Tim Harford The Undercover Economist

Undercover EconomistUndercover Economist

My weekly column in the Financial Times on Saturdays, explaining the economic ideas around us every day. This column was inspired by my book and began in 2005.

Undercover Economist

The best way to solve problems is to wait for a century or two

In 1928, an anonymous donor resolved to clear the UK’s national debt and gave £500,000 with that end in mind. It was a tidy sum — almost £30m at today’s prices — but not nearly enough to pay off the debt. So it sat in trust, accumulating interest, for nearly a century.

The trust now contains £400m, and we have decided we are no longer willing to wait. The British government has gone to court to get the money now, a move that eloquently captures the payday-loan mood it is displaying in its Brexit negotiations. No gain is too small, no price too great, as long as the bill comes later.

What might we achieve if only we were willing to play the truly long game?

That anonymous trust fund suggests an instructive thought experiment. Let us assume that it grows 3 per cent a year faster than the UK economy — not inconsistent with what Thomas Piketty has measured in the long run. At that rate, the trust fund will double as a proportion of gross domestic product every 25 years. In just three centuries, it will have grown 4,000-fold relative to the economy as a whole.

As long as the debt stays roughly in proportion to national income — not an outrageous assumption — then the trust fund would be sufficient to pay off the debt a mere four centuries after the original bequest.

Perhaps that is too optimistic. No matter. If four centuries are not enough, why not five? It is surprising how many problems will simply solve themselves if we wait long enough.

This analysis is glib, I admit. Over such a long time horizon there is always a risk that bad luck strikes and the trust fund is wiped out entirely. If the fund falls to zero at any point, all the compound interest in the world is useless after that.

A wise investor may be able to avoid such an outcome: in 1956, John L Kelly, a mathematician at Bell Labs, derived a formula we now know as the Kelly criterion. It was designed to allow an investor or gambler with a known edge to maximise her compound rate of return, while avoiding the risk of bankruptcy.

Yet even Kelly’s criterion only works if the risks are correctly understood. Kelly himself survived a plane crash as a Navy pilot, only to die of a brain haemorrhage at the age of 41. The world is full of risks. Can anyone guarantee that over the next 300 years both the UK trust fund and country will survive asteroid strikes, thermonuclear war or a deliberately engineered pandemic?

Perhaps we are getting ahead of ourselves. The imminent threat to the trust fund is the British government itself, which has decided that a tiny advantage is worth seizing now, since the costs will fall to someone else. (You may supply your own analogy at this point.) All democratically elected governments struggle to see past the next election, but this one struggles to see past next Tuesday. In fairness, it often feels as if the next election may come sooner than that.

And it is hard to take a truly long-term perspective, whether contemplating the future of human life or the prospect of cheesecake. The Astronomer Royal Sir Martin Rees wrote a book titled Our Final Century, warning of the existential threats arising from complex, interconnected modern systems. The book was renamed Our Final Hour in the US, perhaps because a century seemed like too much time to kill.

Economists and moral philosophers argue among themselves over how to account for the interests of future generations. The answer is far from obvious. It turns out to be crucial in pondering a rational response to slow-burning disasters such as climate change — assuming that anyone cares about a rational response, which seems a forlorn hope.

The Chinese are sometimes admired as fabulously long-term thinkers, although sometimes I wonder whether that is merely the mythologising of westerners. (Zhou Enlai impressed many in 1972 when as Chinese premier he said that it was “too early to tell” about the consequences of the French Revolution. He was under the impression that the question was about the student uprising in Paris in 1968.)

No, those who genuinely show patience are rare. There is Warren Buffett, of course — his favourite holding period, “forever”, has served him well. And the Long Now Foundation, based in San Francisco and founded in the year “01996”, which supports ideas such as a modern Rosetta stone designed to preserve languages through time and ­catastrophe.

I am pleased that a few souls are willing to take the long view. Perhaps the champion is Anders Sandberg, a researcher at Oxford university’s Future of Humanity Institute. Dr Sandberg points out that since computation requires far less energy at ultra-cold temperatures, an advanced civilisation could get much more done with the resources available if it first waited a few trillion years for the entire universe to approach absolute zero.

This resolves the famous Fermi paradox: since the universe is so big, why haven’t aliens appeared from somewhere? The answer: they’re quietly having a trillion-year siesta, waiting for the cool of the twilight of the cosmos.

Written for and first published in the Financial Times on 25 May 2018.

My book “Messy: How To Be Creative and Resilient in a Tidy-Minded World” is now available in paperback both in the US and the UK – or through your local bookshop.

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Bread, Brexit, and the power of the third option

Written for and first published in the Financial Times on 18 May 2018.

Imagine that you sell bread-making machines. Your task is complicated by the fact that most people have only a hazy grasp of what a bread-making machine does, let alone the joys and sorrows of owning one.

Nevertheless, there is a simple trick that will help these machines to fly off your shelves: next to what seems to be a perfectly adequate $150 bread-maker, place a $250 bread-maker with a long list of bewildering extra functions. Customers will think to themselves: “I don’t need all that nonsense. The cheaper, simpler bread maker is the better option.” Some of them will buy it, even though they would not have otherwise.

