Tim Harford The Undercover Economist

Articles published in May, 2013

Royal Society Annual Public Lecture

I am delighted to announce that I will be giving the Royal Economic Society’s annual public lecture this year, in Sheffield on 26th November and London on 28th November. Come along! (Tickets will be released in September.)

Next series of Pop Up Ideas to be recorded on June 10th

Pop Up Economics is now Pop Up Ideas, and the next series will be inspired by ideas from anthropology and political science. We’re recording the entire series in front of a live audience – please come along. You can apply for free tickets here.

Speakers will include anthropologist / capital markets editor of the Financial Times, Gillian Tett; counterinsurgency expert David Kilcullen; and a man who needs no introduction, Malcolm Gladwell. And yours truly, of course.

26th of May, 2013RadioSpeechesComments off

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Misinformation can be beautiful too

Data visualisation creates powerful, elegant images from complex information, but can also be potentially deceptive

Camouflage usually means blending in. That wasn’t an option for the submarine-dodging battleships of a century ago, which advertised their presence against an ever-changing sea and sky with bow waves and smokestacks. And so dazzle camouflage was born, an abstract riot of squiggles and harlequin patterns. It wasn’t hard to spot a dazzle ship but the challenge for the periscope operator was quickly to judge a ship’s speed and direction before firing a torpedo on a ponderous intercept. Dazzle camouflage was intended to provoke misjudgments, and there is some evidence that it worked.

Now let’s talk about data visualisation, the latest fashion in numerate journalism, albeit one that harks back to the likes of Florence Nightingale. She was not only the most famous nurse in history but the creator of a beautiful visualisation technique, the “Coxcomb diagram”, and the first woman to be elected as a member of the Royal Statistical Society.

Data visualisation creates powerful, elegant images from complex data. It’s like good prose: a pleasure to experience and a force for good in the right hands, but also seductive and potentially deceptive. Because we have less experience of data visualisation than of rhetoric, we are naive, and allow ourselves to be dazzled. Too much data visualisation is the statistical equivalent of dazzle camouflage: striking looks grab our attention but either fail to convey useful information or actively misdirect us.

For a relatively harmless example, consider The New Yorker’s recent online subway map of inequality. “New York has a problem with inequality,” we are told. Then we are invited to click on different subway maps to see a cross-sectional graph, showing us the peaks and troughs of median income along different subway lines. The result is gorgeous but far less informative than a map would have been. It is a piece of art pretending to be a piece of statistical analysis.

A more famous example is David McCandless’s unforgettable animation “Debtris”, in which large blocks fall slowly against an eight-bit soundtrack in homage to the addictive computer game Tetris. Their size indicates their dollar value. “$60bn: estimated cost of Iraq war in 2003” is followed by “$3000bn: estimated total cost of Iraq war”, and then Walmart’s revenue, the UN’s budget, the cost of the financial crisis, and much else.

The animation is pure dazzle camouflage. Statistical apples are compared with statistical oranges throughout. The Iraq comparison, for instance, is not one of “then versus now” as it first appears – but one of what the US Department of Defense once thought it would spend versus a broader estimate, including a financial value on the lives of dead soldiers, and over a trillion dollars of “macroeconomic costs”. The war was a disaster. No need for a statistical bait-and-switch to make that case.

Information can be beautiful, McCandless tells us. Unfortunately misinformation can be beautiful too. Or, as statistical guru Michael Blastland puts it, “We are in danger of making the same statistical mistakes that we’ve always made – only prettier.”

Those beautiful Coxcomb diagrams are no exception. They show the causes of mortality in the Crimean war, and make a powerful case that better hygiene saved lives. But Hugh Small, a biographer of Nightingale, argues that she chose the Coxcomb diagram in order to make exactly this case. A simple bar chart would have been clearer: too clear for Nightingale’s purposes, because it suggested that winter was as much of a killer as poor hygiene was. Nightingale’s presentation of data was masterful. It was also designed not to inform but to persuade. When we look at modern data visualisations, we should remember that.

