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

How this climate change economist changed my world

I read a lot of economics papers, but I don’t often read economics papers that make me think, “this changes everything”. But Martin Weitzman wrote one. I still remember exactly where I was when I read it. Even for a nerd like me, that’s not normal.

Professor Weitzman took his own life in late August. He was 77 and had reportedly been worried that he was losing his mental sharpness.

Weitzman’s sad death prompted me to reflect on what it was about his essay that so struck me. It was a commentary on Lord Nicholas Stern’s Review on the Economics of Climate Change. Weitzman gently pulled the Stern Review apart — “right for the wrong reasons” — and offered an alternative view of the problem.

For those of us who think climate change requires bold, urgent action, there are two awkward facts to contend with. The first is that its most worrying impacts — including floods, crop failures and diseases — are unlikely to manifest at full strength for decades or even centuries. The second is that because the world has been getting dramatically richer, future generations are likely to be much wealthier than we are.

Both these awkward facts militate against doing anything too expensive in the short term.

Here’s an analogy: imagine that I discover an incipient damp problem in my house. A surveyor tells me that if I spend £1,000 now, that will spare my great-grandchildren £5,000 of repair works in a century. At first glance it seems that I should fix the damp.

On reflection, though, spending money now would be foolish. Investing £1,000 in the stock market on their behalf would be better. At a modest 3 per cent real rate of return, it should be worth about £20,000; at 5 per cent it will be worth £130,000.

In any case, won’t my great-grandchildren be vastly richer than I am, just as I am vastly richer than my great-grandparents? Why worry? They’ll cope.

This oversimplification of the complexities of climate change gets at something important. Lord Stern’s case for action depended on arguing that our super-rich descendants living in the far future should weigh very heavily in our calculations. It is hard — not impossible, but hard — to square that with how we behave in respect to any other issue, personal or social. We simply do not set aside nine-tenths of our income to benefit future generations.

Weitzman was among several prominent economists to raise this concern. But he then asked us to contemplate the risk of runaway effects. An example: as arctic permafrost thaws, a huge volume of methane, a powerful greenhouse gas, may be released. Other economists have recognised the issue of “tail risks”, well outside the most likely scenarios. None have thought more deeply about it than Weitzman.

Central estimates can lead us astray. The most likely scenario is that climate change will cause real but manageable suffering to future generations. For example, the World Health Organization estimates that between 2030 and 2050, climate change may cause an extra 250,000 deaths a year because of threats such as malaria, heat exposure and malnutrition — a less serious problem than local and indoor air pollution, which kill 8m people a year. If we focus on the central forecast, it is local air pollution that should get most of our attention.

It is only when we ponder the tail risk that we realise how dangerous climate change might be. Local air pollution isn’t going to wipe out the human race. Climate change probably won’t, either. But it might. When we buy insurance, it isn’t because we expect the worst, but because we recognise that the worst might happen.

The truly eye-opening contribution — for me, at least — was Weitzman’s explanation that the worst-case scenarios should rightly loom large in rational calculations. If there’s a modest chance that the damp problem will give all my great-grandchildren fatal pneumonia, I shouldn’t ignore that. And my great-grandchildren wouldn’t want me to: the probably rich great-grandchildren would happily sacrifice some trivial amount of income to avoid being the possibly dead great-grandchildren. But they won’t have the choice. It’s up to me.

Weitzman was a stupendously creative man. Other celebrated contributions studied the trade-off between pollution taxes and pollution permits, the “Noah’s Ark” problem of what to focus on when preserving biodiversity, and an early argument in favour of companies sharing profits with their employees.

“If you don’t think an idea might be worthy of the Nobel Prize, you shouldn’t be working on it,” he told one colleague. Some economists would say that he reached that impossibly high standard more than once — and were surprised that he was not named as a joint Nobel Prize winner last year, when William Nordhaus was recognised for his work on climate change economics.

Nevertheless, the message of Weitzman’s recent work has influenced the policy debates on climate change: the extreme scenarios matter. What we don’t know about climate change is more important, and more dangerous, than what we do.

Written for and first published in the Financial Times on 13 Sep 2019.

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When it comes to productivity hacks, are you an Arnie or an Elon?

Returning from the summer with a head full of good intentions, I have become aware of a philosophical schism in the world of productivity hacks. In one corner, Arnold Schwarzenegger. In the other, Elon Musk and the “timeboxers”. (I swear, I am not making this up.) The philosophical divide is over a simple question: how much should you schedule blocks of time in your calendar?

Mr Schwarzenegger reportedly kept his diary clear as a film star, and even tried to do so when he was governor of California. “Appointments are always a no-no. Planning ahead is a no-no,” he once said. Visitors had to treat the Governator like a walk-in restaurant — show up and hope for the best.

The opposite approach is timeboxing: timeboxers advocate transferring the entire “To Do” list to a calendar. Need to do some laundry? Set aside time on the calendar. Have a column to write? Block out the necessary hours. Want to chill out on Instagram? Put it in the calendar. Not getting enough sleep? You guessed it: calendar.

