Dear Economist

Dear Economist,
When my daughter reached the age of six, my wife and I decided to give her a small amount of pocket money. However, access to money of her own would allow her to buy herself large quantities of sweeties. So instead of giving her cash in hand we keep track of the money she’s accumulated, which she can then use to purchase anything she wants so long as it’s not food or drink.
This worked well, but for her eighth birthday a number of kind friends and relatives gave her cash. She now plans to keep this money as an ongoing sweeties budget while buying birthday presents from her saved pocket money to show her benefactors.
Short of confiscating her birthday money, is there any way we can hope to discourage this?
Outmanoeuvred parent

Dear Outmanoeuvred,

Your daughter has discovered that money is fungible. As they say in the aid industry, you may think your grant is funding your favourite project, but it’s really funding the president’s favourite project. Thus, you give money on condition that it is spent on an extra hospital, the recipient builds the hospital he was planning to build anyway, sends you the receipts and increases his expenditure on limousines and AK-47s. (Did he spend your money on the hospital or the limousines? The question is meaningless, and that’s fungibility.)

Your plan worked only while your daughter had no access to outside sources of funding.

I can see three options. You rule out confiscation. The second is to offer incentives for low sweet consumption by increasing or reducing your daughter’s pocket money. The trouble is that sweet consumption may be hard to monitor. The third is to admit defeat and let your daughter make her own choices. Sweets have costs and benefits, and your daughter appears to be a better economist than you are.

Also published at ft.com.

Dear Economist,
As an economics student, I look to impress my girlfriend on a budget, and I know I am not alone. When it comes to choosing the wine to have with dinner, on the rare occasion that I get to take my girlfriend out, I avoid going for the cheapest bottle, as this makes me look, er, cheap. So instead I go for the second-cheapest bottle. But now I hear that restaurants, having cottoned on to people like me, ensure the second-cheapest bottle is highly profitable, overpriced plonk. My best response now is to go for the third-cheapest bottle, at least until everyone else does the same. Or is it? Based on price alone, what is the best bottle to buy?
William Nicolson

Dear William,

You assume that the price of the wine and its quality can be neatly separated out. This seems reasonable, but is wrong. Price changes the very experience of quality. Neuro-economists have found, for instance, that while placebo painkillers work, they work best if the subject thinks they are expensive. Energy drinks give you less energy if you buy them at a discount. (Yes, really.) And of course, wine tastes better if you believe that it is expensive.

One possibility is to conceal the price of wine from your girlfriend and tell her you’re buying the expensive stuff when in fact you are buying the house red. This is a white lie: many people prefer the taste of cheap wine in blind tastings, and by claiming it is expensive you will quite genuinely improve the way she thinks it tastes.

If your girlfriend knows nothing about wine, this will work. If she knows more than you about wine – which seems likely – then why not invite her to choose? You’ll get a better bottle. And if she blithely splashes your money around, console yourself: you will have learnt a lesson about her that would have been even more costly to learn later.

Also published at ft.com.

Dear Economist,
The betting markets reckon Elin Nordgren will shortly divorce Tiger Woods. Considering the experiences of the wives of Shane Warne and Bill Clinton, that seems hasty. Shane Warne’s wife tolerated his scandals for years before divorcing him. Australian cricketers do not make as much money as global golf stars, hence, the probability of her receiving a large alimony was low. It would have been rational for someone in her position to try to salvage the marriage and lay aside their emotions. Hillary Clinton had a much lower probability of political success as a divorcee.
I think we should look at economic rather than emotional reasons for divorce. Have I discovered a new canon in marital economics?
Chetan S.

Dear Chetan,

Your theory goes well beyond Ray Fair’s “Theory of Extramarital Affairs”, published in the Journal of Political Economy. Still, you need to clarify your reasoning a little. You contrast Shane Warne’s earnings with those of Tiger Woods, which suggests you have in mind some kind of income effect, where the richer the husband, the more likely the wife is to divorce him. This has the merit of being a falsifiable theory, but I am not sure it is true.

Such cases belong instead to the theory of the firm. When two units of production – Hillary and Bill, say – are worth more together than they are separately, we call them “complementary assets”, and there is a strong reason to keep them together. If one of the units of production is sleeping with a pancake waitress, then that is a reason to separate them. It’s all a question of how annoying the affairs are versus how strong the complementarities are. Hillary and Bill are highly complementary assets; this is less obvious for Nordgren and Woods. As for a general theory, there is plenty of data out there – a research project for a diligent student of economics such as yourself?

Also published at ft.com.

Dear Economist,
This Christmas, I asked my three children, aged 19, 18 and 16, for the following present: that they read the book Notte, Nebbia, a true story set in Gusen concentration camp, to help them remember the importance of tolerance, justice and freedom. This was also a condition of them receiving their Christmas presents, three presents for each child.
The girls read the book and received their presents. The boy (18) didn’t finish it. He said he couldn’t read a sad story during his holidays. So he received only two presents. What am I supposed to do? To hide the last present until next Christmas? To ask my son to finish the book and to read another one as a penance, or to think in a different way? Am I insane?
Francoise Gilli

Dear Francoise,

It is hardly insane to give your children incentives to do your bidding, but you have clearly bodged this scheme.

First, behavioural economists have found that offering miserly incentives can discourage people, relative to no incentives at all. Your incentive was a gift that most children tend to expect with no strings attached, which seems a miserly payment. No wonder your son disobeyed you, and I doubt if your daughters were quite as compliant as you imagine.

Second, you made a fundamental error by making a non-credible threat. You tacitly admit that it would be silly to hide the present until next Christmas, while demanding a second book compounds your folly. Game theory says that non-credible threats will be ignored, and your son is evidently a game theorist.

This is a lost cause. If you wish to control your children’s reading, I advise a significant incentive payment on top of the customary present. Alternatively you could simply recommend a book wholeheartedly. They may not read it, but at least you will look less foolish.

Also published at ft.com.