Also published at ft.com.

Loose money in all that spare change

The disappearance of small coins will be little noticed, writes Tim Harford

‘There is a wish among the German population to keep hold of the small coins. can personally only join that opinion.’ Jens Weidmann, Bundesbank president, quoted in the German newspaper Bild

Why is a German central banker bothering to campaign for the retention of the euro cent? It’s not as if anyone is proposing scrapping them.

Actually, the European Commission has proposed exactly that.

Oh.

They have a case: one and two euro-cent coins are expensive to make, relative to their face value. And they are useless things, as are the British penny and the US cent.

But people don’t want to see these coins disappear.

There does seem to be a psychological barrier. This is most obvious in the US, which did away with the half cent back in 1857, when it was worth quite a bit – 14 modern cents, after adjusting for consumer prices. Relative to the wages of the day, the half cent was worth almost a dollar in today’s money. It was no small thing to get rid of the half cent when people were only paid a few cents an hour. Nevertheless, the coin was withdrawn and everyone survived. Modern pennies, because they feel like some kind of foundational building block of the monetary system, have clung on stubbornly.

And why not? We like them.

No, we hate them. Actions speak louder than words. People don’t use these coins as money, for the excellent reason that they’re not terribly useful as a medium of exchange – too heavy and too difficult to count when purchasing anything but the tiniest item. The reason that so many euro cents have to be minted is that people get the things in change but don’t then spend them. They end up down the back of sofas or gathering lint in people’s belly buttons.

Isn’t that Gresham’s law or something?

It’s actually a weird inverted form of Gresham’s law, which says that “bad money drives out good”. When two coins with the same face value are circulating, people will tend to spend the coins with lower metallic value and keep the rest. The commemorative John F. Kennedy half dollar, for instance, was 90 per cent silver when first minted in 1964. Later half dollars contained less, then no silver. Gresham’s law predicts that the silver half-dollars will not circulate – and indeed, they do not. According to the website Coinflation, the melt value of a 1964 half dollar is $8. But the situation with the euro cent is the reverse: people hold on to them not because they are too valuable to lose but because they are too trivial to use.

Or they are popped in a charity collection box. Charities have a lot to lose if small-denomination coins are abolished.

The cost of keeping these coins in circulation has been €1.4bn since 2002, according to the European Commission. We should be able to figure out a cheaper way to encourage donations.

But the euro cent is hardly the least valuable coin in the world.

Indeed not. The More or Less programme on the BBC looked into this in 2012 and found a number of absurdly small-value coins. A jar of 500 of Tanzania’s smallest coin, the 5 cent piece, was worth just one British penny. There were 1,300 Burmese pya to the penny. The lowest-value coin in the world was Uzbekistan’s 1 tiyin.

How much is that worth?

One hundredth of a som, which as I am sure you know means that the tiyin was worth about one-three thousandth of a penny.

Has any country withdrawn small-denomination coins?

Various economic basket cases have, yes: Sweden, Australia, New Zealand and the home of the next Bank of England governor, Canada. New Zealand’s smallest coin is the 10 cent piece, worth more than 6 euro cents or 5 pence. The most valuable smallest coin of all is the Norwegian krone, worth more than 13 euro cents or 11 pence. The Norwegian economy has coped.

Things are awfully expensive in Norway. Perhaps people are right to fear inflation if these small coins are eliminated.

There’s a question of cause and effect here. Are things expensive in Norway because the country abolished smaller denominations, or were smaller denominations abolished because things were expensive? Don’t worry about inflation: the effect of scrapping small coins is unlikely to be noticeable, and inflation in the eurozone is low anyway. I don’t think the bastions of small-denominationism – Tanzania, Myanmar and Uzbekistan – suggest there is anything especially prophylactic about keeping our smallest coins.

Also published at ft.com.

The antisocial network?

