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

Should I bet against my party winning?

Dear Economist,
As canvassing for the general election gathers speed, I’ve been thinking about the gambling possibilities. Without going into specifics, I’m considering placing bets on the rival team’s victory – as insurance in the event of having to live in a world not entirely to my liking.

Would this be psychologically effective, or am I wasting my money? What price should I place on my political ideals?
Justin, south-east London

Dear Justin,

In principle, your plan makes sense, but the practicalities are more troubling. One possible difficulty is “habituation”, our tendency to adjust psychologically to what we have. Some research on happiness economics suggests that people get used to extra money more quickly than they get used to ongoing situations such as a long commute. I could imagine you winning big when your party loses, but then quickly taking the extra cash for granted, while the smug face of the wrong prime minister infuriates you every day. Would your win have compensated you in any significant way?

A more basic problem is that many people object strongly to losses – a phenomenon called, unmysteriously, “loss aversion”. The idea is that a gain of £10 may be mildly pleasant, while a loss of £10 is infuriating.

Your plan guarantees a loss either way.

I worry that if you won your bet you would find it was scant compensation for your party losing the election, while if your party won the election, the celebrations would be ruined by your knowledge that you lost the bet.

If you do decide to bet, you are best placed to judge how much compensation is necessary. You clearly find the outcome more significant than I do. And a word of warning: you imply that if your favoured party wins the election, the world would be entirely to your liking. I can assure you that this possibility is remote.

Also published at ft.com.

17th of April, 2010Dear EconomistComments off
Dear Economist

Help! I’m trapped in a spiral of superstition

Dear Economist,
When I sneeze, people often say to me – I know not why – “bless you”. I do not reciprocate when others sneeze, for I refuse to subscribe to any form of superstition.
It follows that my well-wishers clearly are superstitious. Therefore, my exceptional politesse dictates that I ought to offer them a blessing whenever they expel extraneous sinal mucus.
But perhaps the whole of humankind believes that everyone else is superstitious and so this absurd tradition continues between people who ought to know better, each of them fearing that they will cause offence. It is an awful superstition-fearing spiral. How, dear economist, to break out of it?
Hugh Costello

Dear Hugh,

There seem to be competing explanations for the “bless you” convention – that the sneeze has driven out an evil spirit, that the blessing wards off the bubonic plague, or even that a blessing restarts the heart after the sneeze stops it.

You conclude that anyone who says “bless you” either believes one of these things, or is indulging another person’s presumed superstition. A more likely explanation is that saying “bless you” sends a signal that you have noticed another person’s existence. It is a weak signal, but not saying “bless you” sends a strong signal that you do not care to acknowledge the presence of another human being.

Here is a parallel. When I wish a colleague “good morning” it is not because I believe doing so will cause a good morning to spring into existence. It is because not saying “good morning” is rude – doubly so if she has said “good morning” to me.

You seem a literal-minded fellow, Hugh. When you addressed me as “dear” economist, were you expressing romantic feelings for me? If so, I am afraid I have some bad news.

Also published at ft.com.

10th of April, 2010Dear EconomistComments off
Dear Economist

If I reduce ‘supply’, will my ‘price’ go up?

Dear Economist,
I was in a long-distance relationship with my ex-girlfriend for six months, I in Bangladesh and she in England. At first, everything was perfect, but then her demand curve for me seemed to be slowly shifting to the left. Paranoid, I started giving her a lot more attention, thereby increasing my supply. My price and marginal utility fell. We broke up once, but I convinced her to come back.
We went back to normal and we talked for hours everyday. I decided I would move for her and managed to get offers to study economics in the UK. She started acting very oddly, and a few days ago, she said she doesn’t love me any more and completely broke up with me.
We’re still friends and she’s started making excuses that don’t seem too rational. I think she’s confused and that she’ll come back if I play my cards right. Should I sharply reduce supply and hope that my price goes up? I love her more than anything. My demand curve for her is perfectly inelastic.
Anon, Bangladesh

Dear Anon,

I would put away the supply and demand curves and treat this as a problem of imperfect information. Before you cross continents, you must figure out what your ex-girlfriend thinks.

You blame your needy desperation for her change of behaviour – and it probably hasn’t helped. Even if you rescue this relationship you’ve basically conceded that you’ll be washing the dishes from now on.

But remember that she reduced demand before you increased supply. Why? Two hypotheses: she was bothered by the long-distance nature of the relationship, or she found someone she preferred to you. Test each against the fact that when you announced you’d be arriving on her doorstep, she dumped you. It’s pretty clear where the truth lies: it’s over. Yes, “sharply reduce supply” to this girl, but not because you hope to win her back.

Also published at ft.com.

3rd of April, 2010Dear EconomistComments off
Dear Economist

Should I become a vegetarian?

Dear Economist,
A growing trend among my fellow students is converting to vegetarianism for environmental reasons, citing statistics that meat production, in particular beef, is a tremendous cause of greenhouse gas emissions. I was wondering if you could provide some insight into the actual environmental cost of a steak. How does it compare to driving, or flying? Would a simple tax on beef production be much more efficient than vegetarianism?
Max

Dear Max,

Your friends are right to worry about beef; you are right to ask questions. Let’s start with the beef itself. Cows are ruminants, which means they produce large quantities of methane – contrary to what some people believe, much of this is emitted through the mouth. Methane is a powerful but transient greenhouse gas, so it is not straightforward to compare with carbon dioxide emissions, especially those produced by planes at altitude, which are more damaging.

