Tim Harford The Undercover Economist

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Why Thaler’s Nobel is a well-deserved nudge for behavioural economics

Richard Thaler has won the Nobel memorial prize in economics, an award that had been anticipated for some time. Mr Thaler is a behavioural economist, one of the group of economists who applies insights from psychology, or perhaps plain common sense, into the idealised world of economic modelling.

One trivial behavioural insight that Mr Thaler is fond of mentioning concerns a large bowl of cashew nuts he once served to dinner guests over drinks. Observing his guests hoovering up the contents of the bowl, he removed it to the kitchen so as not to spoil everyone’s appetite. The guests could in principle have stopped of their own accord; nevertheless they were pleased to see temptation removed.

Early in his career, he started making a list of “Dumb Stuff People Do” on the blackboard in his office. The cashew nut example was on the list, and it is a classic piece of Thaler thinking: obvious, trivial, fun and yet completely beyond the scope of traditional economics to model. Mr Thaler’s insight is that such trivia might lead to important analytical and policy insights.

Thomas Schelling, Nobel laureate in 2005, was also a master of these deceptively simple observations of human nature. And Daniel Kahneman — a psychologist, mentor for Mr Thaler, and winner of the prize in 2002 — had with Amos Tversky laid the foundations for behavioural economics.

Mr Thaler advanced the field in two important ways. He campaigned for behavioural economics to be taken seriously within the economics profession. He also brought it into the policy environment with his book Nudge (co-authored with Cass Sunstein) and his support for behavioural policy units in the White House and 10 Downing Street.

Within the profession, Mr Thaler found a pulpit in the Journal of Economic Perspectives, an academic journal supplied to all members of the American Economic Association. His Anomalies column was witty and sharply reasoned, highlighting strange features of the economic and financial world that standard economic theory could not explain, and rigorously debunking unconvincing attempts at rationalisation.

His evangelism for behavioural economics has been successful, at least in microeconomics: it is commonplace to see economic models incorporate psychological realism, and Mr Thaler himself was president of the American Economic Association in 2015.

In the policy world, Mr Thaler’s most famous idea was to use behavioural insights in pensions policy — for example, by enrolling people in a pension scheme by default, while giving them the choice to opt out. The stakes here are much higher than with cashew nuts: default enrolment has, according to the UK pensions regulator, increased participation in private-sector pension schemes from 42 per cent to 73 per cent between 2012 and 2016.

Rational economic man does not care — or even notice — whether a pension is opt-in or opt-out. He simply calculates (instantly) whether it pays to participate and chooses accordingly. Mr Thaler’s insight is not only that people are not perfectly rational (that much is obvious, even to the most traditional of economists) but that apparently small departures from rationality can have outsized impacts.

Mr Thaler’s catch-all advice: whether you’re a business or a government, if you want people to do something, make it easy. This year’s choice of Nobel Prize winner is an easy one to like.

Written for and first published in the Financial Times on 9 October 2017.

My new book is “Fifty Inventions That Shaped The Modern Economy”. Grab yourself a copy in the US or in the UK (slightly different title) or through your local bookshop.

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Behavioural economics books to enjoy

Congratulations to Richard Thaler, who has been awarded the Nobel memorial prize in economics “for his contributions to behavioural economics”. Thaler is a worthy winner. In addition to his academic contributions, alongside the likes of Daniel Kahneman and Robert Shiller, he has been the leading evangelist in the profession for behavioural realism in economics.

Thaler’s influence on policymakers has been unparalleled, in part thanks to his book Nudge (UK) (US) with Cass Sunstein. I wrote a quick appreciation of Thaler for the FT (subscription req.) and this much longer piece a couple of years ago asking what lay in store for behavioural economics.

Here are a few of my favourite behavioural economics books:

Daniel Kahneman Thinking Fast and Slow (UK) (US) – now the bible of behavioural economics, full of fascinating experiments and examples.

Michael Lewis The Undoing Project (UK) (US) – a touching biography of Kahneman and Tversky. Skip the first chapter, but the rest is beautiful storytelling and insightful.

Cass Sunstein and Reid Hastie Wiser (UK) (US) – the best book I know about group decision-making and how to overcoming polarisation and groupthink.

For inside stories of behavioural economics try Thaler’s Misbehaving (UK) (US) and David Halpern’s Inside the Nudge Unit (UK) (US).

And for behavioural science to brighten your day, there’s Think Small (UK) (US) by Halpern’s colleagues Owain Service and Rory Gallagher, or How To Have A Good Day (UK) (US) by Caroline Webb.

Enjoy! And if you’d like a reminder that the old rational choice school of thought has some intriguing insights to contribute, may I (ahem) recommend my second book The Logic of Life (UK) (US).

 
My new book is “Fifty Inventions That Shaped The Modern Economy”. Grab yourself a copy in the US or in the UK (slightly different title) or through your local bookshop.