Dear Economist,
I have always been curious about two things. First, why are traffic jams always heavier on Mondays than on other weekdays? Second, I wonder why traffic is heavier when it rains. I know drivers get more cautious on rainy days, but even when it rains so little that I can hardly feel the raindrops, the traffic gets a lot heavier than on sunny days. Why?
Confused commuter, South Korea

Dear commuter,

I began by checking the data, and they surprised me. Inrix, who supply data to in-car satellite navigation systems, reports that the worst mornings of the week – in the US, at least – are actually Tuesday, Wednesday and Thursday. Monday and Friday are low-congestion mornings. Friday evenings are bad, but Monday evenings are particularly quiet. My guess is that Monday is a popular day to take a holiday or call in sick.

As for data on rain, two Australian academics have found that the heavier the rain, the lighter the traffic in Melbourne. You are asking me to explain two illusory phenomena.

So what is going on? One possibility is that things are different in Korea, but I am not so sure: I think that Australians, Americans and we Brits all share your perceptions that rainy days and Mondays are bad for traffic. And we seem to be wrong.

I think we need to turn to psychology for our answers. Norbert Schwarz – a psychologist who is well known to economists thanks to his work with Nobel laureate Daniel Kahneman – has famously showed that if you want people to tell you that their lives are a wreck, just ask them on a rainy day. There is also some psychological evidence that Monday mornings depress us, too.

In short, rainy days and Mondays always get you down. You’re living in a Carpenters song, but please don’t blame the traffic.

Also published at ft.com.

Dear Economist,
I’ve been dating a great, loving and caring woman for a year and a half. She’s in her early thirties – eight years older than me – and works as a senior manager in a big company; she earns around £60,000pa, and her company provides a car and a city-centre flat. I am about to finish my PhD and my stipend is £14,000pa.

We’re in love and think it’s about time to move our relationship to the next level – which is moving in together. However, I feel that my girlfriend is stingy towards me. I’m the one who treats at posh restaurants and buys expensive gifts, and when we spoke about me moving into her flat she said that I’d have to pay the bills in return.

I’m finding it silly to mention such things, but they do annoy me. Am I shallow, greedy and opportunist? I understand her pay isn’t supposed to be a perk of our relationship but I must admit that, deep inside, I feel that a better lifestyle out of it wouldn’t go amiss.
Confused student

Dear Confused,

Your girlfriend is testing you, and you are at risk of failing. Naturally she is pleased to have a young, intelligent boyfriend, but she is worried that you only love her for her cash and will dump her for a younger model once you have a decent income of your own.

So she is using a “screen”, as described by Nobel laureate Michael Spence. By ensuring that she remains a cost centre rather than a cash cow, she is creating a situation that would be intolerable to a genuine gold-digger. She wants to see how you react, but by assuming that the “next level” is a free apartment for you, rather than a proposal of marriage, you are simply confirming her fears. Forget the flat, buy her a diamond ring, and she will mellow.

All this assumes, of course, that she is not just a miserly sociopath. Either way, good luck.

Also published at ft.com.

Dear Economist,
There seem to be economic benefits for a society where people are law-abiding, trustworthy, caring and generally nice. You get less cheating, and where you feel you can trust people, you can enter into business dealings with more confidence. Has anyone calculated the economic value of people being nice? And could a government invest in people being nice? If so, what would be the return on that investment?
James Atkins

Dear James,

Even economists would recognise that niceness is valuable for its own sake. But you are right, it is also good for the economy. Steve Knack, an economist who specialises in governance, trust and social capital (translation: niceness) once told me that, taking a broad definition of trust, it would explain the difference between the per capita income of the US and Somalia. That is, niceness and its cousins are worth about 99.5 per cent of US national income.

There are limits, though. When people trust each other, they become vulnerable to cheats. A recent paper by economists Jeff Butler, Paola Giuliano and Luigi Guiso finds that for an individual, there’s an optimal level of trust in others. Too little and you’re over-conservative, missing opportunities; too much and you get screwed. The effects are large, similar to the difference between going to college or not.

It is not clear how a government might encourage people to be nicer, but one famous economic study does suggest a way: Ray Fisman and Ted Miguel looked at the behaviour of diplomats in New York. The Scandinavians committed 12 unpaid parking violations between them; diplomats from Chad and Bangladesh notched up over 2,500. But when the city was given more power to punish offenders, all the diplomats cleaned up their act – niceness is best supported by legal incentives.

Also published at ft.com.

Dear Economist,
I was recently given notice that my position will be eliminated at the end of the month. My employer is offering two months’ severance.
I’m thinking about changing industries, from finance to clean tech, and moving from the US to Europe. I’m in my late twenties, single, and able to relocate – something less likely to be the case after my next position.
Making such a drastic change may prove difficult and take longer than two months. On the other hand, I can stay here and take a job in the same industry relatively quickly. Should I go big and risk a long unemployment or play it safe and take a job now?
Jeremy

Dear Jeremy,

“Behavioural economics” work on the boundary between psychology and economics offers relevant insights here. Unfortunately, it provides two entirely contradictory messages.

On one hand, you may be suffering from “hyperbolic discounting” – a tendency to weigh immediate costs too heavily and ignore longer-term benefits. You have three or four decades ahead of you, and yet you are focusing on a few weeks’ unemployment.

On the other hand, economist Johannes Spinnewijn has discovered that job-searchers tend to be far too optimistic about their chances of finding a new job quickly. So you are probably underestimating the risks at the same time as you focus too much upon them.

So let me put aside the contradictions of behavioural economics and rely instead on economic history. Experience suggests that grand transformative projects – Mao’s Great Leap Forward, the UK’s nuclear power “jackpot” – end in disaster. A gradual approach is better. Your own plan is to switch industries and continents from a precarious position on the dole. Would it really be impossible to reach your dream career step by step instead?

Also published at ft.com.