Itamar Simonson, a marketing professor at Stanford University, attests that the kitchenware company Williams-Sonoma doubled their sales of bread-makers in the early 1990s using this sort of technique. Mr Simonson, along with Amos Tversky, one of the fathers of behavioural economics, demonstrated similar preference reversals in a laboratory setting.

Mr Simonson and Tversky showed that when people are wavering between two options, you can change what they choose by offering a third, unattractive option. A $1,000 camera might seem extravagant unless there’s a $5,000 camera sitting next to it. The grande sized cup at Starbucks seems restrained when put next to the venti, a Brobdingnagian vat of flavoured warm milk.

All this brings us to Brexit. What we voters feel about different flavours of Brexit (hard, soft, train-crash) depends in part on facts, in part on propaganda, and in part on our prejudices. But it also depends on the comparisons that come readily to mind.

That means that the re-appearance of the European Economic Area is an intriguing development in the debate. The House of Lords recently voted to keep the UK in the EEA, and therefore the single market, after leaving the EU. This “Norway option” seems a popular enough plan: a BMG opinion poll in January found 52 per cent of people in favour of staying in the single market, and only 14 per cent of people against. In these polarised times that is as decisive a margin as one might expect for anything. Nevertheless, both prime minister Theresa May and the leader of the opposition, Jeremy Corbyn, have rejected the single market option, making it unlikely.

This might seem illogical. Why not go for a popular compromise that respects both the close vote and the fact that the Leave campaign won the referendum? But, remembering the tale of the bread-maker, it makes perfect sense that Mr Corbyn and Mrs May, both Euro-sceptics, should fear the Norway option being placed in front of voters.

To most voters, the EU is like a bread-maker: we don’t really understand what it does and we don’t know what to think about it. The Norway option clarifies matters in a way that does not help Leavers. It is very much like being in the EU, except just a little bit worse. If it becomes a salient possibility, it makes staying in the EU look rather attractive by comparison.

A hard Brexit will probably go quite badly for the UK, but it does have the merit of being a very different path to remaining in the EU. A Norway-option Brexit might well work out smoothly, but it is almost guaranteed to underperform the option of not leaving at all. No wonder Brexiters — so cavalier about having their cake and eating it before the vote — are now determined to ensure that the Norway option is taboo. They realise that if the British public decides that staying in the single market is a plausible plan, they might eventually reach the conclusion that staying in the EU itself would be even wiser.

This sort of preference reversal can occur in other circumstances, too. A hard Brexit offers temptations to many voters: control over immigration; an independent trade policy; no more membership fees to Brussels. It also offers obvious risks: leaving the largest single market in the world; damage to the political settlement in Northern Ireland; setbacks to scientific and diplomatic collaboration. Staying in the EU merely offers business as usual.

Do we tend to find a mix of stark risks and clear rewards appealing? That depends on whether the costs or the opportunities seem more salient. During the referendum campaign, the opportunities opened by Leavers seemed expansive, while the costs (“lower GDP by 2030!”) were vague and dull. During the negotiation process, it is the opportunities that are starting to seem vague while the costs are becoming vivid, at least to the small number of people who are paying attention.

None of this makes it likely that Brexit will be reversed. The simple fact that Leave won the referendum is likely to be proof against all sorts of psychological subtleties. Yet these seem to be nerve-racking times for the Brexiters.

It was always clear that asking an absurdly simple question about an absurdly complicated decision was unlikely to work out well. There is one ironic consolation: however befuddled our referendum decision might have been, the divided cabinet is now doing its best to make us, the great British public, seem like philosopher kings by comparison.

My book “Messy: How To Be Creative and Resilient in a Tidy-Minded World” is now available in paperback both in the US and the UK – or through your local bookshop.

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Why it’s important to gather the evidence – but easy to forget it even then

Written for and first published in the Financial Times on 11 May 2018.

It is hard to know which is more frustrating: last week’s announcement that over the past nine years, 450,000 British women were accidentally not invited for breast cancer screening; or the widespread indifference of a howling media to the evidence that such screening is of doubtful benefit anyway. Mammograms lengthen the lives of some women and shorten the lives of others: they allow the early detection and treatment of dangerous tumours, but they also produce many false positives, leading to the unnecessary and risky treatment of tumours that would never have caused any problems.

The best evidence we have, after weighing up several high-quality clinical trials, is that the harms and the benefits are finely balanced. When UK women are offered breast screening, they are sent a leaflet explaining the advantages and the risks so that they can make an informed choice. That choice should not have been denied to them by an administrative blunder. Still, we should be grateful that the error did not disrupt cervical cancer screening instead, which has convincingly been shown to save lives.

We should draw two lessons from the affair, beyond the obvious, which is that British institutions need to get a grip. The first lesson is that it pays to collect the best evidence that we can. The second is that having the best evidence is seldom enough.

Still, the evidence is a start. The world is full of sensible-seeming ideas that disappoint — along with some odd-seeming ideas that turn out to work. Among the latter is the idea that lemon juice prevents and cures scurvy, a disease so debilitating that ships could lose half their crews. In 1747, James Lind, a Scottish doctor, conducted one of the most celebrated early clinical trials proving the efficacy of lemon juice. This is not what common sense might have suggested. The mechanism was obscure: a chemical in lemons — later dubbed “vitamin C” — makes the difference between life and death in tiny doses.