Two economists have been collecting data to assess whether online friends are good for the soul. The quick answer: not really

Eliza was the first software to simulate human conversation. It was developed in the mid-1960s by Joseph Weizenbaum, a computer scientist at MIT. The most famous version mimicked a psychotherapist, thus hiding its conversational incompetence: “Men are all alike.” “In what way?” “They’re always bugging us about something specific or other.” “Can you think of a specific example?” “Well, my boyfriend made me come here.” “Your boyfriend made you come here?” And so on.

It was a clever program but Professor Weizenbaum, who died in 2008, was disturbed by the fact that several people seemed to find talking to Eliza genuinely therapeutic. Computers, concluded Weizenbaum, might not be terribly good for our emotional wellbeing.

These days, concern has moved to the amount of time we spend checking social networks – even if our online friends are, presumably, human beings. Two economists, John Helliwell and Haifang Huang, have been collecting the data necessary to assess whether such online friends are good for the soul. The quick answer: not really.

Helliwell and Huang analyse a Canadian social survey of 5,000 people called the “Happiness Monitor”, which measures how happy, stressed or satisfied with their lives people are, using a variety of standard questions. The Happiness Monitor also asks people how many friends they have in their real-life social network, as well as how large their online network is.

They find that having troops of friends is correlated with a sense of wellbeing. (As is common with such exercises, the direction of causation is unclear: perhaps happy people attract friends.) The effect is substantial: having twice as many friends is associated with the same increase in happiness as having a 50 per cent increase in income. But move the social network online, and larger networks do nothing for our happiness. Millions of digital sceptics will be unsurprised.

I am sceptical about the value of Facebook myself, but the most natural reading of Helliwell and Huang’s results is that a Facebook “friend” is not necessarily a friend at all, just a setting that tells software whose status updates to show us. The Happiness Monitor doesn’t even use the word “friend” when asking about the size of online social networks. (I have 73 Facebook friends and 65,000 Twitter followers, and it is not clear which represents the size of my online social network.)

Another study, by Fenne Deters and Matthias Mehl, published late last year in Social Psychological & Personality Science, asks a different question about our online socialising: how do we feel when we post status updates to Facebook? And how do we feel if nobody responds? Deters and Mehl ran a randomised trial with 102 students at the University of Arizona. The control group was given no specific instructions; the treatment group was asked to post more status updates “than they usually post per week”. Some ignored the instruction – but those who did not said they felt less lonely. It would be easy to over-interpret these results: the sample is small and there is something artificial about posting updates to Facebook in response to the request of an experimental psychologist.

The study is intriguing. It did not seem to matter whether anyone responded to the status updates. Perhaps people felt that they were being read even if there was no feedback; or perhaps responses came via email, text or face to face, unseen by the experimenters.

Or perhaps Facebook updates make us feel connected even though nobody out there is listening. That suggests a curious view of social networking: it may have little to do with true socialising. We may simply feel satisfied with the illusion that someone is paying attention. Joseph Weizenbaum, the creator of Eliza, would not have been surprised.

Also published at ft.com.

Mile-high bid to step up to a better class

Auctions seem a fine way of assessing willingness to pay, writes Tim Harford

‘For those seeking a way out of the economy cabin, a number of airlines, including Virgin Atlantic, Etihad, Austrian Airlines and Tap Portugal offer a facility whereby you tell them what you are prepared to pay to get upgraded.’
Financial Times, May 15

Am I supposed to be impressed? Isn’t the normal method of being upgraded to pay for it?

I think the distinction here is that traditionally, the customer – or the customer’s employer or client – pays the sticker price to fly business class or first class. This new scheme invites the customer to suggest the price. The airline will sit on that bid for a while, see whether better offers come in and, depending on how busy the front of the aeroplane is, will accept or reject the offer.

I see – that is a change.

Yes, but not a big change. A well-designed auction flushes out information about what people might be willing to pay, and charges accordingly. In some markets that is a very useful innovation, but there’s a reason why Tesco doesn’t run auctions when you pop in to buy milk.

It’s too much hassle, of course.

