Dear Economist

Dear Economist,
I wish I frequented the same high street as the statisticians who calculate measures of inflation. Given their calculations include “Various selected popular brands of sweets, chocolates, gum”, will they take note of a Mars Bar shrinking in size from 62.5g to 58g while remaining the same price? I make this an effective price increase of 7.76%. If not, when are those lying bastards going to stop lying to me?
Ralph Corderoy

Dear Mr Corderoy,

Your arithmetic is correct but your objection is confused. The statisticians – or “lying bastards”, au choix – do indeed adjust for such changes. It is far easier for them to do that than to make the many other adjustments they attempt every year to cope with the fact that nobody knows how many gramophones there are in an iPod.

Certainly, you are right to suspect that when the bean-counters go out to calculate inflation, they are not buying exactly the same products that you buy. How could they? Some people spend a lot on petrol, heating and mortgage payments; others are more interested in clothes, fast-food and laptops. The statisticians’ best can never be quite good enough.

I will concede, though, that the Mars Bar has been worthy of scrutiny ever since the late Nico Colchester noted in the Financial Times back in 1981 that it was a very stable unit of account. It is a veritable ingot of basic commodities (sugar, milk, cocoa) that has kept its value relative to the price of other goods such as small cars, which have cost about 20,000 Mars Bars for the past 70 years.

Fortunately, there is no strong trend towards debasing the Mars Bar – its weight has always fluctuated. It weighed 57g in the late 1970s and as much as 67g in the mid-1980s: 58g is simply a return to historical norms after something of a Mars Bar bubble.

Also published at ft.com.

Dear Economist,
At the time, Kaká’s transfer fee from AC Milan to Real Madrid was reported to be the largest in the world, clocking in at £57.5m (€67.2m). However, in terms of euros, Zinedine Zidane’s transfer from Juventus to Real Madrid in 2001 was the largest, at €76m (£46m). Given that both transfers happened solely in the eurozone, with no English clubs involved, how can we claim this is a world record transfer?
Ed Lewis, London

Dear Mr Lewis,

The fact that the pound was strong in 2001 and weak today does not justify the suggestion that Kaká’s transfer fee is larger than Zidane’s, so you are right to query the way this has been reported. But the problem goes deeper than you suggest. Even if both transfers had taken place in the UK, a 2001 pound is not the same as a 2009 pound.

I have before me an illustration of the so-called world transfer records, courtesy of the BBC. These start in 1905 with Common (£1,000), move through Jeppson (£52,000, 1952), Maradona (£5m, 1984) and others, to Ronaldo (£80m, 2009). But it is absurd to suggest that Ronaldo’s transfer fee was 16 times greater than Maradona’s or 80,000 times greater than Common’s.

According to www.measuringworth.com, £1,000 in 1905 is worth about £80,000 today if adjusted for retail price inflation, and about £425,000 today relative to average earnings. Maradona’s £5m transfer fee in 1984 is worth £12m or £17.5m today, by the same metrics. Cristiano Ronaldo’s transfer fee of £80m is titanic enough to need no flattering.

I am sure the press fail to make these adjustments because they want to be able to announce new records. In future, perhaps they should first convert all monetary sums into Zimbabwean dollars. Records would tumble daily.

Also published at ft.com.

Dear Economist,
One of the first lessons I learnt in Econ101 was that barter trade is inefficient compared with a money economy. Yet, in an interesting article in the FT’s House & Home section (“Fair Trade”, May 16 2009) I read about the rising popularity of websites through which people can swap houses, instead of buying and selling them. Is this another example of how useful my economics degree is?
Confused Economist

Dear Confused,

Up to a point. Your degree probably did not contain much behavioural economics, and that would have been helpful to understand half of the story. People tend to form strong views about what a fair price is for a house, and behavioural economists call this “anchoring”.

Anchoring can take extreme forms. Experimental subjects have been known to be influenced by contemplating the last two digits of their national insurance number or other obviously random numbers. More commonly, people fixate on what some estate agent told them was their home’s value at the peak of the market. When the market weakens, prices do not so much fall as evaporate, as sellers cling on to the hope of a price that buyers are not willing to pay.

Under the circumstances it should not be surprising that barter has become more common. Neither seller needs to acknowledge that his precious house has become less valuable; they simply recognise the fact that their homes are of similar value and get on with the trade.

Still, the practice is not entirely the product of a psychological quirk. In a market as thin as this one, selling a house and buying another one is a big financial risk. Prices can move a long way before the two trades are finalised, and so swapping hedges both parties against that risk. Your degree has a little life left in it yet.

Also published at ft.com.

Dear Economist,
You have advised readers that, in blind tests, most people like the taste of inexpensive wine, and that their impressions of wine are more closely correlated with the price tag than with expert opinion. In other words, it is possible to save money by drinking plonk. In these straitened times, can we draw similar conclusions about food?
Harry Nicholas, Los Angeles

Dear Harry,

My gurus in these matters are the members of the American Association of Wine Economists, and a new AAWE working paper, “Can people distinguish pâté from dog food?”, suggests an answer to your question. The authors were the “Gonzo Scientist” John Bohannon and two food critics who had worked on the earlier findings on cheap wine.

The appearance of food is key, so it was an important breakthrough to realise that dog food and pâté look much the same – once the former has been blended to a mousse-like consistency and garnished with parsley. In order to win over some subjects without deceit, the experimenters began with a wine-tasting session. Subjects were then offered two quality pâtés, two cheap imitations (puréed liverwurst and puréed spam) and the dog food – all accompanied by Carr’s water biscuits.

The results were surprising. Subjects overwhelmingly rated Dish C (the dog food) as the least tasty. However, few actually thought Dish C contained dog food. Broadly, people thought that Dish E (the liverwurst) was the dog food; they also thought it tasted good. Disappointingly, most people correctly identified the expensive pâtés, and the blind-taste rankings correlated exactly with the (unseen) price tags. In other words, there are no bargains to be had by serving dog food to dinner party guests. No wonder economics is known as the dismal science.

Also published at ft.com.

Dear Economist,
Having become more computer-literate in recent months, I have made an unpleasant discovery. My husband has been visiting pornographic websites and has also downloaded explicit videos. I love my husband, but am not sure what to do now. Is his behaviour common?
A disappointed wife, Cincinnati, Ohio

Dear DW,

If only you had a subscription to the Journal of Economic Perspectives. One of its regular features is a data-driven description of different markets in action, most recently a study by Benjamin Edelman asking “Who buys online adult entertainment?”

The latest data reported are from 2006, when adult entertainment clocked up $13bn in retail sales in the US – about $50 per adult, presumably somewhat skewed towards men. Much of this was video sales and rentals, but internet and cable subscriptions are also substantial and, unlike video, growing briskly.

Paid subscriptions to internet porn sites remain a minority hobby. Edelman studied subscriptions to one top 10 service provider and found that almost all states had between two and three subscribers per 1,000 home broadband users. Ohio, incidentally, is towards the low end of that range.

Is your husband, then, unusual? Not that unusual. Scale up Edelman’s numbers to include other service providers, add cable subscriptions and you’d conclude that about 5 per cent of connected households are paying for regular porn. This doesn’t include the largest category, video rental – and more importantly, doesn’t include free internet porn. Since free internet porn is ubiquitous and presumably more private, one can only surmise that it is far more widespread.

I can’t tell you what to do about your husband – but he is certainly not alone.

Also published at ft.com.

Dear Economist,
I tend to procrastinate and leave tasks until the very last moment. As a consequence, I always feel as though I could have done more and that my potential has been somewhat unfulfilled. However, I find I concentrate much better and am more prolific with a deadline dangerously close. Can economics help me resolve this tension?
T.N., Limerick, Ireland

Dear T.N.,

The answer is obvious: make sure you always have a deadline to hand, and you will always be prolific. That, at least, is the logical implication of your letter. It is also backed up by research.

The behavioural economists Dan Ariely and Klaus Wertenbroch conducted an instructive study of procrastination with three groups of students at MIT. Each group had to complete three assignments over the course of the 12-week course. The first group had a separate deadline for each paper, after four, eight and 12 weeks. The second group had no intermediate deadlines: all three papers were due at the end of the course. Students in the third group were asked to impose their own deadlines.

Students with well-spaced deadlines – those in the first group and a subset in the third who had spaced out their deadlines – tended to achieve the highest grades. Students who had assigned themselves no intermediate deadlines, or had been assigned none, fared poorly.

You must learn this lesson. Ensure that a binding deadline is always looming. Chop up large tasks into smaller ones and assign a deadline for each one. If you do not have a professor willing to make these deadlines meaningful, you can do so yourself. Make firm commitments to your colleagues or clients. Alternatively, write out a schedule and make bets with a few friends that you’ll stick to it. If “the very last moment” is always “now”, you’ll be the world’s most productive procrastinator.

Also published at ft.com.

Dear Economist,
Should I sell my home and liberate cash? If I sell today I will have made a 400 per cent return over 12 years. I am not English and will be leaving the country for an extended period, perhaps for ever. However, I don’t have to sell and I love my home dearly.
Max Mulhern

Dear Max,

You need to move away from qualitative pros and cons, especially since few of the ones you give stand up to scrutiny. A quantitative estimate of costs and benefits is more useful.

Let’s start with your estimate of a 400 per cent return over 12 years. You do not state whether this is before or after inflation, but who cares? It is the likely future return that matters for your decision. You do not know that and neither do I, but I suspect it will be poor.

Make a guess, and add the income you would expect if you let out your house – assuming this is what you would do. Those are the financial benefits of keeping the house.

On the other side of the equation, make a guess as to the return you could earn if you simply sold your home and invested the cash in the best available prospects. Bear in mind that you might even buy a home overseas; this would have the distinct advantage that you could live in it. These are the opportunity costs of retaining your existing house.

So, yes – the opportunity costs will outweigh the likely financial benefits of keeping your home. Fine. You imply that you are wealthy and declare that you love your home. Perhaps this affection is strong enough to outweigh the financial loss, but I doubt it. Behavioural economists warn of the “endowment effect”, in which people irrationally overvalue what they already have – the “bird in the hand” maxim inflated to unwise proportions. So make your choice: but first, figure out how much your sentimentality will cost you.

Also published at ft.com.

Dear Economist,
I notice that my tobacco packet includes merely a helpline number for people who want to quit, and not a grotesque picture of someone in the advanced stages of a smoking-related disease. This leads me to conclude that I might be prepared to pay more for my tobacco if its legally required guilt trips were in text form rather than pictures. Am I on to something?
Ms Lovegrove, Oxford

Dear Ms Lovegrove,

I think you just might be. The pictures you describe are a form of “product sabotage”, a tactic used by companies with some pricing power. Some customers are very sensitive to price while others pay less attention to it. The sensible business, then, will try to separate the two groups and charge them different prices for similar products. This can be easier if the cheaper product is given some additional defect that the price-sensitive customer will swallow and the price-blind customer will not.

Examples abound. Tesco Value products are cheap, but the packaging reminds me of an emergency food drop from the United Nations. The “short cappuccino” from Starbucks is cheap – and not advertised on the menu. Most software packages have a cheaper version in which features are disabled at the vendor’s expense. Some hardware does, too.

The government could allow the sale of tobacco under two different conditions: the current version, with tax and disturbing pictures, and a “guilt-free” version with no pictures but a higher tax. The effect would be something to test, but I would expect school children and the poor to choose the traditional version, while older and more affluent smokers would buy the premium version. I would guess that with two different schemes available, the government should be able to discourage more smokers while also raising extra cash.

Or perhaps I am just smoking something.

Also published at ft.com.

Dear Economist,
My partner and I have well-defined boundaries to our relationship; they are already liberal, and we are now considering permitting liaisons with others. The benefits for my partner are enormous, as she is an attractive young woman interested in men and women alike.
I, on the other hand, am an awkward wallflower of unremarkable appearance, who has trouble attracting women. Or at least I was until I met my partner. In the years we’ve been together, I’ve received a startling amount of unsolicited attention from women who would not have looked at me twice when I was single.
Can economics explain why I’m unappealing as a singleton, but hot property when with a stunning girlfriend? More importantly, will I still be hot property in a non-monogamous setup? As a consumer I seem to be able to have my cake and eat it, but as a commodity, can I both be had and eaten?
Confused, Paradise

Dear Confused,

Your sudden attractiveness does indeed have an economic explanation: your new admirers are rationally inferring information about you from the behaviour of your partner. She is vivacious, beautiful and intelligent, and yet she dates you; ergo you have hidden assets.

I am not sure an open relationship is wise. You are right to point out that your partner has much to gain from such an arrangement. Onlookers would rightly conclude that her commitment to you has few downsides for her, so doesn’t convey much of a signal that you are a hidden gem. There is another risk. Through her experiments, your partner may discover an alternative lover who insists on a monogamous relationship. Monogamy may be a price worth paying, given that she is currently dating “an awkward wallflower of unremarkable appearance”. You currently live in paradise; don’t risk being cast out.

Also published at ft.com.

Dear Economist,
I am a third-year university student and I share a flat with a student on the same course as me from the year below. We are good friends, but I, alas, want us to be more than that. The risks of my confessing my feelings are quite high. If it works out, I have a girlfriend; if it doesn’t, I’ll end up homeless, looking for an (almost prohibitively expensive one-person) apartment, having lost my best friend. If I keep her in the dark I’m guaranteed to have a roof over my head for the two remaining years. Can economics provide an answer to my dilemma?
Unnamed student, London

Dear student,

The cost-benefit analysis here is deceptive, so let me walk you through it. Your mistake has been to frame your dilemma as a static choice problem: either you confess now and take your chances, or you never confess.

That is wrong. There is, dare I say it, a third way. Simply wait and see whether anything is clearer tomorrow, or the next day, or the day after that.

In technical terms, you have an option on making a pass at this lucky lady, and you will continue to have that option until either you actually do so, or until either you or she falls for someone else. The option is valuable and should not be exercised lightly, and thus expended. Option valuation models suggest that you should make your move only if you are absolutely sure (you clearly are not) or if other suitors are circling and your option is about to vanish anyway.

Even in the latter circumstance, you shouldn’t make your move if you feel the odds are against you. I suspect they are. The chances are that this young woman knows exactly how you feel. Since she has done nothing to encourage you, I expect she is praying you’ll keep your feelings to yourself.

Also published at ft.com.

Dear Economist,
Thanks to the recession kindly engineered by financial whiz-kids, I find myself jobless with large debts and a house that is worth less than the mortgage. I have some redundancy money. What am I supposed to do with it? It’s not enough to pay off my debts. Financial disaster seems very likely, so why shouldn’t I just spend the windfall on lottery tickets?
J.P., via e-mail

Dear J.P.,

I’m not going to argue with you about the expected returns on lottery tickets; you’ll know that your chances of winning anything worthwhile are near zero. Let me make a more striking claim: even if you won, it would be unlikely to save you from financial trouble.

