Tim Harford The Undercover Economist

Articles published in February, 2020

The prisoner’s dilemma at 70 – at what we get wrong about it

Once upon a time, a pianist was arrested by the secret police and accused of spying. He was carrying sheets of paper covered with a mysterious code. Despite protesting that it was merely the sheet music for Beethoven’s Moonlight sonata, the poor man was marched to the cells. A couple of hours later, a sinister interrogator walked in. “You’d better tell us everything, comrade,” he announced with a thin smile. “We have caught your friend Beethoven. He is already talking.”

This sets up the most famous problem in game theory: the prisoner’s dilemma. The interrogator explains that if one man confesses and the other does not, the talkative prisoner will go free and the other will do 25 years in a gulag. If they both remain silent, they will each spend five years in prison. If they both confess, 20 years each. The dilemma is clear enough: each would do better to confess, regardless of what the other does; yet collectively they could profit by sticking together.

The dilemma is now 70 years old — it was developed in a simple mathematical form in 1950 by mathematicians Merrill Flood and Melvin Dresher and wrapped in a story by Albert Tucker. (My own retelling owes a debt to economists Avinash Dixit and Barry Nalebuff.)

Dresher, Flood and Tucker worked at the Rand think-tank. The prisoner’s dilemma distilled the tension between selfishness and co-operation into a potent form, making it emblematic of the risk of nuclear destruction and much more besides. The dilemma received a second burst of attention in 1981, after the publication of “The Evolution of Cooperation” by political scientist Robert Axelrod and evolutionary biologist William Hamilton. Their article is not only the most cited in political science, but as popular as the next three works put together.

I hope readers will forgive my dredging up such a venerable idea, because it remains relevant, instructive, and widely misunderstood. One common misunderstanding is that the problem is one of communication: if only the pianist and Beethoven could get together and agree a strategy, they’d figure out that they should stick together. Not so. Communication doesn’t solve anything. The attraction of teaming up is obvious; so is the temptation to betray. Those who believe talking helps much should watch Golden Balls, a game show based on a modified prisoner’s dilemma. What makes the show fun to watch is the emptiness of the promises contestants make to each other.

More problematic is the mistaken belief that the prisoner’s dilemma means we are doomed to selfish self-destruction. Moral philosophers have tied themselves in knots trying to refute it, to show that it is somehow rational to collaborate in a one-shot prisoner’s dilemma. It isn’t. Fortunately, most human interaction is not a one-shot prisoner’s dilemma. The 1981 paper — and subsequent book — may have pushed the pendulum too far in an optimistic direction. Prof Axelrod ran tournaments in which computer programs competed against each other, playing the prisoner’s dilemma hundreds of times. Repeating the game allows co-operation to be enforced through the threat of punishment — something game theorists had known since the 1950s. When Prof Axelrod enshrined that idea in a simple program called “Tit for Tat”, it routinely triumphed.

Tit for Tat responds to co-operation with co-operation, and betrayal with betrayal. Whatever you do to it, it does right back. Prof Axelrod highlighted the fact that although the program was tough, it was “nice” — it tried co-operation first. And he drew broader parallels, arguing that the success of the strategy explains why soldiers in the trenches of the first world war were able to agree informal ceasefires. His inspiring message was that in the worst possible circumstances, nice guys finish first — provided they have an inner steel.

But that goes too far. A simpler explanation of “live and let live” in the trenches is that popping up to shoot at the enemy is nothing like ratting out Beethoven. It is dangerous. One needs no game theory to explain why soldiers might prefer to lie low.

Prof Axelrod also set far too much store by Tit for Tat’s “niceness”. Other strategies prosper in prisoner’s dilemma tournaments, depending on details of the rules. Among them is “Pavlov”, a strategy that tries to exploit suckers and changes tactics when it encounters a punishing response. It can be co-operative, sure — but it is hardly “nice”.

Prisoner’s dilemmas do exist. The most pressing example today is climate change. Every nation and every individual benefits if others restrain their pollution, but we all prefer not to have to restrain our own. It would be foolish to hope that Tit for Tat will save the day here — and we don’t have to. We have tools available to us: domestically, taxes and regulations; internationally, treaties and alliances. Such tools change the incentives. We could and should be using them more. The pianist and his suspected accomplice were trapped. We are not. Unlike them, we can change the game.

Written for and first published in the Financial Times on 24 January 2020.

My book “Fifty Things That Made the Modern Economy” (UK) / “Fifty Inventions That Shaped The Modern Economy” (US) is out now in paperback – feel free to order online or through your local bookshop.