Partly that – although it is possible to run auctions incredibly quickly and cheaply in some circumstances. Every time you type in a search term on Google, the company runs a quick auction to decide which adverts to display. But Tesco doesn’t need to bother trying to figure out how to run auctions because it already has a fantastic amount of information about willingness to pay in general. It may also have information about your own shopping habits through which it can offer selective discounts.

And the same must be true for airlines.

Yes. Airlines are always tweaking the prices of their seats on each particular flight as the departure date looms and the plane starts to look full or empty. The auction may generate a bit of extra information, and therefore a bit of extra cash, but it seems marginal. My theory is that airlines want to differentiate between people who insist on flying business class and people who are willing to take a chance that they will not. A good way to offer different prices to these people is to sell some seats upfront and others in a more opaque auction.

Still, you’re making auctions sound rather passé.

This idea seems passé, but auctions certainly aren’t. The Bank of England uses auctions to determine how to inject liquidity into the banking system, for instance. This is a challenge because the problem is multidimensional: the BoE could offer loans backed by all sorts of different collateral, but would rather lend against safe collateral than riskier stuff. The potential interest rates at which the loans might be made depend on how desperate the system as a whole is for liquidity, but the spread between loans on safe collateral and loans on dodgy collateral should also vary depending on demand. Paul Klemperer, an economist at Oxford university, calls this general problem a “product mix auction” and has figured out a way to make the process run instantaneously, rather than dragging out for weeks as government auctions of yesteryear used to do.

It’s a long way from Sotheby’s, though. Or for that matter, a long way from eBay.

Both Sotheby’s and eBay accept proxy bids that come into play only when needed, and that is the key to Prof Klemperer’s scheme. And Sotheby’s could use a product mix auction to sell off a wine cellar, full of cases of similar but not identical wines. But you are right: auctions are becoming automated and a lot of auctions take place without us puny humans knowing. Your electricity supplier may soon be installing a computer that will vary the price of electricity by the second, and if prices are high some of your appliances will drop out of the bidding: the lights will dim, the fridge will allow the temperature to rise a little, the immersion heater will wait for a more propitious moment. An auction is a natural way for the computers to determine who gets priority.

I, for one, welcome our new silicon masters. Anything else?

You can already auction off your time to the highest bidder through Amazon’s “Mechanical Turk”, an online marketplace for small tasks requiring a bit of human judgment. It’s possible that sort of thing might become more widespread. On which point, I’ll have to leave you. This conversation was pleasant enough but I’ve just received a better offer.

Also published at ft.com.

18th of May, 2013Since You AskedComments off

Proof that leaders need to look the part

We expect successful people to be attractive, writes Tim Harford

‘Governor Chris Christie, who once famously called himself “the healthiest fat guy you’ve ever seen”, disclosed Tuesday he had secretly undergone weight-loss surgery, a major new step by the potential Republican presidential contender to address both his health and a political vulnerability.’
Associated Press, May 7

I always thought Governor Christie was too fat to be president.

You shouldn’t judge a book by its cover, even if it is a padded cover. Mr Christie claims the surgery cialis was for health reasons anyway.

I’m sure I don’t know the inside of Mr Christie’s mind, even if I do now know more about the inside of his abdomen than I care to. I just think the American electorate, like many electorates, judge politicians at least in part by their appearance.

That does seem to be true. Presidential elections are usually won by the taller candidate, for example. The last president to be elected who was shorter than the average American man was William McKinley; that was in the 19th century. Most presidents have good hair. Every president so far has had a penis.

Quite – none of these are terribly profound indicators of political competence.

Don’t be quite so sure of that. Nobody doubts that striking looks are an asset for a film star or a model. Perhaps they make other people more productive – people in sales, for instance. We do know that more beautiful people tend to earn more; slimmer people tend to earn more; taller people tend to earn more and better-groomed people tend to earn more. Maybe this is discrimination, or maybe beautiful people are better at their jobs. After all, we want politicians to speak persuasively. Why shouldn’t we want them to look persuasive, too? Or maybe something else is going on.

Such as?

