Dear Economist

Dear Economist,
I frequently extract large sums of money from Bozzer, my flatmate, in our regular poker game. He’s convinced variance is to blame for his losses; in truth, however, he’s simply terrible – and I’m simply delighted with my new watch. Am I right to exploit him in this way?
R. Casablanca

Dear Mr Casablanca,

Unless you are holding poor Bozzer’s family hostage in the basement, this is a voluntary transaction between consenting adults. Presumably, he knows that he is losing money, even if he is not smart enough to work out why. And poker is lots of fun: even if he recognises that he is outclassed and the game is costing him, it may still be worth his while. After all, no customer makes a profit from going to the cinema either, but we rarely worry about that.

On that basis you have no case to answer.

However, I cannot wholeheartedly give you the absolution you seem to be seeking. You must first establish whether Bozzer is a poker addict. I’ll spare you the technical details – let’s just say that they probably involve hyperbolic discounting – but I can recommend an approach for dealing with a rational addict. If, away from the card table, Bozzer says that he wishes he could quit the poker habit, you must help to discourage him. Perhaps you could enlist a third party to hold on to cheques from the pair of you. She would post the money to a charity if you are ever caught gambling together.

I must also warn you that things may not be as they seem. Is Bozzer, perhaps, playing the long game?

If one evening he suggests raising the stakes, beware.

You think he’s the “fish” – but he may be reeling you in.

Also published on ft.com.

Dear Economist,
I feel guilty because I paid £200 to co-host a birthday party for my five-year-old with another mother, but got at least £300 of gifts in return. As a guest, I don’t like these parties because you take two gifts in return for only one party bag. But co-hosting is surely a rational thing because you pay half and get a full complement of presents?
South London Mum

Dear SLM,

Congratulations on your move to more efficient birthday parties. It seems to be a happy accident, since you have failed to realise the true scarce resource here. It is not doggy bags or disposable toys, but time. By hosting a joint party with a friend, you are saving time for many parents who would have had to attend two such parties in quick succession. The children may feel hard done by, but then again they may not. Even five-year-olds do not want a party every day.

As for making a profit on these parties, an economist understands that gifts need not be exchanged instantly and with exact accounting for value. You hosted a profitable party but feel exploited when others reciprocate – perhaps you should see these events as two sides of the same coin. It will not take long before these profits and losses even out. Surely the credit crunch is not so severe that you cannot wait a month or two for a return on your gift giving?

As for the party bags, they are truly immoral: to quell your feelings of guilt, you dose up other people’s children with sugar and additives. Is this a generous act, or a craven one? I commend your move to halve the supply of party bags; my only complaint is that you have not eliminated them altogether.

Also published at ft.com.

Dear Economist,
In restaurants my husband always picks something better than me. It’s boring to choose the same as him. What can I do?
Sarah

Dear Sarah,

The behavioural economists Dan Ariely and Jonathan Levav speculated that we all tend, like you, to alter our choices to fit in with those around us – and they decided to put the theory to the test.

They came to an agreement with a local bar, dressed up as bar staff, and offered unsuspecting groups free samples from a choice of four tempting local beers. (One of the customers recognised Professor Ariely and assumed that his academic career had run aground.)

Sometimes the experimenters took the orders in conventional fashion; at other times, they made each person’s order confidential by asking them to write their desired beer on a piece of paper. After bringing the samples, Ariely and Levav noted how much the recipients had enjoyed their beers.

You will recognise your predicament in their results. First, when orders were called out publicly, people tended to avoid duplicating the choices of others. Second, that mattered: the people who chose first were significantly happier with their choices than those who felt obliged to choose whatever beer was left over. (This survey was done in the US. When transferred to Hong Kong, people instead tended to emulate the first choice. But, again, those who chose first were happier.)

The implication is obvious. You should make a mental note of what you wish to eat and not change your mind when your husband announces his selection. If that is too “boring’’, the solution is even simpler: order first.

Also published at ft.com.

Dear Economist,
This Christmas and new year, I expect to encounter a lot of drunks on the road. In fact, I may well be one of them. Should I feel guilty? And should I be worried?
Mr F Jones, London

Dear Mr Jones,

It has always been difficult to test the effect of alcohol on drivers let loose on the roads. The difficulty is this: if half of all crashes involve drunks, that may be because drinking impairs your driving or it may be because there are a lot of drunks on the road – and we can only guess at how many drunk drivers there are.