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Book of the Week 7: To Engineer Is Human by Henry Petroski

Henry Petroski is a fascinatingly eclectic writer – a nerd with the soul of a poet. I relied upon his book The Pencil: A History in writing the opening chapter of the forthcoming The Next Fifty Things That Made The Modern Economy (coming in May), and turned to Success Through Failure while writing Adapt.

I was delighted to receive To Engineer Is Human as a Christmas present – one of those rare surprise presents that actually works out… It’s a wide-ranging collection of essays and musings. Topics range from the experience of being a toddler in a world of adults, through the distinctive pattern of fatigue in a “Speak & Spell”, to the catastrophic collapse of walkways in the lobby of a Kansas City hotel in 1981.

One provocative idea in Petroski’s work is the idea that engineers learn through trial and error more than one might expect. Yes, there are the laws of physics and in principle one can calculate the load-bearing strength of any structure – but in practice, when we try to do something new we will sometimes run into the unexpected.

Not every essay hits the mark – I didn’t feel moved or improved by the analysis of the Oliver Wendell Holmes poem “The Deacon’s Masterpiece” – but like a collection of poems or short stories, if you don’t enjoy one you can skip to the next. Overall I felt I was learning things from Petroski that I wouldn’t learn from anybody else.

Some overlap with the more recent book Success Through Failure, but lots to intrigue.

US: Powell’s / Amazon   UK: Blackwells / Amazon

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17th of February, 2020MarginaliaComments off

Why my purchase choices have the kiss of death

Steve Eisman, the investment manager made famous by Michael Lewis’s The Big Short, did a lot of homework in his quest for terrible assets to bet against. But when he was introduced to another investment manager — Wing Chau — he saw the opportunity to accelerate the decision-making process: “Whatever that guy is buying, I want to short it.”

For Mr Eisman, Wing Chau was the equivalent of a watch that is six hours off: a perfect guide, as long as you realise that you need to look at the opposite side of the deal — or the clock face.

A few years ago, four business school academics won attention for the discovery that the same logic may work for retail products. Eric Anderson, Song Lin, Duncan Simester and Catherine Tucker found what they called “harbingers of failure” — consumers who simply adored the Ford Edsel, the Betamax video format, or those squeezy bottles loaded with Heinz EZ Squirt ketchup in bright blue, green and purple, a kind of edible paint. These people thought nothing cried out “sophisticated lady” more loudly than a packet of Bic disposable knickers.

Product development teams have long prized the idea that “lead customers” could give them insight into where the mass market might be going. A celebrated example is the mountain bike, a product assembled by enthusiasts who, starting in the early 1970s, modified old bikes by adding balloon tyres and motorcycle brakes to cope with demanding off-road conditions. Fifteen years later, the mountain bike was a mainstream retail product.

Pointing to such examples, Eric von Hippel, a professor at MIT, argued that companies shouldn’t just show product ideas to focus groups made up of generic, average consumers. They should find the early adopters and the trend setters, and pay particular attention to them.

But the “harbingers of failure” study reminds us that we could equally seek customers with the opposite quality: an unerring nose for products that the mass market will despise. Perhaps it shouldn’t be a surprise that such people exist. Prof Anderson and his colleagues suggested that companies could identify harbinger customers by examining their purchase decisions, and then use them as a guide to what not to stock in future. They also concluded that these customers provided a strong signal of a product’s prospects: “The more they buy, the less likely the product will succeed.”

Recently, the plot thickened like a glob of EZ Squirt: a research paper from professors Simester and Tucker and Clair Yang reported on “The Surprising Breadth of Harbingers of Failure”. This study found that “not only are there customers who are harbingers, but there are also harbinger zip codes”.

People in these accursed neighbourhoods buy doomed products, and also niche products that nearby zip codes don’t find attractive. The tendency is broad-based: they buy unpopular products at a big-box warehouse store, but they also buy unpopular garments at a clothing retailer. This is rather convenient for market researchers — Prof Simester and colleagues argue that zip codes provide all the information needed to learn from the harbinger effect. The harbinger zip codes are even losing propositions in electoral campaigns: they are more likely to donate money to political candidates who lose, and less likely to donate to popular ones.

And then I realised: they’re talking about me. While I’d prefer not to reveal too much about my voting habits, it has been a very long time since I was on the winning side: I didn’t vote for Boris Johnson, I didn’t vote for David Cameron and I didn’t vote for Tony Blair. I was on the losing side in all the referendums, too. Politically, I am Crystal Pepsi. I am Colgate ready meals.

