

And?

It’s a similar story to that which David Reiley found on Ebay: reviews can affect sales, for good or ill, but negative reviews have a much greater impact.

Wouldn’t it be better if reviewers themselves were properly identified?

This does happen – for instance Amazon can use credit card details to verify the identity of a reviewer, should that reviewer want to be identified. Social networks such as Facebook and Google Plus prevent anonymity and have tried to prevent pseudonyms too. The advantages of this are obvious as far as the likes of TripAdvisor are concerned – so too are the advantages to, for instance, the Chinese police. An alternative is to allow users of a website to review the reviewers. But who reviews the reviewers of the reviewers? Apparently it’s reviewers all the way down.

Also published at ft.com.

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