The economists Scott Hankins, Mark Hoekstra and Paige Marta Skiba are in the process of investigating that claim, looking at 35,000 winners of the Florida lottery, almost 2,000 of whom later filed for bankruptcy. The researchers find that lottery winners are more likely to go bankrupt than others – which is not surprising, since many of them don’t win much, and lottery enthusiasts tend to be poor.

More surprising is the discovery that those who won between $50,000 and $150,000 were as likely to have gone bankrupt five years later as those who won less than $10,000. Since the size of a win is random, there should have been no difference between big winners and small winners at the time they bought their ticket. It is remarkable that the additional money was not used to pay off debts.

Admittedly, winning $100,000 did seem to postpone bankruptcy by a year or two, so presumably these winners had a nice time on their way to ruin. Yet this is not an approach I feel able to recommend. Finding a job would go a long way to solving your problems. I won’t pretend that will be easy, but the odds are better than those of winning the lottery.

Also published at ft.com.

Dear Economist,
When my neighbour was desperately searching for staff to run her guesthouse, I, after due deliberation about whether to get involved and much trouble, eventually found her a married couple who complied with all her demands. She now thanks God for bringing them to her.
Do you think she’s confusing me with God? If so, should I gently remind her that I’m a simple earthly being and such high praise is making me feel a little uncomfortable? I would prefer you not to use my real name; I don’t want any more people contacting me in search of miracles. In any case, my husband thinks this business has gone to my head.
Mrs S., South Africa

Dear Mrs S.

I would say that a more likely explanation of your neighbour’s actions is that she is trying to ingratiate herself with God, not you. I can imagine how aggravating this is for you, given the trouble you’ve gone to, but this attitude makes sense if God is subject to flattery. God is, after all, omnipotent, so it must be better to have God on your side than plain Mrs S.

The question is, does God pay attention to supplicants? No less an authority than Nobel laureate James Heckman has investigated the answer using highly fashionable statistical techniques. (Some claim that Heckman’s paper is a parody of sloppy statistical practice. I couldn’t possibly comment.)

Heckman observes that “the empirical conclusion from this analysis is important. A little prayer does no good and may make things worse. Much prayer helps a lot.” This is fascinating, suggesting that sit-on-the-fence agnostics are choosing a very foolish approach. Your neighbour has taken this lesson to heart: given the importance of extremely fervent prayer, small wonder that she is giving God all the credit for your hard work.

Also published at ft.com.

Dear Economist,
I am moving into an eight-bedroom flat with seven friends in a few months and need to decide fair rates for each of the rooms. Assuming some people want cheaper rent and some want nicer rooms, what is the fairest way to split the total monthly rent of £3,200 and decide who gets what?
Student, St Andrews

Dear Student,

I have answered a very similar question before, but for three people rather than eight. My solution then – a modification of “one cuts, the other chooses” – would not work for you. Therefore I propose a simultaneous ascending auction of the largest seven rooms; whoever does not win one of the largest seven gets the smallest room at whatever rent is necessary to bring the total to £3,200.

Bidding proceeds in rounds. In the first round, any student may choose to bid on any of the seven largest rooms, in increments of £5. Ties are broken with the toss of a coin. In each subsequent round, students without rooms must submit a bid to exceed the current high bid by £5. Any incumbents thus dislodged can bid on any room in the following round.

The auction ends when seven students are incumbents in the seven rooms, and the eighth student does not wish to outbid any of them, but would rather take the small room and pay the balance of the £3,200. (If the bidding is frenetic enough, she may be paid to take the small room.)

At any time, roomless students have an incentive to bid on whichever room offers the best combination of price and quality – or to drop out if they think the smallest room looks cheap. But beware: such an auction is neither foolproof nor, if some players decide to collude, cheat-proof. Still, perfection is for mathematicians, not economists.

Also published at ft.com.

Dear Economist,
I am an economist, as is my boyfriend. We started dating as students, but after four years we broke up for a couple of months because of differences in our ways of thinking. We always supported each other professionally, but things changed. I got a job in a multinational organisation, but he didn’t like me travelling, going out for business dinners, or even spending time at the office.

His father was head of the family, while his mother stayed at home; both my parents worked. (We live in Paraguay, which is quite chauvinistic.) Probably, he thinks women have to stay at home, yet he fell in love with me because of my aspirations. I’ve said that maybe he needs to marry a woman who wants to be a housewife. I gave him another chance, as I love him. Should I be patient?
L.E.

Dear L.E.,

The economist Betsey Stevenson has discovered that in US states that liberalised divorce laws, couples became less willing to support each other through expensive courses. That makes sense: easy divorce raised the spectre of being dumped once hubby had spent your money and acquired his law degree.

Your own situation is the reverse. Your boyfriend supported you while you built up your human capital, but now spurns the payoff. You are right to be suspicious, I think. Your boyfriend wrongly thought that you would change; you face a similar disappointment.

There is another, more calculating, explanation. Roland Fryer, an economist fascinated by the causes of African-American under-achievement, theorises that some people find professional qualifications disturbing because they allow a credible exit from any relationship. You’ve given yourself that option; your boyfriend has given you reason to use it.

Also published at ft.com.

Dear Economist,
With the economy slowing down, I have seen an outburst of “pay-what-you-want” options where customers of, say, coffee shops are encouraged to pay what they consider the product or service is truly worth. Is this sustainable in the long term, or will people take advantage of it, gaming the system into failure?
John Wegman, London

Dear John,

While we economists realise that people pay money even when they don’t legally have to, few of us have studied exactly when or why. One exception is Paul F., the “bagel man” made famous by Stephen J. Dubner and Steven D. Levitt, the authors of Freakonomics. Paul F., a retired economist, delivered bagels to offices, along with a box for payment. He specified prices and kept careful track of payment rates – a little under 90 per cent.

Pay-what-you-want goes further than this simple honesty system, and might work better because it stands a chance of persuading affluent customers to pay over the odds. Most retailers devote great ingenuity to this task of “price discrimination”; it would simplify things a lot if customers simply complied.

Yet I am doubtful. A major attraction of pay-what-you-want is free publicity, whether for an ageing rock band or the new café on the block. The more businesses try it, the less publicity each will receive. I wonder, too, whether customers continue to contribute more than they must after the thrill of the new wears off: the economists John List and Uri Gneezy once conducted an experiment to see if temporary workers tried harder if unexpectedly paid a generous wage. The answer: yes, but the gratitude wears off in a matter of hours.

Still, pay-what-you-want has to be worth a try. If the journalists look elsewhere and the customers become ungrateful, it’s a simple matter to install a cash register.

Also available at ft.com.

Dear Economist,
Our son (aged 14) has been going to a local school and has made friends and settled in. But we are not happy. We think the school is poor, with a high teacher turnover, low expectations, poor exam grades and now a bad report from school inspectors. We’re thinking of moving him to a different school but we don’t want to disrupt his education. What should we do?
John and Julia, London

Dear John and Julia,

The economists Eric A. Hanushek, John Kain and Steven Rivkin have looked at data on Texas schools. They conclude that moving children repeatedly is disruptive both to the child and to his peers, but that a one-off move causes only temporary disruption to studies, especially if carried out at the end of an academic year. The researchers also found that in the cases where children were moved to better schools, they achieved a lasting improvement in academic performance.

A similar conclusion emerges from the research of another economist, Bruce Sacerdote, who looked into the aftermath of the Katrina disaster. After Hurricanes Katrina and Rita, about 200,000 Louisiana children had to switch schools. Unsurprisingly, test scores took a sharp turn for the worse. Yet Sacerdote finds that for those evacuees who left schools in urban New Orleans, which had a terrible reputation, test scores recovered within two years. College enrolment rates also improved. Three years after the disruption, children who began in bad schools ended up doing better than if Katrina had never struck.

My conclusion is that your son can thrive after a school move, but only if the new school really is superior. I am not sure what criteria you used to select the current one, but you might want to revise them before choosing the next. If I was your son, I’d be wondering why you think you will be second time lucky.

Also published at ft.com.

Dear Economist,

I have a parking spot in a local garage and want to tip the people who work there so I continue to get good service. Assuming I take the car out once a week, should I tip the attendant $2 every time or pay a lump sum of $104 at the end of the year?
GHD, New York

Dear GHD,

Classical economic theory suggests there is little to choose between the two options. However, recent advances in “neuroeconomics” are providing insights into the way that our brains process different kinds of reward. I asked the neuroscientist Ben Seymour, of University College London, to advise.

He counselled against both of your systems. The Christmas bonus will be diminished because it will tend to be compared with other income and outgoings, and both tend to be larger at Christmas. The regular income makes more sense, but Dr Seymour fears that if you are too predictable, the parking attendant’s brain will start to encode two dollars as “no surprise” and thus dismiss them. If you miss a payment it will seem like spite.

Other possibilities include a steadily rising tip, which the attendant’s brain should simply register as “better and better” – but this plan requires lots of change and can seem odd.

Then there is the “lottery” tip, where you offer the attendant a 1/52 chance each week of receiving $104. (Ask him to pick the Ace of Spades from a deck of cards.) Too shifty-looking, I feel – which is a shame, because many people tend to enjoy such gambles.

The ideal tip would combine security and the excitement of surprise. Why not tip him a dollar a week plus an extra $5 every month or so? Such a policy should maximise the appreciation of your behaviour. Perhaps it is no surprise that it is what most people instinctively do anyway.

Also published at ft.com.

Dear Economist,

Here in India – as in most other parts of the world – there is an assumption that all politicians are corrupt. As such, politics is not the first career choice for most individuals. However, if all politicians are indeed corrupt, wouldn’t that mean that all politicians benefit more than the rest of us? Therefore, shouldn’t the rational choice be that more people join politics? And would “competition” reduce corruption?

Chirag Panjikar, India

Dear Chirag,

You are clearly thinking along the right lines, but the details can be more subtle. I asked Mikhail Drugov, an expert on the economics of corruption from Oxford University, for advice. One of his observations is that politicians may not necessarily make more money from a corrupt system. If, for example, you wish to exploit a political position for personal gain, you may find that to obtain the position, you must pay a substantial bribe to some other politician. On balance, even the most venal political neophyte may decide it is easier to make money by getting a proper job.

Competition may reduce bribes: as the economist Robert Klitgaard famously commented: “Corruption equals monopoly minus accountability plus discretion.” It’s hard to charge a bribe if the official in the next office will perform the same service for less.

But competition does not always reduce corruption. The number of bribes required may rise, even as the size of the bribes falls. And corruption can secure illegitimate services as easily as legitimate ones. Should we be pleased if it becomes cheaper to obtain a driving licence when one cannot actually drive?

When competition does reduce corruption, it is very good news. In such cases, the most feared phrase in politics should be “bipartisan agreement” – for which read “cartel”.

Also published at ft.com.

Dear Economist,

I have started playing the national lottery in an attempt to resolve my worsening financial situation. While I am aware of the improbability of winning, I was wondering if I would improve my chances by sticking with the same numbers rather than using the randomly generated “quick pick”?
Peter, Canada

Dear Peter,

You seem to have a rather charming scenario in mind, with you playing the role of a little lost child, and the lottery machine playing the role of parent, diligently searching for you. This is called a “rendezvous problem”, and, in general, you would be better off staying where you are and letting the lottery machine find you.

With almost 14 million combinations to try, this would take, on average, seven million attempts – about 67,000 years if you play twice a week. Success would be guaranteed after 135,000 years. If you choose your numbers at random, however, success is never guaranteed, and tame mathematicians tell me that the average time to strike lucky is also longer – perhaps 100,000 years or so.

But whether you can shave 35,000 years off is beside the point. The lottery machine is not trying to find your number. It has no memory of previous combinations, and is equally (un)likely to pick any of the 14 million. Pick at random, write down your birthday … it makes no difference to your chance of winning – although if you write down unusual numbers, it will minimise the likelihood that if you win, you’ll have to share your prize.

In case you are not a long-time reader, I will repeat my advice as to how to enjoy the thrill of the lottery without the fool’s bet. Choose your numbers, but don’t buy a ticket. You’ll win almost every week – the fear that your number might actually come up is an adrenaline rush to beat them all.

Also published at ft.com.

I have a great boyfriend. We’ve been together for five years, have a son and are planning more kids. I have a good job which I would like to continue doing and that pays OK. My boyfriend earns a lot more money than me and we have a very comfortable lifestyle. We are both in our early thirties but I am worried that after three kids and 10 years with me, he’ll run off with a younger woman. Should I marry him?

C.M., France

Dear C.M.,

Economists have gathered evidence from speed dating and internet dating, and found that it supports the conventional wisdom: men like young women and women like rich men. Clearly, you have reason to be nervous.

I keep re-reading your letter and I cannot work out whether you regard the risk of desertion as a reason to get married or a reason not to. No matter: a spot of game theory, which economists use to understand how rational people interact with each other, may help you here. You have three options: dump him now; stay with him but do not get married; or get married now. Ten years later he will respond by staying with you or leaving you for the nanny.

Dumping him seems odd: you already have a child together, you enjoy the relationship, and dumping him will not change the unpleasant logic of evolutionary psychology, which puts you at an increasing disadvantage as you both grow older. Staying with him seems more sensible, but if he does run off you will have limited negotiating power. Marrying him seems best of all: the legal contract, in most jurisdictions, protects you against this sort of behaviour. You cannot prevent him leaving you, but you can make it an expensive proposition for him if it happens.

Do I hear the distant sound of wedding bells? Happy Valentine’s Day.

Also published at ft.com.

I work with an international bank, but have recently been laid off. Fortunately, I have managed to land myself another job in this very tough job market (yes, in India too!).

The catch is that my current employer is offering me a severance package of around 20 months pay – but only if I stick around for six more weeks, while the other company wants me to join as soon as possible.

One option gives me a pile of hard cash, but uncertainty and the stigma of unemployment. The other option is a secure and cushy job. And, another thing: India does not have any unemployment benefits.

P.M., India

Dear P.M.,

I’m not surprised you’re tempted by the severance package, especially with two companies fighting over who employs you for the next six weeks – a great boost to your ego.

Still, I’d urge you not to get too confident. An economics PhD student at MIT, Johannes Spinnewijn, recently published a research paper showing that most unemployed people are too cocky about their prospects of finding a new job. On average, they expect seven weeks of unemployment, but eventually endure 23 weeks. And this is using data from the mid-1990s, not recession years. Be warned, then: don’t let overconfidence lure you into undervaluing the guarantee of a good job.

A better approach would be to negotiate a compromise. Surely there is a way to secure the new job without losing all the severance pay – perhaps involving part-time work for both companies for the next two months.