But the economists Steven Levitt and Jack Porter realised that it was possible to say more, by looking at how often drunk drivers crashed into each other. If 10 per cent of drivers drink, and if drunk drivers are as safe as any other kind of driver and randomly mixed among the sober drivers, then only 1 per cent of two-vehicle crashes should involve two drunks.

Drunk-on-drunk crashes are much more common than one would expect, given the number of drunk-on-sober crashes, allowing Levitt and Porter to reach firm conclusions about the risks of drink driving.

They find a very large effect. Drivers who have been drinking are seven times more likely to cause a fatal crash; those who have drunk over the legal limit (in the US) are 13 times more likely to cause a fatal crash. You might also bear in mind another finding from the paper: “The great majority of alcohol-related driving fatalities occur to the drinking drivers themselves and their passengers.” That should be sobering.

Also published at ft.com.

Dear Economist,
My time waiting in a bank queue is vastly longer than standing in a supermarket one. How can I reduce my queuing time?
Ken

Dear Ken,

On a personal level, your options are obvious. You could take a collection from those behind you and use it to pay those in front of you to leave. Or you could simply bring a slim paperback and put your queuing time to good use.

But what really matters here is the cost to society. Queues are enormously costly. Imagine a bank queue in which one customer arrives per minute, and one customer per minute is dealt with by staff. All it takes is a cashier on a cigarette break, or a sudden rush of customers, and you could have 10 people in the queue. At that point, each person has to queue for 10 minutes, even though people are leaving as quickly as they are arriving. Somehow the queue must be disposed of.

The solution is elegant and unexpected: new arrivals should go directly to the front, to be served immediately after the current customer. Queues would then be very short, because once a customer was pushed back a couple of places he or she would give up and go home. The economist Refael Hassin has shown that this rule can be socially efficient, while the economics writer Steven Landsburg has advocated its introduction for telephone queues.

This makes sense. In both cases, the same number of people get to use the bank. But under the Hassin-Landsburg rule, queues are much shorter and we all spend less time waiting in line. All that remains is to encourage banks to enforce the system. Since it is perverse and counter-intuitive, they may find it very appealing.

Also published at ft.com.

Dear Economist,
My boyfriend spends a lot of time in front of the mirror, prettying himself up. I am pleased to have a well-groomed man in my life but it is a bit unnerving. Should I get him to stop?
PL, Warwick

Dear PL,

Your boyfriend’s disturbing personal-grooming habit offers you financial as well as aesthetic benefits. Economists have known for some time that better-looking people are paid more. This is probably due to a combination of discrimination against the ugly, the fact that some beautiful people have jobs where beauty is an obvious advantage, and the likelihood that better-looking people are more confident.

More recently, economists have discovered evidence that endogenous beauty (make-up, hair-styling) is as important as exogenous beauty (having Bond girl Eva Green’s eyes).

Economists Daniel Hamermesh, Xin Meng and Junsen Zhang have found that spending money on clothes and make-up slightly raises the earnings of Shanghai workers. More recently Jayoti Das and Stephen DeLoach, of Elon University’s economics department, have shown that time spent on grooming substantially improves wages, especially for men.

They estimate that each extra 10 minutes a man spends in front of the mirror will raise his wages by 6 per cent. (Women would have to spend two or three hours to get the same effect.) So if you prefer your boyfriend to be rich, don’t stand between him and his mirror.

I do not know why you’re complaining. Perhaps you’re afraid that your boyfriend is becoming too attractive to rivals. If so, dump him and find yourself someone desperate. An economist, perhaps?

First published at ft.com.

Dear Economist,
My girlfriend and I were planning to fly to Frankfurt on a budget airline. We were offered travel insurance, which I didn’t think was worth the £4.95. Still, my girlfriend insisted on both of us taking the insurance. Assuming the chance of surviving a plane crash is negligible, you do not get to enjoy the benefits of the insurance should a disaster happen. Most likely your family will get paid for your death. So the worst-case scenario is that you’re £4.95 poorer and dead; or at best, alive, but still £4.95 poorer. What is the rationality of taking out the insurance?
Farid Daim, Nottingham

Dear Farid,

I sympathise with your reluctance to pay for insurance but I do not follow your reasoning. There is nothing irrational about life insurance per se (although it is an unattractive product to someone with no dependents – or a selfish disposition). Overall, though, life insurance is one of very few types of insurance it is rational to purchase, because it protects against the risk of a dramatic loss. Another is insurance against catastrophic medical expenses, another role for travel insurance; but you may not be bothered about this, as EU citizens get cheap health-care in member countries.