Dear Economist,
With regard to the controversial goal that has shattered Irish World Cup hopes, how would an economist have chosen to control the ball in Thierry Henry’s position? Given that the rewards so greatly exceed the risks, would it have made any economic sense not to handle the ball? Is this a form of moral hazard?
Rich Stevenson, Oxford

Dear Rich,

Allow me to answer the questions in reverse order. Moral hazard describes a situation where a decision-maker takes unwarranted risks because he or she has been provided with some kind of safety net. Examples include people who insure their cars and then don’t park securely, or financial traders who gamble because they get bonuses for profitable trades, but no real penalty for losing money. Thierry Henry committed a deliberate handball and set up the winning goal for France. I cannot quite see the parallel with moral hazard.

As for the risks and rewards, I think you are extremely confused. You say that the rewards exceed the risks, but we must ask to whom those risks and rewards accrue.

Henry has been selfless. The rewards of his cheating go largely to his team-mates, who get to go to the World Cup with their names unblemished, and to fans of French football, once they get over the embarrassment – which they will. Henry himself faced all the risks. He might have been cautioned or sent off, but surely the far greater risk was what happened: only the TV cameras noticed the handball and a great striker’s reputation was tarnished. His subsequent pronouncements of guilt, shame and remorse have hardly put matters right.

So, what would an economist have done? The answer is absolutely clear: economists would never cheat in front of the camera. Their fans and team-mates might be frustrated with them, but their sponsors would be delighted.

Also published at ft.com.

Dear Economist,
I’m a 32-year-old American woman; I moved to Italy about five years ago and later applied for a master’s programme at an Italian university. Average earnings for my BA in political science are low, so I wasn’t missing out on much.
My problems are two-fold: first, dating. Italy has the second-oldest population in the world. Seeing a single thirtysomething is like finding a unicorn. Eliminate men who live with their mothers, are chain-smokers, or are shorter than me, and I’m in a convent.
Second, my Italian university has decided to reverse its previous decision to accept my American degree. I am being forced to re-earn an Italian BA, which could take a further year.
I’d hate to turn down another degree, but can I handle another year’s worth of pasta and enforced singledom?
My current plan includes going to San Francisco upon my return, though I do have the choice of a semi-permanent job with Nike in the middle of nowhere. Or I could stay in Italy; but if I spend another year single, according to my mother, I will die alone.
Crying in my cappuccino

Dear Crying,

You appear to be committed to staying in a country whose food, bureaucracy and dating scene do not suit you. Your judgment has been clouded by the sunk-cost fallacy: you hoped to get a master’s degree, great food and an Italian paramour. Things didn’t work out and you have wasted five years. You’re only human if you want to waste another year or two, but you’re making a mistake. Go home.

As for your career, forget cash: the happiness literature suggests that a happy relationship and secure job are far more important. San Francisco is not famed for its excess of single straight men, but the demographics of the middle of nowhere are excellent, with many eligible bachelors. Your new life awaits.

Also published at ft.com.

Dear Economist,
My newlywed wife and I are deeply in love. There is, however, one issue that threatens the blissful fabric of our marriage. I absolutely insist upon shopping at Walmart. My wife, meanwhile, would rather avoid Walmart at all costs.
I have recently tried to convince her that not only does Walmart offer the lowest prices known to man, but that the chain is also a force for good – lower prices mean better standards of living for all consumers, increased global trade means a tighter-knit international community, and efficient operations translate into higher productivity growth for the economy. My wife complains about poor labour policies, the “fact” that Walmart squeezes suppliers, and that it puts local shops out of business.
Who is right? Will our marriage survive?
Brian Gee

Dear Brian,

I have to agree with you about Walmart. Jason Furman, then an economist at New York University, now an adviser to President Obama, famously argued in 2005 that Walmart was (unwittingly) a progressive success story. The chain’s prices don’t much affect me (I prefer Whole Foods) but Furman reckoned that they benefited low- and middle-income Americans to the tune of around $250bn a year.

Walmart does not pay much, so it may depress wages. Then again, it may boost wages by offering jobs to the otherwise-unemployed. Either way, the benefits of low prices to Walmart shoppers far outweigh any plausible costs to Walmart employees. And while it is true that Walmart employees tend to be poor, the same is true of Walmart shoppers.

Armed with this information you can confront your wife with confidence. You are sure to win the conversation. The divorce is likely to be more keenly contested.

Also published at ft.com.

Dear Economist,
My son has two children and my daughter four. I propose to give £5,000 to each grandchild in my will. Would this be equitable, given that £20,000 would go to my daughter’s side of the family and only £10,000 to my son’s?
Mr Robinson

Dear Mr Robinson,

Let me be frank: at first glance I thought your dilemma was idiotic. If you want to hand out equal shares, that’s fine – but make your mind up. Given your daughter’s fecundity and some basic arithmetic it is quite clear that you cannot simultaneously give equal shares to grandchildren and to children.

Why, then, would you hand out £5,000 to each grandchild and still fret about fairness between your children? Your children don’t get the money; your grandchildren do. Similarly, it would make no sense to hand out £15,000 to each child and then start worrying that your grandchildren had been unequally treated.

Yet arch-rationalists such as Gary Becker or Robert Barro might leap to your defence. Assume your children are Becker-Barro altruists. This means that they care not about how much cash they give, but about the total sum their children receive from all sources.

If you give your grandchildren £5,000 each, that is simply £5,000 that their parents don’t have to give. They will adjust their bequests in the light of yours. Viewed in this way, your attempts to give money to your grandchildren are really hidden transfers to your children – and you would be quite right to worry that your daughter was getting more than your son.

But before you pat yourself on the back (Becker has a Nobel prize; Barro may get one too), ask yourself if your children are Becker-Barro altruists. Most people focus narrowly on their bequests, not on the total receipts of their offspring. I doubt your children are Becker-Barro altruists. After all, you aren’t.

Also published at ft.com.

Dear Economist,
When the Chancellor of the Exchequer reduced value-added tax from 17.5 per cent to 15 per cent as an incentive for consumers to spend, there was a widespread view that the reduction was too small to be of use. Now that we are approaching the time when VAT returns to 17.5 per cent, some retailers say that the increase will have a negative impact. This doesn’t sound logical, but is it true?
Andrew Hewett, Hertford

Dear Andrew,

I remember the complaints well: how is a 2.5 per cent cut in the price of goods going to boost spending? (Let us leave aside the facts that while the cut was 2.5 percentage points, it was actually only 2.1 per cent; that not all goods are liable for the tax; and that some retailers decided to increase pre-tax prices rather than reduce post-tax prices.) And in truth, the VAT cut, while billed as a “stimulus”, was tiny compared with the vast government deficit.

