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

How can we stop our child buying sweets?

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.

6th of February, 2010Dear EconomistComments off
Dear Economist

Can a cheap wine be a winner at dinner?

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.

30th of January, 2010Dear EconomistComments off
Dear Economist

Should we rethink the reasons for divorce?

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.

23rd of January, 2010Dear EconomistComments off
Dear Economist

How can I bring my son to book?

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.

16th of January, 2010Dear EconomistComments off
Dear Economist

Why are traffic jams so bad on Mondays?

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.

9th of January, 2010Dear EconomistComments off
Dear Economist

My girlfriend’s the rich one, yet I pay…

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.

2nd of January, 2010Dear EconomistComments off
Dear Economist

Can you put a price on being nice?

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.

19th of December, 2009Dear EconomistComments off
Dear Economist

Should I take my own great leap forward?

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.

12th of December, 2009Dear EconomistComments off
Dear Economist

Did Thierry’s head inform his hand?

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.

5th of December, 2009Dear EconomistComments off
Dear Economist

Should I stay single in Italy – or come home?

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.

28th of November, 2009Dear EconomistComments off
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