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9th of October, 2017MarginaliaResourcesComments off
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Messy – paperback publication day US

messy-us-cover

The paperback of Messy is out in the US! You can order from Amazon here or find out more about the book and other places to buy here – or if you have a good local bookshop then please support it by picking up the book there.

I had a lot of fun – and no small amount of heartache – writing the book. Tyler Cowen says it is my “best and deepest”; Brian Eno comments, “It’s a very very good book, full of wise counterintuitions and clever insights”; while The Economist comments that it “masterfully weaves together anecdote and academic work.”

To get a flavour of what the book is all about, there’s my TED talk here – or you can check out my Messy inspired reading list, too.

4th of October, 2017MarginaliaComments off
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Books about how to see into the future

(One prediction I’m willing to make is that the US paperback edition of Messy is out on Wednesday. Buy buy buy! More about the book here.)

 

Walter Friedman has a fascinating history of economic forecasting in the early 20th century: Fortune Tellers (UK) (US). Well researched, full of interesting detail, and some of these guys (Irving Fisher, Roger Babson) were remarkable characters. For an insight into Fisher’s rival as an economist and investor, John Wasik’s Keynes’s Way To Wealth (UK) (US) is a fun light read.

Paul Goodwin’s Forewarned (UK) (US) is a broad survey of different forecasting approaches. I learned a few interesting things – but also felt Goodwin never quite reached a conclusion.

Philip Tetlock, with Dan Gardner wrote Superforecasting (UK) (US). Tetlock is one of the most interesting social scientists alive, and this research project into who does and does not make good forecasts is fascinating. (You might also look up Tetlock’s brilliant earlier, nerdier Expert Political Judgement and Gardner’s earlier polemic Future Babble, books which led to this collaboration.)

People who are interested in an alternative approach, scenario planning, might check out this offering from two of my former colleagues in Shell’s scenario planning team, Rafael Ramirez and Angela Wilkinson: Strategic Reframing (UK) (US). I haven’t yet read the book but I have no doubt about the qualifications of its authors, and the scenario method is a clever approach to an almost impossible future-gazing task.

Finally, this BBC Radio program about economic forecasting is good fun.

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28th of September, 2017MarginaliaResourcesComments off
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Hunting for the 51st thing – suggestions for further reading or listening

Loyal listeners and readers will know that Fifty Things That Made the Modern Economy  is turning into Fifty-One Things, at least in radio form. We have a short-list of six candidates to be made into a special final episode. Please vote here before noon GMT on Friday 6 October 2017.

But the loyal-of-loyal listeners might want some suggestions for further reading and/or listening.

If you’d like to know more about an early episode in the history of credit cards, try 99% Invisible’s episode The Fresno Drop.

Steven Johnson’s excellent technological history How We Got To Now (US) (UK) focuses on just six key inventions rather than fifty – and glass is one of them.

GPS, meanwhile, gets a book all of its own: Greg Milner’s PinPoint (US) (UK).

To understand the role of irrigation in China, try Philip Ball’s The Water Kingdom (US) (UK) – or if you want a quick hit on irrigation in Bali, there’s this.

For the pencil, there’s only one place to go: Leonard Read’s classic, I, Pencil.

And spreadsheet enthusiasts can enjoy Planet Money’s special episode, imaginatively titled Spreadsheets! 

And if you’d like to pick up a copy of  my own book, it has received some lovely reviews. It’s out now in the UK and in the US (with the title Fifty Inventions That Shaped the Modern Economy).  Do feel free to order copies for all your friends…

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25th of September, 2017MarginaliaComments off
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Ideas about the past, present and future of the economy

Books

Book of the week is James C Scott’s Against The Grain (UK) (US) – an examination of the origins of civilisation. Scott – best known for the magnificent Seeing Like A State (US) (UK) – is on fascinating form. There’s a fine long review by John Lanchester in the New Yorker.

I’ve been enjoying Ed Thorp’s A Man For All Markets (UK) (US).  Thorp is a quite brilliant thinker about both gambling and investment – he also built a wearable computer with Claude Shannon to predict the fall of the ball on a roulette table. So far this is a fascinating autobiography. Thought-provoking foreword by Nassim Taleb, too, who emphasises the simple practicality of Thorp’s approach.

Then there’s Paul Goodwin’s Forewarned (UK) (US) – which at first glance seems to be a great survey of what works and what doesn’t in the forecasting game. (It’s next on my list to read.)

 

Bro-casts

I’m going to admit to listening to The Art of Manliness and The Tim Ferriss Show, at least on occasion, because there are occasional gems. Check out this fascinating interview about the professor who taught Homer’s Odyssey to a class including his on octogenarian father – and what both the text and the class taught him about the relationship between fathers and sons. And here’s Mr Money Moustache on Ferriss’s podcast.