Come to think of it, as a student I did go through a phase of drinking the monumentally unsuccessful soft drink, Tab. I’ve never owned an iPhone and when my wife bought me an iPad, I sent it back because I couldn’t figure out how to make it work. In the pool, I wear Speedos. I am the Wing Chau of retail and politics: come study me, oh trendspotters and psephologists, for a glimpse into what the future does not hold.

All this makes me wonder: what makes a harbinger of failure, and why is our taste for the unpopular so wide-ranging? Why would someone who admires Clairol’s Touch of Yogurt shampoo feel the same way about the Liberal Democrats’ Vince Cable? Perhaps we harbingers are open-minded, happy to take a risk on something new and unusual? Perhaps; but harbingers don’t just try Frito-Lay lemonade, we swig it down and then come back for more.

Perhaps the answer is that ordinary, well-adjusted people notice what other people are doing, and fit in. In contrast, we harbingers are simply oblivious. Jacket and jeans? Socks and sandals? Why not? I have yet to see a completely convincing explanation — or even to be fully persuaded that the whole idea isn’t one big statistical fluke. But if anyone in market research would like to follow me around a supermarket, get in touch.

 

Written for and first published in the Financial Times on 17 January 2020.

My book “Fifty Things That Made the Modern Economy” (UK) / “Fifty Inventions That Shaped The Modern Economy” (US) is out now in paperback – feel free to order online or through your local bookshop.

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Book of the Week 6: What We Need To Do Now

Chris Goodall’s latest book is What We Need To Do Now (For A Zero Carbon Society). I confess a temperamental kinship with Goodall: he’s a nerd, with a calm manner and an underdeveloped sense of outrage. This, I like very much. The book starts from the premise that we need to get carbon dioxide emissions down dramatically, and focuses on the UK: “the purpose of this book is to give an outline of the strategy the UK needs to adopt to address the climate threat”. 

Goodall acknowledges the progress – domestic emissions down more than 40 per cent since 1990, and down 10 per cent even after allowing for the offshoring of emissions to China and other manufacturers.

He then gets down to brass tacks. The first and most distinctive item on the agenda is to increase renewable electricity generation 20-fold. This should create a large surplus which can be used to create synthetic fuels, cover intermittency and provide for growing demands for electricity such as electric vehicles.

Other items include: mass insulation, electrifying transport, shiftying towards plant-based food, etc. A lot of this looks at the engineering but there’s plenty of discussion of the economics (and the economic instruments, such as a carbon tax) that will be needed.

There were a few surprises for me – I had no idea, for example, that there was so much carbon dioxide tied up in the fashion & clothing value chain.

Anyway: what Goodall sets out is a pretty ambitious plan. Whether you think it’s a good idea, and whether you think it’s feasible, this book is packed with analysis and refreshingly short on hysteria. I learned a lot.

UK: BlackwellsAmazon.

Possibly unavailable in the US; try here for the Kindle edition.

My book “Fifty Things That Made the Modern Economy” (UK) / “Fifty Inventions That Shaped The Modern Economy” (US) is out now in paperback – feel free to order online or through your local bookshop.

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10th of February, 2020MarginaliaComments off

Two cheers for the dematerialising economy

If past trends continue, the world’s gross domestic product will be about twice as big by 2040 as it is today. That’s the sort of growth rate that translates to 30-fold growth over a century, or by a factor of a thousand over two centuries. Is that miraculous, or apocalyptic? In itself, neither. GDP is a synthetic statistic, invented to help us put a measuring rod up against the ordinary business of life. It measures neither the energy and resource consumption that might worry us, nor the things that really lead to human flourishing.

That disconnection from what matters might be a problem if politicians strove to maximise GDP, but they don’t — otherwise they would have hesitated before imposing austerity in the face of a financial crisis, launching trade wars or getting Brexit done. Economic policymaking has flaws, but an obsession with GDP is not one of them.

Nevertheless the exponential expansion of GDP is indirectly important, because GDP growth is correlated with things that do matter, good and bad. Economic growth has long been associated with unsustainable activities such as carbon dioxide emissions and the consumption of metals and minerals.

But GDP growth is also correlated with the good things in life: in the short run, an economy that is creating jobs; in the long run, more important things. GDP per capita is highly correlated with indicators such as the Social Progress Index. The SPI summarises a wide range of indicators from access to food, shelter, health and education to vital freedoms of choice and from discrimination. All the leading countries in the Social Progress database are rich. All the strugglers are desperately poor.