So it seems to me that you purchased “rucksack insurance”. Petty insurance is highly profitable – which is why it is bundled with cheap flights. But it is unnecessary. Over the course of your life you will earn thousands of times the price of your rucksack and contents. It is better to save on premiums and take occasional losses on the chin – you’ll come out well ahead in the long run. I have.

Take heart, though. You saw the bigger picture, and did exactly what your girlfriend told you. Smart move.

First published at ft.com.

Dear Economist,
I am often asked to sponsor various “a-thons” for charitable purposes. The range of events is endless, from bowl-a-thons to skip-a-thons, and of no inherent value to anyone. Would it not be far more beneficial if the events were more creditable in nature? For example, arranging a rubbish-a-thon whereby individuals are sponsored by the hour for clearing a riverbank of rubbish. Surely the end result would be increased sponsorship being raised; a cleaner environment; and an increased sense of achievement.
Jenny

Dear Jenny,

The risk is that your proposal would choke off the supply of willing volunteers. You seem sanguine: volunteers would, you surmise, enjoy a sense of achievement. I am not so sure. Charity is a wonderful thing, but let us not blind ourselves to the fact that a lot of volunteering is about showing off.

The economists Jeffrey Carpenter and Caitlin Knowles Myers studied the behaviour of volunteer firefighters who were offered modest financial incentives. Many were motivated by these incentives, but some were not.

Curiously, the ones who were not motivated by money were also the ones who had bought special vanity plates indicating that they were community volunteers. It seems that these volunteers were motivated by a desire to look good, and did not want the idea of a cash incentive to sully their reputation.

I speculate that your approach might make “a-thons” less showy and therefore less useful for signalling altruism. If your idea is really so good, why has it not already caught on?

First published at ft.com.

Dear Economist
British rock band Radiohead have come up with a radical price model for their new album In Rainbows: it is available for digital download and customers decide the price themselves. Could you elaborate on the economic principles at play? I chose to pay £5 out of love for original and creative content, but I admit that my behaviour is absurd from any rational choice model.
Stig, Copenhagen

Dear Stig,

This is just an electronic tip jar, and people’s payments are governed by a desire to feel generous – or at least, to avoid looking stingy. That desire is enough to persuade almost everyone to tip at a restaurant, but what about online? Less so, it seems.

According to one internet consulting firm, almost two-thirds of those who downloaded the album paid nothing, and those who did pay didn’t pay much – less than £3 on average. That makes sense: much easier to leave no tip when you don’t have to look the waitress in the eye, and Radiohead make more than your waitress anyway.

If the figures are accurate, the band seems to have made £500,000 or less from downloads in just three weeks; their traditionally priced CDs probably made the band 10 times more, at least. But it is too early to say whether this scheme was profit-maximising, especially since Radiohead have criticised these estimates.

There is more to this than direct revenue, of course. The stunt also brought free press for a band widely thought to be past its prime. That trick will not work again, and future electronic tip jars seem likely to be emptier.

I can’t say whether your payment was rational. I strongly suspect that this business model, in the long term, is not.

First published at ft.com.

Dear Economist,
My wife and I have separated. Naturally our relationship is not great, but it’s OK. Now divorce proceedings have started and we will be dividing up our assets. Should I hire a lawyer? I am not convinced that it is worth the expense.
Seth, via e-mail

Dear Seth,

You have obviously grasped that this is a zero-sum game with two to four players. The assets will be divided between you, your soon-to-be-ex wife, and any lawyers the two of you bring on board.

I can sympathise with your suspicion that the lawyer is money down the drain.

It is worth considering the scant evidence available.

The Austrian economist Martin Halla has collected data from divorce proceedings in his home country, and he finds a curious pattern. Husbands end up paying the smallest alimony when no lawyers are involved. If the husband hires a lawyer, but his wife does not, the alimony payment rises (and then there are fees to be paid, too). If the wife hires a lawyer, or the couple hires a joint lawyer, the husband forks out still more. Worst case scenario for hubby is if both sides hire their own lawyer. On top of that the proceedings are longer and more expensive.

Interpret that result with caution, because it is not clear whether the lawyers cause poor settlements for husbands, or whether husbands hire lawyers when things look grim. Still, the pattern that Halla discovered does bolster your scepticism.

In the absence of better information, then, Halla’s research suggests that you have a dominant strategy, meaning one that is best no matter what your wife does. That strategy is not to hire a lawyer. And for goodness sake, don’t let your wife see any research from Martin Halla.

First published at ft.com.