Other Writing

First published in Business Life magazine, February 2008

I recently saw a blast from the past: an independent coffee shop trying to charge an extra ten pence for a Fair Trade cappuccino. Fair Trade coffee is bought from certified coffee growers; they receive a premium, and a guaranteed minimum price. And so it might seem reasonable for a coffee shop to ask its customers to pay more for a Fair Trade cappuccino.
It isn’t, because there is very little coffee in a cappuccino – about seven grams of beans, or a quarter of an ounce. The Fair Trade premium, so important to a struggling grower in Kenya or Ecuador, is typically less than a penny when applied to such a small quantity of coffee. When a coffee shop charges ten pence extra for a Fair Trade cappuccino, the grower gets his due, but most of the mark-up is profit for the shop.
That sounds cynical, if unsurprising. But an alternative way of describing the same situation makes it seem much odder: the coffee shop is willing to slash prices and take a big hit to margins if you don’t buy fair trade coffee. Profiteering is one thing, actively working against fair trade is another. Why does it happen?
The coffee shop – like many businesses – faces a dilemma. Raise prices and it loses some customers; cut prices and it loses margins. Sometimes, however, it is possible simultaneously to raise prices to price-insensitive customers while cutting prices to the customers who are hungry for a bargain. Grown-up economists call this “price discrimination” – I call it “price targeting”.
Outside the bazaar or the used car forecourt, customers rarely accept the idea of haggling for a special price. So businesses work out their own methods of price targeting. The discount for students and pensioners? You might just as well call it a surcharge for people with a job. Kids eat for free in this family-friendly restaurant? Childless couples have cash to burn and can be offered a bit less for their money.
And in the coffee shop, fair trade coffee is a terrific marker for price-sensitivity. Anyone willing to pay ten pence extra for fair trade coffee is demonstrating that she doesn’t mind paying a bit extra.
The first rule of price targeting, though, is that it should never aggravate the customers. Economists started to point out what was happening, customers got cross, and the big chains now tend to offer fair-trade coffee without any mark-up.
That makes sense: they have plenty of other ways to identify price-insensitive customers, which is something to think about next time you pay thirty pence for a couple of marshmallows on the side.

First published in Business Life Magazine, November 2007

I remember Saturday evenings when I was a boy, curled up in a towel after bath time to watch game shows such as “The Price is Right”. Little did I know it, but those Saturday evenings were preparing me for life as an economist.
Economists have theories about how people behave, but those theories are hard to test in the muddle of the real world. And laboratory experiments may be no better, because the stakes are too trivial to see how people act under pressure.
That is where the game shows come in. Like real life, game shows are often played for high stakes. But like the laboratory, the rules are simple and the experiment is repeated over and over again.
In one early piece of game show research, economists Jonathan Berk, Eric Hughson and Kirk Vandezande showed that contestants in “The Price is Right” made transparent mistakes but learned from them.
Four contestants would in turn name a price for some household object such as a toaster. The contestant who got closest to, but not over, the correct retail price would win. The other contestants would get another chance.
If you’re smarter than the average contestant you’ll see that the fourth person to bid has an advantage. Since you want to be closest, but not too high, the best strategy is to guess just one pound higher than one of the other contestants (or zero, if you think they’re all too high). Not many contestants did this, but once somebody figured it out, the others were more likely to use the tactic in later rounds.
The economics of quiz shows hit the big time with Steven Levitt, now famous as the co-author of Freakonomics. Levitt tried to understand what was behind discrimination in the job market: did people simply dislike ethnic minorities or the elderly? Or did they believe them to be less competent?
For the answer, he looked to “The Weakest Link”, in which contestants vote for other contestants to be excluded. The best approach is to vote off weak players early on, because they’re costing everyone money – but later, to vote off strong players, because they are the most dangerous competition.
Levitt showed that elderly players tended to be voted off at any stage, suggesting a pure dislike for them. Hispanic players were likely to be voted off early but kept on later in the game, implying that other contestants thought they weren’t very smart.
The game show boom in economics is still going. I’m aware of eight economists who’ve studied “Deal or No Deal”. If only I’d been thinking like an economist when I was younger, I could have beaten them all to it.

The choice isn’t yours

Review by Tim Harford

Predictably Irrational: The Hidden Forces that Shape Our Decisions
By Dan Ariely
HarperCollins £14.99, 304 pages
FT bookshop price: £11.99

Not long ago three professors, Daniel Ariely, Elie Ofek and Marco Bertini, set up a stall to hand out free cups of coffee at the Massachusetts Institute of Technology (MIT). In exchange, they asked patrons to tell them whether they liked the roast.