Randomised trials have finally become entrenched in medicine as the obvious way to assess what works — as, just as importantly, have reviews that systematically assemble, evaluate and summarise all the available trials in one place. This did not happen easily, since few senior doctors enjoy being embarrassed by an unexpected trial result.

Such trials have also become an important way to assess ideas in education, criminal justice and economic development. Their use is far more patchy and more controversial but is still yielding dividends.

A new book, Randomistas (UK) (US), by Andrew Leigh, an Australian economist turned politician, gives plenty of examples. One — notorious in geek circles — is “Scared Straight”, a programme designed to deter juvenile offenders by taking them to prison to be bullied in short bursts by terrifying inmates. Scared Straight was so fashionable in the late 1970s that a documentary film about the policy won an Oscar; randomised trials showed it to be counterproductive.

That is often the way. Three decades ago the sociologist Peter Rossi quipped that the more rigorously a social programme evaluation was designed, the more likely it was to show a net benefit of zero. Unfortunately, Mr Rossi may well have been right — but showing which ideas do not work is one of the most important roles of high quality trials.

And not every idea fails. While the evaluations of Scared Straight showed that it made matters worse, a randomised trial of police protocols for domestic violence in Minneapolis in 1981 demonstrated that the police needed to be tougher on domestic abusers, arresting them rather than having a quiet word, if they wanted to prevent future assaults.

Randomised trials of cash transfers to entrepreneurs in developing countries have shown some excellent results, including a spectacular trial in which some Nigerian entrepreneurs with high-quality business plans were randomly chosen to receive $50,000 to realise their ideas.

This research is useless, however, if the people making the decisions are not aware of it. The academic’s cliché, “more research is needed”, is not necessarily true. Often all the necessary research has been done, but it has not been assembled and systematically reviewed. Or — as in the case of breast screening — it has been systematically reviewed, but not enough people have noticed.

Lind’s trial of lemon juice is instructive here. As early as 1601, James Lancaster of the East India Company had demonstrated in an informal trial that lemon juice was proof against scurvy. It took two centuries for the Royal Navy to make it part of sailors’ rations — and longer still for other navies to catch on. Yet as voyages grew shorter, and still lacking a convincing theory for why lemon juice vanquished scurvy, we simply forgot. In 1911, 300 years after Lancaster’s demonstration, Robert Scott’s expedition to the South Pole — including a Royal Navy surgeon — did not know how to prevent scurvy. They suffered grievously as a result. Knowledge can be gained; it can also be ignored, or forgotten.

 

My book “Messy: How To Be Creative and Resilient in a Tidy-Minded World” is now available in paperback both in the US and the UK – or through your local bookshop.

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Cheap innovations are often better than magical ones

Written for and first published in the Financial Times on 4 May 2018

If you type “technology indis…” into Google, you are instantly directed to a webpage discussing Arthur C Clarke’s third law: “any sufficiently advanced technology is indistinguishable from magic”. The science fiction writer’s aphorism was published in 1962, at a time when a demonstration of Google’s autocompleting search engine would indeed have seemed like sorcery.

There are plenty of other examples: electricity, the aeroplane and the telephone would all have seemed miraculous and inexplicable to earlier generations. Each of them exemplified what a technological breakthrough is supposed to look like, deservedly winning attention as they appeared.

We need to be careful, however, not to overlook much simpler technological advances. The lightbulb is a safer and more controllable source of artificial light than the candle or the oil lamp, but what really makes it transformative is its price — the cost of illumination has fallen approximately 400-fold in the past two centuries.

Supercomputers and space travel get all the press. Merely being cheap doesn’t. But being cheap can change the world. Consider barbed wire (cheap fencing), the shipping container (cheap logistics), or the digital spreadsheet (cheap arithmetic). Ikea gave us cheap furniture, and the same principles of simple modular assembly are giving us cheaper solar panels, too.

My favourite example is paper: the Gutenberg press radically reduced the cost of producing writing, but it was of little use without an accompanying fall in the cost of a writing surface. Compared to papyrus, parchment or silk, one of paper’s most important properties was that it cost very little.

With all this in mind, what are today’s technological advances that we may be overlooking or misunderstanding because they are cheap rather than magical? The obvious answer: sensors. We are surrounded by inexpensive sensors — in our phones, increasingly in our cars — continually taking in information about the world.

A new book suggests a different, albeit related, answer. Prediction Machines (UK) (US) by Ajay Agrawal, Joshua Gans and Avi Goldfarb argues that we’re starting to enjoy the benefits of a new, low-cost service: predictions. Much of what we call “artificial intelligence”, say the authors, is best understood as a dirt-cheap prediction.

Predictions are everywhere. Google predicts that when I type “technology indis…” I am looking for information about Clarke’s third law; Amazon makes a prediction about what I might buy next, given what I have bought already, or searched for, or placed on my wishlist. A prediction may literally be a forecast about the future, or more generally it may be an attempt to fill in some blanks on the basis of limited information.

Not all such predictions are very good, but not all of them need to be. The tiny keyboards on our smartphones turn out to be quite serviceable when combined with modestly accurate predictions — from suggesting an entire one-phrase email reply (“I agree with you”) to subtly expanding the “H” and shrinking the surrounding keys on a touchscreen if the phone thinks that “H” is the more likely target for a fat-thumbed typist.

Errors in predictive text tend to be trivial and easy to correct, so a high error rate does not matter much. Clumsy text predictors can be released into the world so that they may learn. A high error rate in a self-driving car is not so easy to forgive.