If you do decide to turn down the new job and look again with severance pay in hand, look very hard indeed. Spinnewijn’s research shows that job-seekers tend to harbour another misperception: that an energetic job search does not pay dividends. They are wrong.

Also published at ft.com.

Dear Economist,

I was living with my boyfriend when he got accepted to a very good university in London. He convinced me to go with him. I applied and got accepted to another very good university to pursue a masters degree that I long dreamed of. He broke up with me before I knew I had been accepted, arguing he wasn’t prepared to carry the responsibility of me leaving a life behind to go after him. Of course, it was his idea in the first place.
He has been living in London since September. I have just arrived. I still love him, but I think he has been very selfish. Should I forgive him and look him up? Human selfishness and economics have always walked hand in hand. I would love to have your advice.
CP

Dear CP,

The whole episode seems to have been very good for you: at your boyfriend’s urging, you followed your dreams and now you are realising them. Wonderful.

However, this happy fact does not translate into a compelling reason to renew the relationship. Normally I advise people that they should ignore “sunk costs” – to put it another way, there is no use crying over spilt milk. In this particular case you should ignore the “sunk benefits”. Forget the fact that it’s all worked out well, and focus instead on what this story tells you about the prospects for a happy future together.

If your boyfriend is not rational then his behaviour is self-destructive and self-obsessed. Even worse, if your boyfriend is rational – as economists usually assume – then he seems simply to have been opening up an option (to have his old girlfriend in London) and discarding it when it had no value to him.

I’d guess he thought he could do better than his old relationship in London. I’m quite sure that you can.

Also published at ft.com.

Dear Economist,

Finding myself alone again, I have joined a dating agency. As a result, I am taking delightful, unattached women out to dinner. This is almost always very enjoyable and, according to tradition, I pay for the meal.

I am very happy to do this but I am disappointed when the woman in question does not send me a text or other message the next morning to say thank you. Am I expecting too much in this modern world?
R.S., London

Dear R.S.,

Oh dear. I am inclined to agree that a thank-you is appropriate, and if you are not receiving so much as a text or an e-mail, this is a bad sign. But a sign of what?

Scenario one: the woman is a rational self-interested agent. If she regarded a free dinner as sufficient compensation for the time she had to spend in your company, then a “thank you” would be a simple way of securing a repeat of the experience. The fact such gratitude is not forthcoming suggests your dining companion did not wish for a second date. Nor did she care if you regarded her as ungrateful or said so to others. In short, she would be happy never to see you again.

Scenario two: your date wished to continue the relationship, but was too stupid or self-obsessed to realise that “thank you” would be a good first step. In which case, you are better off without her.

A final possibility is that your offer to pay for dinner struck your companion as sexist. But then, either she protested and you boorishly ignored her, in which case scenario one now applies (you have no chance); or she let you pay anyway and then sulked, in which case scenario two applies (you got away lightly).

The good news? You seem to enjoy these first-date dinners – and I suspect many more are in prospect.

Also published at ft.com.

Although Christmas in the company of various members of the extended family was fun, it was interrupted and spoiled by family rows over who got to watch what television programme, who got the best seat, who did the washing up, and so on. Can economics prevent such rows spoiling next Christmas?
Penny Belton, Gloucester

Dear Penny,

I am all in favour of assigning clear property rights in such cases. Someone can “own” the right to the remote control; the best seat can also go up for grabs, as can exemption from the washing-up rota.

One can get pretty fancy about these auctions, but I wouldn’t advise doing so unless you’re going to buy bespoke software and hire a team of specialist economists. A simple set of auctions for temporary use of selected scarce resources should do the trick.

I have made this sort of recommendation before on the basis of sound economic theory. This year, I am delighted to report that I have empirical support. Bev Stewart, a grandmother from Yorkshire, auctioned the right to spend Boxing day in the comfy armchair in front of the telly. All family members were eligible to bid; she was expecting a “rabble of Stewarts” to descend upon her the day after Christmas.

The winner, after 17 bids from a range of bidders, was her daughter-in-law for the sum of £13.50. The ingenious Grandma Stewart not only raised money for a good cause, but prevented the annual arguments over what she is quoted as saying is the “perfect seat … straight in front of the TV and has got the coffee table at the side for you to rest your drink on and the TV remote, so everybody wants to sit there”.

Twenty-five family members and no arguments. If auctions can work for Bev Stewart, they can work for us all.

Also published at ft.com.

Dear Economist,
Here in Michigan we have a problem: the automobile industry. Thanks to foreign competition and the doubtful management of the Big Three, the state’s economy is in serious trouble. Should we just sell the state to the Chinese? There is a history of this in Michigan – we once traded the city of Toledo to Ohio in exchange for the upper peninsula. So perhaps it would be a good idea. But what would be a good price?
Mrs J, Michigan

Dear Mrs J.,

Make sure you don’t sell yourselves cheap. According to the US Bureau of Economic Analysis, Michigan’s GDP was $382bn in 2007. This is an attempt to measure the value added to all goods and services in Michigan, which includes anything from haircuts to assembling a car – but not, for instance, any components imported from out of state.

The $382bn figure is impressive. It would sneak Michigan into the top 25 economies in the world. Even China’s GDP is less than nine times greater.

So how much would it cost to buy $382bn of productive power? No corporation adds nearly as much value; the economist Paul de Grauwe reckoned that in 2000, value added was $67bn for Wal-Mart and $53bn for Exxon, the two largest companies. Their market value at the time was about five times their value added.

If the same ratio applies, buying Michigan would cost the Chinese almost $2 trillion –roughly what China’s State Administration of Foreign Exchange has to spend. All this assumes that Michigan’s residents, like Wal-Mart’s employees, would be free to leave if they didn’t like the new management.

Still, don’t hold out too long: even before the credit crunch hit, Michigan’s GDP per head was falling in real terms. This may be the right time to sell.

Also published at ft.com.

Should I associate with happy people because they make me feel good by association, or unhappy people because they make me feel good by comparison? Or do economists claim that I should be indifferent?
D.K., New York

Dear D.K.,

Economic theory makes no such claim: it insists merely that your preferences be consistent and complete because that makes the mathematics easier. Although many economic models concentrate on your demand for physical goods, that is merely to keep things simple. There is no theoretical reason to insist that your happiness cannot depend on the happiness of others.

Your question, then, should be addressed empirically, and a fascinating new paper in the British Medical Journal tries to do just that. The authors, James Fowler and Nicholas Christakis, find that happiness is contagious.

If just a single nearby friend becomes happy, your chances of being happy rise by a quarter. Physical proximity seems to be important, and happiness is far more contagious among people of the same sex.

This has a ring of plausibility, yet there are some curious results – for instance, that a happy next-door neighbour seems to affect your mood more than a happy spouse. Meanwhile, in another BMJ study, Jason Fletcher and the economist Ethan Cohen-Cole use a similar data set and methodology to demonstrate that height also seems to be contagious, which seems rather unlikely.

The trouble is that it is hard to separate genuine contagion from other effects – such as a shared physical environment, or people befriending others who seem similar to them. My recommendation: by all means seek out happy people, but do not expect miracles.

Also published at ft.com.

Dear Economist,

When you think about it, Christmas is a strange ritual. Is there any economic logic to it?
FR, London

Dear FR,

The late Cambridge economist, Nicholas Kaldor, is said to have observed that the money supply surges in December and then falls back in January, before dryly remarking, “At last I have discovered the cause of Christmas!”

Professor Kaldor – a staunch critic of monetarism – asked whether central banks might be able to halt the Christmas spending spree by keeping a tight rein on the money supply in December. No, he concluded: people would turn to credit cards. How ironic that this year, the central banks desperately pumped money into the economy in an attempt to ensure that Christmas wasn’t cancelled.

But you are right: the spend-and-give, spend-and-eat side of Christmas makes little economic sense. Mainstream theories suggest that consumers should prefer to smooth their consumption rather than binge at Christmas and then, broke and fat, cut back in the new year. So economists are turning to psychological research to understand what is going on. Demarcation seems to be an important part of the story: we look forward to Christmas, enjoy it while it is happening (if done right), and recall past Christmasses fondly. All of which only happens if the day itself stands out.

Gift-giving works best when co-ordinated – on birthdays, anniversaries and at Christmas. A.A. Milne, in Winnie the Pooh, wished people “happy Thursday” instead of happy birthday; Lewis Carroll’s Humpty Dumpty received unbirthday presents. Alas, neither concept has caught on. Perhaps that is no bad thing. I am always forgetting my wife’s unbirthdays, and live in fear of forgetting our anniversary. But even I remembered Christmas.

Also published at ft.com.

Dear Economist,
Can economics help me pick out the perfect Christmas gift for my brother?
Tim Maly, Ottawa, Ontario, Canada

Dear Tim,

Your letter obliges me to disinter the influential research of the economist Joel Waldfogel on the “deadweight loss of Christmas”. Fifteen years ago, Waldfogel published an academic article demonstrating that the recipients of gifts would not generally have been willing to pay what it cost to provide the gift. A £30 sweater was valued at £20, for example, creating a “deadweight loss” of £10. Siblings were not the most incompetent givers – that honour goes to aunts and uncles – but they were not especially competent either.

Waldfogel’s work is often misinterpreted as suggesting that gift-giving is pointless. That is not true. He explicitly excluded the sentimental value of gifts from his calculations, and, of course, the sentimental value is part of the purpose of giving presents. That may explain why the economists Sara Solnick and David Hemenway have discovered that we prefer unsolicited presents to those we have specifically requested. It may also explain why gift vouchers are a bad idea: they have no sentimental value but still create deadweight loss, since many expire without being used, or are sold at a loss on eBay – as the economist Jennifer Pate Offenberg has documented.

All this points to the optimal gift-giving strategy: you need to minimise the deadweight loss while maximising the sentimental value. This suggests buying small gifts and striving for emotional resonance. Look for something inexpensive, and consider supplementing it with a letter, a photo, or time spent together.

If you feel a financial transfer is necessary, slip a cheque into the envelope too. I wish you, your brother, and all the readers of this column an optimal Christmas.

Also published at ft.com.

Dear Economist,
My young son came home from school and asked me: “Mummy, what’s a credit crunch?” How can I explain this to a five-year-old?
Ms LG, London

Dear Ms LG,

Once upon a time, there was a blameless girl called Consumerella, who didn’t have enough money to buy all the lovely things she wanted. She went to her Fairy Godmother, who called a man called Rumpelstiltskin who lived on Wall Street and claimed to be able to spin straw into gold. Rumpelstiltskin sent the Fairy Godmother the recipe for this magic spell. It was written in tiny, tiny writing, so she did not read it but hoped the Sorcerers’ Exchange Commission had checked it.

The Fairy Godmother carried away armfuls of glistening straw-derivative at a bargain price. Emboldened by the deal, she lent Consumerella – who had a big party to go to – 125 per cent of the money she needed. Consumerella bought a bling-bedizened gown, a palace and a Mercedes – and spent the rest on champagne. The first payment was due at midnight.

At midnight, Consumerella missed the first payment on her loan. (The result of overindulgence, although some blamed the pronouncements of the Toastmaster, a man called Peston.) Consumerella’s credit rating turned into a pumpkin and Rumpelstiltskin’s spell was broken. He and the Fairy Godmother discovered that their vaults were not full of gold, but ordinary straw.

All seemed lost until Santa Claus and his helpers, men with implausible fairy-tale names such as Darling and Bernanke, began handing out presents. It was only in January that Consumerella’s credit card statement arrived and she discovered that Santa Claus had paid for the gifts by taking out a loan in her name. They all lived miserably ever after. The End.

Also published at ft.com.

Dear Economist,
Due to multiple disruptions to my schedule since the first of the year I have not had the opportunity to take down my Christmas tree. At this point, should I leave the tree up for the remainder of the year or take it down now?
D. Seattle

Dear D. Seattle,

We all procrastinate from time to time. I, for example, received your e-mail in the spring of 2007. Forgive me if in the interim you have solved your dilemma, but it is possible that my answer will still be useful.

I think we can postulate a utility function along the following lines: having a Christmas tree up during the Christmas season brings positive utility, but diminishing marginal utility over time. After a while, the marginal utility is negative: the tree becomes an irritation, offering neither use nor ornament.

Given that parsimony is a virtue in economic modelling, let us assume that if the tree (presumably plastic) survives the year, its presence at the following Christmas will not seem like old news, but will be as welcome as ever. Assume also that putting up the tree and taking it down bring disutility, although in my experience this is not necessarily the case.

All these simplifying assumptions create a bias towards leaving the tree up; despite that, working through a few numerical examples suggests to me that in almost all cases you are better off taking the tree down. Even now, in early December, I would advise you to dismantle your festive foliage and enjoy the thrill of renewing it on Christmas Eve.

If the tree is still up, I would suggest that your problem is deeper than poor cost-benefit analysis: it is a profound tendency to put off action that is troublesome in the short term. We have developed an institution to deal with this. It is called the New Year’s resolution.

Also published at ft.com

I was recently stood up on a first date. The guy sent me a message four hours after we were supposed to meet, saying he hadn’t made it because he’d had to work and had been unable to call because his phone battery was dead. I was disappointed and angry. When he apologised and proposed meeting up later that week, I said no.

I found these excuses all too familiar. Using “working” as an excuse without respecting my time was exactly what my ex-boyfriend did to me. I always forgave him, and tried to be understanding. But he did this repeatedly and each time he knew that I was going to forgive him. Never again!

However, maybe everyone needs a chance to make things right. Am I punishing this guy for my ex’s behaviour?

BC

Dear BC,

This is an experimentation problem: how much do you need to see of a man’s behaviour before deciding you’d be better off without him? It is also a signalling problem: you need to ensure you don’t appear to be a doormat.

With your ex-boyfriend, you made both mistakes: ignoring plentiful evidence of his selfishness, while encouraging him to walk all over you by forgiving his abuse. (Economists call this latter problem “moral hazard”.)

Yet I think you have been harsh on the new chap. Admittedly, he got off to a poor start. If you have a queue of suitors, by all means move on. If not, it would be wise to allow him one chance. Your “no second chances” policy gives him the right incentives in future, but that is irrelevant unless you give him another try.

You should make the price of a second date high but not infinite. Insist on lobster and champagne. If he complies, he has made it worth your while. He will also have learned to keep his phone charged in future.

Also published at ft.com.

Should my co-workers and I accept a pay cut to preserve our jobs?
David A, London

Dear David A,

In principle, of course you should: this is so obvious that I’m not even sure why you bothered to ask. Another way of phrasing this question is to ask whether you would rather have most of your old salary or none of it.

You might object that unemployment has one big advantage over a pay cut: it means that you don’t have to work. For most people, however, this is not an advantage. The economist Andrew Oswald, one of a growing clan of “happiness economists”, has found that unemployment is extremely distressing, far more than could be explained by mere financial loss. If he is right, jobs bring happiness and self-respect, and even a severe pay cut is worth taking on the chin if that’s what it takes to stay in work.