It’s possible that physical appearance is correlated with something else we care about. People have made the same complaint about Mr Christie’s weight as they made about President Barack Obama’s nicotine habit: that it showed a lack of willpower. Admittedly, that’s not a very good argument – being fat is a pretty weak indicator of low willpower and one would hope that the campaign trail would provide a slightly better guide to a politician’s character.

Tall politicians win elections, but you can’t gain height through sheer determination.

Height is interesting for a different reason. There is a correlation between being tall and having a good job, and the natural explanation for that is some kind of discrimination. But the economists Anne Case and Christina Paxson argue that height is also correlated with intelligence, even for children. What seems to be going on is that poorly nourished children will tend to lose out both mentally and vertically.

I know some tall people who are pretty dim.

Of course you do. These are just statistical tendencies. When we make a snap judgment about someone because they are fat, or short or ill-groomed, we are doing both them and ourselves a disservice. Which leads to another intriguing possibility: that years of these unfair snap judgments make pretty people self-confident and ugly people shy, hesitant or bitter – and so the superficial judgments eventually become self-fulfilling.

That sounds very speculative to me.

There is some evidence for the idea, though. Two researchers, Markus Mobius and Tanya Rosenblat, confronted their experimental subjects with a series of maze puzzles, asking them to guess how quickly they could solve the mazes before inviting them to have a go. More beautiful subjects were more self-confident, but not actually any better at the task. So perhaps there is something in the idea that our appearance ends up having important effects on personality.

We’re faced with an embarrassment of riches.

True. There are many reasons why appearance may be correlated with success in life. But one study by the economist Daniel Hamermesh cleverly isolated the purely superficial effect. Professor Hamermesh looked at candidates who stood for election to an association more than once, and showed that their chances of success rose when they used a more flattering photograph.

Voters can be so superficial.

It is disappointing – especially since this should, in theory, have been the world’s most rational electorate: the members of the American Economic Association.

Also published at ft.com.

Patently a stitch-up

Are smartphone patents helping innovation – or strangling it?

I’ve been thinking about a remarkable industrial designer, a man who built on previous innovations to produce an indispensable product and a corporate titan. Not Steve Jobs, of course, but Isaac Singer, the developer of the first commercially successful sewing machine.

Singer and Jobs have something else in common: their products both became embroiled in bitter legal wrangling over patents. Jobs told his biographer, Walter Isaacson, that “I’m going to destroy Android, because it’s a stolen product. I’m willing to go thermonuclear war on this.” Singer threatened to kick Elias Howe down the stairs when Howe demanded cash from him for infringing Howe’s patent.

The courts eventually backed Howe, but many other patents existed and soon the entire US sewing machine industry seemed more interested in suing rivals than selling sewing machines. That will surprise nobody who pays attention to the legal battles over smartphone patents – and many observers have come to the conclusion that patents are not helping innovation, but strangling it.

Is that true? Patents give a temporary monopoly to inventors. This will raise prices and constrict supply, which is bad. But in the long run the patent should promote innovation by encouraging inventors to develop new ideas. This is a balancing act, not a matter of moral or practical absolutes.

But the sewing machine patent wars, and the modern smartphone litigation, show us that the balancing act is more complex when a technology may embody many different patents. According to one well-publicised estimate, there are 250,000 patents relevant to a modern smartphone. Even if the number is one-tenth of that, it suggests an impossible thicket of intellectual property through which a company must hack to bring a cool new product to market.

A key issue is something called the hold-up problem. If a bn www.isotretinoin-online.org product depends on 1,000 patents, it is clearly impossible to pay the typical patent holder more than $1m. But any patent-holder could try to extort many times that amount by threatening to block the whole project.

Large firms have responded to this problem by buying or developing large collections of patents. This gives them the ability to launch countersuits, and that threat should make rivals reasonable. But although defensive patenting looks like a pragmatic solution, it has costs and limits. The wave of defensive applications swamps patent offices, which means more poor-quality patents and longer delays.