As Mr Agrawal and colleagues point out, sufficiently accurate predictions allow radically different business models. If a supermarket becomes good enough at predicting what I want to buy — perhaps conspiring with my fridge — then it can start shipping things to me without my asking, taking the bet that I will be pleased to see most of them when they arrive.

Since good predictions reduce uncertainty, we may also see less demand for things that help us deal with uncertainty. If that conspiratorial fridge can arrange just-in-time delivery of meal ingredients by predicting my requirements, it can be much smaller as a result.

Another example is the airport lounge, a place designed to help busy people deal with the fact that in an uncertain world it is sensible to set off early for the airport. Route-planners, flight-trackers and other cheap prediction algorithms may allow many more people to trim their margin for error, arriving at the last moment and skipping the lounge.

Then there is health insurance; if a computer becomes able to predict with high accuracy whether you will or will not get cancer, then it is not clear that there is enough uncertainty left to insure.

All this seems a useful way to look at the fast-changing world of machine learning — more useful than pondering Clarke’s most famous creation, the murderous computer HAL 9000. Some automated predictions are already marvellously good, but many are changing the world not because they are omniscient, but because they’re good enough — and cheap.

 

More on all this in my recent book, “Fifty Things That Made The Modern Economy” – now out! Grab yourself a copy in the US (slightly different title) or in the UK or through your local bookshop.

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Undercover Economist

How much would I have to pay you to quit Facebook?

Written for and first published in the Financial Times on 27 April 2018.

How much would I have to pay you to give up Facebook? What about email? Or access to search engines? I found myself asking these questions of myself during my recent trip to China, where several familiar services are blocked. But the answers to those questions have a lot to teach us, both about how the economy is doing and about how we might regulate these new digital services.

A new research paper from three economists — Erik Brynjolfsson, Felix Eggers and Avinash Gannamaneni — attempts to measure exactly what services such as Facebook are worth to us. They offered various experimental subjects (adult US residents) the possibility of a cash payment if they quit the social media network for a month, observing which offers were rejected or accepted.

Twenty per cent of the site’s users were willing to quit for as little as a dollar; raise the monthly price to $48 (in 2016) or $38 (in 2017) and half of Facebook’s US users would happily jump ship. No robust data are yet available to show us how the Cambridge Analytica scandal has changed our preferences.

Mr Brynjolfsson and his colleagues used a more informal survey to estimate the value for other services. Their rough-and-ready conclusion is that the typical person would have to be paid about $17,500 a year to do without internet search engines, $8,500 to abandon email and $3,500 to quit using digital maps. Video streaming through sites such as Netflix and YouTube is worth over $1,150 a year; ecommerce $850, and social media just over $300. These numbers vary quite a bit depending on the survey method, but the overall ordering doesn’t change much.

My own experience in China echoed these rankings: it was annoying to lose Google Maps, and it felt essential to replace Gmail and Google search with alternatives (fortunately such alternatives are readily available). There was no alternative to Twitter and Facebook — not unless I fancied rebuilding my social network from scratch — but neither did I mourn their loss. Quitting Twitter for a fortnight felt like quitting alcohol for January. And I didn’t miss Facebook for a second.

The first lesson from this research is that some of these new digital goods have a huge and unmeasured benefit to consumers — “consumer surplus”, in the lingo. This is not entirely news: the economist William Nordhaus has estimated that during the second half of the 20th century, innovative companies generally managed to capture as profits just 3.7 per cent of the social value they created; the other 96.3 per cent went to others, largely consumers.

For example, penicillin saves lives for pennies. Another example: the indoor lavatory. Messrs Brynjolfsson, Eggers and Gannamaneni found that indoor toilets were valued much more highly than any internet service. Lavatories are not expensive, so they produce a huge consumer surplus.

Still, many digital goods are free — and if internet search really is worth $17,500 per person each year, that is equivalent to one-third of US gross domestic product. So perhaps unmeasured consumer surplus is larger than in the past — that, says Mr Gannamaneni, “is still an open question”.

But there is a second important lesson here. Access to email seems to be worth almost 30 times more than access to social media; a good search engine is worth twice as much again. Yet the key suppliers of email and search — Alphabet, Apple and Microsoft — are not worth 50 times more than Facebook, which dominates social media through its own site and its subsidiaries Instagram, Messenger and WhatsApp. If they were, they would be $20tn companies.

In other words, Facebook is more effective at turning consumer surplus into profit. This is no surprise, since all your friends are on Facebook. The only serious alternative is not to use social media at all. By contrast, it is easy to find an alternative email provider.

We urgently need a way to turn social media into something more like email — a portable profile that can be taken seamlessly from one provider to another, just as we can take our phone numbers with us from network to network, and dial any other number in the world.

Various proposals now exist: web pioneer Tim Berners-Lee is pushing a system called “Solid”, which enables web users to control their own data and release it to digital services on a need-to-know basis. The Italian MP and tech entrepreneur Stefano Quintarelli has been trying to introduce enabling legislation in Italy.

One final lesson emerges from another research paper — from the economists Susan Athey, Christian Catalini, and Catherine Tucker. Ms Athey and her colleagues asked what value MIT students place on their own private data, and the data of friends. The answer was nothing terribly coherent: students would make very different choices in response to small nudges, and would gladly hand over private data in exchange for a pizza.