It is true that taking a pay cut may result in a lower salary for many years, but losing your job, especially in a recession, is worse: your skills depreciate rapidly and you are quite likely to be worse off for the rest of your life.

You might reasonably ask why it isn’t more common to see swingeing pay cuts in place of redundancies. They are preferable for employees and probably preferable for employers, too. After all, sacking people is costly, as is going short-staffed and re-hiring people when things pick up. Far better just to squeeze salaries.

But that’s too easy. I suspect that there is a strong bias against salary cuts because otherwise employers would be demanding them every couple of weeks, with the flimsiest of excuses. Sacking somebody, in contrast, is not something an employer will tend to do lightly.

That is why “either pay me properly or sack me” is a good negotiating position. But, like many good negotiating positions, it may occasionally backfire.

Also published at ft.com.

I have worked full time for six years and presently earn £40K. I am also about to attain chartered engineer status, which sounds good. However, I stumbled on an old letter the other day that confirmed my admission into nursery aged four, 29 years ago! Looking back at all the money invested in my more than 20 years of formal education, I feel short-changed by my income and quality of life.

Do you know how I can calculate a “fair” figure that will reflect my master’s degree and international experience? I want to use this as the minimum salary for my next job.
G

Dear G,

I’m not going to attempt to calculate your “fair” figure: it would do you no good. Employers care very little about what salary would be a fair reward for your background; instead, they want the best possible people for the lowest possible cost. Competition from other employers typically leads them to compromise on both counts.

Your fair figure might eat away still further at your fading happiness. It seems that you were satisfied until you reflected on your education and inflated your aspirations. This is sad but typical, if the economist Andrew Oswald is to be believed.

Oswald has compared people’s circumstances with their happiness. He finds that, other things being equal, happiness rises with money, good health and a successful marriage, but falls as a person’s “expected income” rises. Expected income is the income that another person of the same age, sex and education level would typically earn. In other words, more educated people have richer peers and so tend to be less satisfied.

What is especially sad is that your income would comfortably put you in the richest 10 per cent of UK citizens, who are themselves relatively rich. As for being short-changed, I doubt that you personally paid for your nursery education. Put away your admission letter, and forget about it.

Also published at ft.com.

I am a father of three teenagers and happily married for almost 20 years. In my opinion the secret to my success is a traditional one, which is that there is no doubt about who wears the trousers. I am wondering whether there is any support in economic theory for my view?
Harry R, Surrey

Dear Harry,

There is ample support in economic theory for your view – it is just a shame there is little support for it in practice. Economists have always tended to use a “household” model of decision-making, which treats domestic decisions as being made by one person – the kind of benign dictator with whom you, as paterfamilias, identify yourself. This had the chief virtue of simplicity.

Gary Becker, a Nobel laureate, then advocated treating the household as if it had more than one decision-maker. This helped to explain rococo details such as the existence of divorce lawyers.

Changes that increased the bargaining power of women, such as the introduction of “no fault” divorce, turned out to have the logical consequence that women became less likely to be physically abused by husbands. They also reduced the likelihood that couples would invest in each other – for example, by financially supporting one partner through a professional course.

The plot now thickens. The economist William T. Harbaugh, with colleagues, has discovered that children as young as 11 seem to make rational consumption choices as well as adults do. And a team including the economist Anyck Dauphin has demonstrated that British teenagers do influence household consumption, especially if they have access to their own income. The paterfamilias household is no more.

How, then, should we reconcile this with your own situation, which seems comfortably wedged in the 1950s? My guess is that your wife and children have decided that it suits them to maintain your delusions of control.

Also published at ft.com

My sister and I both use the same car. When we started to share, we were both students and never had more than £10 to pay for petrol. Now that neither of us are students, we still only put a tenner’s worth of petrol in because we figure, “What is the point of one filling the car up for the other to get the benefit of driving it?” – commonly known as “sisterly love”. Of course, this means that we are endlessly having to stop to put in petrol.

Is there an optimal amount to put in the car in our situation, or, perhaps, a better way to deal with the predicament, bar getting a car each?
Lucy

Dear Lucy,

It might sound strange, but your letter reminded me of Somalia. Your method of ensuring equitable payment for fuel works, but is quite a hassle. Living in a quintessential failed state, Somali entrepreneurs also have to go to great lengths to ensure payment in a situation where the rule of law has broken down.

For example, electricity is locally generated using second-hand equipment from Dubai. The suppliers offer a simple menu of choices: daytime (good for businesses), evening or 24-hour electricity. They charge per light bulb. The costs of collecting payment are probably as high as the costs of producing the electricity, but at least the lights tend to stay on.

Clearly there is a superior solution for the two of you: leave a notepad and pen in the glove compartment, and each of you note both your mileage and your petrol expenditure. If the two fall out of sync with each other, the heavy driver can compensate the heavy filler. This is time-consuming, but not as time-consuming as incessantly stopping for petrol.

This system assumes that you and your sister would not lie to each other. Perhaps this is not true, and family tensions call to mind downtown Mogadishu. If so, it is time to buy another car.

Also published at ft.com.

At the apartment block where I used to I live, I once parked in another tenant’s car bay for a brief period. The tenant called the wheel clampers and landed me with a $120 (£69) fine, despite the fact he doesn’t have a car and there were 30 spare car bays, and despite knowing that the car belonged to me. Up to that point I had had no run-ins with this person.

The tenant gained nothing from this except my bad opinion, and I was $120 worse off. Why did he not either ignore my car, or come up and knock on my door and say: “Look, I’ve got these people on the phone who will clamp your wheels unless you persuade me otherwise.” He could have had a few bottles of beer out of it. But he didn’t. So what was the rational reason behind his action?
Jeremy Cook

Dear Jeremy,

You are right to be puzzled. Clearly, this neighbour did not maximise the value of his bargaining position in the narrow situation you describe. Still, I think there is a certain logic to what happened.

Game theory is the economist’s tool of choice to analyse what happens when two or more people have to negotiate, co-operate, compete or otherwise engage with each other. The essence of game theory is that each side would expect the other side to anticipate and respond to his likely actions.

Game theory shows that there are times when irrationality (real or feigned) is a highly effective strategy. Someone who seems impervious to logic is someone who also gets his own way a lot. Consider, for example, toddlers, terrorists, bosses, dogs and the late Charles de Gaulle.

Your neighbour may have calculated that by demonstrating a willingness to punish you for no immediate personal gain, he will gain in the long term anyway. Irrational perhaps, but rationally irrational.

Also published at ft.com.

I struggle to wake up in the morning although I sleep, on average, seven and a half hours. As I do have a flexible timetable, I arrive at work at 10am. I would like to start at 9am, but my laziness makes it impossible.

Do you have any advice?
Ruth

Dear Ruth,

Your guide here must be the Nobel laureate Thomas Schelling. Schelling’s expertise as a game theorist was honed by his experiences as a cold war strategist – he advised John F. Kennedy during the Berlin crisis.

Schelling realised that the same bargaining and bluffing techniques that worked against Nikita Khrushchev might also work in an individual’s struggle with herself, to quit smoking, diet or get out of bed in the morning. He called the idea “egonomics”.

Your predicament is a contest between two competitors, Evening Ruth and Morning Ruth. Evening Ruth has fine ideas about an early start, but her late nights impose costs on Morning Ruth, who then stays in bed.

One option is to tie Morning Ruth’s hands, just as Odysseus ordered his sailors to tie him to the mast. Evening Ruth might buy one of those motorised alarm clocks that falls off the dresser and scuttles under the bed, beeping loudly.

An alternative is to recruit a third player. The British government handed over control of interest rates to the Bank of England. Similarly, ask an early-bird friend to call every morning.

Odder still, Evening Ruth could enlist Bad Cop Ruth to punish Morning Ruth for lie-ins by, say, denying her(self) television privileges. Bizarre as it may seem to turn one person’s decision into a three-way inner struggle, Schelling avers that this technique works.

One final point. Your letter was evidently composed by Evening Ruth. Are you sure that Morning Ruth’s preferences are so mistaken?

Also published at ft.com.

I have a question which, I hope, you will be able to answer with particular insight. Should I subscribe to the Financial Times?

I buy the FT Weekend every Saturday, for $2.17 including California sales tax. I recently received an e-mail offer to receive the FT for $8.25 for four weeks, which would be a saving of 43 cents, and yet provide me with the newspaper every day.

However, I am conflicted because I primarily enjoy the FT Weekend for the cultural and political coverage. I am somewhat interested in the financial news, but my concern is that I will spend too much of my time following the soap opera that is Wall Street these days. But if there was a time when it would be advisable to read the FT, this would be it.
John Halbert, Los Angeles

Dear John,

I am not sure what puzzles me more, the fact that the FT subscription department is trying to get you to pay less in order to receive more, or the fact that you hesitate to accept.

The most likely explanation is that both you and the subscription department suspect the Financial Times of being an addictive product. They hope that once you are hooked, you won’t stop. Admittedly, this assigns the subscription department the role of crack-pushers, but we should call a spade a spade here.

The story is further complicated by the fact that not all addictions are harmful. You may find yourself addicted to the Pink’un for the happiest of reasons: an infatuation with Lucy Kellaway – or Gideon Rachman, if you prefer.

I suggest that you put this offer to one side, because the sums involved are trifling. Instead, buy and read the FT every day for a week. If you’re hooked by Friday, it will be because you’ve found the daily newspaper to your taste. You can then take advantage of the next subscription offer to feed your habit cheaply.

Also published at ft.com.

I work as an escort in Canary Wharf. I wonder if you might have some sound business advice on how workers in my industry should tackle the sudden drop in demand following the collapse of Lehman Brothers?
Miss C

Dear Miss C,

I wasn’t aware that escort services were pro-cyclical, but I shall take your word for it. You have three options, none of them perfect.

One: relocate. Canary Wharf is a pure banking play, and you could seek a more diversified market. The West End is full of hedge funds, oil barons and old money. However, I recognise that it will take some effort to find new clients. The economist Steve Levitt and sociologist Sudhir Venkatesh discovered, in a recent analysis of Chicago street prostitution, that the industry was very concentrated because prostitutes and clients would otherwise fail to find each other. You, of course, are not in quite the same game and may be able to relocate with ease.

Two: tough it out at Canary Wharf and hope that supply falls to match demand. Levitt and Venkatesh found that the supply of street prostitution was highly elastic in response to a demand surge. (The fourth of July holiday provokes a spike in trade for prostitutes – who knew?) Existing prostitutes would work longer hours, other prostitutes would travel to the area, and women who didn’t normally work as prostitutes at all would dabble in the business. This suggests that many of your rivals will find something else to do in the tough times.

Three: you may find that escort services are a little like estate agency, in that even severe demand shocks don’t tend to reduce fees. You’d find yourself well paid when in work, but frequently idle. That spare time could be used to study or find a part-time sideline.

I would give exactly the same advice to an estate agent.

Also published at ft.com.

In the women’s individual gymnastic competition at the Olympics, there were a couple of controversies over scoring that experts believe cost the US gymnast a gold. The problem is that officials from the top countries cannot be judges if a citizen from their country is in the competition, so the remaining judges are from countries with no gymnastic tradition. Is there an efficient way to solve this problem?
Doney Joseph, Los Angeles, CA

Dear Doney,

In a sport whose entire aim is to win the approval of the judges, error is unavoidable. Yet (as the sports economist Stefan Szymanski reminds me) there is a trade-off here between two sorts of error: bias and variance. The decision to use disinterested but inexperienced judges should reduce bias but increase the variance of the outcome. That is a painful trade-off.

National pride is not the only source of bias. Judges have friends; they may know athletes, or their coaches. It was for this reason that the great US orchestras began to introduce “blind auditions”, where musicians performed behind a screen. The idea was to eliminate favouritism towards the students of particular teachers. The unexpected result – shown by the economists Claudia Goldin and Cecilia Rouse – was to disarm sexism as well as favouritism: many more women succeeded in the blind tests.

Alas, gymnasts can hardly perform behind a screen, although I suppose they could compete in balaclavas. All I can recommend is an alternative reward system for judges. Each should assign scores in isolation, and then be paid only if the other judges agreed. The judges will need to co-ordinate on a “focal point” if they wish to be paid, and the obvious focal point is their honest opinion of a gymnast’s performance.

This is surely worth a try. If the judges cannot agree, of course, they will be paid exactly what they deserve: nothing.

Also published at ft.com.

Disciplining children seems simple enough. Reward them when they do well and punish them when they misbehave. They should respond to incentives, right? Am I missing something?
Tom Cookson, Berkshire

Dear Tom,

You are right up to a point. Children do respond to incentives, but there are limits to this strategy, the most obvious being that children are impatient. If you cannot help them to become pleasant people without rewards and punishments, you will find that both carrot and stick must be brandished with alarming frequency.

A second problem is credibility. Will you really carry out your threat to subject four-year-old Billy to waterboarding? It seems unlikely, and since Billy will not always respond to your threats, he will soon discover if they are hollow.

The challenge, then, is to make sure that you have punishments available to you that you are willing to carry out. You may be able to rise to that challenge by building up what Joshua Gans calls “punishment capital” – not to be confused with capital punishment. Professor Gans, author of a new book called Parentonomics, points out that if you are the source of a steady stream of money or sweets, that gives you a negotiating position. Threatening to remove the carrot (or rather, the flow of chocolate coins) is more credible than threatening to wield the stick. What one parent sees as junk food, Professor Gans sees as an “incentive opportunity”.

I have written before about the research of economist Bruce Weinberg, who finds that children in richer families are much less likely to be spanked, yet more likely to have allowances withdrawn. That makes sense: poor families lack all kinds of capital, and that includes punishment capital too.

Also published at ft.com.

I’ve been offered a job in the UK. The job, the salary and the possibilities are beyond my expectations. However, trying to think in pounds instead of euros (and changing them every time I visit my family) and in miles rather than kilometres, having to change the plugs and learn to drive on the other side, and – why don’t I say it? – facing the weather and food, all make me feel a bit uncomfortable, especially since it would be for at least five years. Am I right to worry?
Anna, Florence

Dear Anna,

Do not worry about adjustment costs such as currency, driving on the left and changing plugs. In the context of a five-year visit they are trivial.

More serious are the lasting compromises you must make. You are right to mention the food. You will also be far from your family. Who is to say whether money and a good job outweigh these concerns?

Since the price and quality of goods is different in the UK, your consumption bundle should also change. You would be wise to drink tea instead of coffee, and to seek out daring new art rather than hoping to find British Renaissance masterpieces.

Think of this move as an experiment. Your time in the UK will open up new options: the younger you are, the more valuable those options, because you will have a lifetime to take advantage.

So your age counts: being British, I am too much the gentleman to ask what it is.

