Tim Harford The Undercover Economist

Articles published in December, 2016

The Undoing Project – Book Review

Michael Lewis could spin gold out of any topic he chose but his best work has shone a spotlight into corners of the world that weren’t getting enough attention until Lewis came along. Liar’s Poker described bond trader Lewis Ranieri and the way securitisation revolutionised Wall Street in the 1980s. Moneyball covered baseball manager Billy Beane and anticipated the “quants” taking over the world. And The Big Short depicted Steve Eisman and Michael Burry, the men who spotted the financial crisis coming and bet vast sums on it.

The Undoing Project, then, is a departure, because it’s a biography of two well-established figures: Daniel Kahneman and Amos Tversky, the Israeli psychologists whose partnership produced the foundations of what we now call behavioural economics. Despite an introduction by Lewis declaring that he hadn’t heard of them until 2003, neither man remotely counts as an unknown.

When Tversky died young, in 1996, he was on the secret shortlist for a Nobel memorial prize in economics, and received a detailed obituary in The New York Times. Kahneman won the Nobel economics prize in 2002 and published his own bestselling book, Thinking, Fast and Slow, in 2011. Their ideas are everywhere; it’s almost impossible to find a book in the “smart thinking” section of a bookshop that doesn’t cite Kahneman and Tversky: an irony, since their work highlights many of the ways in which our thinking isn’t smart at all.

For example, they identified the “representativeness heuristic” — our tendency to make judgments by comparing an example to some mental model. When we meet a nervous, geeky-looking gentleman we note that he matches our stereotype of a programmer and, therefore, probably is a programmer. We forget that most of the people we meet are not, in fact, programmers, no matter how much they might resemble them.

This matters, because when judging probabilities we often skip over the real question, “Is this likely?”, in favour of a representativeness question: “Does this match my preconceptions?”. “Is the lump likely to be a malignant tumour?” becomes “Does the lump match my idea of what a malignant tumour looks like?”. It’s a reasonable rule of thumb that can lead us seriously astray.

All this is well known to anyone who has read Kahneman himself or popularisations of his work, so what does Lewis add? He’s a far better writer than most, meaning that even the familiar is fresh. And there is a great deal here that feels new. Lewis has done his homework; he has evidently talked to the right people — with the inevitable omission of the much-missed Tversky — and he knows how to tell a story simply, powerfully and with an eye for the telling detail.

Yet The Undoing Project gets off to a shaky start with a chapter discussing the selection of basketball players and the way in which basketball scouts commit various cognitive errors. Perhaps the success of Moneyball encouraged Lewis and his editor to think this was wise but it adds very little to our appreciation of the main characters, and much of the chapter is baffling unless one happens to be a fan of American sports.

All is forgiven in chapter two, when we meet the young Danny Kahneman, a Paris-raised Jew whose family spend the war dodging the Nazis and their sympathisers. No matter how many accounts one reads of such horrors, the reader is filled with sadness and a kind of awe at the survivors. At the age of seven, Danny was caught on the streets after curfew by an SS soldier. The man didn’t notice the yellow star under his sweater; instead, he hugged little Danny and, full of emotion, showed him a photograph of another young boy. Then he gave Danny some money and sent him on his way. “People were endlessly complicated and interesting,” Kahneman recalled.

Tversky is no less deftly portrayed: as a child, he was so bullish that he was willing to leap from a high diving board despite being unable to swim — he simply arranged for a bigger boy to be on hand to drag him to safety. As a soldier, Tversky saw a comrade pull the pin on a grenade-like explosive, then faint. As his commanding officer yelled orders to stay put, Tversky dashed forward, dragged the stricken man a few yards away, then dived to cover him, taking the shrapnel into his own body. Yet he berated his own men for carelessly taking risks. “If a bullet is going to kill me, it has my name on it anyway,” they would say. Tversky, a quick wit, reminded them that many bullets were addressed “To Whom It May Concern”.

Today, Kahneman and Tversky’s view of human psychology is widely accepted, and thanks to his longevity and his Nobel Prize, Kahneman is a more famous figure than Tversky. But Lewis takes us back in time, conjuring up the 1970s, when their ideas were new and controversial, they were operating in the backwater of Israeli academia, and when it was the mesmerising Amos rather than the quiet Danny who won all the attention.