Since any productivity hack needs a celebrity endorsement, timeboxers claim (on thin evidence, it seems to me) that the technology entrepreneur Elon Musk uses the technique. Most of us have to compromise a little more with the rest of the human race than do either Mr Musk or Mr Schwarzenegger. Yet the divide is real: schedule as much as possible, or as little as you can get away with? We must all decide if every minute of productivity or rest should be planned in advance, or whether it’s better to be more flexible.

Timeboxing originated as a collaborative technique for software developers, and in that context it may work well. Yet, as a personal productivity tool, it seems infantilising. Calendars work for time-specific commitments, such as flights or nights at the opera; everything else should go on a to-do list, a much more flexible way of keeping track of commitments.

I do not want to dismiss those who claim timeboxing works for them. I’m just not persuaded. Some say timeboxing helps them avoid being overwhelmed by a long list of tasks; I say prioritise. Timeboxers note Parkinson’s law: work expands to fill the time allocated. I say, set deadlines.

More recently, I’ve seen timeboxing praised as a strategy for avoiding distractions. Nir Eyal, the author of Indistractable, says that timeboxing helps him confine Facebook and YouTube to narrow slivers of the day. If that works for you, fine; I suspect it’s more productive to have a more fundamental rethink of your relationship to social media.

David Allen, author of the cult book Getting Things Done, reckons that timeboxing is a psychological crutch. We all need to feel on top of the commitments we’ve made to others and to ourselves, and it’s not easy. For those of us who feel we’re losing our grip, he tells me, “structuring time for social media, walking the dog, prepping for dinner, might make you feel more comfortable. If you’re like me, though, you plan as little as you can get by with”.

Todd Brown of Next Action Associates, a management training firm, agrees. People like blocking out time because it feels like they can “grab control of the situation”, he says. At the end of the week, however, what if everything has changed?

I agree with both of them. Commitments do not become easier to manage simply because you decide in advance when it is all going to happen. Life has a habit of producing surprises: the boss has an urgent task; the car won’t start; an old friend texts to tell you she is on a flying visit from Australia. The most inevitable surprise of all is that everything always takes longer than you think it will.

Still, that is just my opinion. If a serious study of the rival techniques exists, I have yet to find it. One relevant experiment was conducted nearly 40 years ago by the psychologists Daniel Kirschenbaum, Laura Humphrey, and Sheldon Malett. They recruited undergraduates and gave them some basic productivity tips. One group was counselled to plan their goals and activities in broad monthly blocks. Another group was instead advised to plan their activities and set their goals on a daily basis.

Neither approach is precisely analogous to timeboxing, but the daily schedule is similar because students would draw up detailed plans. These plans backfired disastrously: day after day, the daily planners would fall short of their intentions and soon became demotivated, spending less time on studying and falling behind over the course of the academic year. The more amorphous monthly planners proved far more successful, presumably because they had more flexibility to adapt to events, as well as wasting less time fiddling around with their calendars. A plan that is too specific soon lies in tatters.

It is clear that some people have made timeboxing work for them. Everyone is different, and every job is different. For me, however, my To Do list is long, and my diary is as clear as I can keep it. And if Arnie is on my side, so much the better.

 

Written for and first published in the Financial Times on 6 September 2019.

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The curious economics of being ripped off on holiday

I once wrote that there are two types of charges: the ones you see coming and the ones you don’t. Perhaps I was too reductive. There’s a third category: the fees that you know are looming, but the fog is so thick that you can’t see them clearly.

Travellers are well used to these: the strange cover charge in the tourist-trap restaurant; the outrageous price of the hotel minibar and WiFi; those painful fees for flying with luggage. (Does it cost more to carry your bag on to the plane, or to put it in the hold? I lose track.)

I found myself pondering this a few weeks ago in the baking heat of Europcar’s Munich office. We’d hired a car online, arranging to drop it off in Milan and agreeing to pay the extra charge for doing so. Now the grumpy lady behind the desk insisted that there was a further charge of €14.99. Why? Because we planned to drive the car outside Germany. Apparently, the price we’d paid online was perfectly valid, but only if we arranged to teleport the car to Malpensa airport.

Surrounded by heat-exhausted children, my wife was outraged. It was the principle of the thing: Europcar had found a way to charge an extra fee despite not supplying anything beyond the original service. I was more relaxed, but only because mentally I’d already started drafting this column. (Europcar now tell me that because of a “system error” the charge was not clearly flagged at the time of booking, and they hope to prevent repeats.)

In fairness to Europcar, the only reason we had booked with them was because their rival Avis had stiffed us for a substantially larger sum of money the previous year. We are always careful to refuse all the overpriced extras, but this time, when we dropped the car off, Avis charged us almost €90 for “windscreen insurance” and then ignored our complaints about the matter. (I guess the true value of the insurance to be more like 90 cents than €90.)

Perhaps, somewhere in the byzantine process, we had failed to seek out and untick a “please overcharge me later for windscreen insurance” box? Even after the fact, it is often hard to tell.

How much should we worry about these hidden extras? Perhaps we should laugh them off as a cost of modern life. After all, businesses must still compete with each other and cover their overheads, so if these hidden charges could somehow be made to vanish, the everyday price might have to rise. We all know that such charges lie in wait when we deal with certain sorts of business — tourism and banking spring to mind. So why worry?