My own view is that people are price-sensitive, so the modest VAT cut probably had a modest effect, the increase will reverse that effect, and the details will be so small that we will never know for sure.

Is it logical to claim that the cut was pointless but the rise is significant? The motive for the claim is obvious enough. And it may be justified. The switch each way caused a fixed cost: menus had to be printed, staff trained, accounts re-counted and tills reprogrammed. It is reasonable, and perhaps true, to say that the benefits for businesses of the VAT cut were swallowed by the costs of adjustment. The VAT rise, and a second round of adjustment costs, simply adds injury to the insult.

Psychology may be at work too. Behavioural economists believe in “the endowment effect”, a tendency for people to overvalue the status quo. The VAT cut seemed trivial until retailers got used to it. Now they regard it as indispensable.

Also published at ft.com.

Marketplace worked with me to produce this video about the economics of signalling in the workplace. They did a fantastic job, and you even get to hear my David Attenborough impression. The video is loosely based on one of the Dear Economist letters. Enjoy!

Dear Economist,
Do waiters in mid-priced restaurants work less than those at high-end ones? If not, shouldn’t their tips be the same (in absolute terms)?
Manoj

Dear Manoj,

I can see where you’re coming from: a 10 per cent tip on a £20 meal is less than a 10 per cent tip on a £100 meal. If it’s the same waiter doing the same job, shouldn’t the tip be, say, £5 for each meal – a 25 per cent tip in one case and a 5 per cent tip in the other?

This is not what happens. According to a survey by the economist Ofer Azar, the absolute size of tips in the US is overwhelmingly dependent on the size of the bill. In Europe, formal service charges often replace tips and the FT’s restaurant insider, Nicholas Lander, tells me that such charges tend to be proportionate to the bill – or if anything, to be a higher percentage in the fanciest restaurants.

I am not sure the puzzle is quite as perplexing as you think, though. First, the connection between what the customer tips and what the waiter gets is far from straightforward. Waiters are not slaves: if tips are too low to attract them, then the restaurant owner will have to add a wage. And if a waiter can earn hundreds of pounds in tips at a top restaurant, the owner will be able to demand a share without running short of staff.

Second, high-priced restaurants tend to have fewer customers per waiter, to ensure attentive service. They receive higher tips, but fewer of them.

Despite these points, it is of course possible that waiters are paid more in better restaurants. But in a capitalist society, skilled workers expect to earn more. I suggest you sample the quality of service at El Bulli or the Fat Duck, and pop into Pizza Hut on the way home. Then tell me again that the waiters should earn the same at each place.

Also published at ft.com.

Cass Talks, courtesy of Cass Business School, London:

Dear Economist,
With the imminent passing of my pet rat I am faced with a lot of grief; he has been a great pet and so I will be more saddened by his passing than if he had been a bad one. My question is: is it possible for the cost (the grief from losing a friend/pet/family member) to outweigh the benefit (the joy gained through time spent with them) and so make the purchase of my pet not worth it, as the net benefit would be negative? Would there be a point where you would say: “I don’t want to get involved because I love X so much that I will be destroyed if I lose him?”
Ilka

Dear Ilka,

Your intriguing problem has not, as far as I know, been explored by economists before, although it has been discussed by artists. Your ailing rat puts me in mind of a departed sparrow, mourned in verse by Catullus. Paul Simon expressed the trade-off more directly in his early song “I Am a Rock”: “If I never loved I never would have cried.”

But poetic speculation gets us nowhere. Let’s head straight to the data. Andrew Oswald, professor of economics at Warwick University, provides the following data points to ponder, based on surveys of life-satisfaction. Relative to never having been married, being married is worth 0.38 “points” of life satisfaction on a scale of 1-7. Being separated is worth -0.24, widowed -0.19 and divorced -0.09.

This is not much to go on, but it is better than nothing. If we incautiously interpret these numbers as causal – in fact they are merely correlations – then we could conclude that 20 years of marriage is compensation for up to 40 years of widowhood. Ten years of marriage more than justifies 40 years as a divorcee.

For human marriages, these odds seem pretty good. For a pet rat, less so: the little darlings hit puberty at six weeks and rarely live past three years. Perhaps you should buy a tortoise next time.

Also published at ft.com.

Dear Economist,

After reading with interest your plan to start exercising last Christmas (by giving to charity if you didn’t meet your goals), I’d be obliged if you could offer an opinion on a similar scheme I have concocted. Wine is the problem. I drink too much of the glorious stuff, and am unable to convince myself that doing so is unhealthy.

Your idea of giving to charity would not work with me. I’m uncharitable, I’m afraid, and would probably rather lie than give my earnings away. Here is my alternative. Each month I will deposit the total amount I would spend on wine in the family joint bank account. If I want a bottle, it must come out of this account, but whatever is left at the end of the month is to be given to my wife and children.

This appears to be an excellent solution; in my view, the guilt of taking something away from my beloved wife and children is far greater than taking from myself. Do you agree?
DW

Dear DW,

In classical economic theory, your scheme would be useless. Every pound spent on the demon drink is always a pound unavailable to your wife and children, and it should make no difference which bank account you put it in.

But Richard Thaler, a leading behavioural economist, has a theory of “mental accounting” that supports your plan. We do attach different labels to different pounds: this one is for my pension, that one is slush money. And Thaler has discovered that those labels make a difference to the way we behave.

Your scheme may well work, then. But like all commitment strategies, there is a risk that it will backfire, and you end up with the worst of all worlds. You may find yourself unable to stop drinking, feel more guilty than ever, and demonstrate unambiguously to your family that you love booze more than you love them. You evidently like to live dangerously: good luck.

Also published at ft.com.