The value we place on services such as email and search is clear. The value we place on our own privacy is not. The current mess is hardly a surprise.

 

My book “Messy: How To Be Creative and Resilient in a Tidy-Minded World” is now available in paperback both in the US and the UK – or through your local bookshop.

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The world is not as gloomy, or wonderful, as you may think

Written for and first published in the Financial Times on 20 April 2018.

Is the glass half full, half empty, or laced with cyanide? Last week I wrote about “statistics, fast and slow” — the gap between the world as we intuitively perceive it, and the world as described in spreadsheets. Nowhere is this gap more obvious than when we are invited to reflect on whether things are going well, or badly.

With some telling exceptions, the situation is this: the world is getting better in many of the ways that matter, but we simply don’t realise that this is true. Population growth has slowed dramatically. Most of the world’s children have been vaccinated against at least one disease. Girls are rapidly catching up with boys in their access to education. The world is full of flaws, but progress is not only possible — it is happening.

A new book, Factfulness (UK) (US), by Anna Rosling Rönnlund, Ola Rosling and the late Hans Rosling, describes this knowledge gap, which is at times grotesque: two-thirds of US citizens believe the global proportion of people living in extreme poverty has doubled in the past couple of decades; it has halved. As Hans Rosling used to say, we don’t become this ignorant by accident.

Nor are our misperceptions limited to global development. Surveys by the polling company Ipsos Mori show that citizens of the developed world are also ignorant about our own countries. Most people vastly overestimate the prevalence of crime (which in the UK is dramatically down since the 1990s) and teenage pregnancy (which affects fewer than 1 per cent of 13-15 year old girls). We also seriously overestimate the size of the Muslim population in the west, which suggests that the concerns of tabloid newspapers loom large in our imaginations.

This is not just a statistical phenomenon — it’s a political and psychological puzzle. How worried should we be about unemployment, vandalism, immigration, litter, bad hospitals, or drug dealing? There is no objective answer, but there is a strong tendency for people to be concerned about these issues for their nation, but more relaxed about their local area. We don’t see a serious problem where we live, but we feel strongly that trouble is all around us, just over the horizon. The economist Max Roser — creator of Our World in Data — calls this “local optimism and national pessimism”.

The mismatch is particularly stark when people are asked about their own happiness. Almost all of us are reasonably content: in the UK, 92 per cent of us are “rather happy” or “very happy” with our lives. But we believe that fewer than half of our fellow citizens are in the same cheery situation. The UK is typical in this respect: full of happy people who believe they are surrounded by misery.

This generalised pessimism seems powerful. The one global question that people reliably get right, despite ferocious misinformation campaigns, is the one where the news is bad: do climate experts believe the planet will get warmer over the next century?

So it would be tempting to conclude that we are all systematically too pessimistic about everything except our own experience. That is not quite true. The FT’s chart doctor, Alan Smith, tells me that Saudi Arabians are far too sanguine about the prevalence of obesity: they think a quarter of the nation is overweight or obese, but the true figure is closer to three-quarters. Most people in most countries also underestimate wealth inequality; it’s worse than we think, although, here, the UK is an exception to this belief.

The optimists are not right about everything. Angus Deaton, Nobel laureate in economics, has found that we are too optimistic about our own futures: almost everywhere, people tend to feel that they will be living a strikingly better life in five years’ time. We are doomed to disappointment. Life satisfaction is already high, does not tend to move much, and if anything tends to fall as mid-life approaches.

This misplaced optimism about ourselves is a striking contrast to an equally misplaced despair about our children: across Europe and North America, according to the Pew Research Center, twice as many people believe their children will be worse off financially than they are, rather than better off. Given the past decade of recession and slow recovery, that is not impossible. But economies do tend to grow over the long term, so it is a remarkably grim forecast.

What should we conclude from all this? One plausible hypothesis is that we form many of our impressions about the world from the priorities of the mass media. That would explain why we are pessimistic about most things, but not about obesity, since television loves skinny people.

A second conclusion is that many of us — citizens, the media and mainstream politicians — need to take more interest in the way the world really is. I hardly need to list the political movements that have travelled from the lunatic fringe to positions of power by reinforcing people’s worst fears. But when your policy platform is built on misperceptions, little good is likely to come of it. Optimism and pessimism both have their merits, but right now the world needs a dose of realism.

My book “Messy: How To Be Creative and Resilient in a Tidy-Minded World” is now available in paperback both in the US and the UK – or through your local bookshop.

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Statistics, Fast and Slow

Written for and first published in the Financial Times on 13 April 2018.

One way to understand China is to look at the statistics. Real income per person has increased nearly tenfold since 1990. Since the early 1980s, the number of extremely poor people in China has fallen by more than three-quarters of a billion people, more than half the population of the country. China consumed more cement in a recent three-year period than the US used in the entire 20th century.

Even on paper, it is the most dramatic explosion of economic activity in human history. Seeing it with your own eyes is another experience entirely.

Nothing in the statistics truly prepared me for a journey across Guangdong, the southern province of China that has been at the forefront of this growth. Start at Hong Kong — the ultimate high-rise city — and walk into its mainland twin, Shenzhen. Then in the shadow of the Ping An skyscraper, which dwarfs the Empire State building, catch a bullet train across the province.