Using a standard rule of thumb – and the work of “Economical Environmentalist“ Prashant Vaze – I can inform you that a 250g steak is responsible for more than 4kg of CO2-equivalent emissions, before cooking the stuff.

Sheep is just as bad; pork and chicken are half as bad; cod or wheat are at least eight times less carbon-intensive; potatoes and herring are far better still. Organic methods reduce carbon dioxide emissions, but not by much.

Yet this all looks modest relative to the costs of transport. Vaze reckons that steak’s emissions will get you about eight miles by plane, or 15 miles if you travel alone in a car.

As for the tax, it should be on all greenhouse gases, not just cow burps. I suspect it would create a few vegetarians, perhaps better diets for cows, and headaches for the taxman. More importantly, it would inspire some loft insulation.

Also published at ft.com.

27th of March, 2010Dear EconomistComments off
Dear Economist

Which is best: chess, romance or A-levels?

Dear Economist,
My son is applying to read medicine at university, and his various options require different combinations of subjects. He would like a place at UCL, with Barts as a fallback.
He feels reasonably confident of attaining an A grade in all four A-levels, but chemistry will be the trickiest. Should he ignore maths, focusing on UCL; or ignore chemistry, which would be fine for Barts?
Also, he does voluntary work in a home for the elderly which, quite honestly, he embarked upon in order to improve his application. In fact he gets a lot out of the voluntary work, including chess and philosophy with retired experts. Should we encourage him to give it up anyway? Should he also give up his musical instrument, sport, an Easter break in Paris and his girlfriend? He doesn’t want to be reductive, but he must meet one of his offers.
Family in Harpenden, Herts

Dear “Family”,

You write collectively but there is a principal agent problem here. Chess, romance and good works count in your son’s eyes, but when you boast to your friends in Harpenden, the hard currency is A grades and university places.

Your risk-management is also amateurish, setting out mechanistic strategies for selecting from an unimaginative set of options: UCL, Barts or oblivion. You talk as if you can shift effort from maths to chemistry with predictable results, but you have no idea what obstacles may lie ahead. Your son might abandon chemistry and then be undone by a tricky maths paper. Or he might find that when he misses a grade, he wins his place anyway because he’s the only applicant who stuck with the voluntary work. Or he may find that he does not care for medicine once he begins to study it. What then?

He may not want to be reductive, but you clearly do. You’re wrong.

Also published at ft.com.

20th of March, 2010Dear EconomistComments off
Dear Economist

Should I try to make school fees fairer?

Dear Economist,
I’m a marketing manager at a British private boarding school. Fees start low and increase during a pupil’s education regardless of the fact that costs remain pretty constant before inflation. I want to reflect this “flat” cost and reward loyalty – but how can I without an ugly hike at reception class?
Fairfeea

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.

13th of March, 2010Dear EconomistComments off
Dear Economist

Help! How do I keep my students in class?

Dear Economist,
I teach special education at an urban public high school. Every period, as many as half my students ask to go to the bathroom. I am pretty confident that most of them are just looking for an excuse to leave the classroom, but going to the bathroom is a right and I don’t want to run my class like a prison.
Beside making my content more engaging, how do I allow students to go to the bathroom in a way that’s equitable and limits the numbers outside the classroom in a given period? Three stipulations: grades are off-limits; I also don’t have much money, so I’m reluctant to offer prizes; and I’d like this system to have as little to do with me as possible. I’m a teacher, not a gatekeeper.
Anon, Washington, DC

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.

6th of March, 2010Dear EconomistComments off
Dear Economist

What’s the point of ‘hidden city’ fares?

Dear Economist,
I discovered “hidden city” fares some years ago when I learnt that the price of a ticket from JFK to Reykjavik cost much more than a ticket from JFK to London with a stop in Reykjavik. Icelandair explained that they had to compete with many other carriers on the NY-London route. Fine. But I recently bought an Amsterdam-Riga-Helsinki ticket and got off at Riga: the Amsterdam-Riga flight itself was fully twice the price, and competition is not always strong.
I keep buying tickets for seats I do not use on continuing flights that the airline cannot sell to another passenger. I have my theory on why airlines do this – what is yours?
Richard N. Golden

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.

27th of February, 2010Dear EconomistComments off
Dear Economist

Do I need maths to be an economist?

Dear Economist,
I am currently studying for my A-levels, including economics, but chose not to study maths. As my time is a scarce resource, I felt it would be more worthwhile to allocate an equal amount of time to each of my subjects, thus getting better grades in them, rather than dedicating most of my time to maths and sacrificing my other grades. However, I now find that I need an A-level in maths to study economics at a top UK university. Did I make the right decision? If not, could you put in a word for me at Oxford?
Tom, Co. Durham

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.

20th of February, 2010Dear EconomistComments off
Dear Economist

Should I marry my depressive girlfriend?

Dear Economist,
Valentine’s Day is coming, and I am thinking of proposing to my girlfriend. She is beautiful, intelligent and loving, a wonderful person in every respect. I only have one concern, which is that sometimes her sensitivity tips over into anxiety. She can get easily upset or even depressed. Maybe that’s not a problem for our relationship, because I’m a very cheerful person. And opposites attract, right?
Chris, London

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.

13th of February, 2010Dear EconomistComments off
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