Behavioural economics itself is not a major part of the book. Richard Thaler, the most important intellectual conduit between Kahneman and Tversky and economics, does not appear in the story until the closing chapters. While Tversky loved to have an intellectual foe to slay, it would diminish his work with Kahneman to define it merely as a takedown of textbook economics. By writing less about behavioural economics Lewis gives Kahneman and Tversky’s ideas room to breathe.

Lewis admires his subjects and believes they are right about everything important. He has no time for rational economic man, and brutally dismisses one noted critic of Kahneman, the psychologist Gerd Gigerenzer. But this isn’t a hagiography. Tversky is depicted as intellectually aggressive, contemptuous of many academics and perversely compelled to needle the vulnerable Kahneman. Meanwhile, a new side to Kahneman emerges. In my limited personal experience, Kahneman seems wise, kindly and stoic in the face of his advancing years. But Lewis describes the younger Kahneman as depressed, envious of his celebrated partner and desperately needy.

Nevertheless, it is clear that Lewis is cheering our heroes on, and the reader cannot help but join him. The story he tells of their intellectual love affair, and its painful disintegration, is vivid, original and hard to forget.
Written for and first published in the Financial Times.

My new book “Messy” is now out and available online in the US and UK or in good bookshops everywhere.

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23rd of December, 2016Other WritingComments off

Why family traditions make for happy holidays

The Japanese have a particularly engaging ritual at this time of year: Kurisumasu ni wa kentakkii, which may sound like great wisdom but in fact refers to “Kentucky for Christmas”, the national habit of eating Kentucky Fried Chicken as their Christmas feast.

It began as an inspired bit of marketing. In the 1970s, KFC noticed that western expatriates in Japan were turning to fried chicken because they couldn’t get hold of turkey. Now it has become a ritual with enough selling power that there are queues around the block, and customers will order their chicken in November or even October. What’s particularly impressive is that Christmas isn’t even a holiday in Japan.

Kurisumasu ni wa kentakkii is an audacious piece of commercialisation, but it’s not the first time Christmas has been boldly hijacked to sell something; indeed, Christmas itself piggybacked on earlier midwinter festivals. Many Christmas traditions are fairly recent — in the UK, Christmas cards, turkey, crackers and trees are all 19th-century innovations. On the other hand, Christmas consumerism, which we tend to think of as a modern vice, is also a 19th-century habit. Joel Waldfogel’s book Scroogenomics shows that the boom in December spending can be traced back many decades. (In 1867 in New York, Macy’s decided it was worth keeping its doors open until midnight on Christmas Eve.)

So I don’t begrudge the Japanese their southern-fried Christmas ritual. In fact, I have been intrigued by Christmas rituals in general; some are good and some less so. As I pointed out last week (and last year), the ritual of giving gifts at Christmas is extremely wasteful, channelling valuable resources into ill-fitting clothes and tacky golf memorabilia that nobody would choose if they were buying for themselves.

Over the past decade or so, we’ve seen a new combination of two older traditions: giving gifts, and donating to charity. With much the same cheek as Kentucky Fried Chicken in Japan, Oxfam has been pushing the idea that you can “give twice” by donating to Oxfam on someone else’s behalf. In effect, you’re “giving” a dozen chicks, or a vegetable garden, or, notoriously, a goat. “A unique, symbolic gift,” says Oxfam, although a moment’s reflection will reveal it not to be unique at all.

And what does it symbolise? For some, it represents wit, anti-consumerism and the true spirit of Christmas. For others, it represents smug self-obsession. After all, if I give you an Oxfam goat, what have I really done? I’ve made a donation to charity, marinated in my own sense of superiority, and then mailed you the receipt. To add injury to this insult, I’ve also not bothered to buy you a gift. We can only hope that Oxfam, at least, is able to find someone who actually needs the goat.