“Patent trolls” – a derisive name for companies that make money purely from their patents – have less to lose in a patent war but although some are legitimate, others are extortionists. And while established players may reach cosy understandings, a young company with a new idea may find it impossible to break into a market that is thick with defensive patents. If only the big boys can play the patent game, innovation will suffer.

It’s clear that some industries are plagued by nuisance lawsuits. According to a survey by economists Bronwyn Hall and Dietmar Harhoff, firms complaining of infringement win more than half of court cases involving non-software patents, but only 13 per cent involving software patents. That suggests software suffers from weak patents and aggressive litigation, perhaps in the hope of extorting a settlement. It is not a good sign.

Yet we should not lose hope. The sewing machine companies eventually pooled their patents and competed on the high street rather than in the High Court. And despite apparently endless litigation, there seems to be plenty of innovation in the smartphone industry. The patent system is not a total failure – but on present evidence it is hardly a total success.

Also published at ft.com.

A hire truth

New research shows with horrible clarity what a wretched trap long-term unemployment is becoming

When my friend Nicola quit her job in educational publishing, it was for understandable reasons: one of her colleagues was a bully, her boss was providing little support and work had become miserable. (I’ve changed her name.) She had a strong CV, a husband with a steady job and young children to spend time with so she decided to resign before finding a new job. She’s now been unemployed for a year and a half.

So many economies have been depressed for so long that Nicola’s predicament is common. But new and unpublished research from a young Lebanese PhD student, Rand Ghayad of Northeastern University in Boston, shows with horrible clarity what a wretched trap long-term unemployment is becoming.

(April was a good month for economics students elsewhere in Massachusetts: Thomas Herndon of the University of Massachusetts, Amherst, delivered a reputational kneecapping to Harvard professors Carmen Reinhart and Ken Rogoff when he discovered a spreadsheet error in their much-trumpeted paper “Growth in a Time of Debt” as part of a course assignment.) (Here’s our coverage on “More or Less” – MP3.)

Ghayad used a computer program to generate job applications that were standardised but varied along a few parameters – whether the imaginary applicant had worked in the relevant industry, had hopped a lot between jobs, and how long the applicant had been unemployed, if at all. Ghayad mailed 4,800 of these CVs off to apply for 600 vacancies, chosen to reflect a variety of city locations, seniority and industry. He then recorded which applications were offered an interview.

Unsurprisingly, candidates with recent relevant experience were at an advantage, and a history of job-hopping did not help. But what was astonishing was the effect of long-term unemployment. Applicants with experience from the wrong industry who had been unemployed for 14 weeks or less were more than three times as likely to receive a call from the employer than applicants with experience in the right industry but who had been unemployed for six months or more. Regardless of sector, employers are, apparently, more interested in shunning the long-term unemployed than in looking for relevant experience.

The implications for Nicola and others like her are clear. But it is puzzling that employers put such emphasis on avoiding the long-term unemployed. A long period of unemployment is a negative signal, of course – it suggests that the applicant might not have been trying, might be getting rusty or might have been interviewed and rejected several times by other employers. But quite why it is such an overwhelming stain on a CV is not clear. Six months isn’t even a long time – in Europe, you don’t even count as long-term unemployed until you’ve been looking for work for a year.

Ghayad believes the evidence suggests that employers are using long-term unemployment as a quick – perhaps even automated – reason to disqualify applicants for oversubscribed vacancies. He thinks the policy implications are that the US needs more economic stimulus, because only a surge in employment would force employers to give the long-term unemployed a chance.

What’s certainly clear is that this reluctance to hire the long-term unemployed is one way in which the recession is leaving long-lasting scars. This has happened before: one of Margaret Thatcher’s less trumpeted achievements was a rise in the equilibrium unemployment rate that lasted into the mid-1990s. One likely cause was simply the number of people who became severed from the labour market in the deep recession of 1981.

I asked Ghayad, 27, why he’d chosen a PhD in economics. He had a simple answer: “I graduated during a recession and I couldn’t find a job.” Silver linings, for some.

Also published at ft.com.

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