Also published at ft.com.

Being a considerate father, I am planning a monetary incentive scheme to improve my 18-year-old son’s marks at school. Instead of executing a relative’s bequest as decreed, I intend to spend the €7,000 rewarding good results. During three semesters, he will have to pass 48 preliminary tests, then the main exams in the fourth and last semester. How should I divide up the capital?
Robert Saverin, a grateful father

Dear Mr Saverin,

Start by promising more than you can deliver. If you offer €10,000 for a perfect score, you will only need to apologise after your scheme has succeeded. That may seem to undermine your credibility, but the real risk lies the other way: your son may expect to get the money from his doting dad anyway. Discourage this view or your plan will be in vain.

You must also pitch the stakes just right. Research in behavioural economics suggests that trivial rewards are worse than no rewards, but also that performance suffers when too much is at stake.

Finally, focus on the early exams, because success breeds success. Promise your son €200 for every excellent result in these: that should engage his interest without throwing him into a panic. If things go well, the money will run out before the high-pressure exams. But by then he will have mastered his subjects anyway.

Also published at ft.com

I remember reading that men shouldn’t marry career women because such wives were more likely to have affairs and/or seek divorce. Is this based on research? Not that I am facing an imminent choice of marriage partner.
Eligible Bachelor, London

Dear Eligible Bachelor,

You may be thinking of an article in Forbes, published two years ago, which caused a stir by summarising academic research suggesting that professional women are “more likely to get divorced, more likely to cheat and less likely to have children”.

Tone aside, this makes sense. Children interrupt the careers of women more than of men, and so women with rewarding careers face a high opportunity cost when having children. And a woman whose husband turns out to be a pig will find it easier to leave him if she has an independent income.

However, research by Zvika Neeman and two other economists at Boston University suggests that career women have more stable marriages, in part because they marry late, and carefully.

Even if true, the Forbes piece is hardly a knockdown argument. Or if it is, one might equally counsel against an heiress (too independent) or a beauty (too many admirers).

In any case, remember this is the 21st century. You say you have no imminent prospects of marriage. I am not surprised.

Also published at ft.com.

My four-year-old son has a July birthday, which would make him one of the youngest in his class at school. I am thinking of keeping him back a year so that when he does start school, he’ll be bigger and more confident. Is this a good idea?
Sarah Goldberg, by e-mail

Dear Sarah,

Other parents think it is. The economists David Deming and Susan Dynarski have found that the percentage of six-year-olds not yet registered at school has quadrupled in the US over the past 40 years, largely because parents are holding back their children.

Being older seems to convey lasting benefits in sports: an unusual number of international footballers are old for their year, for instance. That is surely because the older children are more likely to be selected for the most competitive games with the best coaches. Academic streaming may create a similar effect.

An influential piece of research, from Kelly Bedard and Elizabeth Dhuey (also economists), found that the oldest in the class tended to do better not just when five or six but even as college students.

Not every study agrees, and Deming and Dynarski also point out that starting school late has its costs. Still, one thing is certain: since your boy has a mother who is fussing about this sort of stuff, he’s going to do fine no matter what.

Also published at ft.com, subscription free.

As a wine evangelist, I always bring a bottle of something really decent whenever I visit friends. The trouble is, their thanks rarely reflect my expenditure. Should I make more of a fuss about the cost of fine wine, or just bring plonk?
Gabriel Elliott, London

Dear Gabriel,

Either plan would work just fine. Several pieces of research by wine critics and “neuro-economists” have found that most wine drinkers pay more attention to price than they do to taste.

Research published by the Journal of Wine Economics shows that inexpert wine drinkers actually prefer cheap wine in a blind tasting. More skilled oenophiles do prefer pricier booze, but only a little. That suggests you should buy plonk with a nice label and a clear conscience.

The alternative is to point out the expense of the wine. This is crass, but should encourage people to rate it more highly.

Or you could bring plonk but claim it is expensive wine. The “neuro-economist” Antonio Rangel has found people enjoy wine more if they are told (truthfully or otherwise) it is expensive. Not only do they rate the wine more highly, but their brains seem to process the experience differently.

Your friends probably can’t tell the difference between expensive and cheap wine. Exploit that information as you wish.

Also published at ft.com, subscription free.

While at a recent Elton John concert, I observed a heated altercation between two ladies. The younger lady wanted to stand up, dance and sing along with Elton. The older lady, seated directly behind her, wanted to stay seated, watch the band and enjoy the music. The older lady asked the younger to sit down, but was told that she should also stand up and dance. An argument quickly broke out. Any thoughts on how they might have resolved the conflict without swinging handbags?
David Walker

Dear David,

I blame Elton John himself, since he apparently did not clearly define property rights, contrary to the recommendations of the great economist Ronald Coase.

Should a concert seat come bundled with the right to get up and dance, the older woman could have offered to pay her tormentor to sit down. Conversely, should a seat come bundled with the right to an unobstructed view, it would have been the younger woman offering the bribe. Either way, the dance would have continued only if the dancer’s enjoyment outweighed its victim’s frustration. Perhaps the bargaining might also have involved swapping seats?

Sadly, with no clear property rights, there was no basis for a deal. No wonder the night turned out to be all right for fighting.

Also published at ft.com, subscription free.

I have recently agreed with my student partner that she will move into my flat during the Edinburgh Festival so that she can sublet her room and pay for her half of our holiday together. She maintains that she should pay me for staying in the flat, whereas I argue that this would defeat the purpose of the exercise. How can we effectively resolve this dispute and look forward to our holiday? Should I simply charge her for any increase in my bills, or are there other considerations?
Ben, Edinburgh

Dear Ben,

Stop the tiptoeing about who pays what to whom. Let’s be blunt: she can’t afford this holiday, you can afford to subsidise her, but she doesn’t seem to want to incur too large a debt. It seems to me there are two solutions: an explicit contract, or an implicit one.

The implicit contract: quietly subsidise her holiday. Accept a little money from her as a tenant, and pick up a few of the extra holiday costs. The explicit contract: charge her the market rate for staying in your flat. Do not be surprised, however, if she begins to charge you for “services” provided either during her stay or on your holiday.

Choose whichever contract is to your taste. It will set the tone for your relationship – and the explicit contract may be cheaper in the long run.

Also published at ft.com, subscription free.

I pay someone to clean my car three times a week. He usually does a good job of it. However, I often travel and as soon as I’m gone, the cleaner stops work. So I always come back to a dirty car.
I pay him even when I’m not around. Shouldn’t he at least clean the car the day before he knows I will return, thus pretending to have been cleaning it regularly?
DT, Bahrain

Dear DT,

I can think of three explanations for this behaviour. Either the cleaner is too stupid to realise he should be skiving more subtly, or he thinks you are too stupid to notice, or he does not care if you notice.

If he is stupid, or he thinks you are stupid – don’t ask which – the solution is easy: say you’ve noticed that the car is dirty and ask him to clean it before you return.

If he does not care, that means he can try to get an equally good job elsewhere. Since the current job comes with frequent paid holidays, that is unlikely – unless you are being especially stingy.

I suggest sharper incentives. Tell him you’ll pay him a bonus if you return to a clean car. Frankly, since you are paying him to clean an unused car, incessantly, and he isn’t doing it, any change is likely to be an improvement.

Also published at ft.com, subscription free.

I take small steps to reduce my carbon footprint (I walk, recycle etc) and attempt to influence others by spreading awareness of climate change. However, a friend recently accused me of being a hypocrite because of my contribution to carbon emissions when I fly for my holidays. I admit I do not weigh the damage done to the environment when planning my breaks, and am not ready to forgo them. How do I preach green without breaching the walk-the-talk philosophy?
An apparent pseudo-treehugger

Dear Treehugger,

You are in good company. Most of the developed world’s governments have been spouting about climate change, without adopting policies that have noticeably prevented the growth of carbon emissions.

But hypocrisy does not strike me as the issue here. In fact, you are refreshingly honest – you say you do not know the impact of your travel, and would not change if you did.

The problem, rather, is that most people are equally as ignorant and as self-centred as you. Few humans are capable of making serious sacrifices for the unborn grandchildren of total strangers, which is the basic selling point of voluntary action on climate change.

That leaves us with two alternative policies: hope that people chivvy each other into action, or hope that governments swap some of their taxes on labour and capital for taxes on carbon. I am not holding my breath for either.

Also published at ft.com, subscription free.

I am the mother of two young children, and extremely grateful to my own parents for looking after them for a few hours now and then. My problem is that they stuff the kids with chocolates, crisps and ice cream. This is not good for the children, their behaviour and my own efforts to feed them something nutritious. Why do the grandparents have such a different philosophy, and can I do anything to change their thinking?
F.M., Cumbria

Dear F.M.,

The symptoms are familiar, but you have misdiagnosed the cause. Your parents do not have a different philosophy; they have different incentives. As you surmise, the costs of the junk-food strategy are mostly long-term: the children become fat, their teeth rot and they refuse to eat more wholesome fare.

In contrast, the benefits – delighted smiles, grateful kisses, compliant silence – are all short-term. Their strategy is perfectly rational for temporary carers.

Rather than reasoning with your parents, you must change their incentives. Unfortunately, this is not easy. You could try to bribe your parents, but threats will be useless because they are doing you a favour.

Perhaps your best bet is to try to arrange for longer bouts of childcare. Your parents will have a fresh perspective on the merits of carrots after trying to put a three-year-old to bed in the midst of a sugar high.

Also published at ft.com, subscription free.

My husband and I both have fairly demanding jobs, and we also have two children under the age of five. Bedtime is sometimes fulfilling, but more often exhausting and aggravating. Most of the work – especially the stories and the staring at the ceiling waiting for the children to fall asleep – is best done alone. So how should we share the chore?

Taking it in turns seems obvious, but what about when one partner is particularly tired already? Should we be holding an auction or something?
Sophie Jamieson

Dear Sophie,

Your problem is surprisingly subtle. Simply taking turns is inefficient, since that may mean the wearier party being faced with the chore. But a more discretionary system of side-payments is complex, and may be corrupted if one of you feigns exhaustion when in fact you simply fancy a glass of wine and a bit of TV.

Such situations are common. For example, a price-fixing cartel faces a trade-off between rigid profit-sharing rules and complex schemes to trade market share. The general problem has been analysed in the formidably mathematical research of Professor Susan Athey. She finds that less efficient but simpler schemes often – but not always – pay off. So you should indeed take turns, and if that is occasionally sub-optimal, tough luck.

Please note that Athey also has two children under the age of five.

Also published at ft.com, subscription free.

I am about to leave university and have received employment offers from management consulting firms in both London and New York. I have to say that I like the idea of living in either one of these global cities – the question is which one should I plump for?
R. A., Cambridge, UK

Dear R.A.,

Congratulations on asking the right question. Too many people relocate based on a nice job offer – or love affair – without considering the significance of the geographical decision. The economist and urbanophile, Richard Florida, argues that your choice of city is the most important decision you can make, because it determines job options, the quality of your everyday life, your love life and much else.

That said, you seem to have made this decision already. Cities such as Seattle, Berlin, Dar es Salaam, Hong Kong and Moscow each offer something unique, but it is hard to see much difference between New York and London. In fact, London has more in common with New York than any British city.

If you must restrict your choice, you are at least taking advantage of the trend for the big global cities to become ever more dominant. Perhaps you should consider New York: you have a network of friends in the UK; New York would diversify your life experiences and expand your networks. And apparently, if you can make it there, you can make it anywhere.

Also published at ft.com, subscription free.

I often share a taxi home with friends, and wonder how best to split the bill. When dropping a friend off first, I have received contributions varying from nothing to the full fare. If I get out first, what should I pay? As a woman with a large collection of frivolous shoes, walking home is a last resort.
Frances, Brussels

Dear Frances,

Of course contributions vary.

In a bar with friends, haven’t you noticed that sometimes somebody pays for your drink, and at other times you buy a round for everyone?

But in the long run, the saving should be divided fairly – a word with many interpretations. If three friends would have paid €4, €8 and €12 for taxis along the same route, and now must pay €12 in total, the total saving is €12.

That saving could be divided equally, €4 apiece, meaning fares of zero, €4 and €8. Or it could be divided in proportion to the original fares, meaning fares of €2, €4 and €6. Or the first leg could be split three ways, the second leg halved, and the third leg paid by the final passenger, implying fares of €1.34, €3.34 and €7.34.

There is no magic formula.

That is why no economist would share a cab without agreeing terms beforehand.

Also published at ft.com, subscription free.

I am about to be married, and have no doubts about the relationship. But there is one nagging worry: my fiance co-owns a condo overlooking the Pacific Ocean near San Francisco – with an ex-girlfriend, who lives next door to it. She is not in a position to buy him out of his investment, and although they rent it out, the mortgage is steep. I believe the condo is an investment specific to the former relationship and would like it divested – but the housing market is a shambles.
Mary

Dear Mary,

While I sympathise with your problem, I must correct you. A relationship-specific investment is one that is worth more within a relationship than outside it, such as a set of wedding photos. The condo is not relationship-specific, just unprofitable and illiquid.

The condo can therefore be disposed of without destroying value – but not, it seems, by either side buying the other side out.

If your fiance sold his share to a stranger, he’d sell at a loss. But in truth, the loss has already happened; his reluctance to sell suggests he’s pig-headed as well as an incompetent investor.

So I recommend that you buy out your fiance’s share, at a fire-sale price. Subsequent negotiations about the condo would then be between you and the ex. Should your marriage work out, you can share the profits with your fiance. And if not, at least you will have prearranged some compensation.

Also published at ft.com, subscription free.

The offer of a new job means I have the chance to move from sunny Assisi, the home of Saint Francis, to Luxembourg, one of the rainiest and cloudiest places in Europe. Of course the move will mean I have a better salary, but how much value should I place on the weather?
Simone

Dear Simone,

Lacking a hedonimeter, I cannot tell how much you love the sunshine. But I can tell you what others in your position have done.

Superficially, it seems that many people seek sunny climes, especially now that air conditioning is available. For example, long-run population growth in the “Sunbelt” – the US South – is often attributed to a demand for, well, sun.

Harvard economists Ed Glaeser and Kristina Tobio think otherwise. They argue that before 1980, the boom in the South was thanks to the region’s growing productivity. After 1980, population continued to grow, but house prices lagged behind those elsewhere in the US, suggesting that the driving force was not high demand but permissive planning rules. Certainly balmy California, with its tighter restrictions on building, did not enjoy the same population growth.

All of this tends to suggest that people don’t value sunshine quite as much as is supposed. In other words, don’t expect too much compensation for moving to Luxembourg: your more weatherproof rivals will do the job for less.

Also published at ft.com, subscription free.