Dear Economist,
Should the football authorities put a cap on the total value of players, based on their transfer cost, that can play for a Premier League team in any given match? For example, although a squad might have cost a team £150m, the cap would mean that they could only use players in a match up to a value of £75m. This would create a level playing field and prevent wealthy clubs from “buying” silverware through purchasing the best players.
Keith Bates

Dear Mr Bates,

Your proposal sounds reasonable, but it is muddled on three counts. First, think of the unintended consequences of your rule. It would favour wealthy clubs with expensive established training academies, because they have a stable of young players who carry no transfer price. You would also discourage clubs from trading players if one club’s academy discovers three great goalkeepers. And would music fans be better off if Mick Jagger and Keith Richards were forced to take it in turns to play for the Rolling Stones?

Second, transfer payments are not in fact associated with success on the field. The economist Stefan Szymanski, co-author of Why England Lose, has used a statistical analysis to show that while a club’s wage bill is correlated with success, its transfer spending is not.

Finally, fans do not actually want a level playing field. Arsenal’s “invincibles” season, 2003-2004, saw them win 84 per cent of league matches and lose none. Every game was a sell-out. More rigorously, Szymanski has shown that more unequal seasons attract more fans. And why not? The big clubs have lots of fans and those fans want to see victories.

In short, you have the wrong objective, suggest the wrong rule to achieve it, and are blind to the side-effects. Any banking regulator in the world would be proud to give you a job.

Also published at ft.com.

Dear Economist,
I have been divorced since 2007 and decided to start dating three months ago. I am not terribly shy of men, but I am very insecure about me. I recently met an artist whom I find extremely HOT! I am curious to know how much information about myself I should divulge to him. I have made some bad decisions in my 42 years. I am stable now, but fear some of these things may affect his view of me. What would be the benefit of opening up to him before we hit a home run?
Sincerely yours,
Seeking

Dear Seeking,

It seems to me that this is all about switching costs, a concept formalised by Paul Klemperer, an economist at Oxford University. If breaking off this relationship will be painful for you but easy for him, you had best get the skeletons out of the closet immediately and hope he doesn’t run a mile. It would be worse to have loved and lost than never to have loved at all.

If, on the other hand, your own switching costs are low, there is every reason to keep your mouth shut. Enjoy a few “home runs”, and if he later discovers that you are a former prostitute, a recovering alcoholic or a fan of Boyzone, at least you had your fun while you could.

The case for discretion is even stronger if your new beau has his own switching costs. In this case, once he has committed to the relationship he may find himself stuck with you even if he later learns the stark truth. Keep your secrets to yourself, give him a taste of what’s on offer, and wait until he’s hooked.

Come to think of it – my own wife has confessed to a few former indiscretions recently that might have given me pause for thought earlier in the relationship. I am reasonably confident that she was never a call girl. But when it comes to Boyzone, I wish I could be that sure.

Also published at ft.com.

To my astonishment, my talk at LSE next Tuesday is already a sell out.  But never fear. I am also giving a talk on “The Consolations of Economics” at Cass Business School in the City – please register before you go along – on Wednesday 14th October. The day after, I am speaking at One Alfred Place but it is not yet clear whether the speech is open to the public (an excellent reason to become a member, shurely). Finally, I’m giving a sermon on Frugality just before Christmas: 13 December at Conway Hall, under the auspices of the School of Life. Do please come along.

In all cases, the inspiration for the talks will be “Dear Undercover Economist“, my new book.

Dear Economist,
I am an economics student sharing a house with two other students and there is an issue with keeping the kitchen clean. I thought that a grim punishment strategy would maintain a system of alternate cleaners. But my threat to “punish” by refusing to clean indefinitely is not seen as credible by my housemates as I value a clean kitchen more than they do. What to do?
Tom, Gloucestershire

Dear Tom,

I counsel against “grim” as a strategy. As you know, “grim” describes a strategy of punishing unwelcome behaviour with everlasting, implacable revenge. In most circumstances, your own included, this is bluff. It’s not hard to imagine the bluster: “Right! I mean it this time. This really is your last warning.”

There is a more serious problem. You are treating the issue as some kind of public-goods game or prisoner’s dilemma, in which everyone has an incentive to act selfishly while hoping that others will do the spade work. But this is a student household. Not only is “spade work” likely to be an accurate description of what it will take to clean the kitchen, but your housemates may be entirely indifferent to how clean the place is. Many of these men will, later in life, inhabit bachelor pads with kitchens just as filthy, which suggests that we are not really talking about a collective action problem at all.

If you could persuade them to care about the kitchen at all, your best bet might be to persuade them to contribute to hiring a cleaner, rather than to contribute to cleaning up themselves. Behavioural economics suggests that people are much more reluctant to cheat if hard cash is involved. But how to make them care in the first place? Perhaps you might speculate about why no young female students ever come to stay. Point out that while women enjoy culture as part of a night out, they do not wish to find it growing in the fridge.

Also published at ft.com.

I have a guest post up on the Freakonomics blog, taking readers’ questions. Here’s a sample:

Q. If a reasonably intelligent young person today is looking to make as big a contribution to society as possible, is he or she better off making a small impact on something very large (like federal policy) or picking one particular problem and spending a lifetime attacking it (like curing a disease or improving public education in a country or even city)? — Matt

The answer, with several others, is here.

Dear Economist,
Samantha, my PA, is so very unreliable. For example, she failed to pass on your invitation to feature as a responding correspondent in your recent “Dear Undercover Economist” plug article. However, she does have a fantastic pair of, er … feet. Should I fire her?
Bob Casablanca

Dear Mr Casablanca,

Much depends on your line of business. In Mel Brooks’s masterpiece, The Producers, the crooked Broadway magnate Max Bialystock hires a blonde bombshell, Ulla, whose secretarial skills consist solely of the ability to pick up the telephone and intone, “Bialystock unt Bloom, Good tag por day.” She can, however, dance. Bialystock is happy enough, which is understandable given that the sole aim of his production is to go bankrupt.