Unfortunately, it’s not that simple. Even when we know that certain charges will be added, we behave differently when those charges are highlighted. Over a decade ago, three economists, Raj Chetty, Kory Kroft and Adam Looney, conducted an experiment with a US retailer in which the familiar sales tax on everyday items was either made explicit or left implicit.

The sales tax, of nearly 7.5 per cent, is traditionally added only at the checkout. When products were relabelled to show clearly both the usual pre-tax price and what the post-tax price would be, shoppers bought substantially less. Professor Chetty and his colleagues had demonstrated that we respond differently when a cost, even a familiar one, is drawn to our attention.

There’s another reason to object to hidden charges: they make it harder to compare prices. The harder it is to compare prices, the less vigorous the forces of competition will be, to the detriment of the typical customer. I can rely on the fact that any car hire company will try to overcharge me, but I can have no confidence in just how hard the financial sucker punch will be, or when and where it will land. Should I refuse to do business again with Europcar, or should I reckon that they let me get away lightly?

A company could, of course, make a great play of not engaging in such tricks. Why not offer a price with “no hidden extras”? Alas, there are two problems with this. The first is that anyone can claim to offer a price with “no hidden extras”. When I typed the phrase into a search engine, one of the top results was Avis. Given my painful experience with the company, that is not encouraging.

There is a subtler problem too, explored a few years ago by the economists Xavier Gabaix and David Laibson. Even if an advert proclaiming “no hidden charges” is credible, it is not necessarily profitable. The problem is that not all customers would find the promise appealing. Some would instead infer “if you are good at avoiding hidden charges, try one of our competitors, who will offer you a cheap deal in the vain hope of ripping you off”. The transparent company would attract the suckers without exploiting them; the sneaky company would be a magnet for the sophisticates, who might well then avoid the tricks. The advertisement would backfire.

Perhaps it is no surprise, then, that companies boast about offering clear, transparent prices less often than we might expect, and that the boasts are often empty. That is my view as an economist. My reaction as a consumer will require some careful thought. Windscreens are transparent; prices, less so.

Written for and first published in the Financial Times on 30 August 2019.

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We are all potential victims of the con artist

Denise Milani was a 32-year-old Czech swimwear model. Paul Frampton was a divorced particle physicist more than twice her age. What happened next was a tale as old as time: they met online; she sent messages by turns steamy and adoring; they arranged to meet in Bolivia, where she was doing a photo-shoot.

Alas, when Prof Frampton arrived in La Paz to meet her face-to-face for the first time, she’d had to dash to another shoot in Europe. Could she meet him in Brussels instead? And would he mind, terribly, collecting an empty suitcase of hers and bringing it with him?

Of course, the real Ms Milani had no idea that her photographs were being used by a Bolivian drug gang. Prof Frampton seems to have had no idea either, although a friend warned him — correctly — that drugs were surely concealed in the suitcase linings. Prof Frampton duly spent several years in a Buenos Aires jail for smuggling 2kg of cocaine.

Why do we fall for the con? The obvious explanation: some people are idiots, or in Prof Frampton’s case, idiot-savants. But he isn’t the only academic to fall for a fake persona online.

In 2007, psychologist Robert Epstein struck up an online conversation with Ivana, a pretty and affectionate woman from Nizhny Novgorod. He was sufficiently charmed that it took him four months to realise that she was a chatbot. What makes that incident notable is that Prof Epstein was no head-in-the-electron-cloud particle physicist: he is one of the world’s foremost experts on how computers imitate humans.

He concluded that he had been fooled by his own wishful thinking as much as by a clever programmer. This isn’t unusual. Maria Konnikova, in her elegant book The Confidence Game, puts it well: “Cons work so widely because, in a sense, we want them to.” Profs Epstein and Frampton wanted to believe that attractive young women found them desirable. Wishful thinking can lead us far astray.

So, too, can fear and greed. Visceral emotions are easy to exploit. The “Nigerian prince” scam hooks our greed. We are promised vast riches, unlocked by a small advance payment. Other scams prey on fear: one cold-caller claims to be from your bank, warning that your account has been compromised; another is from the Revenue, demanding prompt payment of unpaid taxes. Anxious and panicked, we find ourselves bounced into making decisions we would mock in others.

There is no single unified theory of the con. Certain con artists really are artists — astonishingly charismatic, bold and versatile. But Ms Konnikova points out that many cons, like many magic tricks, are uncomplicated exploitations of common human traits, often traits that in other contexts would be strengths rather than weaknesses.

Self-deception, for example, is surprisingly useful in everyday life. One psychological study of competitive swimmers found that those with a clear-eyed assessment of themselves were more likely to fail. Another study, of married couples, found that the happier marriages were also the ones in which the spouses had a fuzzy read on each other’s opinions. Life seems smoother if we can’t see the wrinkles.

We like to think of ourselves as exceptional. Indeed, we wouldn’t be human if we didn’t loom large in our own thoughts. Our self-absorption leads us not to ask hard questions when we are promised exceptional treatment. It seems reasonable that a voluptuous model finds us irresistible, that an African oil billionaire trusts us with his cash, and that Brexit will be a doddle because, if we are polite yet firm, Germany will give the UK everything we want.