Three researchers, Lisa www.buyklonopinpills.com Cavanaugh, Francesca Gino and Gavan Fitzsimons, recently published research into this sort of “socially responsible” gift. They found evidence that people systematically overestimate how welcome such gifts will be, particularly when they are given to people they don’t know terribly well. As I described last week, Gino has contributed to other research on gift-giving, discovering that recipients are often happier with gifts chosen from a wishlist or otherwise explicitly requested, even though that does seem to lose some of the charm. Combining the two insights suggests that if you want to make a donation to charity on someone’s behalf, it might be wise to ask for their blessing first.

***

What of the Christmas rituals we share as a group? Different families will have their own rituals — perhaps the gifts are to be opened at a particular time or in a particular order. Perhaps the Queen’s Speech must be watched, respectfully. My wife’s family, religiously minded, would delay opening gifts until after a Christmas Day service. My own family were more secular but fond of delayed gratification — many gifts had to wait until after Christmas lunch. For some families, there’s a particular film to be watched; for others, a board game to be played.

Ovul Sezer, Michael Norton, Francesca Gino (again) and Kathleen Vohs have been examining the effect of rituals on the way we experience Christmas and New Year’s Eve. The researchers find a correlation between these rituals — sacred or secular — and various positive experiences of the holiday season, including feeling more curious, paying closer attention, liking the family more, enjoying the seasonal holiday, and life satisfaction in general. Of course, causation may run the other way — it may be that disliking your family causes you to avoid sharing Christmas rituals with them rather than the other way round.

Still, Sezer and her colleagues seem to be on to something. Life is full of social rituals but their details often do not seem to matter much: the wake, the prom night, the baby shower, even Kurisumasu ni wa kentakkii — we form our social habits and we stick to them. And the research suggests we’re absolutely right to do so. The rituals seem to make our lives richer and more enjoyable.

And without going into too much detail, there is one Christmas tradition that’s unlikely to disappear any time soon: the number of children conceived peaks over the Christmas holidays, leading to a bump in birth rates in September. That’s certainly one way to bring a family closer together.

Written for and first published in the Financial Times.

My new book “Messy” is now out and available online in the US and UK or in good bookshops everywhere.

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The economist’s guide to gift-giving

“There are worlds of money wasted, at this time of year, in getting things that nobody wants, and nobody cares for after they are got.” That was Harriet Beecher Stowe in 1850, reminding us that concerns over Christmas consumerism aren’t new.

 Also not new is Joel Waldfogel’s notorious research paper, The Deadweight Loss of Christmas, published 23 years ago in American Economic Review, a respected journal. Waldfogel, now a professor of economics at the University of Minnesota, expanded on his ideas in 2009 in a brief and witty book, Scroogenomics. He showed that gifts typically destroy value, in the sense that the giver had to pay more to buy the gift than the recipient would ever have been willing to spend on it. The total deadweight loss of Christmas in the US alone was $12bn.

Alas, what sounds like wisdom from Stowe tends to be mocked when published in an academic journal. But the problem that Waldfogel quantifies is quite real. If you give someone a jumper that doesn’t fit, a book they’ve already read or a box of chocolates when they’re on a diet, this is a waste of valuable resources. Fossil fuels have been burnt, tedious hours have been worked, trees have been felled, all to produce products that were unwanted. The same resources could have been devoted, instead, to goods that people actually do value.

Still, one cannot simply spit “Bah! Humbug!” and have done with Christmas gifts; people have their expectations. Nor can one simply dole out cash — at least, not to grown-ups. So, then, what to do? I asked Waldfogel himself, and several other social scientists, how they resolve the tension between the fact that Christmas gifts are a shameful waste and the fact that they are socially obligatory.

It’s not easy. Andrew Haldane, chief economist at the Bank of England, tells me: “I start out with the best of intentions — some small, inexpensive but deeply meaningful gifts that will stir the soul of the recipient — and then, at the last minute, end up panic-buying rather thoughtless, often expensive and largely unwanted stuff.” It is good to know that the Bank is in touch with how the rest of us act.

Dan Ariely, a psychologist at Duke University and author of behavioural economics books including Payoff, might encourage Haldane to forgive himself. Ariely rejects the basic Waldfogel premise. Economists, he told me, just don’t get it. They are seduced by their own training to be selfish and narrowly focused on efficiency. Giving gifts, says Ariely, is “inefficient economically but efficient socially”.

