Tim Harford The Undercover Economist

Dear EconomistDear Economist

The problem page where personal dilemmas are “solved” with the latest economic theory, “Dear Economist” ran in the FT from 2003 to 2011

Dear Economist

Why is a bag of weed always $10 (man)?

Dear Economist,

I have been a client of weed dealers in North America since the mid-1980s and no matter who the vendor, the price has remained $10 a gramme. I don’t think anything in 25 years has stayed fixed in price like weed has.

Dealers might have some power to increase prices, as it’s illegal, and there are some significant barriers to entry, such as getting arrested. But if I don’t like the prices, it’s pretty easy to grow some on my own, because it “grows like a weed”, even if it might not be as good as the dealer’s Cannabis sativa.

So how did we end up at $10 a gramme?

Sebastian

P.S. I meant to email this sooner, but was pretty baked and forgot to hit send …

Dear Sebastian,

The nominal price rigidity you describe is remarkable and unusual. If the price of weed had increased in line with US consumer price inflation, you’d be paying $20–$25 a gramme now. So I agree, it is a puzzle.

My guess is that the illegality of the market gives a push towards the price stickiness you have encountered. Buying and selling cannabis is hazardous and there must be a benefit to a situation where nobody haggles over the price.

Still, the nominal price wouldn’t stick like that unless supply and demand were at least roughly in balance at $10 a gramme. And I confess, I am perplexed. My own research, which has been purely academic, suggests that prices vary between £20 and £250 an ounce in the UK, roughly £1 to £10 a gramme. Since the price stability you describe is not matched in other markets, could it be purely fortuitous?

Whatever the reason, this could be a handy discovery. In hyperinflationary times, people turn to tobacco or coffee as more stable currencies. If quantitative easing gets out of hand, you have found a stable currency for the 21st century.

Also published at ft.com.

8th of September, 2010Dear EconomistComments off
Dear Economist

What’s your approach to picking toilet stalls?

Dear Economist,

When I travel I am faced with a difficult choice: which of the toilet booths to use in offices or hotels. I always try to guess which one is the least used. Probability theory should tell me that all the booths should be equally used, but perhaps human psychology plays a part in this. My boyfriend believes the last one is the least used – contrarily, I believe the opposite. Perhaps this proves that, on average, all are equally used. Which one do you use?

Jan Lucan, Prague

Dear Jan,

The efficient market hypothesis says that stock and bond traders will swoop on underpriced assets, driving their prices up. If so, an ignorant investor may pick and choose at random, knowing that her selections will be priced as keenly as any others.

Let us assume that everyone, like you, wishes to use the stall less travelled. Can we apply the hypothesis to public lavatories? If so, you may pick any stall you wish.

But the efficient market hypothesis is not universally accepted even in financial markets, and in public toilets it is less convincing. After all, there are no highly paid “toilet traders” engaging in arbitrage – or if there are, the term conventionally applies to a different profession altogether. So perhaps there are systematic errors to exploit.

Internet research uncovers one poll that suggests that many people, like your boyfriend, head to the farthest cubicle. Another site claims that the nearest stall is the least used.

But all this is a little puzzling. Your stall-picking strategy reminds me of Warren Buffett’s comment that “diversification is a protection against ignorance”. Presumably you just want a clean toilet with some paper. Would it kill you to do a little research and check a couple of stalls? That’s what I do.

Also published at ft.com.

28th of August, 2010Dear EconomistComments off
Dear Economist

Is garlic bread really fungible?

Dear Economist,
Having bought identical garlic breads for my wife and myself, I proposed that we should equally share one immediately and equally share the second later. She was unhappy with this, proposing that she eat half of hers and that I eat half of mine. When I suggested that half garlic breads should be fungible, she accused me of making the word up. Assuming that garlic breads could be exactly shared equally, had I been correctly using established economic terminology?
Hungry Chris, Teesside

Dear Hungry Chris,

“Fungible” is an inherently amusing word but you did not invent it and you have used it correctly, assuming – as you claim – that the tasty loaves were indeed identical. Fungibility is usually used of commodities such as Brent crude or 24 carat gold, or currencies. All these are fungible because a reasonable person wouldn’t care which particular barrel of Brent crude or which ounce of gold they received.