While exceptionalism makes us susceptible, so too does emotional vulnerability. Bereaved people, or those on the rebound, are tempting marks. People who have fallen for anti-vaccine pseudoscience do so because they are anxious about their children — as well as feeling smart enough to see through Big Government, Big Pharma propaganda. Many con victims fall for a second, follow-up fraud as they lick their wounds from the first.

Extended confidence tricks, where victims are fleeced over many months by someone they trust, often begin with the con artist offering friendship, sympathy or easy answers to someone who is feeling wounded. The US and UK electorates may both wish to take note.

One of the final cruelties is that many victims of fraud continue to trust the fraudster long after the con should have been apparent. A pre-Ponzi Ponzi scheme — William Franklin Miller’s 1899 Franklin Syndicate — was striking not only for its scale, but for the way Miller’s investors continued to dote on him even after the New York Times exposed the scam. What was the Times anyway, but a purveyor of fake news?

What unnerves me about Prof Frampton is that my own father knows him well. They were students together decades ago and still keep in touch. When I think of Prof Frampton, I instinctively worry that the victim of the next con could be my father. Perhaps I should be more alert to the fact that the victim of the next con could be me.

 

Written for and first published in the Financial Times on 19 July 2019.

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Should we take a few long holidays, or lots of short ones?

I know a man who used to deal with a stressful job, working 15-18 hour days in a senior role, by slipping away to a rented house near Richmond Park in London.

There, he refused to be interrupted by messages except during office hours, spent time playing bridge well and golf badly, and he ensured that the location of the hideaway was a well-kept secret. The few colleagues who did visit were strictly banned from talking about work. Yet despite his apparently laid-back approach, this fellow got results.

To be clear, I know this person only by reputation; Dwight Eisenhower died before I was born. But this is how he responded to the burdens of being supreme allied forces commander during the second world war. He found it essential to take time off.

We would all like to feel that our work is essential and our personal contribution irreplaceable. But, as Alex Soojung-Kim Pang, author of Rest: Why You Get More Done When You Work Less, notes, we’re unlikely to be doing quite as essential a job as Eisenhower’s. If he benefited from some down time, so might we.

But what sort of break is best? Should we be thinking of long sabbaticals, or is it enough to keep evenings and weekends free? Perhaps the ideal compromise is Bridget Jones’s dream of a “full-blown mini-break holiday weekend”?

The simple answer is all of the above. There’s something fractal about rest: we need it daily, weekly and yearly. That said, my reading of the (slim) evidence is that if you can bear the cumulative expense and the travel time, frequent short breaks beat the occasional elongated vacation.

Reason one: holiday memories tend to depend not on how long the holiday was, but on the intensity of the experiences. What matters is not how long you went away, but just how exciting and different the most exciting and different moments were. The first day of a visit to somewhere new will typically be more memorable than the tenth.

Reason two: a change of activity can be a spur to creativity. This need not be a long holiday; even an engaging hobby will do. Nobel Prize-winning scientists are much more likely to have serious arts and crafts hobbies than other scientists, who are in turn more likely to have serious hobbies than the rest of us.

Still, a holiday can help. Lin-Manuel Miranda was taking his first vacation for several years, at a resort in Mexico, when he read Ron Chernow’s biography of Alexander Hamilton, and was inspired to start working on what became the musical phenomenon, Hamilton. “The moment my brain got a moment’s rest, Hamilton walked into it,” he explained.

Intriguingly, Hamilton is, among other things, a musical about the importance of taking proper holidays.

“Take a break,” sings Hamilton’s wife, Eliza to her workaholic husband. “Run away with us for the summer, let’s go upstate.” Hamilton decides he needs to keep working instead and then makes sleep-deprived errors that led to his downfall.

Eisenhower’s aim in relaxing in his hideaway seems to have been to maintain his energy and good judgment. In short, he rested so that he could be a better general when he was working.

That leads us to reason three for taking a short break: if we need rest to prevent exhaustion, a single, long vacation won’t do the trick. Jessica de Bloom of the University of Groningen has found that the recuperative effects of a vacation tend to wear off in just a few weeks. You can’t store up the benefits of a long holiday any more than you can sleep for 24 hours then stay awake and sharp for the rest of the week.

All this raises another question, though: what should we do while we’re taking a break? According to Mr Soojung-Kim Pang’s survey of the available research, the ideal break offers relaxation, control, mastery and mental detachment.

By relaxation he simply means something that requires little conscious effort — from a walk to watching television. Control means autonomy over how you spend your time. Mastery refers to immersion in a challenging and absorbing task. An active holiday of skiing, sailing or rock climbing might do the trick — but so might a weekend of home improvements, assuming you’re better at putting up shelves than I am.

Finally there’s mental detachment — disconnecting from the responsibilities of the office. Such disconnection is harder than ever these days but it can help, even when the break is otherwise anything but relaxing. Business trips can be exhausting yet even they have been found to reduce burnout and stress, because they provide a break from day-to-day responsibilities.

And one 1998 study — by Professors Dalia Etzion, Dov Eden and Yael Lapidot — discovered that men called up for active reserve duty in the Israeli army found that the experience provided the same relief from burnout and stress in their normal lives that a holiday would have done.