Ariely and his colleagues set up a table of condiments – milk and sugar, but also obscure offerings such as cloves and orange peel. Nobody ever sampled the unusual options, but they turned out to matter a great deal. Some days, the cloves and orange peel were presented in glass containers on a brushed-metal tray, on other days they were dumped in Styrofoam cups with hand-scrawled labels. The presentation of the “condiments-not-taken” turned out to make a big difference as to how MIT students thought the coffee tasted.

This is a typical anecdote from Ariely’s book, Predictably Irrational: inventive, lovingly described, verging on the trivial, and yet something I immediately wanted not only to tell people about but to try myself. In future, I vowed, I would be sure to present wine in a carafe, and dinner on fancy plates.

Ariely’s book is an accessible account of his own research programme, drawing occasionally on the insights of others. His aim is to show that our choices – usually, but not always, in commercial settings – are irrational but predictable. He does this by conducting psychological experiments, sometimes carried out in the laboratory, often in more real settings.

The book has a lot to recommend it. Ariely is a more than capable storyteller, and he sticks close to his own research so his writing is full of colour and detail. He also has a knack for conveying the rigour of the experiments without brandishing too many technicalities. And although he is pursuing a consistent theme throughout, there is a fresh insight in every chapter.

I could scarcely imagine a better introduction to “behavioural economics”, a discipline of growing influence that sits on the boundary between economics and psychology. But opinions differ among economists as to whether behavioural economics seriously challenges the long-held basic assumption of economics that we make rational choices, or whether it merely illuminates some fascinating but relatively minor human foibles.

Ariely’s research shows that our perceptions of a good deal can be hugely influenced by marketing tricks; that sexual arousal changes the way we make decisions, and that we are not good at anticipating this; that we can be confused by the fear of losing options; that the placebo effect is partially dependent on our perception of price. There is much else of interest. And there is plenty there for the economic traditionalists – I am one of them – to chew on.

Yet a question remains over how much we can generalise from these experiments. I have long been persuaded that the evidence shows we are fundamentally rational creatures when it comes to most of the decisions that really matter. Predictably Irrational did not change my mind about that, partly because it tended to steer clear of the bigger questions.

That may have been wise. When Ariely attempts to generalise from his experiments, his conclusions are far less satisfactory than the clever experiments themselves. One example is his work on sexual arousal: having painted a memorable picture of undergraduates answering survey questions while masturbating over a laptop encased in cling-film, he recommends first that teenagers should carry condoms, and second that they should steer clear of situations where they may become aroused. Wise advice, perhaps, but something of a stretch from the experiment itself.

Another example is his work on how choices confuse us. Again, this is based on a laptop experiment. Ariely explains that when his subjects were paid pennies to click on computer icons, they clicked – irrationally – on unprofitable icons, because doing so kept (useless) options open. That suggests a broader message, but when Ariely draws conclusions about how we should choose careers, or boyfriends, he is putting more weight on his own experiment than it can bear.

Fortunately, Ariely does not spill too much ink on heroic conclusions, preferring to describe with charm his relentlessly creative experiments. For anyone interested in marketing – either as practitioner or victim – this is unmissable reading. Other readers will be engaged and looking forward to a sequel. If only more researchers could write like this, the world would be a better place.

Also published at ft.com.

First published in Business Life Magazine, October 2007.

“I don’t care too much for money, money can’t buy me love.” A great tune, but don’t believe everything you’re told by The Beatles. Money can buy you love, and it can buy you happiness as well.
The economist Lena Edlund (whose own greatest hits include an economic “Theory of Prostitution”) finds that wherever the men are rich, the women are plentiful. Women outnumber men in the cities of almost every developed country, which is why the girls from “Sex and the City” were always grumbling that all the good men are taken. In Edlund’s home country, Sweden, the towns with the highest average male income are the towns with the largest proportion of women aged 25-34. Still think that money doesn’t buy love?
More direct evidence comes from internet dating, where economists have shown that men who claim a high income get more “clicks” than their poorer – or more honest – rivals.
These findings probably won’t surprise the cynics, but economists have also been investigating the link between money and happiness. The conventional wisdom is that money doesn’t buy happiness. The truth is a little more subtle.
It is true that the citizens of countries like the US, the UK and Denmark claim to be no happier than their parents did in 1980 or their grandparents in 1950, despite being much richer. But in every country, in any given year, richer people also claim to be happier. Money isn’t everything, though: divorce, unemployment or ill-health are far more depressing than mere poverty.
“Happiness economics” is a booming field at the moment, but even its proponents would concede that findings are at an early stage. One promising approach is led by Daniel Kahneman, a psychologist who shared the Nobel prize in economics in 2002, and the economist Alan Krueger, both at Princeton University. Rather than just asking people how they feel about life in general – the survey approach which has produced most of the happiness data reported in the press – they ask a smaller group of subjects to think about specific episodes during the previous day, and how they felt.
This approach has yielded some surprises: praying is enjoyable, spending time with your children is not. It is no surprise to discover that having sex is lots of fun.And if Lena Edlund is right, that sort of fun isn’t cheap.