My employer has just instituted a new mentoring scheme and as a relatively new recruit I’m eligible. I can’t make up my mind whether this is an important opportunity to learn or a colossal waste of everybody’s time.
Any thoughts?
Ben Harmison

Dear Ben,

Some new research by Jonah Rockoff, an economist at Columbia University, is possibly of interest to you. Rockoff studied an acclaimed mentoring programme for New York City teachers. He adjusted for confounding factors – such as the fact that duff teachers may get more mentoring help, making it seem that mentors reduce teaching standards.

Rockoff found some evidence that the programme encouraged teachers to stay in their jobs and improved the achievements of their students. If his results apply more widely, they suggest that the thing you are most likely to learn from a mentor is how to operate in your particular company, rather than picking up transferable skills.

But the effects seem rather modest. Why, then, is mentoring so popular? Rockoff finds that teachers are convinced that their mentors have helped their teaching skills, even if the effect is not obvious from their students’ results. Overall, I’d suggest that you go for this mentoring scheme. It will make you look co-operative and you might even learn something – but even if it is useless, you’ll still convince yourself it was time well spent.

Also available at ft.com, subscription free.

Dear Economist,
In some countries, mothers and their newborn babies are kept in hospital for many days, while in others they are discharged quickly. Which is right? I’m pregnant, and I want to know whether I should be lobbying for a long stay or for early release after my baby is born.
Michelle, north London

Dear Michelle,

A simple analysis won’t answer you, because we would expect more complicated or worrying cases to stay longer in hospital. But that does not imply that long hospital stays cause complications and worry.

Instead, we need to observe what happens to mothers and babies sent home early or late for no good reason.

Fortunately, there is no shortage of such cases. Californian insurers will pay for a certain number of nights in hospital, but the clock starts at midnight. A baby born at one minute past midnight has nearly 24 hours before clocking up one night in hospital; a baby born two minutes earlier will clock up her first night in hospital within seconds. The economists Douglas Almond and Joseph Doyle used such comparisons to examine whether the extra night was helpful.

They looked at whether mother and baby survived, and whether they had to be readmitted later. There was no evidence that longer hospital stays were helpful.

My experience is that an extended stay for mother and baby is a welcome respite – for the father.

Also published at ft.com, subscription free.

Dear Economist,
I have been trying to discourage the practice of “service” being added to restaurant bills. Where it’s added I ask for its removal and don’t leave a tip, and where it isn’t I tip a fair amount plus the saved service charges from other restaurants. What else can I do?
Patrick Gillett

Dear Patrick,

Discard any question of whether the service charge is aimed at the staff or at the restaurant managers. It makes no difference. Because staff are not stupid, lower tips must mean higher wages, otherwise the waiters will find somewhere else to work.

Similarly, higher service charges will have to mean lower up-front prices, or commercial disaster will surely follow.

That noted, it seems to me that optional tips are an attractive way of doing business. By leaving the customers some discretion, the restaurant manager creates a way of charging less to stingy customers and more to fat-walleted ones. Huge marketing databases are interrogated to achieve the same effect; the tip system is easy by contrast. The American reputation for excellent service may also owe something to a culture of high and variable tipping.

In short, I have no idea why restaurants are abandoning this most excellent, business-friendly custom. If you wish to stamp out the practice, perhaps management consultancy would be an influential place to start?

Also published at ft.com, subscription free.

Dear Economist,
I have been invited to give a presentation at a conference. Naturally, I’d like to look as good as possible. I have been given some flexibility over length, topic, timing and so on. What advice can you give me, and is it best for me to open or close the proceedings?
Jeremy L, London

Dear Jeremy,

Anyone can tell you the obvious stuff: don’t use boring bullet-point slides and keep it simple. Obvious, but most people, at the expense of their audience, ignore this advice.

Let me instead focus on a less-obvious insight, discovered by the economist Lionel Page and his wife, the psychologist Katie Page. The Pages looked at years of results from talent contests such as X-Factor and American Idol, in which contestants perform and viewers vote as to who they’d like to see again.

The Pages were able to measure whether it was an advantage to appear first or last, or immediately after a flop or a show-stopper. Because most singers appeared several times, the Pages could take account of the fact that the show’s producers might deliberately open and close with strong performers. In effect, they looked at what happened to the same contestant when they appeared earlier or later.

The bottom line is that it’s OK to go first but better to go last. A partial explanation is that these acts are easier to remember. Obscurity doesn’t seem to attract you, so make sure you’re closing the show.

Also published at ft.com, subscription free.

Dear Economist,
I am 22 years old with a younger sister. My parents were pretty strict, so I made sure I was a sensible teenager. I didn’t sleep around, didn’t take drugs, never seriously smoked and went on to a good graduate job. But now my 17-year-old sister is getting away with murder: my parents know she smokes, let her boyfriends stay overnight and turn a blind eye to other misdemeanours. It’s just not fair. Did I make a mistake in being such a square as a teenager?
Georgie H, Hertfordshire

Dear Georgie,

The latest Economic Journal presents a simple game-theory model of the problem. All teenagers wish to misbehave but fear parental sanctions. Parents wish to threaten punishment for transgressions, but only some parents are strict enough to do so. Your younger sister’s mere existence skewed the game to your disadvantage. Your parents are evidently soft-hearted, but had a clear incentive to pretend to be strict because every time they punished you, they knew they were also deterring your sister.

Now that you have flown the nest, the gains from “acting strict” are much smaller and discipline has slipped. Your sister pushed and discovered that they did not push back; you would not have found it so easy. But sunk costs are sunk costs, so be content with your graduate job. And if you really want to take drugs and sleep around, I can assure you it is not too late.

Also published at ft.com, subscription free.

Dear Economist,
The law of comparative advantage suggests people should use their talent, but we’re also told “do what you love”. What if I have no talent for what I love? Is it worth time and effort pursuing a dream career I’m no good at?
Joy

Dear Joy,

Your letter is intelligent, but it is also opaque: you do not reveal what your dream career is. Still, a lack of facts has never been an obstacle to economic analysis, so this is no time for methodological scruples. The principle of comparative advantage states that you should focus on what you do best, relative to the standard set by everybody else. You can do accounts and use the money to hire a cook, or do cooking and use the money to hire an accountant; the correct choice depends not just on whether you are a good bean-sheller and a poor bean-counter, but on whether the world is full of better cooks and worse accountants.

There is no conflict between this principle and the idea that you should “do what you love”. Being good at a job means you will earn more; enjoying a job means you will not mind earning less. Decide whether you prefer money or fun.

But what if you are incapable of doing any job you enjoy? Well, your career is not the be all and end all. Economist Andrew Oswald believes we work too hard and under-invest in friendships. So if my career advice is depressing, ignore it and talk to your friends instead.

Also published at ft.com, subscription free.

Dear Economist,
I have fallen in love with a wonderful man, and on Valentine’s Day he proposed to me. We’re planning to marry next summer. The question is: should we live together over the next year, or wait until we’re married? The financial impact is relatively small either way, and I am not afraid of scandal. I am just trying to work out whether some time living together is likely to make our marriage stronger or not.
Elspeth
Boston MA

Dear Elspeth,

For many years, theory pointed in one direction and evidence in the other. The theory – going back to Nobel laureate Gary Becker’s work in the 1970s – is that a period of cohabitation lets you learn more about one another and thus avoid a bad match. Your man may be charming on a date, but if he leaves his underpants lying around or eats toast over the sink to save washing up, forget it.

The overwhelming evidence, on the other hand, used to be that marriages preceded by cohabitation were more likely to break down – in the US, at least. The question is whether this was a causal relationship, or whether the cohabitation and the marital breakdown were caused by a third factor, such as social class or a lack of religious belief.

Fortunately, new empirical research from economist Steffen Reinhold suggests both that the relationship between cohabitation and divorce is not causal, and also that it has faded over time as more educated, middle-class couples choose to live together before marriage.

I recommend following Becker’s theory: learn about the marriage before it is too late by moving in together now. Keep an eye out for discarded underpants.

Also published at ft.com.

Dear Economist,
I subscribe to the FT and enjoy it with my morning coffee. Yet whenever there are school holidays, the paper is delivered late in the day, sometimes the next day or not at all. I expend valuable time calling FT circulation, which always promises this will never happen again. This has been going on for years. Should I be pragmatic and do nothing, saving my valuable time, or should I be quixotic, persisting in an effort to force the FT to live up to its timely delivery obligation in the hope that others may also benefit?
Conflicted Subscriber
Paris, France

Dear Conflicted Subscriber,

I am delighted to hear you love the FT and can vouch for the fact that, from newsroom to delivery team, its managers hand-pick elite workers. How, then, are we to explain this manifest underperformance of the organisation as a whole?

Economic investigation of sport offers a clue. Economists such as Mark Walker, John Wooders and Ignacio Palacios-Huerta, have studied professional tennis and football players. When deciding where to serve or place a penalty kick, they behave in rough accordance with economic theory. David Beckham, it seems, is an intuitive economist.

Yet in a team, the story gets worse. Economist V. Bhaskar studied the declarations of cricket teams, David Romer the fourth-down decisions of American football teams. Neither matched optimal strategy, perhaps because of internal team tensions.

This helps to explain your troubles but offers no solution. All I can suggest is that you make a fuss and write indiscriminately to complain. Evidently, you did not need me to tell you that.

Also published at ft.com.

Dear Economist,
When invited to dinner, I am often unsure whether to bring good wine. If I take an expensive bottle, it may go unappreciated – either through lack of appreciation or people not seeing what I’ve brought. Taking plonk means I can get a free ride on others’ largesse, but my tightfistedness could get rumbled – what do you recommend?
Alex, Geneva

Dear Alex,

A simple bit of game theory will produce the optimal strategy. If this is a repeated interaction with people who know their wine, it’s best to produce a good bottle. Reciprocity for your generosity will make this a good approach in the long run.

You will need to work out whether your dining partners do indeed understand wine. That is easy enough. Bring them something decent and see if they remark upon it. Then observe what they bring the next time you dine together. If your dinners are isolated invitations, or your hosts know nothing about wine, you may cheat with impunity. In short, vary your actions according to circumstance.

There is a deeper point here, though. You need to establish what is giving your fellow diners their utility – good wine, or the pleasure of one-upmanship? My fellow columnist, the economist John Kay, points out that economists “win” gift exchanges by spending less than everyone else, but most people “win” gift exchanges by spending more.

If your fellow diners are economists, then my analysis will apply. Otherwise, as the sole economically minded diner, make sure your wine is a little less assuming than everyone else’s. Everyone is happy, you save money and they feel smug. The moral: never forget to look for gains from trade.

Also published at ft.com.

Dear Economist,
I’m an American. As you know, the primary elections are heating up here, and in a few months we’ll have the real thing. Eight years ago I caught flak from my wife for not voting; I tried pointing out the minuscule impact of a single vote (mine). She responded that if everyone thought as I did, no one would vote. However, I don’t make decisions for everyone, just myself. Is it rational for me to vote, considering only the effect of my vote on the outcome of the election, and leaving out (for once) my wife’s lowered opinion of me?
P.B.

Dear P.B.,

I accept that your vote has almost no chance of deciding the outcome. Even in the infamous Bush-Gore contest in Florida in 2000, the chance that a single Florida voter could have changed the outcome seemed minuscule at the time. With hindsight it was zero, since the official margin of victory was more than one vote.

For this reason, nobody votes hoping that his vote will change the outcome. We vote instead because we like to feel involved, out of a sense of duty, or – importantly – to avoid being criticised by our friends and loved ones. These motives are enough to get about half of us out to the polls, but not enough to persuade us to engage in pointless research into the details of each candidate’s policy platform. All of which explains why many people vote, but few do so in an informed fashion.

None of this changes the fact that democracy is useless without a decent number of voters. That is why your wife is right to put you under pressure. It should go without saying that ignoring her would be highly irrational.

Also published at ft.com.

Dear Economist,
My fiancee is moving in with me. We’ve lived together before, and we hate housework. Before, we didn’t do work in retaliation for housework not done by the other. This led to a suboptimal equilibrium of dirty floors and resentful cohabitants. This time I want to create an incentive scheme to keep our house clean and us happy. I am reluctant to assign monetary value to chores, as this can backfire. Weekly rewards, such as choosing a Friday night restaurant, seem gimmicky. But I can’t think of a better idea. I have racked my brain and time is running out! Help me, Undercover Economist, you are my only hope.
Home Alone

Dear Home Alone,

If this were a holiday fling, the outcome would be clear: each of you would prefer the other to wash the champagne flutes and make the bed in the mornings, but lacking any mechanism to enforce co-operation you might both slack off and feel resentful. It is often the case that brief encounters can be mutually exploitative.

Yet economic theory, experiment and practical experience all suggest that in the most unpromising situations, the bitterest adversaries find a way to get along when they are stuck with each other. Reciprocity seems to be the key. Soldiers in the trenches of Flanders practised “live and let live” when the generals were not looking. The cold war did not end in mutual annihilation.

I venture to say that if this time you and your fiancee can’t even match the grudging co-operation of Khrushchev and Kennedy, you will at least be warned before the wedding day that housework is the least of your worries.

Also published at ft.com.

Dear Economist,
A single Milky Way costs 20p in my local corner shop. A twin pack costs 47p. I’ve made a habit of checking the prices in other shops and a twin pack invariably costs more than two singles. What could be the cause of this apparent madness?
The madness in pricing, that is, not the madness of a twenty-something compulsively checking the price of children’s sweets.
Kendrick Curtis, via e-mail

Dear Kendrick,

I am composing this reply overseas, far from the British corner shops where I can check your story, but what you say rings true. In my own travels around shops with a clipboard – a sure way to make the staff twitchy – I have often discovered products with an unexpected mark-up. One example was the medium-sized pack of washing powder priced at rather more per 100g than the small or the large.

All shops want to offer competitive prices to customers who demand them, while charging more to customers who do not much care. Random mark-ups will do the trick: they are easily avoided by bargain hunters but will often snare the unwary.

You are right that it does feel mad for a twenty-something to check the price of children’s sweets; that is why the pricing you describe is clever. I am confident that many adults do not consider the price of confectionery, and that most children do. If I am right, the mark-up on a twin pack is likely to be aimed with pinpoint accuracy at greedy, careless grownups. The children will find the cheaper deal – if they want two Milky Ways, they can buy two singles. Adults, their wallets overstuffed and the days of saving for penny chews long forgotten, will grab for a twin pack and pay more. It seems to me like sweet justice.

Also published at ft.com.

Dear Economist,
My extended family is very important to me, and I try to make the time to visit them. Unfortunately my husband doesn’t see things the same way. He works very long hours, and says he is tired after work and prefers to stay at home with me. (Actually, he usually watches television.)
Recently, he has been invited to apply for a job that will mean shorter working hours. Should I encourage this? Will he join in more with the social activities that are important to me?
Worried Wife, Cirencester

Dear Worried Wife,

What you seem to be asking is whether shorter working hours encourage social interaction outside the home. It’s a hard question to answer; some studies suggest that people who work long hours spend more time socialising and joining societies or clubs: work hard, play hard, that kind of thing. But that may just be because they are ambitious people with lots of energy and little need for sleep.