It is unlikely that you share Bialystock’s aims, but if you work for a large organisation, you may share his contempt for his shareholders. Your PA’s incompetence largely disadvantages them, while her aesthetic appeal – which an economist might call a “non-pecuniary benefit” – is enjoyed by you alone.

Naturally you have to ensure that your PA’s failings are not so disastrous as to damage your own career, but that should be manageable, especially if you continue blaming her whenever something goes wrong.

If you own a large stake in the business, the trade-off is more painful. Samantha will be costing you money. I cannot advise you as to the right course of action, since I don’t know how much money you have, how much you want, and how “fantastic” she really is. I would simply note that you can always look for other options. You could hire a second PA to work in parallel with Samantha. Or you could seek out a PA who offers the best of everything. It cannot be impossible to find an assistant who is both effective and attractive.

Also published at ft.com.

Dear Economist,
Suppose we plot my preference curve for a man as units of “good boy” traits (thoughtfulness, caring, emotional support) versus “bad boy” traits (adventurousness, sexual attractiveness). My boyfriend, whom I’ve been dating for a year, would come up very high on the former and low on the latter. This situation was fine for me before, but now I’m having a hard time being attracted to him and I wonder if I want to continue the relationship. Has my preference curve simply shifted more in favour of the “bad boy” traits? I know the one year is a sunk cost, but I’m reluctant to give up so easily on such a nice man.
Beatrice

Dear Beatrice,

It is a pleasure to receive a letter that packs so much consumer choice theory into so little space – although I sense a creeping confusion in your question. You speak of a preference curve expressing a trade-off between good boy and bad boy traits. (By the way, I recommend the term “indifference curve”, both because it is technically more precise, and because it makes you sound sexy and unavailable.) Yet you do not specify your budget constraint. You act as if you can have a thoughtful boyfriend or a sexy boyfriend, but not both. I wonder why you think this is true. Perhaps you should hang around with economists more.

Let us take your problem at face value, though, and assume that you cannot simply find a man who has it all. If so, the problem you describe is familiar enough: that of diminishing returns. Only little children want to eat their favourite food for every meal, or listen to the same story again and again. For most of us, variety is the spice of life. So dump your boyfriend and find a rogue. Date him for a year. It is bound to end in tears, and then you can find yourself another ugly, tedious – yet thoughtful – man. They are not in short supply.

Also published in ft.com.

Dear Economist,
I send the FT the Polymath crossword solution on a fairly regular basis, but I notice that a greater than expected number of winners hail from overseas. Would I have a better chance of winning were I to send the solution to my friends in Sweden for them to post in an envelope with a foreign stamp?
Tony Waldron, UK

Dear Mr Waldron,

You are not the only one to notice that Johnny Foreigner appears to win with alarming regularity. Still, we must be statistical.

You say that a “greater than expected number of winners hail from overseas”. But you do not say what you expect. The British make up about 1 per cent of the world population. Accordingly, there should be a British victor approximately 1 per cent of the time, or once every two years, on average. I believe the British victory rate is higher than this.

Another basis for forming our expectations is to look at subscribers. Many UK-resident FT subscribers fail to realise that they are outnumbered by overseas subscribers. If the British won Polymath half the time, this would be “more than expected”. The informal estimate of the Polymath team is that the proportion of foreign winners is roughly in line with the proportion of foreign subscribers.

After discussion with the Polymath administrator, I have concluded that her method for picking winners is reasonably random. However, she takes no extravagant precautions to ensure this is so. Perhaps foreign stamps do attract her magpie-gaze.

Even so, you must weigh the fractional additional chance of winning against the time and expense of routing your entry via Sweden. Surely the costs outweigh the benefits, unless you are motivated chiefly by the glory of having your name published in the Financial Times. If so, I believe I have solved your problem.

Also published at ft.com.

Dear Economist,
I read that supermarkets are abandoning the 99p price point in favour of a “round pound” as this makes the products appear cheaper and reflects a more honest business practice.
I wonder if pricing psychology played any part in this decision – or is it just a cynical cash grab? After all, if they make an extra penny on every product they sell this year, it will mean tens of millions of pounds in extra profits.
S.C.

Dear S.C.,

This particular pricing decision involves three very different sets of costs and benefits, none of which the article you sent me sets out clearly.

The first is to do with the physical task of giving change. This is time-consuming for staff and shopper alike. However, because it requires that the transaction be registered, it also makes it harder for staff to divert money from the till into their own pockets.

The second is psychological. Do “round pound” prices or those ending in 99p seem cheaper? The article cites the same “expert” supporting both views.

The third is simple price-sensitivity. In classic economic theory, when the price goes up, revenues per item rise but sales fall. This is a straightforward trade-off and it is up to individual companies to find the sweet spot.

But your own theory is almost as confused. You seem to think supermarkets have offered customers a penny discount because they were run by kind people. This season the kind people are no longer in charge – and prices have risen.

I would dismiss your thesis out of hand if … I had a better one myself. Our discussion suggests several reasons for retailers using 99p endings, and several reasons for them using round numbers. It is not at all clear, though, what has changed. If you want my guess: some marketing bright spark tried “round pound” pricing and was surprised to find that it worked.

Also published at ft.com.

Dear Economist,
My husband and I are following a tight budget, whereby he is using an Excel spreadsheet to plan our gas usage, spending of store card loyalty points, and so on. (I name just two of the 12 columns.) He has also plotted our petrol use on a graph. However, I became somewhat concerned when I lost a glove and its value was inputted into the “deficit” column – aptly titled column 13 – of the spreadsheet. I challenged this, as the glove was singular and therefore half the cost. It was also actually a gift – or two gifts. Are we down £15 (the approximate price of the pair of gloves), down £7.50, up £7.50, or quids in? This has become a sensitive issue in our marriage.
Mrs, soon to be Miss

Dear soon-to-be-Miss,

That the gloves were a gift is no longer important: the question is whether you are worse off for having lost them. And you are.

Nor are you worse off by a mere half-pair of gloves. Your gloves are, in the jargon, perfect or near-perfect complements. This means that the odd glove is worth little, unless you are holding down a career as a Michael Jackson impersonator. Just as important, the missing glove will be difficult to replace. Your husband is therefore quite right to claim that you have, in effect, lost the full pair of gloves.