It’s not that serving in the army is relaxing but that it provides a sense of distance from the day job. Unless, of course, your day job is in the army. In that case I recommend that you emulate Ike and enjoy a game of golf or bridge.

Written for and first published in the Financial Times on 16 August 2019.

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What we get wrong about meetings – and how to make them worth attending

I rely on Google Calendar to tell me where I am supposed to be, when and with whom. When the service collapsed for an afternoon last month, it felt like a teachable moment. For a few seconds, I panicked. Then, I realised that with all the meetings gone, I was free to do some real work.

I know I’m not the only person who loves to hate meetings. Will There Be Donuts?, a book by David Pearl, skewers the “Wagner meeting” (of epic length), the “mushroom meeting” (appears suddenly, multiplies rapidly) and the “Stonehenge meeting” (it’s been a fixture for ages but nobody knows why).

Yet Mr Pearl also acknowledges that ineffectual meetings often suit us. Boring meetings make us feel interesting by comparison. Long meetings pass the time. Indecisive meetings postpone painful choices.

Meetings frustrate when they reveal painful disparities in power. For subordinates, meetings are often the things that get in the way of doing their job. For the person with the power — the manager — meetings are the job. The manager can even offload the scheduling on to her secretary. No wonder some staff feel resentful of meetings while their managers are oblivious.

That said, the relentless democracy of a meeting where everybody must be heard is a kind of torture in its own right. Never-ending consultations are a good way to ensure that nothing ever happens and nobody has to take responsibility. Oscar Wilde never said that socialism “would take too many evenings” but if he’d met UK Labour leader Jeremy Corbyn, he surely would have.

Some meetings are to transfer information, some to allow discussion and some to reach a decision or resolve a problem. There are committee meetings that exist to satisfy some rule or regulation. I am on such a committee, and find it useful as a reminder not to sign up for any other committees. Then there are the meetings that exist purely for the sake of meeting. Don’t dismiss them; there’s nothing wrong with consenting adults enjoying a coffee break together. There doesn’t always need to be a reason.

But nothing undermines a meeting more than a lack of agreement as to why it’s happening. I know a school that invites parents in for curriculum meetings. The teachers think they’re explaining their approach to the parents; the parents are under the misapprehension they’re being asked for their input. Nobody goes away happy.

Yet despite all the well-justified complaints, there are many situations in which there’s simply no substitute for a meeting. For quickly co-ordinating a shared task, it’s perfect. A few minutes is often sufficient. “Agile” working methods call for a “scrum” in which team members briskly report what they did yesterday, what they’re going to do today and if there’s anything stopping them. A newspaper’s morning editorial conference serves a similar purpose, without the funky terminology.

Or perhaps the meeting is a workshop designed to produce ideas. Some people will assert that meetings are creativity killers, and “a camel is a horse designed by committee”. But this is absurd. We’ve all been in conversations where one idea sparks another. And while an individual can write a novel or paint a portrait, solo creativity is no way to produce nuclear fusion or a new antibiotic. In a world full of specialists, complex projects require collaboration. Meetings can and do generate ideas that no individual could have conceived alone. They do not do so automatically, however.

A persistent myth is that “brainstorming” — the unfiltered, no-wrong-answers, bellowing out of ideas — is a reliable route to innovative brilliance. Psychologist Keith Sawyer, the author of Group Genius, points out that there are many reasons to doubt this. In brainstorming, individuals distract each other, groups fixate on particular topics and some people use the opportunity to stop thinking entirely. Twelve people generate more ideas if they work separately than if they brainstorm together.

The meeting serves a far more important creative purpose when it is time to criticise, evaluate and combine those ideas. Charlan Nemeth, a psychologist at UC Berkeley and author of In Defense of Troublemakers, has found that groups come up with more ideas — and, importantly, better ideas — when they are invited to debate and dissent. It may even be worth breaking the meeting into subgroups with the express purpose of developing competing ideas. “Do not criticise” is a handy rule for new grandparents; it’s not a good approach for innovators.

In a daily scrum, everyone arrives with a brisk update and leaves with a crisp to-do list. In a creative workshop, everyone arrives with a boxful of ideas, ready to discard some and weave the rest together. There’s a big difference between the two types of meeting, but there’s also a clear common thread: people come prepared, have a reason to work together and finish the meeting with a clear sense of what comes next. A good meeting is a good meeting less because of what happens at the time, but because of what came before — and most importantly, what comes after.

 

Written for and first published in the Financial Times on 26 July 2019.

My book Messy has more on the joys of creative tension. Feel free to order online or through your local bookshop.

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US health care is literally killing people

It is astonishing how far the debate on healthcare has moved in the US, at least for the Democrats. Not long ago offering universal, government-funded healthcare was viewed as tantamount to communism; now, it’s a touchstone of many presidential hopefuls.

Not before time. The US healthcare system is a monument to perverse incentives, unintended consequences and political inertia. It is astonishingly bad — indeed, it’s so astonishingly bad that even people who believe it’s bad don’t appreciate quite how bad it is.