And not-at-all Bro-ish, but I loved this recent episode of The Why Factor about why we ask “so what do you do?” of strangers – and whether we can do better than that question. Wonderful radio.

 

The Search For the Fifty First Thing

If you’ve been enjoying the book / series of Fifty Things That Made the Modern Economy you can vote for one more special episode here (until noon GMT 6 October 2017) – the shortlist of six is worth a look!

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18th of September, 2017MarginaliaComments off
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Your chance to vote for the 51st thing that made the modern economy

It’s been such fun working on the radio series and book Fifty Things That Made the Modern Economy – but one of the frustrations was all the fascinating ideas, inventions and stories that I couldn’t squeeze into the book. Well, now there are six more on the table – and I’d love you to vote as to which of them will be the subject of one final episode.

The options are: credit cards, glass, the global positioning system, irrigation, the pencil, and spreadsheets. I chose this short-list of six from hundreds of suggestions that came in from BBC listeners.

So – please vote here before noon GMT on Friday 6 October. Or you could hold your fire until next weekend (23 September) at which point we’ll have a special podcast covering the six shortlisted ideas.

And if you’d like to pick up a copy of the book, it has received some lovely reviews. It’s out now in the UK and in the US (with the title Fifty Inventions That Shaped the Modern Economy).  Do feel free to order copies for all your friends…

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16th of September, 2017MarginaliaComments off
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Undercover Monday – ideas about decision-making

A few interesting books have crossed my desk recently.

Garry Kasparov’s Deep Thinking (UK) (US) promises to reflect on “Where Machine Intelligence Ends and Human Creativity Begins”, although on that particular point it is not especially profound. Nevertheless Kasparov does say a lot that is interesting about innovation and risk-taking (like me he’s concerned that we’re favouring the marginal gain over riskier basic research) and there’s a terrific history of AI in chess. The heart of the book is an account of Kasparov’s battles with Deep Blue, and reads like a thriller. Great stuff.

Tali Sharot’s brand new The Influential Mind (UK) (US) discusses the social, emotional and rational cues that persuade us or deter us from taking action. It’s a familiar formula of anecdote, argument and research, but some of the research is new to me and it’s well-written and combined to good effect. Recommended.

Depressingly relevant at the moment is The Ostrich Paradox (UK) (US) by Meyer and Kunreuther; in a brief, expert book the author apply the cognitive biases literature (familiar from Kahneman and others) to disaster preparedness and crisis management. Very much focused on hurricanes and tsunamis but there’s much of relevance to other catastrophes (banking crises, industrial accidents) too.

 

And some great podcasts for your delectation. Tyler Cowen’s Conversations With Tyler is fascinating – he asks unusual and often revealing questions. The conversation with Kasparov was particularly good. Russ Roberts’s EconTalk is an old stalwart (I’ve been on twice with another appearance scheduled) but it’s often excellent. Two recent episodes – with John McWhorter on language and Benedict Evans on self-driving electric cars – were superb, perhaps because only tangentially related to economics.

 

Meanwhile the US edition of Fifty Inventions That Shaped The Modern Economy is out as of six days ago. Buy, buy! A few more days available to suggest what the 51st invention should be (details here) or pick up the UK edition here.

 

 

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4th of September, 2017MarginaliaComments off
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Publication Day!

50things-hb-us-205x300

Loyal readers will be aware that the UK edition of Fifty Inventions That Shaped The Modern Economy is already out (under a subtly different name) but I’m delighted to announce publication of the US edition today. Enjoy! The Wall Street Journal says that the book is “great fun” and while Kirkus says it’s “hard to resist”, and who am I to argue?

Thank you to everyone who’s pre-ordered a copy or reviewed it somewhere on the internet. It’s a great day to order another copy or three for all your friends via Amazon, your local bookshop – or wherever you get your books. More details here.

I loved writing this book and I hope you love reading it.

29th of August, 2017MarginaliaComments off
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What underrated idea or invention most shaped the modern economy?

It’s been such fun working on the radio series and book Fifty Things That Made the Modern Economy – but one of the frustrations was all the fascinating ideas, inventions and stories that I couldn’t squeeze into the book.

I get another bite of the cherry now: the BBC is inviting suggestions for a special episode: one more thing that shaped the economic forces that surround us and changed the way we live, spend or work. Full details here, but the gist is: please send your suggestions to email hidden; JavaScript is required (or the BBC World Service Twitter or Facebook accounts) by noon GMT on Friday 8 September. (Please don’t tweet at me directly – I will almost certainly miss your suggestion, which would be a shame.)

Please search your brains for the surprising and the overlooked. The original list of 50 didn’t include the motor car or the computer, so of course we could do that – but I suspect there’s a more intriguing story to tell.

There are more details about the book here – it’s out now in the UK and next week in the US (with the title Fifty Inventions That Shaped the Modern Economy).  Do feel free to order copies for all your friends…

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21st of August, 2017MarginaliaRadioComments off
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