So the prospect of a doubling of world GDP matters, not for its own sake, but for what it implies — an expansion of human flourishing, and the risk of environmental disaster. So here’s the good news: we might be able to enjoy all the good stuff while avoiding the unsustainable environmental impact. The link between economic activity and the use of material resources is not as obvious as one might think. There are several reasons for this.

The first is that for all our seemingly insatiable desires, sometimes enough is enough. If you live in a cold house for lack of money, a pay rise lets you take off the extra cardigan and turn up the radiators. But if you win the lottery, you are not going to celebrate by roasting yourself alive.

The second is that, while free enterprise may care little for the planet, it is always on the lookout for ways to save money. As long as energy, land and materials remain costly, we’ll develop ways to use less. Aluminium beer cans weighed 85 grammes when introduced in the late 1950s. They now weigh less than 13 grammes.

The third reason is a switch to digital products — a fact highlighted back in 1997 by Diane Coyle in her book The Weightless World [pdf]. The trend has only continued since then. My music collection used to require a wall full of shelves. It is now on a network drive the size of a large hardback book. My phone contains the equivalent of a rucksack full of equipment.

Dematerialisation is not automatic, of course. As Vaclav Smil calculates in his new book, Growth, US houses are more than twice as large today as in 1950. The US’s bestselling vehicle in 2018, the Ford F-150, weighs almost four times as much as 1908’s bestseller, the Model T. Let’s not even talk about the number of cars; Mr Smil reckons the global mass of automobiles sold has increased 2,500-fold over the past century.

Still, there is reason for hope. Chris Goodall’s research paper “Peak Stuff” concluded that, in the UK, “both the weight of goods entering the economy and the amounts finally ending up as waste probably began to fall from sometime between 2001 and 2003”. That figure includes the impact of imported goods.

In the US, Jesse Ausubel’s article “The Return of Nature” found falling consumption of commodities such as iron ore, aluminium, copper, steel, and paper and many others. Agricultural land has become so productive that some of it is being allowed to return to nature.

In the EU, carbon dioxide emissions fell 22 per cent between 1990 and 2017, despite the economy growing by 58 per cent. Only some of this fall is explained by the offshoring of production. (For a good summary of all this research, try Andrew McAfee’s book More From Less.)

Can we, then, relax? No. To pick a single obvious problem, global carbon dioxide emissions may be rising more slowly than GDP — but they are rising nevertheless, and they need to fall rapidly. Yet the fact that dematerialisation is occurring is heartening. We all know what the basic policies are that would tilt the playing field in favour of smaller, lighter, lower-emission products and activities. Adopting those policies means we might actually be able to save the planet, preserve human needs, rights and freedoms — and still have plenty of fun into the bargain.

 

Written for and first published in the Financial Times on 10 January 2020.

Catch up on the first season of my podcast “Cautionary Tales” [Apple] [Spotify] [Stitcher]

My book “Fifty Things That Made the Modern Economy” (UK) / “Fifty Inventions That Shaped The Modern Economy” (US) is out now in paperback – feel free to order online or through your local bookshop.

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Book of the Week 5: You Look Like A Thing And I Love You

What surprised me about You Look Like A Thing And I Love You is that it’s genuinely funny – laugh-out-loud-funny, read-quotes-to-your-family-over-breakfast-funny. Who would not be charmed by an AI that develops My Little Pony names and suggests “Parpy Stink” and “Starsh*tter”? Or the accidental Murderbot that was supposed to be acting as a friendly usher? Or the curiosity-driven AI that plays Pacman by going to watch the ghosts, because they’re so interesting?

It’s not just a bunch of silly-AI gags, though. There may be a My Little Pony called Raspberry Turd on every other page, but there’s also a great deal of information about how machine learning actually works and why it finds certain kinds of problem a lot more difficult than others. Janelle Shane runs through various sources of AI-weirdness: AIs being trained in simulations (because simulators are faster and safer) and then finding ways to hack the simulation; AIs being fed subtly flawed training data (such as the AI which noticed that the difference between cancerous skin and healthy skin is that there’s usually a ruler in the picture when skin cancer is involved); AIs seeing giraffes everywhere in photographs of the savannah (because people like to take photos of giraffes, it’s safest to assume there’s one in the photo).

I learned a lot and laughed a lot.

My book “Fifty Things That Made the Modern Economy” (UK) / “Fifty Inventions That Shaped The Modern Economy” (US) is out now in paperback – feel free to order online or through your local bookshop.

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3rd of February, 2020MarginaliaComments off

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