A new idea of fungibility has emerged in recent years, which concerns monetary transfers such as foreign aid or politicians’ expenses. If an MP claims £10,000 in expenses for something he was planning to buy anyway, it doesn’t matter whether he sends in receipts for secretarial expenses, a train season ticket or a duck island. All we know is that he is £10,000 better off when his expense claim is approved. In short, expenses are fungible.

But your story raises a deeper question than that of terminology: one of marital bliss. In the classic analysis, “Love and Spaghetti”, economist Ted Bergstrom modelled two lovers who both enjoyed Italian food but also loved to watch the joy in each other’s faces as they shared spaghetti. You and your wife, in contrast, are behaving like a pair of bond traders.

Your grasp of economic terminology is quite secure. I am not so sure about your marriage.

Also published ft.com.

21st of August, 2010Dear EconomistComments off
Dear Economist

Is my dream win worth a lotto punt?

Dear Economist,

In Holland we’ve got a “postcode-lottery”: every month, people living in a certain postcode win – provided, of course, that they’ve bought a lottery ticket.

As a rule, I don’t buy lottery tickets. The chances of winning are small. In my view you only pay for the privilege to dream about what you would do with money you are never going to have in real life. And I don’t know about you, but I can dream for free.

But lately I’ve started dreaming (well, it’s more like a nightmare) that my zip-code wins the lottery, so my neighbours become millionaires and I miss out on all the money.

What should I do? Join the herd and start buying tickets every month?

Rob Voorwinden, the Netherlands

Dear Rob,

Being the only pauper in a street full of millionaires does seem a miserable prospect. (A famous survey by the economists Sara Solnick and David Hemenway suggested many Harvard students would rather be the richest pauper than the poorest millionaire.) The post-code lottery pays out sums in tens of thousands, not millions. Still, that makes a difference: the economist Peter Kuhn, with three colleagues, finds that people with neighbours who win the zip-code lottery are much more likely to buy a new car in the next six months. Envy matters.

And while the zip-code format accentuates the lottery’s downside, it also seems to improve the rewards. Standard issue lottery winners tend to become isolated from their community.

I would still advise against buying a ticket, though. First, you’re not psychic: a dream is just a dream. Second, happiness research suggests that lottery winners are not made happy by their victories. But most importantly, your chance of winning remains close to zero. The zip-code format has raised the stakes, but it has not improved the odds.

Also published at ft.com.

14th of August, 2010Dear EconomistComments off
Dear Economist

When should I drink my six special bottles?

Dear Economist,
I have inherited six bottles of excellent wine, which I plan to consume, over time, on special occasions. But how do I know when to open a bottle when I don’t know what occasions lie ahead? I don’t want to use up all the bottles within a few months on mediocre occasions, but neither do I still want to be hoarding them until I die.
George Stevens

Dear George,

This is known as the “spongeworthiness” problem, after an episode of Seinfeld in which the contraceptive sponge is taken off the market. The character Elaine Benes stocks up with several hundred sponges, but then faces the same problem you do: how to decide whether a man is “spongeworthy”.

This is an option-value problem: every sponge or bottle consumed is one that cannot be used later. It has been solved by Avinash Dixit, a renowned game theorist and former president of the American Economic Association. (For some reason, Professor Dixit waited to finish his term of office before publishing his research on spongeworthiness.) Unless you are absurdly patient, you should open them more quickly than you might think.

Assuming you are patient enough to wait for a gain of 5 per cent a year – but not more – and if you have one possibly special occasion per month, Dixit calculates that you should open a bottle if you expect an occasion in the top 21 per cent of all possible occasions. As the number of bottles remaining shrinks, raise your standards. The last bottle should be consumed on an occasion in the top 9 per cent.