Where London might have a single big block like Trellick Tower, Shenzhen will have a cluster of a dozen identical monoliths, crammed with apartments. Next to that cluster, another dozen of a different design. Then another, and another. Here and there, in the distance across the haze, would be a Manhattan-esque cluster of skyscrapers. The towers marched on and on, all the way — or so it seemed to me — to the city of Guangzhou: 45 minutes or so of high-speed travel through what seemed an infinite vista of concrete.

That night, tucked into bed in the picture-postcard landscape of Yangshuo, I couldn’t sleep. The endless tower blocks scrolled through my mind. What if we had lost our six-year-old son in the middle of Guangdong? So many people. So much concrete.

There was nothing in this experience to contradict the economic data; in fact, the two perspectives on China’s growth were perfectly complementary. But they felt very different. To borrow the terminology made famous by Daniel Kahneman’s book Thinking, Fast and Slow, (UK) (US) the statistics spoke to my mental “system 2” — the deliberate, effortful processing of logical or mathematical information. The train journey tapped into “system 1”, a swift and automatic forming of impressions, making of comparisons and recognising of dangers. This was statistics, fast and slow.

Some will be tempted to dismiss the statistics as irrelevant book-learning, and declare that only personal experience matters. There is certainly something in that, especially when a situation is fast-moving or contains soft, hard-to-quantify details. As the Nobel laureate economist Friedrich Hayek remarked, the “knowledge of the particular circumstances of time and place” is important and often neglected.

HR McMaster — who before he was US president Donald Trump’s former national security adviser, was a counterinsurgency pioneer in Iraq — had a similar concern. He once told me the army used to wrongly believe that “situational understanding could be delivered on a computer screen”. It would be convenient if that was possible, but as Gen McMaster and his colleagues learnt the hard way, it is not. Sometimes you have to be there to understand.

But while there is a lot to be said for the rich and vivid lessons of personal experience, they have an obvious limitation: we cannot be everywhere and see everything. And what we do see may be as unrepresentative as the sloppiest of surveys. My trip to China took in tourist spots and high-speed rail links. As a result, I formed an indelible impression of a very particular slice of China.

The skew in our personal experience affects us when at home almost as much as when travelling. We are surprised when an election goes against us: all our friends agreed with us, so why did the nation vote otherwise? Newspapers and television carry tales of lottery wins and fairytale romances, terrorist atrocities or gruesome assaults by strangers. None of these stories reflect everyday life; all of them are viscerally memorable and seem to take place in our living rooms.

And there are more subtle ways in which personal experience can mislead. For example, most of us who ride on London buses will attest that they are packed. Yet the average occupancy of a London bus is just 17 people. How so? Most people witness the full buses — that is why they are full — while empty buses are observed only by their drivers.

It is not quite fair to say that our fast-and-loose “system 1” impression is a lie. It really is true that most people travel on busy buses. But if we want to understand emissions per passenger, we need a statistical perspective.

A new book by the late Hans Rosling and his family, Factfulness (UK) (US), advocates the merits of understanding the world both through the data and through personal experience — not of news stories or tourist traps, but of the everyday lives being lived all over the world. “Numbers will never tell the full story of what life on Earth is all about,” wrote Rosling, despite being the world’s most famous statistical guru. But the story they do tell matters. In statistics, as elsewhere, hard logic and personal impressions work best when they reinforce and correct each other.

 

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Judge the value of what you have by what you had to give up to get it

Written for and first published in the Financial Times on 6 April 2018.

I’m not one to collect inspirational slogans, but here’s one I like: “Judge the value of what you have by what you had to give up to get it.” Perhaps I took it more seriously because it was pinned to the corkboard of an inspirational friend; she always seemed to be off for another expedition to Mongolia or Patagonia.

But my fondness for the motto may reflect that it describes an under-appreciated idea in economics: that of opportunity cost. And I’ve come to realise that our collective failure to think rationally about opportunity costs can be used as a weapon against us.

The principle of an opportunity cost does not at first glance seem hard to understand. If you spend half an hour noodling around on Twitter, when you would otherwise have been reading a book, the lost book-reading time is the opportunity cost of the tweeting. If you decide to buy a fancy belt for £100 instead of a cheaper one for £20, the opportunity cost is the £80 shirt you could otherwise have bought. Everything has a cost: whatever you were going to do instead, but couldn’t.

We should weigh opportunity costs with some care, mentally balancing any expenditure of time or money against what we might do or buy instead. However, observation suggests that this is not how we really behave. Ponder the agonised indecision of a customer in a stereo shop, unable to decide between a $1,000 Pioneer and a $700 Sony. The salesman asks, “Would you rather have the Pioneer, or the Sony and $300 worth of CDs?”, and the indecision evaporates. The Sony it is.

This vignette was sketched in a research paper entitled “Opportunity Cost Neglect”, published by five behavioural scientists (in 2009, hence the mention of CDs). What makes the anecdote curious is that it is hardly an act of genius to figure out that buying the $700 Sony stereo would save $300, nor that $300 will buy $300 worth of CDs. It is not that the indecisive shopper couldn’t work this out, but that the explicit trade-off never crossed his or her mind.

