Dear Fairfeea,

You work in marketing, so I’ll explain this slowly. If your fees are currently designed to rise steadily, and you would like them instead to stay flat, and you would also like not to raise initial fees … well, there’s only one answer: slash final-year fees and lose money.

Let’s take a step back. You say that you’d like to reflect costs. Why? Most businesses set prices to attract customers and increase profits. Costs are not directly relevant. What makes you different? And then there’s this bizarre idea of rewarding loyalty. Most companies say they reward loyalty, but it is more traditional to gouge loyal customers while chasing new ones. Don’t fall for your own propaganda.

Your existing pricing scheme works well. Parents will be nervous about whether the school will suit their children, so a cheap price year in reception is sensible. As they grow more confident and the child settles in, they will be increasingly unwilling to switch. That is why rising fees make sense. If parents are dim enough not to notice them, even better.

The only reason to change your current pricing is if you can figure out a way of concealing some of the later fees. Perhaps you could offer overpriced school trips and exam revision classes in later years – or even put a surcharge on the larger sizes of school uniform.

The only reason to reward loyalty is to create it when it does not exist. A private school will have loyal customers without your fancy pricing schemes. You should take full advantage.

Also published at ft.com.

Dear Anon,

The great Kenneth Arrow is famous for his “impossibility theorem”, which proves there is no satisfactory way to aggregate individual preferences into a group preference. I am tempted to propose my own “bathroom impossibility conjecture” – which is that the requirements you specify cannot all be simultaneously satisfied. (Let’s summarise them: the bathroom remains a right; making lessons interesting is a side-issue; neither monetary nor academic incentives are to be deployed; no input from you is to be required.)

I do have one suggestion, inspired by Roland Fryer, a Harvard professor who has been running policy pilots that offer cash to good performers at school. Since Fryer’s earlier work suggests that peer pressure explains much slacking at school, some pilots group kids into teams which succeed or fail together.

Perhaps you could group the kids into two or four teams and offer a reward – or just praise – to the team with the strongest bladders. It might work. It might also lead to accidents and mockery. I wish you luck.

Also published at ft.com.

Dear Mr Golden,

Competition is only indirectly relevant. The question is how responsive an airline’s customers are to price – “own-price elasticity of demand”, in the jargon. When elasticity is low, airlines can increase prices without losing many customers. Naturally this affects the price they charge – and one explanation for elastic demand and low prices is that customers could easily shift to another airline.

Customers prefer to fly direct to their destinations, so any indirect route will tend to have to be cheap to attract custom. If competition is weak, the pricing is harder to explain, but demand can still be elastic if people would rather not fly at all than pay handsomely to fly indirectly.

The second question is why airlines charge less for more, as you describe. But from “home edition” software to electronics that have been “chipped” to slow them down, the world is full of discounted products that are more expensive to produce than their full-price counterparts. This raises costs, but if it allows companies to target price increases at those most willing to pay, it makes sense.

Also published at ft.com.

Dear Tom,

I am not sure which decision you wish me to evaluate: the decision to pick your A-levels without decent advice, or the decision to pursue a mathematical subject with no mathematical talent. Neither looks smart. You have theorised on the basis of neat concepts without any real-world knowledge – in some ways, ideal preparation to be an economist.

Yet this could yet work out well for you. Ap Dijksterhuis, an economic psychologist, has studied how people make complex decisions. In one experiment he gave people fiddly hypothetical choices, giving some plenty of time to concentrate, while he distracted others before suddenly asking them to choose. He found that such complex decisions seem to be best made subconsciously.

Choosing a course to study at university is a decision with many variables. You have all but closed off economics without even thinking about it. Perhaps that’s for the best. Studying economics without maths is like studying literature when you can’t read without moving your lips – not impossible, but difficult.

As for Oxford, you could always try. Several of my classmates read philosophy, politics and economics without maths. At least one of them now calls himself an economist.

Also published at ft.com.

Dear Chris,

I am glad to hear you have such a sunny disposition. Perhaps it will rub off on your wife-to-be: James Fowler and Nicholas Christakis demonstrated not long ago that happiness was contagious. This is plausible, although similar methods have been used to demonstrate that height is contagious.

We are then left with the risk that your marriage will live under the shadow of a large happiness gap. This is unusual, because when it comes to happiness, opposites do not attract. Three economists, Cahit Guven, Claudia Senik and Holger Stichnoth, have shown that romantic partners tend to be equally happy when they get together. Worse, the same researchers also show that when one partner is much happier than the other, trouble is often in store. A happiness gap in any given year is correlated with an increased probability of separation in the subsequent year.

One may of course fret about causality: if the husband was having an affair and the wife knew about it, it would be an odd interpretation to blame the divorce on the fact that she was much less happy than him. Yet it is also true that a happiness gap in the first year of marriage is a decent predictor of divorce at any time in the future.

Guven et al point out that when a happiness gap yawns, it is usually the woman who initiates divorce proceedings. Happy Valentine’s Day.

Also published at ft.com.

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 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 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 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 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.