I don’t say this out of any great devotion to the UK alternative. The National Health Service works well enough for a vast tax-funded bureaucracy, but it might work better if we didn’t view any attempt at reform as the desecration of a holy institution. Nor do I have bad experiences of US healthcare. My daughter was born in America, where my family had sensitive and expert medical care. But that’s what you’d expect with a good health insurance plan — something that many Americans don’t have.

Around 27m people — 10 per cent of the non-elderly US population — have no insurance at all. That is precarious, given that a serious illness or accident could incur bankruptcy-inducing costs. Yet the astonishingly large number of people living on the edge is still progress: before the passage of the Affordable Care Act under President Barack Obama, the figure was closer to 45m people.

It’s this lack of anything resembling universal access that seems most grotesque to observers from other rich nations. But it’s just the beginning of the costs that the US health system imposes on Americans.

The financial costs are most obvious, and they are truly extraordinary. For a family of four, the US system costs about $13,000 a year more than that of Switzerland, which itself is substantially more expensive than any other. The US system costs more than twice as much, per person, as the universal coverage provided by the UK’s NHS. Even the government-funded part of the US system costs more per capita than the NHS.

Why so expensive? It’s because US doctors prescribe more treatments, and those treatments cost much more than they do elsewhere. Most governments limit the price of treatments, freeriding on the US market to stimulate investment in medicine. American hospitals and drug companies have enormous leeway to raise prices — insurers have limited bargaining power, and uninsured patients even less.

Nor is all this money bringing any obvious reward. Compared with other rich countries, the US ranks at or near the bottom on life expectancy, infant mortality, adolescent pregnancy, sexually transmitted infections, drug-related mortality, obesity, diabetes, heart disease, lung disease and arthritis. No, the healthcare system can’t be blamed for all that — but it is hardly covering itself with glory.

One of the striking tragedies of modern America, brought to light by the research of the economists Anne Case and Angus Deaton, has been the phenomenon of “deaths of despair”, from suicide, alcohol abuse and overdoses. Such deaths go a long way to explaining why mortality rates for middle-aged white Americans have stagnated or perhaps even risen in the US, while falling fast in other rich countries.

I recently had the opportunity to ask Prof Case and Sir Angus to what extent the US healthcare system was to blame. Their answer, in a nutshell: it would be an exaggeration to blame the system entirely but not a gross exaggeration.

The most obvious connection is that the opioids that have played such a role in these deaths of despair were supplied by the healthcare system. Opioids are a simple and profitable palliative for a widespread condition (“I’m in pain”) rather than a cure for anything. Doctors and drug companies made more money if they prescribed more opioids, and human nature being human nature, found ways to justify that decision to themselves.

The dysfunction of the US healthcare system has also eaten away at American wellbeing in other ways. Those extraordinary costs — more than $10,000 per person — must be paid by someone. When they are paid by employers, through workplace health plans, rising healthcare spending becomes a substitute for the rising wages that workers so desperately want.

And those extortionate costs also give employers a powerful reason to jettison staff at every opportunity, employing freelancers and subcontractors in the hope of cutting the cost of employer-sponsored health insurance. As a result, people feel disconnected from the workplace. Jobs become insecure ways to scrape a living, rather than sources of identity and pride. For many, despair follows.

Such problems are easier to diagnose than to cure. Reforming American healthcare will require an almighty effort. With politics gridlocked and soaking in lobbyist money, it’s not obvious that the US government is capable of running the kind of healthcare system that works elsewhere — even if Congress decides to try. But try it must, because the status quo is a tragedy.

 

 

Written for and first published in the Financial Times on 12 July 2019.

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Undercover Economist

The strange power of the idea of “average”

“While nothing is more uncertain than a single life, nothing is more certain than the average duration of a thousand lives.” The statement is often attributed to the 19th-century mathematician Elizur Wright, who not coincidentally was a life insurance geek. But buried in the aphorism is a humdrum word concealing a powerful idea: the “average”.

The idea of taking an average — that is, of adding up (say) a hundred lifespans and dividing the total by a hundred, to produce the arithmetic mean — seems absurdly simple. But Stephen Stigler, a historian of statistics, reckons it is the most radical statistical operation ever devised. I am inclined to agree. The mean has a strange power over the way we think, and not always a benign one.

We do not know who invented the arithmetic mean. The statistician Churchill Eisenhart once tried to trace its history. It was originally used as a way of combining various observations that should be identical, but were not — for example, estimates of the direction of magnetic north.

In 1635 the mathematician Henry Gellibrand used the word “meane” to describe the midpoint of a lowest and highest number — not the same thing — but by 1668, a person known as “DB” was quoted in the Transactions of the Royal Society describing “taking the mean” of five values casually enough to make it clear that the concept was by then established.

Why is this such a powerful idea? As Prof Stigler puts it in The Seven Pillars of Statistical Wisdom, “you can actually gain information by throwing information away”. This is true in the straightforward sense that too many numbers become confusing: more than 50m people died last year, but if I could somehow show you a hundred-mile long printout of all their ages at death, you might struggle to learn much from it.

But the mean also eliminates errors. In the context that Gellibrand and DB were writing, taking an average cancels out mistakes in the original observations. This was by no means obvious. When confronted with contradictory measurements, the instinct of mathematicians had been to figure out which one was best and to dismiss the rest. But taking the average was a far better way to eliminate error.