Various experiments in the research paper supplement the anecdote with some data. And other research in psychology suggests that our attention is far narrower and more fleeting than it seems. As psychologist Nick Chater explains in a remarkable new book, The Mind is Flat (UK) (US), the brain generates powerful illusions of continuity. It stitches together what is actually a patchwork of fleeting impulses and perceptions.

We feel intuitively that we are able to check our phones while simultaneously keeping an eye on the road ahead, but we can’t. We think we can summon to mind a clear image of a tiger, whiskers twitching, fur shining, licking its lips. But asked to draw a tiger we start to struggle. Do the stripes on its legs loop laterally around, or run vertically?

It is the same with opportunity cost. We tend to feel that our choices reflect the whole picture: as crisp and vivid as the tiger, a balanced consideration of all the alternatives. But often we spend money simply out of habit or instinct.

Drawing our attention to opportunity costs, no matter how obvious, may change our decisions. The notorious falsehood on the campaign bus used by Vote Leave during the 2016 referendum campaign was well-crafted in this respect: not only could the UK save money by leaving the EU, we were told, but that money could then be spent on the National Health Service.

One could certainly debate the premise — indeed, the referendum campaign sometimes seemed to debate little else — but the conclusion was rock solid: if you have more money to spend, you can indeed spend more money on the NHS. (Just another way in which that bus was a display of marketing genius.)

We would make better decisions if we reminded ourselves about opportunity costs more often and more explicitly. Nowhere is this more true than in the case of time. Many of us have to deal with frequent claims on our time — “Can we meet for coffee so that I can pick your brains?” — and find it hard to say no. Explicitly considering the opportunity cost can help: if I meet for coffee I’ll have to work an hour later, and that means I won’t be able to read my son a story before bedtime.

There may also be situations where we make the opposite mistake. If you save £100 in some act of thriftiness, that is £100 you can spend on a case of wine, or a good shirt, or dinner for two. But you cannot spend the same £100 on all three. While we would be wise to explicitly consider what else we might do with our money, we should be careful not to spend it over and over again — something political manifestos have a tendency to do.

So, the inspirational motto is right. We should judge the value of anything by what we had to give up to get it. And we should get in the habit of doing this deliberately. If it was an automatic process, we would need no inspirational motto to remind us.

My book “Messy: How To Be Creative and Resilient in a Tidy-Minded World” is now available in paperback both in the US and the UK – or through your local bookshop.

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4th of May, 2018Undercover EconomistComments off
Undercover Economist

A Monetary Remedy for the Mid Life Crisis

Written for and first published in the Financial Times on 30 March 2018.

“The time has come when we boomers are going to have to reach into our own pockets.” That was the view of David Willetts — formerly UK minister for higher education — a few weeks ago.

It sounds as though Mr Willetts was calling for a tax on the over-55s, but he was in fact drawing attention to the more mainstream idea of raising taxes on wealth. But perhaps we should be bolder. Why not raise taxes on the over-55s? It seems like a terrific policy to me, at least until I grow a little older.

We do have age-related subsidies, such as Medicare in the US and state pensions in many countries. The UK government even waives its quasi-income tax, national insurance, when working people pass pension age. But these explicitly aged-based measures are rare.

It is more common to see policies that redistribute between the generations as a side effect of something else. The introduction of higher university tuition fees in the UK — thanks in part to Mr Willetts himself — was designed to fund the expansion of universities at the expense of those who benefited from them. Alas, it also spared anyone who already has a degree while burdening the young with debt.

Then there is housing: tight planning restrictions from San Francisco to London help to squeeze house prices higher. That benefits people who already have houses, and they tend to be older than those who rent.

Low interest rates cut both ways, pushing the price of assets higher, but making it harder for retirees to live off their accumulated savings. Each policy has a differential effect on different generations that is largely accidental.

Perhaps we should be more deliberate about this. But trying to figure out which generation, if any, is more deserving is not straightforward. Should we look at a snapshot, or a life cycle?

The snapshot view is that at any given moment, young people have low-wage jobs and debts, while older people have higher-wage jobs and assets, so we should tend to redistribute from old to young.

The life-cycle view is that at any given age, each cohort tends to be richer than its forerunners, so we should tend to redistribute from young to old. Recently, the young have been worse off either way, which does at least resolve the dilemma.

Another question is whether we should focus on money. That seems natural; money is easy to redistribute. But money is not necessarily what matters most.

Young people have little cash, but they are fitter than the rest of us. They are taut and pert where we are flabby and saggy. And they have yet to have their dreams dashed.

All this becomes abundantly clear when we ask people about how they feel their lives are going. Gallup uses the following question: “Please imagine a ladder, with steps numbered from zero at the bottom to 10 at the top. The top of the ladder represents the best possible life for you and the bottom of the ladder represents the worst possible life for you. On which step of the ladder would you say you personally stand at this time?”

Without exception across the continents, people in their late teens and early twenties tend to give the most positive responses to this question. According to young people, young people are doing just fine.

In Africa and ex-communist nations, life just gets worse as you get older. In anglophone countries, the story is more of a midlife crisis then recovery. There is a dip in people’s life evaluations between the mid-twenties and mid-fifties, followed by a marked improvement; I am 44, which puts me right in the middle of the Slough of Despond.

There may be something quite deep behind this. A team including primatologists, psychologists and the economist Andrew Oswald has even found evidence of a midlife crisis in great apes.