But your husband’s competence ends there. His “deficit” column makes no sense in a spreadsheet designed to track expenditure. If you buy a replacement pair of gloves (or a single glove – good luck with that) then that is the moment to make a note in your spreadsheet, not before. You may not feel the need to replace them; it is August, after all.

Let’s be honest, though. This isn’t about the gloves, is it? It’s about your husband’s infuriating attempt to control you through a spreadsheet. Tell him either to put it away, or to add column 14: divorce expenses.

Also published at ft.com.

Dear Economist,
I am assisting a friend who is contesting an Indian election as an independent candidate. We would like to raise campaign funds by getting common people to chip in. One of the problems I foresee is people arriving at a contribution website or collection booth and then not knowing how much to contribute. We could suggest predefined contribution amounts, but we wouldn’t like to see large contributions lost because our suggestions are too small. Neither do we want to turn away micro-contributions from large numbers of people. How should we proceed?
Regards, Gaurav Roy

Dear Gaurav,

Rachel Croson, an economist, and Jen Shang, a psychologist, have been asking themselves a similar question. Croson and Shang teamed up with fundraisers at two American public radio stations to stage a couple of experiments. In each experiment, when listeners called in to donate, the fundraiser casually mentioned a previous donation.

In the first experiment, the donation was either said to be $75, a typical donation, or $300. Callers who were told about the $300 donation tended to give more – more than 10 per cent more, on average. In the second experiment, the donation was said to be either $600 or $1,000. Here, the $1,000 hint raised less money than the $600, perhaps because the amounts were too large to seem relevant.

I have three suggestions. First, make your suggested contributions optimistic but realistic. Second, offer a spread of options to catch different types of donor. Third, experiment if you can – perhaps you can program your website to make different suggestions and see which combination works best. An election is not a radio station, and India is not the US, so this is an area where a little extra research may tell you a great deal.

Also published at ft.com.

Economists might not be an obvious source of advice on parenting, the intricacies of etiquette or the dark arts of seduction. Even seen in the most flattering light, the economist can appear a remote figure: resolutely rational, untroubled by indecision or weakness of the will, a Spock-like creature too wedded to theory to be able to relate to mere human concerns. At worst he can look like a social naïf, if not an outright sociopath; a man (or occasionally a woman) who knows the price of everything and the value of nothing.

At least such is the traditional image of the economist; and who is Dear Economist to demur?

He is not, it would be fair to say, as sympathetic as more traditional agony aunts. He is blunt. He is rude. He loves jargon. When confronted with a woman who enjoys the dating game but worries that she might leave it too late to settle down, Dear Economist offers not a shoulder to cry on but a frank explanation of optimal experimentation theory. When a dinner party guest wonders how much to spend on a bottle of wine, Dear Economist ignores the Good Wine Guide and reaches for the Journal of Wine Economics.

But – and this is the crucial question – is the advice any good? In the six years since the Financial Times entrusted me with the awesome responsibility of answering letters to Dear Economist, I have happily donned the persona and issued my instructions. But I have not asked too closely how they were received – until now.

Over the past few weeks, I’ve been writing to some of my correspondents to ask them what they made of my advice, whether they took it and how things worked out. Here, for the first time, are their responses. Read the rest of this entry »

Dear Economist,
In the bunfight for Christmas leave, it’s never too early to start. I work in middle office, where there is an operational requirement to be staffed to a minimum of 50 per cent at all times. This year there are three working days between Christmas and New Year, and nobody wants to work them. What is the fairest way of divvying up the Christmas leave?
Middle Office Minion, London

Dear Minion,

It is an outrage that you and your colleagues have been placed in this absurd position. Let’s review the facts: you place a higher value on your time between Christmas and New Year, but your company’s annual leave policy does not place a higher price on these days. Given this pricing policy, everybody wants leave at Christmas, and so a bureaucratic bodge job is duly handed down from on high.

It is as though the company had offered each staff member a Christmas gift of either a bottle of champagne or a can of lager, and then started inventing rules on discovering that there was not enough champagne for everyone. The idiots who foisted this system on you should scrap it at once, and instead offer sufficient overtime pay at Christmas to ensure that there are enough recruits.

Failing that, the sensible solution is to arrange side-payments among yourselves. The people who value the break least (those with different faiths, or infuriating relatives) should be the ones doing Christmas duty, while the rest pay them compensation. Arrange a quick auction in which the amount of compensation rises over time; when enough bidders have dropped out of the auction, the remaining bidders pay the volunteers to hold the fort. Perhaps the compensation should be suitably seasonal: the bidding could open at one partridge in a pear tree.

Also published at ft.com.

Dear Economist,
Now that we have completed our family, my wife wants me to have a vasectomy, strongly hinting that she will withdraw all sexual favours unless I comply. For a long time now, the amount of sex we have been having (about once a month) has been less than I would like (a couple of times a week). While I am not an economist, I have read that positive incentives are important. Wouldn’t my wife have more chance of persuading me to have the snip if she promised me more frequent sex rather than threatening to withdraw it altogether?
Dave, London

Dear Dave,

In traditional economics there is no important motivational difference between stick and carrot, and so I can hardly accuse your wife of bad economics in that respect.

But, even if your proposal is accepted, you face a serious problem. Your vasectomy is a one-off operation, for which you seek an ongoing future incentive. How can you be sure that your wife will stick to the deal? Economists call this the “hold up problem”.

You are hoping for an extra 90 bouts of intimacy per year. Since I give your marriage five more years, tops, this adds up to an extra 450 sexual encounters in total. But there is no guarantee that, after you have your operation, you will experience any of them.

The obvious answer is a performance bond. Your wife could deposit, say, £45,000 with a lawyer. Whenever the two of you contact the lawyer to confirm that intercourse has occurred, he will release £100 to your wife.