And yet in this method lies a trap, because not all variation is error. The trap was sprung in the 1830s by the hugely influential statistician Adolphe Quetelet, who was an astronomer as well as a founder of the idea of “social physics” — using statistical techniques to understand humans and their societies.

Quetelet asked us to imagine that a thousand sculptors had made a copy of a famous statue of a gladiator. Each copy would have some errors or imperfections — but on average, they would be a perfect copy. So far, so good. But then, Quetelet continued, if we measured a thousand real soldiers and averaged their body measurements, we could get the ideal, perfect soldier. “L’homme moyen” — the average man — was Quetelet’s benchmark for perfection. (What about “la femme moyenne”? Well, quite.)

But as Todd Rose points out in The End of Average, Quetelet’s logic isn’t just andro-centric. It’s nonsense. A tall copy of a statue may be an error, but a tall soldier is not — and may well benefit from having superior reach.

Quetelet did not lack for critics. His contemporary, the mathematician and proto-economist AA Cournot, correctly argued that the Average Man probably didn’t exist. Victorian statistician Francis Galton was fascinated by averages, yet asserted: “No statistician dreams of combining objects into the same generic group that do not cluster towards a common centre . . . if we do so the result is monstrous and meaningless.”

But this idea of the average as perfection did not die. In an age of mass production it was too convenient. Production-line managers and modernist architects found it easy to design for the average person.

In 1943, the sculptor Abram Belskie and obstetrician Robert Dickinson turned Quetelet’s metaphor into reality, carving statues of “Normman” and “Norma”, based on the average measurements of 15,000 young adults. The US press loved Norma in particular: she was regarded as female perfection, at least from the male perspective. (It would be a stretch to describe the statue as “monstrous”.) Yet a competition to find an actual woman who matched her dimensions did not succeed. Being precisely average is not the same thing as being perfect — but it is just as rare.

We no longer have to fall into this trap. It is still hard to personalise rather than standardise — but it is not impossible. Drugs are not best evaluated by the average effect over thousands of patients. Social care will fail if it is designed only for the average recipient, or education for the average pupil. A forecasting model that is correct on average may be a very dangerous model indeed.

Elizur Wright was quite correct to declare that a single life is uncertain; but we should never leap to the conclusion that an average life is ideal.

 

 

Written for and first published in the Financial Times on 5 July 2019.

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How economics can raise its game

How can economics become a more insightful discipline? Should it aim to be more like physics, with its precision and predictive power? Or should economists emulate anthropologists or historians, immersing themselves in the details of the particular and the unquantifiable?

There’s a case to be made either way. Some critics argue that economics is missing better physics: it got stuck in the 19th century with fusty old ideas like marginal analysis and equilibrium, and missed out on cool ideas like chaos theory and phase transitions that promise to shed insights on economic complexity or sudden crises. (See, for example, Philip Ball’s excellent book, Critical Mass.)

Others say that economics needs to put the mathematics down and back slowly away. As Immanuel Kant put it, “out of the crooked timber of humanity, no straight thing was ever made”, so economists should be less fond of putting rulers against everything.

The fact that both views have the ring of plausibility suggests that this is a tougher challenge than it might appear from the sidelines. Now a new paper addresses the question from the heart of academic economics: Nobel laureate George Akerlof, writing in the Journal of Economic Literature.

Prof Akerlof, now at Georgetown, argues that the academic discipline of economics rewards “hard” rather than “soft” research with publication in the top journals, and therefore with promotion and status. We know “hard” when we see it: numbers are harder than words, quantities harder than qualities. Causation is harder than correlation. Physics is “hard” and sociology “soft”.

There is much to be said for hard science. The downside is that certain questions cannot be answered — or perhaps even asked — in precise, mathematical, causal terms. They are still important, and if economics insists on “hard” methods it will overlook them.

Another Nobel laureate, the late Gary Becker, reflected on his college studies: “I began to lose interest in economics . . . because it did not seem to deal with important social problems. I contemplated transferring to sociology, but found that subject too difficult.”

What is fascinating about that remark is that Becker earned his prize by applying the hard-ish tools of economics to areas that seemed to belong to softer disciplines: addiction, discrimination, marriage and education. How well he succeeded remains a matter of debate. Personally I believe he contributed a lot.

Yet plenty of sociology remains outside the reach of the economists’ tools: it is important but too soft — or in Becker’s words, “too difficult”. More awkwardly for the economics profession, some key economic questions also seem more likely to yield to soft than hard approaches: what are the obstacles to social mobility? Where does innovation come from? Can we strengthen the institutions that matter for prosperity?

Beyond any particular problem there is also the challenge of combining insights from highly specialised subfields. Raghuram Rajan, when he was chief economist of the IMF, came closest to predicting the 2008 financial crisis. He later observed that economists had written insightfully on all the key issues but had lacked someone capable of putting all the pieces together.

Is this also a hard/soft problem? Prof Akerlof thinks so. He argues that the bias towards hard analysis also produces a bias towards specialised silo thinking, and that being a generalist is something of a soft skill.

I’m not sure that’s right. Certain mathematical tools are both highly portable and distinctly hard-edged. But it is surely true that the kind of synthesis that would have identified the looming crisis would have been too discursive to be published in a top economic journal.