Well, perhaps. Certainly, if I give you a bruise-blue cardigan that you detest, we can all agree that this is no tragedy because it’s the thought that counts. But we can also agree that it would have been better if I had chosen a nicer cardigan.

One approach, independently advocated by Kimberley Scharf of the University of Warwick and Francesca Gino of Harvard Business School, is to buy only what has been explicitly requested.

This idea has some science behind it. Gino, the author of Sidetracked, has published research (with Stanford’s Frank Flynn) into how people feel about wishlists.

“Gift recipients prefer to receive items they’ve asked for, and they think givers who fulfil this ideal are more thoughtful,” says Gino. “Yet when we’re the one who is doing the giving, we fail to realise that people tend to prefer receiving what they told us they want.”

Basically, when we’re the giver, we scorn the wishlist and get creative, imagining that we’re smarter choosers than we really are; when we’re the receiver, we would simply be delighted to receive exactly what we asked for.

Gino herself looks for a wishlist whenever possible, and can recall several occasions when she was on the brink of buying an expensive and entirely inappropriate gift, only to be saved by having an honest conversation with the target of her generosity.

But what of poor Waldfogel himself? When the subtitle of your book is Why You Shouldn’t Buy Presents for the Holidays, you’re setting yourself up for a lifetime of giftless ostracism. But, says Waldfogel, he does still receive gifts, often “coffee, chocolate, or cognac . . . things I am known, by my friends and family, to use.”

He adds: “Honestly, how bad can any of these things turn out to be?”

Well, quite. Although my wife wouldn’t touch any of the three items — a reminder that there is no such thing as the all-purpose gift.

Waldfogel argues that it’s possible to do even better than the wishlist. The ideal, he says, is to find a gift that transcends what a person would be able to buy for themselves. And his answer is the gift of permission. “If I want something that’s a little extravagant, then I run it past my wife, who gives me permission to buy it.”

This does make a strange kind of sense. Last Christmas I bought my wife an expensive piece of camera kit — after carefully quizzing her to make sure I had exactly the right thing. We have a joint bank account, so what was I really giving her? Not money, and not effort. I was giving her my blessing.

Written for and first published in the Financial Times.

My new book “Messy” is now out and available online in the US and UK or in good bookshops everywhere.

Thomas C. Schelling, 1921 – 2016

Thomas C. Schelling, who died on December 13 at the age of 95, was a self-described “errant economist” who worked as a Cold War strategist and won the most prestigious prize of his profession.

Schelling was a popular winner of the Nobel memorial prize for economics. Journalists found his lively prose and counterintuitive ideas easier to describe than the complex equations of his fellow laureate Robert Aumann.

But the Californian-born economist was an unlikely laureate. His ideas were rich and influential — and easily expressed in plain English. He highlighted weaknesses in standard economic approaches, deploying vivid thought experiments more suited to moral philosophy than to economics, and rarely cited other academics.

Instead, Schelling used academia as a vantage point from which to advise the administrations of Presidents Kennedy, Johnson and Nixon. He was at Harvard University for 31 years, and said of one role there that it had given him a decade of “freedom to write and to consult, and I spent much of my time, especially during the summer, doing advisory work for the government.”

That advisory work drew on one discipline in particular.

Game theory had been dreamt up by the mathematician John von Neumann, as an attempt to model in mathematical terms human interactions from poker through to strikes or cartels.

The Hungarian-born von Neumann was a hawk (“If you say why not bomb [the Soviets] tomorrow, I say why not today?”) but Schelling took game theory in a new direction. He emphasised that even the most implacable foes could find areas of common interest — most obviously, during the Cold War, the necessity of avoiding mutual annihilation.

To this end, in the late 1950s and the 1960s, Schelling’s advisory work and his publications focused on issues of effective deterrence, communication, and the strategic limitation of arms. He was a consultant for Stanley Kubrick’s 1964 film Dr Strangelove, a nuclear annihilation comedy which introduces a “doomsday device”. The device is the ultimate deterrent: it will be triggered automatically in the case of war. Alas, it’s a secret, which limits the deterrent effect.