Of course, there is always the chance that an occasion is so special that you are tempted to open another bottle. Dixit’s analysis allows for this. After all, Elaine once told a lover that he couldn’t have a second bout: “Sorry, I can’t afford two of them.”

Also published at ft.com.

13th of August, 2010Dear EconomistComments off
Dear Economist

Supply and demand, yes. But polygamy?

Dear Economist,
I live in a place where polygamy is allowed, but generally avoided. One of my friends has two wives. When asked why, he once quipped “more suppliers means more competition and better service for the customer”. Now I know, both intuitively and through observation, that people with two wives seldom lead “peaceful” lives. As an economist, how would you explain that?
Mohsin, Pakistan

Dear Mohsin,

Your friend is demonstrating the truth of the old saying that the only thing more dangerous than an economist is an amateur economist. He’s right that ex post he potentially enjoys the benefits of competition, but he neglects the question of ex ante bargaining.

The truth is that most people who argue against polygamy simply cannot count. Polygamy does not create extra wives – it just changes the dynamics of who marries whom. A few rich or otherwise attractive men will marry several women each, and other women will therefore be in short supply and in a strong bargaining position. (In a patriarchal society, it will put their fathers in a strong bargaining position instead, but this is not the fault of polygamy itself.) Women get more choice: they can share a millionaire with someone else, or they can take their pick from humbler men, many of whom will never marry and each of whom, presumably, will be very eager to please.

Your friend may have found a way to enjoy his double marriage, although I wonder about that. Wise women will have insisted on binding conditions before entering into a marriage with a polygamist. Your friend must have found a way to wriggle out of these – or he’s hiding his pain. But what is certainly clear is that in reducing the supply of wives for other men, he has placed them at a serious disadvantage. I am not sure why he is still your friend at all.

Also published at ft.com.

31st of July, 2010Dear EconomistComments off
Dear Economist

I’m 13 and smart, but my family ignores me

Dear Economist,
You may be surprised to receive a question from a 13-year-old reader of the FT, but I always steal the weekend paper from my father, who is an economics professor.

Everyone in my family is well educated, which is why simple dinner chit-chat usually segues into an exuberant discussion chock full of sarcasm, wit and the occasional clash of opinions. Being the youngest gives me some leeway if I happen to be misinformed. But it also makes it hard to express my opinion on the topics being discussed.

Is there any way I could let myself be heard without having to throw a teenage tantrum?

Abisha Dowla

Dear Abisha,

Dinner sounds wonderful: a privilege to witness, if not so easy to get a word in edgeways. It is much like my life at the FT where I share a corridor with Martin Wolf, Gideon Rachman and Philip Stephens. Perhaps you should simply accept the situation – which could be worse – and soak up the insight. This is what I try to do at the FT. (When I do open my mouth I usually regret it.)

Yet I understand your difficulty. I suspect that your father has been trying to figure out whether you’re worth listening to using an old approach that we economists call “adaptive expectations”. You are 13, but he cannot quite clear his mind of your 12-year-old and even four-year-old predecessors. Still, you might point out to him that he is using an obsolete modelling technique.

An alternative is to recall Charles Caleb Colton’s remark that “the greatest fool may ask more than the wisest man can answer” and phrase your interjections as questions. Begin by asking your father if we will have a double-dip recession, and make a show of taking note of his answer for future reference. He may insist that you do the talking in future.

Also published at ft.com.

24th of July, 2010Dear EconomistComments off
Dear Economist

Should I risk the fine and travel first class?

Dear Economist,

My daily journey requires a change of train at Mumbai station, which is extremely crowded. One day I was in a hurry and jumped into first class without a ticket.

As luck would have it, the inspector arrived. I admitted I did not have a ticket and paid Rs258 (£3.60) as a fine – hefty compared with an Rs8 one-way ticket.

I have always been a risk taker – I’m an economics student – and now I do not fear the inspector or the fine. I decided I would travel ticket-less for a further 15 days, by which time I would have received all the journeys which I could have bought for Rs258. Should I continue to travel in this way? Do fines work as a deterrent?