So I am not completely persuaded that economics is, on average, “harder” than it should be. But I am in complete agreement with the recommendation that economics needs to be more tolerant of different methods, whether the latest ultra-hard physics or the softer explorations of anthropology or even a business-school case study. After all, the economy encompasses a lot of different things; why should it yield only to a particular set of analytical tools?

Economics has certainly profited from the insights of those outside the field, such as psychologist Daniel Kahneman, and the late Elinor Ostrom, a political scientist whose ambition to study economics was thwarted because, as a girl in the 1940s, she’d been steered away from mathematics. Both have Nobel memorial prizes in economics.

The insights can flow the other way, too. Charles Darwin’s theory of evolution was influenced by the economist Robert Malthus’s Essay on the Principle of Population. When working on the kinetic theory of gases, physicist James Clerk Maxwell drew inspiration from social scientists and their habit of thinking in statistical approximations about large populations.

It is easier to make such a recommendation than to embrace it. The further the leading economics journals stray from their core expertise, the more difficult they will find it to distinguish good work from bad. But at the margin, such moves offer a lot of promise.

 

Written for and first published in the Financial Times on 28 June 2019.

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How the Brexit debate was flushed down the drain

On a scale of one to seven, how well do you understand how a flush lavatory works?

This was a question asked by two Yale psychologists, Leonid Rozenblit and Frank Keil, almost two decades ago. Before I explain why, here’s a follow-up exercise: write down your lavatory explanation in as much detail as you can. You may wish to draw a diagram, or explain it to a friend. Or not.

You may then reflect that you knew a little less than you realised. That was the experience of many of the study’s subjects — and not just for lavatories (why does all the water disappear down the U-bend?) but also for zips, quartz watches, helicopters, speedometers, cylinder locks, piano keys and sewing machines. People felt they understood the mechanisms that surrounded them, but their confidence was severely dented by the simple act of giving them pencil and paper and saying: “Show me.”

The same exercise can be performed with politics. In 2013, Steven Sloman and Philip Fernbach, authors of The Knowledge Illusion, were members of a research team that did just that, inviting people resident in the US to rate their understanding of American policy proposals such as introducing unilateral sanctions on Iran, a cap-and-trade system for carbon emissions and a national flat tax. They also asked people to rate their approval of each policy, which would have been unnecessary for lavatories and zips. (Lavatories are useful, zips self-evidently malevolent.)

Professors Sloman and Fernbach and their colleagues found that — just as with locks and speedometers — people tended to overrate their knowledge at first, and then discover some humility when asked to be more specific.

Perhaps British voters could use a dose of the same medicine when it comes to our understanding of Brexit. Leave or Remain, many of us came late to the realisation that there was a difference between the single market and the customs union. I am still not sure most people can explain what that difference is. Many people have strong views about Prime Minister Theresa May’s withdrawal agreement; rather fewer could give a convincing account of how it differs from the political declaration that accompanies it.

When Mrs May began her premiership with the statement that “Brexit means Brexit”, it dawned on most of us that the details of the whole project might need a little more work. But she wasn’t the only one who was vague.

I’d love to see the contenders for the Conservative party leadership quizzed a little less about their cocaine habits and instead forced to sit down and write a detailed explanation of what a no-deal Brexit actually is. While we wait, perhaps the same exercise could be given to the 160,000 Conservative party members who are about to select the country’s next prime minister.

How long, for example, will HM Revenue & Customs wave through imports without inspections? Will the French reciprocate? What are the implications of “trading under World Trade Organization rules” for the UK’s banking and insurance industries? How large are those industries?

How many other developed countries are content to rely solely on WTO arrangements in their trade with the EU? Is the WTO capable of enforcing the rules anyway, given the current crisis in its appellate body? How likely is the EU to grant permission to British farmers to sell meat, milk or cheese? Would any of these decisions be different if the UK refused to pay the “divorce bill” it had negotiated?

I don’t think it is especially shameful that we ordinary voters are incurious about the ins and outs of Brexit, any more than we should be obliged to understand the workings of a quartz watch. An ability to read the time is generally sufficient. But I am stunned by just how little we seem to demand of our political leaders.

We want tailors to understand sewing machines, locksmiths to understand locks and plumbers to know that a lavatory is basically a siphon. But our standards for politicians seem far lower. The next prime minister is likely to be a person who believes that if we demanded it with enough gusto, sewage would remove itself from our homes in some scatological remix of Mary Poppins — and that anyone who tells you otherwise is clearly a shill for Big Porcelain.

We should expect more of anyone who wants to lead the country. And since our politicians have grown so fond of punting the hard questions back to us, perhaps we should also demand more of ourselves.

Profs Sloman and Fernbach found that asking people to explain the workings of the policies they so fervently supported or opposed had a humbling effect. When people realised that they knew less than they had once believed, they quite reasonably wound their necks in as a result. It seems strange to die in a ditch for something we can’t clearly explain, even to ourselves.

Next time you find yourself in some heated political debate, perhaps you should suggest that both sides pause to explain the policy in question. You may find you understand less — and agree more — than you realised.

Written for and first published in the Financial Times on 21 June 2019.

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