I have a piece up at Forbes in part inspired by chapter 8 of “The Logic of Life”. It asks why governments are so determined to back losers rather than winners in industrial policy:

There’s a more sinister logic behind the pattern of government favoritism. Namely, firms in emerging, competitive industries have virtually no incentive to lobby for government hand-outs, while firms in aging, shrinking industries have the most to gain.

Read the rest of this entry »

First published in Business Life magazine, September 2007

It’s been a long time since the heady days of the late 1990s, when email was enough of a novelty to carry the plot of a romantic comedy. How times have changed: email is now an essential business tool. It is also the source of frustration and controversy. Does email actually make us more productive?
It’s not obvious that it does. First, there is the avalanche of emails offering penis enlargements, stock tips and the odd million dollars from Nigeria. Then – and probably more of a waste of time – there are the interminable work discussions into which you’ve somehow been copied. They’re useless and yet you feel you can’t afford to ignore them. Finally there are the clumsy, slowly-typed miscommunications that could have been handled quickly and more smoothly face-to-face. It is all worth it?
Marshall Van Alstyne, an economist at Boston University, thinks he may have an answer. Van Alstyne and various colleagues have been conducting research based on extremely detailed data from an executive recruitment firm – including 125,000 email messages sent and received over a period of ten months. Rather than looking at simple correlations, such as “does more email mean more work gets done?”, the researchers are looking at the pattern of email networks and the completion of specific tasks.
The first surprise is that an email exchange is often more productive than a conversation, because email helps people to juggle many different tasks. That seems to be because a conversation demands that two people are focussing on the same thing at the same time. Sure, you can do your nails while talking on the phone, but beyond that you need to drop what you’re doing and surrender to someone else’s priorities. Email doesn’t make that demand: the recipient can read it when the time is right.
The second surprise is that email’s real value doesn’t seem to be in communicating with Tokyo or even with someone on the other side of London. The most productive workers are not the ones who send the most email or whose external networks are the largest: they are the ones with the largest email network inside the same firm.
It’s ironic: we are always complaining that our colleagues send us an email rather than walking ten yards and talking to us. Yet it turns out that this apparently-frustrating behaviour is precisely the most productive way to use email. Sometimes common sense and economic sense don’t point the same way.

First published in Waterstones Book Quarterly

Life often seems to defy logic. When a prostitute agrees to unprotected sex, or a teenage criminal embarks on a burglary, or a heavy drinker downs another whiskey, we seem to be a million miles from rational behaviour. None of it makes any sense – or does it?
Using some remarkably clever techniques and imaginative perspectives, a bold new breed of economists is busily demonstrating that life makes more sense than anyone would have thought. Using every clue that comes to hand, from a laboratory brain scan to the hidden patterns in old maps, they are discovering that there is a surprisingly rational basis to the seemingly irrational world around us. Read the rest of this entry »

Feature story, FT Magazine, 26 January 2008

In 1737, John Harrison, a self-taught clockmaker from Yorkshire, stunned London’s scientific establishment by presenting an idiosyncratic solution to the most important and notorious technological problem of the 18th century. He was hoping to win a then-fabulous prize of £20,000 (about £5m today) for anyone who could devise a way for a ship’s navigator to determine its longitude and therefore its position at sea. Harrison’s approach was to build a clock that would keep Greenwich time faithfully; by comparing local time (measured using the position of the sun) with the time in London, the navigator would know how far east or west the ship had sailed. The theory was sound, but given the rolling of ships and changing temperature and humidity, the leading scientists of the day – including Sir Isaac Newton – reckoned that a sufficiently accurate clock would be impossible to build. Harrison proved otherwise.

The longitude prize, sponsored by the British government, was not unique. Prizes were also offered in France for a functional water turbine, and for a method of preserving food for Napoleon’s armies. The latter prize quickly inspired the tin can, more of a blessing than food snobs might acknowledge.

But such prizes then fell out of fashion. For commercial innovations, we now rely on patents to encourage and protect innovators. Basic research is funded not by prizes but by grants.

And yet two centuries after tinned fish hit the market, the way we look for solutions has come full circle. Governments, private foundations and even corporations are rediscovering the value of offering prizes for good ideas. Rather than paying for scientific and engineering effort as they have done for the past 200 years, idea-hungry patrons are returning to the 18th century, and paying for results. Read the rest of this entry »

The Times (London) has published two nice extracts from the Logic of Life, plus me reading from the book. Read the rest of this entry »

As a columnist (which is fancy for “journalist in jammies”), I ought to personify the conventional wisdom that distance is dead: All I need to get my work done is a place to perch and a Wi-Fi signal. But if that’s true, why do I still live in London, the second-most expensive city in the world? Read the rest of this entry »