Ela Bodas

Dear Ela,

You are channelling the spirit of Gary Becker, winner of the Nobel memorial prize in economics for his application of economic reasoning to non-financial questions. One of Becker’s moments of inspiration came when running late to examine a doctoral student. He realised that he could save time if he parked illegally, quickly estimated the chances and consequences of being caught, and did the deed. His first question to the student was to ask him to sketch a theory of rational crime and punishment. The student passed, and Becker did not get a ticket.

Ethics aside, your actions do seem rational. You save time in queues and receive personal attention from inspectors instead. You save money, and the uncertainty of when you must pay a fine seems not to disturb you. You will make a good economist, if not a good citizen.

I interviewed Gary Becker some years ago, and his first act was to park in a 15-minute space for a two-hour lunch – on the grounds that nobody checked very carefully. You are following in august footsteps.

Also published at ft.com.

17th of July, 2010Dear EconomistComments off
Dear Economist

Why do I suddenly have six job offers?

Dear Economist,

For the past year I’ve been looking for a new job in banking. No matter what I did or to whom I talked, there were no opportunities and I received nothing but rejections.

One month ago, it began to turn. As of this week, I have five job offers – as well as one internal opportunity. How could this happen? Yes, the economic situation has improved, but can that explain the leap from zero to six offers? If so, aren’t employers completely irrational in their hiring policies? As my supply is completely inelastic, their increased demand means that they now have to pay a significant mark-up compared with six months ago. Are employers just bad at planning or is there another reason why my dry spell has come to such a sudden and inflationary end?

In Demand

Dear In Demand,

Congratulations, but I think you’re making a common mistake, which is to confuse your own situation with that of the economy in general. (As the old joke goes: a recession is when my neighbour loses his job, but a depression is when I lose mine.) For example, data from Lindsey Macmillan at Bristol University shows that at the end of the British recession of the early 1990s, many households were richer than at its beginning. Others were much poorer. The variation between households was far greater than the difference between booms and recessions. Your experience is unique.

Many jobs are all about finding a good match between the job and the person who fills it. An applicant who is well matched – or can talk as if she is – will succeed. So my guess is that you have simply become a polished interviewee. My only concern is that you may have learnt to fake professionalism so well that you land up with a job that is too much for your abilities. But you’re in banking, so at least you’d have company.

Also published at ft.com.

10th of July, 2010Dear EconomistComments off
Dear Economist

How can I break the affection monopoly?

Dear Economist,

I announce the General Theory of Affection Monopoly, and, like Keynes, I place the emphasis on the prefix “general”. Individual producers can collude and earn monopoly profits; Opec is the popular example. On a microeconomic level, individuals can collude to enhance “profits”. The General Theory of Affection Monopoly explains that women collude in an attempt to maximise profits.

In a monopoly, the producer restricts supply to maximise profit. By far, women in aggregate are the largest producers of affection for men. Therefore, women collude and restrict the supply of their affection to extract profit.

Are men hopeless consumers, like the western world with its oil requirement? How do we engage in a productive counter-policy to mitigate this threat?

Mike, New York

Dear Mike,

You may be right. This would certainly help to explain why women who flout this tacit agreement tend to be popular with men and unpopular with women. Some of them even enjoy financial rewards in exchange for their generous supplies of “affection”. Imagine!

However, your general theory is missing a key element: this is a bilateral monopoly. Women may be the largest producers of affection for men but men are also the largest producers of affection for women. You need an explanation for the undeniable fact that men seem to be on the financially disadvantageous end of this market. As an example: economist Lena Edlund has found that young women tend to live disproportionately in areas of Sweden where average male incomes are highest.

As for countering the cartel … Move to Alaska? Drill in protected wetlands? I’m not sure I wish to contemplate any further parallels. I suggest instead that you find a renewable source of affection: buy a tortoise.

Also published at ft.com.

3rd of July, 2010Dear EconomistComments off
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