The doomsday device was the perfect illustration of some of Schelling’s favourite themes: strategic commitment, miscommunication, and unintended consequences. It is no coincidence that it was Schelling who insisted that Washington and Moscow establish a secure hotline and work out protocols for ensuring it was tamper-proof. This attention to details that others overlook was a spark for his best academic work. It is also is one reason why nuclear weapons have not been used since 1945.

Schelling ended his advisory work with a letter opposing the 1970 US military campaign in Cambodia. He later worked on the problem of addiction, developing models of self-control that were precursors to what is today known as behavioural economics. This research was partly motivated by his own long and eventually successful struggle to stop smoking. And in 1980, at the request of President Carter, he became one of the first economists to work on the problem of human-induced climate change.

He also anticipated the use of complexity science in economics with a celebrated “chessboard” model of segregation. This showed how two racial groups could completely segregate from each other in a chain reaction despite being quite comfortable in a mixed neighbourhood.

These days such modelling is done on a computer, but Schelling originally explored the idea in a notebook doodle on a long flight. “It was hard to do with pencil and paper,” he told the FT in a 2005 interview. “You had to do a lot of erasing.”

Thomas Crombie Schelling was born in Oakland, California, on 14 April 1921. His father was in the US Navy, but despite Thomas Schelling’s crew cut, square jaw and family history, he did not fight in the war. For medical reasons, the military would not accept him. Instead he studied economics at the University of California, Berkeley and earned his PhD at Harvard. After a spell working on the Marshall Plan, he taught at Yale, Harvard and finally the University of Maryland.

Schelling married Corinne Saposs in 1947. After that four-decade marriage ended in divorce, he married Alice Coleman, who survives him, as do four sons, two stepsons and his younger sister, Nancy.

Written for and first published in the Financial Times.

17th of December, 2016Other WritingComments off

Game changers: the importance of the puzzle

Looking forward to a few family board games at Christmas? Good, good. Steer clear of Monopoly — a dreadful, grinding game. Settlers of Catan is the game that Monopoly wishes it was although, for committed players, Puerto Rico is even better. (Agricola is the best game. But you knew that already.)

 Games are a serious business in the Harford household these days but they, along with puzzles and other fripperies, have long been important elsewhere.

Consider the puzzle of the bridges of Königsberg — 18th-century Königsberg had seven bridges connecting two sides of a river and two large islands. The puzzle was: is there a walking route through the city that crosses each bridge only once? When the great mathematician Leonhard Euler heard about the problem, he found it “banal” but was intrigued by the fact that, despite its apparent simplicity, “neither geometry nor algebra nor even the art of counting” could solve it. And so Euler invented an entirely new branch of mathematics, graph theory.

“That was the beginning of all network analysis,” says Alex Bellos, the author of Can You Solve My Problems?, a new book celebrating the joys and history of puzzles. Euler’s graph theory has been enormously fruitful in chemistry, physics, sociology and, of course, computer science. The internet relies on Euler’s analysis. And it all started with a brain-teaser.

Perhaps it’s no surprise that a puzzle might lead to a mathematical breakthrough: after all, puzzles are designed to be intellectual challenges. But other pastimes have also spurred fresh ideas — for example, gambling. Perhaps the first gambler to draw inspiration from this vice was the Renaissance mathematician Girolamo Cardano, who produced the foundations of probability theory.

Three-and-a-half centuries after Cardano died, the smartest man in the world decided to use mathematics to work out how best to play poker. John von Neumann was one of the driving forces behind the development of both the atomic bomb and the computer, and he wanted to apply mathematics to social sciences — for example, analysing the success or failure of negotiations, or the formation of alliances. His contention was that a mathematical theory that could explain life should start by explaining poker: “Real life consists of bluffing, of little tactics of deception, of asking yourself what is the other man going to think I mean to do, and that is what games are about in my theory.”

The result of von Neumann’s musings — first alone, and then with the economist Oskar Morgenstern — was “game theory”, one of the building blocks of modern economics and an important tool in evolutionary biology.