A new research paper from Angus Deaton, Nobel laureate in economics, also finds that we are all persistently disappointed by life. Around the world, people tend to feel that in five years’ time they will have climbed a rung or two on life’s ladder, but most of us fail to do so. It is not quite clear why: did we not get as much money, status and sex as we were hoping for? Or did we get the money, sex and status, but found that it left us wanting?

Prof Deaton explicitly takes on the question of redistributing between the generations, more as a thought experiment than a firm policy proposal. Yet even the thought experiment is intriguing. In the US, he finds that the people who would have their wellbeing most improved by a cash injection are the middle-aged, people between their forties and their sixties. Yes, we have money, but we could really use some more.

The young and the aged do not really need money anyway: they are enjoying themselves regardless. Perhaps they could be prevailed upon to give a bit more to us? I will have a word with my father and my children. I am sure a dose of economic analysis will cure them of any doubts.

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Even in Trump’s White House, chaos has its limits

Written for and first published in the Financial Times on 23 March 2018.

“So many people have been leaving the White House. It’s actually been really exciting and invigorating,” said Donald Trump earlier this month. “I like turnover. I like chaos. It really is good.” It is not clear whether he was joking — the remark was made during a light-hearted dinner speech — but, for Mr Trump’s sake, one hopes he meant it.

The past month has seen the resignation of his communications director Hope Hicks, the downgrading of his son-in-law Jared Kushner’s security clearance, the resignation of his senior economic adviser Gary Cohn, the sacking-by-tweet of the secretary of state Rex Tillerson, the escorting-out-of-the-building of his aide John McEntee, the firing of Andrew McCabe, deputy director of the FBI – and now HR McMaster has gone too.

Along the way Mr Trump has railed against the investigations of special counsel Robert Mueller. Chaos reigns.

It remains unclear how much method there is in all this madness, but there may be more than we think. Mr Trump does not drink, but his leadership style is reminiscent of “drunken boxing” — a style of martial arts associated with staggering around unpredictably until your opponent lets his guard down, whereupon you pop him in the mouth.

The disadvantage of chaos is that it is destabilising; the advantage is that it may destabilise your foes more than you. About four decades ago the US military strategist John Boyd (UK) (US) gave a series of influential talks about this idea. Boyd, whose admirers included senior Republican Dick Cheney and management guru Tom Peters, argued for rapid, confusing manoeuvres, improvised if need be, with the aim of disorienting the enemy. Create enough chaos and you could completely paralyse your foe. If the chaos made life uncomfortable for your own side, no matter. Synchronisation, said Boyd, was not for organisations, but for watches.

This messy, improvised approach to tactics is not entirely new. Sun Tzu, the near-mythical author of The Art of War, declared that “quickness is the essence of war”, but also advised being “without ascertainable shape”. This sounds like the incessant, incomprehensible activity of the Trump White House.

It also sounds like the campaign for the UK to leave the EU in 2016. The Brexiters seemed hamstrung by the fact that they ran two mutually suspicious campaigns — Leave.EU and Vote Leave. “It wasn’t one of my adverts,” said Nigel Farage about Vote Leave’s bus, while Boris Johnson said Mr Farage’s inflammatory poster about refugees was “not my campaign” and “not my politics”. This left the Leave campaign, as Sun Tzu advised, “without ascertainable shape”, so voters picked which ever message resonated, while the Remain campaign did not know where to look. Dominic Cummings, of Vote Leave, later said a united Leave campaign would have been easily defeated.

On the battlefield, the master of messy improvisation was the German general Erwin Rommel. He championed swift, energetic action, even if it left his own men scrambling to figure out what was happening. “I have a feeling that things are in a mess,” lamented one Berlin-based general of Rommel’s north Africa campaign in 1941. They were, but for many months the chaos took a worse toll on the British than the Germans.

The same fast-paced seizing of opportunities has worked for some businesses. In the early years of Amazon, Jeff Bezos was clear that he needed to get ahead of rivals such as Barnes & Noble and Toys R Us, even if it meant chaos within Amazon. A more methodical start-up would have been caught and crushed. “It’s a messy process,” Mr Bezos told his biographer, Brad Stone (UK) (US), but there was simply no time to be meticulous. A visitor to an Amazon warehouse in the run-up to Christmas in 1999 would have said the company was a shambles, but the chaos paid off. Amazon bled money but shipped on time, while rivals have been struggling to catch up ever since.

Of course the more ponderous forces of planning and organisation may reassert themselves in the end. Mr Trump has an uncanny ability to dominate the news cycle, change the subject whenever he wants, and turn the spotlight away from his critics and towards himself. This was a huge asset during the election campaign but is a mixed blessing in government.

Facebook’s old mantra, “move fast and break things”, suddenly looks less clever. Mark Zuckerberg must now explain exactly what he has broken.

The Brexiters are running into the limits of the improvisation, ambiguity and self-contradiction that worked so brilliantly as a campaigning strategy, and indeed as a way of managing their own divisions. On a playing field criss-crossed by technical and legal details, EU negotiator Michel Barnier’s ploddingly careful preparation now seems to be paying dividends.

Even the unpredictable Rommel was eventually defeated, by Bernard Montgomery’s cautious and meticulously planned application of force at El Alamein. Montgomery was in no hurry as he assembled everything he needed. Mr Trump may have noticed that Robert Mueller is displaying the same patience.

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