There is one study, by economists Henry Saffer and Karine Lamiraud, that might throw some light on your question. They looked at what happened when France reduced the working week from 39 hours to 35. The law came into force in 2000 for companies with more than 20 employees, and in 2002 for smaller businesses and for the civil service, creating a natural experiment for the researchers to study.

Their conclusion: hours of work did indeed fall, but few people used their extra free time either to visit relatives or to join a book club. I am sorry to disappoint you, but my guess is that if your husband wanted to hang out with your mother, he would already be doing so.

Also published at ft.com.

Dear Economist,
I am amazed by people who stand outside in front of the opening doors of trains and lifts knowing full well that the people inside will have to exit before they can enter. Obstructing the Exiters will only delay them, and the Enterers seem to be in such a rush that this is surely not in their best interests. What is astonishing is that this is a universal phenomenon. Explain!
Nazir Kazi

Dear Nazir,

I, too, have observed this phenomenon with trains but more rarely with lifts, and I think that suggests an explanation.

It is true that by obstructing people who are leaving the train, people may delay it by a few seconds.

A few seconds delay to everyone on the train is an appreciable social loss, but scarcely matters to the selfish individual in question.

True, a delay is a delay.

But you have misinterpreted what such people are aiming to do. They are not trying to hasten the departure of the train; they are trying to get a seat. That means being the first into the carriage just as seats are being vacated, which in turn means standing in front of the opening doors and generally getting in everybody’s way.

It is a classic prisoner’s dilemma: everyone would be better off if everyone hung back, but each individual does better for himself by pushing forward.

It is not surprising that this behaviour is more unusual when it comes to lifts. Lifts do not have seats, and usually have room to accommodate everyone who is waiting.

The behaviour you describe is selfish, but it is not irrational.

Also published at ft.com.

Dear Economist,
Occasionally, I buy and launch my own fireworks, generating cheerful positive externalities. Sadly, some amateur launchings end in tragedy – and there is frequent talk of a private firework ban. What is the economically efficient way of dealing with those negative externalities?
Jens Frolich Holte, Norway

Dear Jens,

If you’ve diagnosed the problem correctly, we can reach for a textbook solution. In a market with zero transaction costs, Coase theorem tells us that your neighbours could, in principle, pay you to hold firework displays, or not to, depending on their enjoyment of the spectacle or fear of injury.

More likely, we would need to approximate the Coasian solution with an externality tax on fireworks (to reflect the risks) or a subsidy (to reflect the benefits). But I am not sure you have correctly identified the positive and negative externalities here.

Unless you are shooting the fireworks down the street, most of the risk is surely borne by you and your friends, who’ve chosen to enjoy the display at close range.

There is no negative externality there: they’ve knowingly taken the risk.

On the positive externality side, I doubt that more distant neighbours enjoy the show as much as you think, not knowing when it is going to start. And they may be aggravated by the noise.

On balance, where are the externalities?

We should focus instead on encouraging more responsible use of fireworks. If your firework display hurts an innocent, you should be liable. An appropriate level of likely damages will encourage you to take exactly the right amount of care with your displays.

Also published at ft.com, subscription free.

Dear Economist,
I gave my sister a 30 per cent share of my mortgage when buying a new house two years ago so she could get on the property ladder. In return, she gave me some money towards the deposit on the house – about 20 per cent of the total put down. Given my larger share of the investment and commitment, should I get a greater proportion of the equity than my 70 per cent share, if and when we sell?
Ben

Dear Ben,

It is astonishing that you have entered into this enormously valuable contract without agreeing terms, but perhaps I should not be surprised – your letter suggests that you are unable even to think clearly.

You do not “give” someone a share of a mortgage any more than you “give” them a share of your restaurant bill.

If all you mean is that you gave her 30 per cent equity in exchange for a deposit, stick to the deal.

But I think you mean that your sister paid 20 per cent of your deposit and 30 per cent of your mortgage and has received nothing in return so far. You, on the other hand, have had your living costs subsidised and your risks in the property market hedged. Thanks to a housing bubble, your joint investment has paid off and you would now like to cream off some additional upside. Had there been a slump – widely forecast when you bought the house – would you be offering to bear more than 70 per cent of the loss?

There is no well-defined outcome from your befuddled arrangement, but it would be reasonable for your sister to enjoy more of the upside.

She took on nothing but risk, while you lived on the cheap. Family values, indeed.

Also published at ft.com, subscription free.

Dear Economist,
I am 17 years old and my school only recently became coeducational. The other sixth-form students are almost all male, like me. I feel that the school does not meet my romantic needs and that I will never know true love while at school. In fact, I’m not having much luck at finding any love at all. Please can you help, or even just offer some hope?
Yours, truly lovelorn,
Student K, Bedford

Dear Student K,

You are right. The sixth form does not meet your romantic needs. Even if the boys only mildly outnumbered the girls – say, 55 to 45 – then assuming everyone paired off in the traditional fashion, there would be 10 boys left out, hormones raging, willing to offer the girls a better deal in one way or another. Sensible girls know how to exploit this healthy competition in their favour.

Still, as you grow older, your time will come. In cities across the developed world, dating-age women outnumber dating-age men. (Economist Lena Edlund argues that women have more to gain from city life than men.)

The excess supply of datable women and the resulting dating disadvantage forces women into bursts of self-improvement, which may explain why they tend to be better dressed and better educated than men. Research by economists Kerwin Charles and Ming Luoh finds a similar effect when many otherwise-marriageable men end up in prison. It does not take much to tip a dating market out of equilibrium, and your plight seems particularly extreme.

Yet take heart. At your age I was in an even worse situation, at an all-boys school. All seemed lost, until I discovered that the girls’ school opposite was willing to look for some gains from trade.

Also published at ft.com.

Dear Economist,
I use the same password for all my e-mail and internet-portal accounts (online shopping, etc). Now I am worried about losing it to an identity thief. What should I do?
Confused Kid

Dear Confused Kid,

Rick Smith, information security expert at the University of St Thomas, summarises the conundrum: “The password must be impossible to remember and never written down.” The typical password is a jumble of characters that must be changed frequently. When you type it in, the computer obscures what you are typing, giving your visual memory no chance. Congratulations if you can cope with all this, let alone duplicate the feat 20 times.

There are some tricks you can rely on – for instance, your passwords could be obscure acronyms inspired by song lyrics. Yet the dilemma remains: either use the same password for each account, or write them down and put them under your mouse mat.

Impossible password guidelines have been developed by security professionals wishing to cover their backsides. Fine. Now you must cover yours. First, consider who picks up the pieces if things go wrong.

Your current approach is discouraged, rather than forbidden, by banks. But if you wrote down your password, security breaches would become your problem.

Second, do not be depressed. Many accounts have obvious passwords: the user’s name, their partner’s or simply “password”. And up to one-third of users are thought to write them down. Fraudsters like easy targets, so remember: you may not need to be smarter than them, merely smarter than the guy whose password is “password”.

First published at ft.com.

Dear Economist,
I am perplexed by the enormous publicity devoted to the subprime debacle while micro-credit lenders have been showered with praise. Isn’t Countrywide just a micro-credit lender for the US, except that people are borrowing for homes rather than bullocks? And why are borrowers in developing countries so much better at repaying their loans?
Bombay Beauty

Dear Bombay Beauty,

No problem explaining why it is easier to repay a microfinance loan: the loans are a lot smaller. Beyond that, you have a point. Microfinance loans, like subprime loans, target poor clients in underserved communities, and charge high interest rates.

The economist Dean Karlan argues that the difference is largely about spin. We hear about the far-away people whose lives have been transformed by microfinance, and we hear about the subprime defaulters whose lives are in a mess. But Karlan points out that micro-credit borrowers do default, and that subprime default rates are much lower than you would think. And while some subprime borrowers were duped by complicated loan terms, financial literacy is even worse in developing countries.

Karlan also argues that micro-credit “group liability” schemes are overrated. In such a scheme, friends and neighbours have to make up the shortfall if someone can’t pay. But an experiment carried out by Karlan showed that such schemes put off borrowers without increasing repayment rates.

None of this is to condemn microfinance. Rather, it is worth remembering that poor people can benefit from access to credit, even if the credit is expensive – and even if they live in the US.

Also published at ft.com.

Dear Economist,
I frequently extract large sums of money from Bozzer, my flatmate, in our regular poker game. He’s convinced variance is to blame for his losses; in truth, however, he’s simply terrible – and I’m simply delighted with my new watch. Am I right to exploit him in this way?
R. Casablanca

Dear Mr Casablanca,

Unless you are holding poor Bozzer’s family hostage in the basement, this is a voluntary transaction between consenting adults. Presumably, he knows that he is losing money, even if he is not smart enough to work out why. And poker is lots of fun: even if he recognises that he is outclassed and the game is costing him, it may still be worth his while. After all, no customer makes a profit from going to the cinema either, but we rarely worry about that.

On that basis you have no case to answer.

However, I cannot wholeheartedly give you the absolution you seem to be seeking. You must first establish whether Bozzer is a poker addict. I’ll spare you the technical details – let’s just say that they probably involve hyperbolic discounting – but I can recommend an approach for dealing with a rational addict. If, away from the card table, Bozzer says that he wishes he could quit the poker habit, you must help to discourage him. Perhaps you could enlist a third party to hold on to cheques from the pair of you. She would post the money to a charity if you are ever caught gambling together.

I must also warn you that things may not be as they seem. Is Bozzer, perhaps, playing the long game?

If one evening he suggests raising the stakes, beware.

You think he’s the “fish” – but he may be reeling you in.

Also published on ft.com.

Dear Economist,
I feel guilty because I paid £200 to co-host a birthday party for my five-year-old with another mother, but got at least £300 of gifts in return. As a guest, I don’t like these parties because you take two gifts in return for only one party bag. But co-hosting is surely a rational thing because you pay half and get a full complement of presents?
South London Mum

Dear SLM,

Congratulations on your move to more efficient birthday parties. It seems to be a happy accident, since you have failed to realise the true scarce resource here. It is not doggy bags or disposable toys, but time. By hosting a joint party with a friend, you are saving time for many parents who would have had to attend two such parties in quick succession. The children may feel hard done by, but then again they may not. Even five-year-olds do not want a party every day.

As for making a profit on these parties, an economist understands that gifts need not be exchanged instantly and with exact accounting for value. You hosted a profitable party but feel exploited when others reciprocate – perhaps you should see these events as two sides of the same coin. It will not take long before these profits and losses even out. Surely the credit crunch is not so severe that you cannot wait a month or two for a return on your gift giving?

As for the party bags, they are truly immoral: to quell your feelings of guilt, you dose up other people’s children with sugar and additives. Is this a generous act, or a craven one? I commend your move to halve the supply of party bags; my only complaint is that you have not eliminated them altogether.

Also published at ft.com.

Dear Economist,
In restaurants my husband always picks something better than me. It’s boring to choose the same as him. What can I do?
Sarah

Dear Sarah,

The behavioural economists Dan Ariely and Jonathan Levav speculated that we all tend, like you, to alter our choices to fit in with those around us – and they decided to put the theory to the test.

They came to an agreement with a local bar, dressed up as bar staff, and offered unsuspecting groups free samples from a choice of four tempting local beers. (One of the customers recognised Professor Ariely and assumed that his academic career had run aground.)

Sometimes the experimenters took the orders in conventional fashion; at other times, they made each person’s order confidential by asking them to write their desired beer on a piece of paper. After bringing the samples, Ariely and Levav noted how much the recipients had enjoyed their beers.

You will recognise your predicament in their results. First, when orders were called out publicly, people tended to avoid duplicating the choices of others. Second, that mattered: the people who chose first were significantly happier with their choices than those who felt obliged to choose whatever beer was left over. (This survey was done in the US. When transferred to Hong Kong, people instead tended to emulate the first choice. But, again, those who chose first were happier.)

The implication is obvious. You should make a mental note of what you wish to eat and not change your mind when your husband announces his selection. If that is too “boring’’, the solution is even simpler: order first.

Also published at ft.com.

Dear Economist,
This Christmas and new year, I expect to encounter a lot of drunks on the road. In fact, I may well be one of them. Should I feel guilty? And should I be worried?
Mr F Jones, London

Dear Mr Jones,

It has always been difficult to test the effect of alcohol on drivers let loose on the roads. The difficulty is this: if half of all crashes involve drunks, that may be because drinking impairs your driving or it may be because there are a lot of drunks on the road – and we can only guess at how many drunk drivers there are.

But the economists Steven Levitt and Jack Porter realised that it was possible to say more, by looking at how often drunk drivers crashed into each other. If 10 per cent of drivers drink, and if drunk drivers are as safe as any other kind of driver and randomly mixed among the sober drivers, then only 1 per cent of two-vehicle crashes should involve two drunks.

Drunk-on-drunk crashes are much more common than one would expect, given the number of drunk-on-sober crashes, allowing Levitt and Porter to reach firm conclusions about the risks of drink driving.

They find a very large effect. Drivers who have been drinking are seven times more likely to cause a fatal crash; those who have drunk over the legal limit (in the US) are 13 times more likely to cause a fatal crash. You might also bear in mind another finding from the paper: “The great majority of alcohol-related driving fatalities occur to the drinking drivers themselves and their passengers.” That should be sobering.

Also published at ft.com.

Dear Economist,
My time waiting in a bank queue is vastly longer than standing in a supermarket one. How can I reduce my queuing time?
Ken

Dear Ken,

On a personal level, your options are obvious. You could take a collection from those behind you and use it to pay those in front of you to leave. Or you could simply bring a slim paperback and put your queuing time to good use.

But what really matters here is the cost to society. Queues are enormously costly. Imagine a bank queue in which one customer arrives per minute, and one customer per minute is dealt with by staff. All it takes is a cashier on a cigarette break, or a sudden rush of customers, and you could have 10 people in the queue. At that point, each person has to queue for 10 minutes, even though people are leaving as quickly as they are arriving. Somehow the queue must be disposed of.

The solution is elegant and unexpected: new arrivals should go directly to the front, to be served immediately after the current customer. Queues would then be very short, because once a customer was pushed back a couple of places he or she would give up and go home. The economist Refael Hassin has shown that this rule can be socially efficient, while the economics writer Steven Landsburg has advocated its introduction for telephone queues.

This makes sense. In both cases, the same number of people get to use the bank. But under the Hassin-Landsburg rule, queues are much shorter and we all spend less time waiting in line. All that remains is to encourage banks to enforce the system. Since it is perverse and counter-intuitive, they may find it very appealing.