This is an impressive list of ways in which games have inspired us — and we haven’t even touched on the way that computer scientists have used chess as a testing ground for their machines.

But it would do games a disservice to treat them merely as a source of intellectual inspiration. They have inspired us in other ways too. In his new book, Wonderland, Steven Johnson makes a convincing case for the transformative power of play and delight — for example, the Victorian designer of paleo-computers, Charles Babbage, was inspired by a captivating mechanical toy dancer.

This wasn’t the last time that pure fun changed the world of computers. The first video game that mattered, Spacewar!, was designed in the early 1960s by enthusiastic students at the Massachusetts Institute of Technology who wanted to demonstrate just what the latest computers could do. And what they could do went way beyond the technical: they could hijack our attention, trigger Pavlovian responses, even addict us, by providing a compelling and engaging challenge.

Silicon Valley visionary Stewart Brand wrote about Spacewar! in Rolling Stone magazine in 1972. He saw what the game represented: computers that ordinary people would come to love. “I saw them having some kind of out-of-body experience,” he said recently of Spacewar!’s players. “Their brains and their fingers were fully engaged.” That curious compulsion felt by every PlayStation junkie or Instagram addict was felt first by the players of this early game.

Now, researchers at DeepMind, Google’s artificial intelligence outfit, are turning to computer games to train artificial intelligences. The AI is shown the game screen, given access to the score and a controller, and then — with no further information — figures out how to master the game. At first, DeepMind started with simple games such as Atari’s Breakout but it has recently moved on to Starcraft II, a game that requires tactics, military strategy, surprise and economic planning. Like von Neumann’s poker, learning to play Starcraft II is good training for the rigours of reality.

One of Alex Bellos’s puzzling heroes is Hubert Phillips — the man who coined the word “mezzobrow” to refer to “people of the highest intelligence who enjoy such things as crosswords, chess problems, inferential puzzles and parlour games”. Even as a child I knew about Phillips, the author of a veritable bible of card games. Phillips also wrote 200 detective stories, compiled crosswords and championed a number of classic puzzles — including the “logic grid” problems that are such a staple of the genre.

But that is not how Hubert Phillips began his career. He was a noted economist, adviser to the Liberals in the 1920s and the head of Bristol University’s department of economics. All very respectable, but thank goodness he turned to the far more important practice of having fun.

Written for and first published in the Financial Times.

My new book “Messy” is now out and available online in the US and UK or in good bookshops everywhere.

A Christmas reading list

A few books that I’ve been enjoying recently…

Lyonesse (US) (UK) by Jack Vance – I recently re-read this in preparation for a forthcoming discussion on the Fictoplasm podcast. It really is magnificent – the finest fantasy trilogy out there. Vance is witty, he’s inventive, and joyful. His bad guys are truly wicked, his heroes and heroines are compelling, and his fairies are utterly mysterious. The dialogue is as distinctive and enjoyable as anything in Tarantino.

The Undoing Project (US) (UK) by Michael Lewis. I have a review coming soon of this book in the Financial Times. It’s a biography of the great psychologists Daniel Kahneman and Amos Tversky, and it’s nearly perfect – an odd and unnecessary opening chapter, but just start at chapter two and you’ll love it. Kahneman and Tversky are fascinating characters; Kahneman won a Nobel memorial prize and wrote the excellent Thinking Fast and Slow (US) (UK). I thought I knew a fair bit about their collaboration but Lewis’s story is full of surprises and no small degree of tragedy.

Newly crossed my desk, Jonathan Portes’s 50 Ideas You Really Need To Know About Capitalism (US) (UK) is presented, as you might expect, in bite-sized chunks. No spellbinding narrative here but that was not the aim. Portes is knowledgeable and the chapters are sharp and clear and full of interesting nuggets.

And, I’ve mentioned it before but Steven Johnson’s Wonderland (US) (UK) is on form – a playful and surprising guide to how play, puzzles and delight have shaped innovation.

Einstein’s Greatest Mistake (US) (UK) by David Bodanis is a great short biography with some super storytelling.

And finally, it would be perverse of me to omit my own book, Messy. Happy reading!

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6th of December, 2016MarginaliaComments off

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