Perhaps that seems unromantic, so I have a better idea – simply secure payment in kind upfront. If the two of you get busy, you should get through 450 lovemaking sessions within a year, perhaps sooner. You might even find you enjoy it so much that this troubled marriage perks up. I suggest you get started at once.

Also published at ft.com.

Dear Economist,
My 15-year-old is disinclined to work for her GCSEs, saying her time is better spent preening herself in preparation for assignations with her delightful, diligent, privately educated, moneyed boyfriend. She insists the money spent on nail-painting, hair-colouring and the like is an investment and will be more than repaid when he marries her. Is she deluding herself?
A curious mother

Dear Curious Mother,

Surprising as this may seem in the 21st century, your daughter’s strategy is not unusual. Evidence on speed-dating gathered by the economists Michèle Belot and Marco Francesconi shows that women are attracted by rich men, while men focus more on a woman’s physical appearance. Lena Edlund, another economist, has found that in the areas of her native Sweden where the wealthiest men live, women of prime marriageable age are over-represented.

However, your daughter is only 15; for Edlund, “prime marriageable age” is 25-44. Your daughter is either going to have to get her hooks into this chap unusually early, or she is going to have to keep him on the boil for another decade – a lot of nail-painting.

Not only is she concentrating her investments into a single asset by abandoning her education, but she may even be making her main goal harder to achieve. Belot and Francesconi discovered that a strong social trend towards “assortative mating” means that although educated, high-achieving men are not interested in marrying a rich woman, they do like educated high-achieving women, rather than shallow girls with shiny nails.

Your daughter should learn to work hard and look good at the same time. Not only will it advance her immediate goals, it will also – sadly – stand her in good stead for the rest of her life.

Also published at ft.com.

Dear Economist,
In your books and columns you have claimed that when people split the bill equally in restaurants they tend to take advantage of each other by ordering expensive dishes. I wonder if this is really true. Wouldn’t friends be more considerate of each other?
Considerate restaurant-goer, London

Dear CRG,

The “diner’s dilemma” you describe is a kind of prisoner’s dilemma, and in theory people should behave exactly as I have described. But many laboratory experiments suggest we are not as selfish as economists’ models claim. So you are right to ask for more evidence.

The economists Uri Gneezy, Ernan Haruvy and Hadas Yafe have been looking into this. They seated various groups of six diners at a nice restaurant in Haifa, Israel, and noted how they responded to different payment schemes. Some ate for free, and they ordered a lot. Others paid for their own order, and they ordered sparingly. Between those two extremes were those who split the bill with the other five diners: they took advantage of their fellow diners, as I would have expected.

Perhaps they were somewhat inhibited by the embarrassment of free-riding, though? It seems not. When the experimenters, in a further trial, told diners that they would pay one-sixth of their individual bill only, they faced the same costs of over-ordering as in the “split the bill” case, but if they made extravagant choices their dining companions did not suffer. Yet they ordered much the same as in the “split the bill” case, suggesting that saving money for fellow diners was not much of a consideration.

It’s worth emphasising that this experiment seated strangers together, not friends. Perhaps people are more generous when it comes to friends. Or perhaps they are simply more careful about their reputations.

Also published at ft.com.

Dear Economist,
It’s that time of year when hemlines get shorter and legs get browner … I am having difficulty in achieving an even tan, yet everyone else (bar none!) has a perfect pair of tanned pins. I know they’re not natural.

As most men are unfamiliar with the fake tan ritual, let me fill you in. After one has showered, one applies the cream. The substance comes out of its tube as a cream, not the colour of “tan” it will decide to be.

The question is one of when to stop. The tan won’t own up for another four to six hours, so it’s a while before I learn whether the gamble has paid off. When it emerges, it’s patchy and streaky and my knees are two satsumas. Do I reapply blindly in a bid to colour in the gaps, risking more streaky satsumas? Or do I wear trousers?
N.M.

Dear N.M.

Maybe the whole fake tan business is a game of pure luck, with winners displaying their bronzed legs and unlucky losers resorting to the trouser option. This biased sampling would create the appearance of a world where the ability to apply fake tan is universal.

If this explanation is correct, you must just keep trying and resort to the trousers whenever you fail. But this seems a counsel of despair, and, for reasons that are not purely selfless, I advise against the trousers. You might do better to consult a central banker such as Mervyn King. Extreme monetary policy, such as printing money to buy other assets, is much like applying fake tan. It is all but impossible to know whether you are doing it right at the time, you must wait some time for the results to be apparent, and it is easy to overdo it. I have never seen Mr King’s legs up close, but perhaps he is a dab hand with the fake tan. If he is a master of quantitative easing, he may also have perfected quantitative squeezing.

Also published at ft.com.

Dear Economist,
Having just read the chapter on game theory in your book, The Undercover Economist, I discovered that Michael Jackson fans (circa 800,000 of them) are being offered the chance to receive their concert tickets as a memento, in place of a refund. I presume the future value of any one ticket will depend almost exclusively on the choices of the other 799,999 fans. To the non-nostalgic fan, who wishes only to see the best financial outcome, what would be your advice based on a game theory analysis?
Patrick Hudson

Dear Patrick,

I think it is safe to assume that if 799,999 fans take the memento ticket, the remaining fan would be better off taking the refund, while if 799,999 fans take the refund and one fan takes the ticket, the ticket will be very valuable. (We must also assume that the concert promoters will not then flood the market with the other 799,999 unwanted tickets.)

From a game theorist’s perspective, the equilibrium solution is clear. Let us say that memento and refund are equally valuable if 100,000 take the memento and 700,000 take the refund. In that case, each fan should independently adopt a “mixed strategy” with a one-eighth probability of taking the memento. (A nerdy hint: roll three dice; there is a one in eight chance that the total is exactly 10.) Every fan will be happy to randomise, because every fan will know that either way, he or she will get something of equivalent value.

I realise all this sounds implausible, and it is. Game theory makes demanding assumptions about human rationality that may not apply to grieving fans. I would pay closer attention to research in economic psychology that suggests people are very unwilling to part with an item once they feel a sense of ownership. A non-nostalgic fan should go for the refund.

Also published at ft.com.

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.