Also published at ft.com.

Dear Economist,
My boyfriend spends a lot of time in front of the mirror, prettying himself up. I am pleased to have a well-groomed man in my life but it is a bit unnerving. Should I get him to stop?
PL, Warwick

Dear PL,

Your boyfriend’s disturbing personal-grooming habit offers you financial as well as aesthetic benefits. Economists have known for some time that better-looking people are paid more. This is probably due to a combination of discrimination against the ugly, the fact that some beautiful people have jobs where beauty is an obvious advantage, and the likelihood that better-looking people are more confident.

More recently, economists have discovered evidence that endogenous beauty (make-up, hair-styling) is as important as exogenous beauty (having Bond girl Eva Green’s eyes).

Economists Daniel Hamermesh, Xin Meng and Junsen Zhang have found that spending money on clothes and make-up slightly raises the earnings of Shanghai workers. More recently Jayoti Das and Stephen DeLoach, of Elon University’s economics department, have shown that time spent on grooming substantially improves wages, especially for men.

They estimate that each extra 10 minutes a man spends in front of the mirror will raise his wages by 6 per cent. (Women would have to spend two or three hours to get the same effect.) So if you prefer your boyfriend to be rich, don’t stand between him and his mirror.

I do not know why you’re complaining. Perhaps you’re afraid that your boyfriend is becoming too attractive to rivals. If so, dump him and find yourself someone desperate. An economist, perhaps?

First published at ft.com.

Dear Economist,
My girlfriend and I were planning to fly to Frankfurt on a budget airline. We were offered travel insurance, which I didn’t think was worth the £4.95. Still, my girlfriend insisted on both of us taking the insurance. Assuming the chance of surviving a plane crash is negligible, you do not get to enjoy the benefits of the insurance should a disaster happen. Most likely your family will get paid for your death. So the worst-case scenario is that you’re £4.95 poorer and dead; or at best, alive, but still £4.95 poorer. What is the rationality of taking out the insurance?
Farid Daim, Nottingham

Dear Farid,

I sympathise with your reluctance to pay for insurance but I do not follow your reasoning. There is nothing irrational about life insurance per se (although it is an unattractive product to someone with no dependents – or a selfish disposition). Overall, though, life insurance is one of very few types of insurance it is rational to purchase, because it protects against the risk of a dramatic loss. Another is insurance against catastrophic medical expenses, another role for travel insurance; but you may not be bothered about this, as EU citizens get cheap health-care in member countries.

So it seems to me that you purchased “rucksack insurance”. Petty insurance is highly profitable – which is why it is bundled with cheap flights. But it is unnecessary. Over the course of your life you will earn thousands of times the price of your rucksack and contents. It is better to save on premiums and take occasional losses on the chin – you’ll come out well ahead in the long run. I have.

Take heart, though. You saw the bigger picture, and did exactly what your girlfriend told you. Smart move.

First published at ft.com.

Dear Economist,
I am often asked to sponsor various “a-thons” for charitable purposes. The range of events is endless, from bowl-a-thons to skip-a-thons, and of no inherent value to anyone. Would it not be far more beneficial if the events were more creditable in nature? For example, arranging a rubbish-a-thon whereby individuals are sponsored by the hour for clearing a riverbank of rubbish. Surely the end result would be increased sponsorship being raised; a cleaner environment; and an increased sense of achievement.
Jenny

Dear Jenny,

The risk is that your proposal would choke off the supply of willing volunteers. You seem sanguine: volunteers would, you surmise, enjoy a sense of achievement. I am not so sure. Charity is a wonderful thing, but let us not blind ourselves to the fact that a lot of volunteering is about showing off.

The economists Jeffrey Carpenter and Caitlin Knowles Myers studied the behaviour of volunteer firefighters who were offered modest financial incentives. Many were motivated by these incentives, but some were not.

Curiously, the ones who were not motivated by money were also the ones who had bought special vanity plates indicating that they were community volunteers. It seems that these volunteers were motivated by a desire to look good, and did not want the idea of a cash incentive to sully their reputation.

I speculate that your approach might make “a-thons” less showy and therefore less useful for signalling altruism. If your idea is really so good, why has it not already caught on?

First published at ft.com.

Dear Economist
British rock band Radiohead have come up with a radical price model for their new album In Rainbows: it is available for digital download and customers decide the price themselves. Could you elaborate on the economic principles at play? I chose to pay £5 out of love for original and creative content, but I admit that my behaviour is absurd from any rational choice model.
Stig, Copenhagen

Dear Stig,

This is just an electronic tip jar, and people’s payments are governed by a desire to feel generous – or at least, to avoid looking stingy. That desire is enough to persuade almost everyone to tip at a restaurant, but what about online? Less so, it seems.

According to one internet consulting firm, almost two-thirds of those who downloaded the album paid nothing, and those who did pay didn’t pay much – less than £3 on average. That makes sense: much easier to leave no tip when you don’t have to look the waitress in the eye, and Radiohead make more than your waitress anyway.

If the figures are accurate, the band seems to have made £500,000 or less from downloads in just three weeks; their traditionally priced CDs probably made the band 10 times more, at least. But it is too early to say whether this scheme was profit-maximising, especially since Radiohead have criticised these estimates.

There is more to this than direct revenue, of course. The stunt also brought free press for a band widely thought to be past its prime. That trick will not work again, and future electronic tip jars seem likely to be emptier.

I can’t say whether your payment was rational. I strongly suspect that this business model, in the long term, is not.

First published at ft.com.

Dear Economist,
My wife and I have separated. Naturally our relationship is not great, but it’s OK. Now divorce proceedings have started and we will be dividing up our assets. Should I hire a lawyer? I am not convinced that it is worth the expense.
Seth, via e-mail

Dear Seth,

You have obviously grasped that this is a zero-sum game with two to four players. The assets will be divided between you, your soon-to-be-ex wife, and any lawyers the two of you bring on board.

I can sympathise with your suspicion that the lawyer is money down the drain.

It is worth considering the scant evidence available.

The Austrian economist Martin Halla has collected data from divorce proceedings in his home country, and he finds a curious pattern. Husbands end up paying the smallest alimony when no lawyers are involved. If the husband hires a lawyer, but his wife does not, the alimony payment rises (and then there are fees to be paid, too). If the wife hires a lawyer, or the couple hires a joint lawyer, the husband forks out still more. Worst case scenario for hubby is if both sides hire their own lawyer. On top of that the proceedings are longer and more expensive.

Interpret that result with caution, because it is not clear whether the lawyers cause poor settlements for husbands, or whether husbands hire lawyers when things look grim. Still, the pattern that Halla discovered does bolster your scepticism.

In the absence of better information, then, Halla’s research suggests that you have a dominant strategy, meaning one that is best no matter what your wife does. That strategy is not to hire a lawyer. And for goodness sake, don’t let your wife see any research from Martin Halla.

First published at ft.com.

Dear Economist,
Were Tottenham right to sack Martin Jol?
A Spurs fan

Dear Spurs fan,

Let me explain to the unconverted that Martin Jol was the manager of Tottenham Hotspur, the second-most successful football club in north London. Jol inspired good results in the past, but the club’s recent performance has been poor.

Were Tottenham wrong to sack him? Many lament the rapid turnover of football managers, and note that the two most successful premiership sides, Manchester United and Arsenal, have the longest-serving managers. But how do the numbers stack up?

Christopher Hope is an economist at Cambridge University specialising in the costs of sacking football managers (and the costs of climate change). He estimates that when a manager is replaced, the typical team loses more than 10 league points from the disruption, equivalent to three wins and a draw. The cost of paying off the manager’s contract means less money to pay players and so a further modest points loss.

Nevertheless, Hope’s analysis recommends that clubs should sack their managers more often. He has concluded that the following algorithm would improve the performance of premiership clubs. Any new manager should have an eight-match honeymoon, during which time he is safe from sacking. After that, his average results should stay above a miserly 0.74 point per game; that average should be weighted to put about half the emphasis on the most recent five games.

Jol averaged 1.57 points per game last season, but just 0.7 points this season and 0.6 points in his last five games.

I believe Hope would have sacked him. But what would I care? I’m an Arsenal fan.

Published at ft.com.

Dear Economist,
I am in doubt whether it is worth changing school for my last year of A-levels. I would be living in a much better place (Cambridge, whereas I am now in Dover) and getting more tuition. I am likely to have better accommodation, more freedom and will meet people with diverse interests. But is it worth the risk of not getting into university or getting lower grades on my A-levels?
Please help me to solve this dilemma.
GP, Dover

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Dear Economist,

I am a woman in my early 30s. I am also a virgin. Should I be?

Gloria, New York

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Dear Economist,

A friend of mine is absurdly late whenever we arrange to meet. I find it infuriatingly rude. Can you suggest a cure?

Yours,
Beatrice, London

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Dear Economist,

As an Englishman who has been living in Chicago for five years, I remain perplexed by baseball, a game that lacks cricket’s sophistication. However, I am unable to persuade my American friends to take cricket seriously. They lack the patience for a game that takes five days and may end in a draw. Is there an economic justification for cricket’s superiority?

Andrew, Chicago

Dear Andrew,

Howard Wall, now a research director at the Federal Reserve Bank of St Louis, faced the mirror image of your situation: he worked for five years in London. Those years resulted in the definitive survey of the economic benefits of cricket versus baseball.

Reviewing the literature, Wall cited such out-of-print classics as Keynes’s General Theory of Employment, Interest, Money and Cricket, and charted the debates between the Marylebone School and the Polo School. But such debates were inconclusive without modern econometric techniques.

It was left to Wall to end the debate with a statistical analysis demonstrating that the typical baseball-playing nation enjoyed a total of more than 180 per cent economic growth between the years of 1960 and 1990, compared with just 60 per cent cumulative growth for the typical cricket-playing nation.

At first glance, then, your American friends seem to be right. However, since Wall’s analysis was published by the Royal Economic Society, India has enjoyed a sharp increase in its growth rate while one of the world’s leading baseball powers, Japan, has entered a long slump. It seems that given enough time, cricket will produce a result eventually – something all Englishmen instinctively appreciate.

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Dear Economist,

As a keen silver surfer, I find YouTube an excellent way to revisit comedy favourites such as Monty Python and Peter Cook and Dudley Moore. I feel guilty watching pirated material, but what really puzzles me is why people post this material for my delectation. Can you explain?

O. Grizos

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Dear Economist,

My economics tutor says that I should be studying harder if I want to do well in my exams. I think that he is basing his advice on purely theoretical assumptions, and that there is no empirical evidence for his assertion. Who is right?

M.W., Cambridge

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Dear Economist,

I am worried that if my children receive sex education at school, it will make unwanted pregnancies more likely. Should I take them out of class?

Protective Parent

Dear Protective Parent,

You are right to be worried. It is easy to see why information about contraception might encourage sex by lowering its costs, but the effects might be more dramatic than you would think. In a nutshell, fixed costs are your problem. These are obvious when it comes to, for instance, producing software. The first copy may cost hundreds of millions of dollars to produce, the second very little. But losing your virginity is like that too: the first sexual experience comes with a psychological cost, but, once paid, future experiences are easier. (Economics students will recognise the implication: sex has economies of scale, so it is efficient to either have lots or none at all.)

Within a relationship, too, the first sexual experience probably has a fixed cost.

In both cases, access to contraceptives makes it likelier that the first experience will be chosen; having crossed that barrier, it may become so attractive to have sex that teenagers will do so even when the contraceptives are not available.

The economists Peter Arcidiacono and Ahmed Khwaja, of Duke University, with Lijing Ouyang of the US Centers for Disease Control and Prevention, believe that this is the way teenagers do, indeed, behave.

Yet, I would not advise you to shield your children from sex education. That might be wise if prevention of pregnancy and disease were your goals, but that is too extreme. Your children will know that sex has benefits as well as costs. Perhaps you should refresh your memory about these?

Originally published at ft.com.

Dear Economist,

I’ve been dating someone for a few months and the relationship is now quite serious. There’s just one problem: his dog. I’ve no strong feelings about dogs, but he’s had this mutt for years and seems to love it more than he loves me. I could swallow my reservations and see where the relationship goes, or I could opt for the old “either the dog goes or I do” ultimatum. What should I do?

Yours, Canophobic in Kettering

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Dear Economist,

I am contemplating writing a popular book on the use of economic tools to explain everyday aspects of modern life, but have grown concerned that there is a growing pile of highly successful books in this vein already in circulation.

I cannot decide whether the success of these forerunners means that the public appetite for such subjects will already be satisfied by the time my work appears, or whether it indicates that my efforts are more likely to find a receptive audience. Please can you advise me how to decide whether I should embark on this enterprise.

Would-be Author

Dear Would-be,

You are confusing demand with supply. Do not worry about the public appetite for popular economics; worry instead about the number of competing titles that may arrive in the market just as yours does. (Given that you are hoping to write an authoritative book, you might also ask yourself why you are asking the questions about economics and I am answering them.)

Your economic training should have covered the notorious “hog cycle”. High profits for pig farmers lead them to rear more pigs. When the glut of pigs hits the market, prices and profits collapse. Farmers decide to rear fewer pigs. Later, when the pig shortage hits the market, profits rise again.

Books, like pigs, take time to reach the market, and so you need to try to place yourself out of sync with the cycle. If I may offer disinterested advice, you should curb your authorial ambitions until after my next book appears in early 2008. Better yet, may I instead strongly recommend a career as a pig farmer?

First published at ft.com.

Dear Economist,

My boss swears that compensation in our corporation is based upon pay-for-performance. Is that an economic reality?

Bob, Texas

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Dear Economist,

I am an economics student, and intend to run for president of the student union this year. The elections are won on the basis of whose name is seen the most around campus. Given that it is improbable I will win, I am willing to offer a pot of hundreds of pounds to people to help campaign – dependent on my winning. What is the most efficient use of this pot? Hire one person to go flat out? Or spread the money around?

Cheers

J, England

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Dear Economist,

Why is it so hard for me to find a properly fitting pair of trousers on the high street? As a 33-34in waisted, 5ft 11in male, I consider myself of average build. Yet appropriate attire always seems to be out of stock. Can economic theory shed any light on this?

Concerned Trouser Consumer

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Dear Economist,

I have just joined a dating website in the hope of finding true love. Friends of mine have started dating someone they met online, only for a “better offer” to arise on the website. If this happens, what should I do?

Duncan, London

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Dear Economist,

I suffer ridicule from economist friends when visiting a local restaurant. The restaurant supplies complimentary tissues and toothpicks to customers. My friends freely use them and even take some for later use. I feel this is wasteful and not “playing the game” but their arguments seem more logical – there’s no extra cost to taking more, it is included in the costing for the meal, and I’m the mug subsidising everyone else. How can I overcome my hang-up and become a maximising consumer?

Stuart

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