Tim Harford The Undercover Economist

Undercover EconomistUndercover Economist

My weekly column in the FT Magazine on Saturday’s, explaining the economic ideas around us every day. This column was inspired by my book and began in 2005.

Undercover Economist

Game changers: the importance of the puzzle

Looking forward to a few family board games at Christmas? Good, good. Steer clear of Monopoly — a dreadful, grinding game. Settlers of Catan is the game that Monopoly wishes it was although, for committed players, Puerto Rico is even better. (Agricola is the best game. But you knew that already.)

 Games are a serious business in the Harford household these days but they, along with puzzles and other fripperies, have long been important elsewhere.

Consider the puzzle of the bridges of Königsberg — 18th-century Königsberg had seven bridges connecting two sides of a river and two large islands. The puzzle was: is there a walking route through the city that crosses each bridge only once? When the great mathematician Leonhard Euler heard about the problem, he found it “banal” but was intrigued by the fact that, despite its apparent simplicity, “neither geometry nor algebra nor even the art of counting” could solve it. And so Euler invented an entirely new branch of mathematics, graph theory.

“That was the beginning of all network analysis,” says Alex Bellos, the author of Can You Solve My Problems?, a new book celebrating the joys and history of puzzles. Euler’s graph theory has been enormously fruitful in chemistry, physics, sociology and, of course, computer science. The internet relies on Euler’s analysis. And it all started with a brain-teaser.

Perhaps it’s no surprise that a puzzle might lead to a mathematical breakthrough: after all, puzzles are designed to be intellectual challenges. But other pastimes have also spurred fresh ideas — for example, gambling. Perhaps the first gambler to draw inspiration from this vice was the Renaissance mathematician Girolamo Cardano, who produced the foundations of probability theory.

Three-and-a-half centuries after Cardano died, the smartest man in the world decided to use mathematics to work out how best to play poker. John von Neumann was one of the driving forces behind the development of both the atomic bomb and the computer, and he wanted to apply mathematics to social sciences — for example, analysing the success or failure of negotiations, or the formation of alliances. His contention was that a mathematical theory that could explain life should start by explaining poker: “Real life consists of bluffing, of little tactics of deception, of asking yourself what is the other man going to think I mean to do, and that is what games are about in my theory.”

The result of von Neumann’s musings — first alone, and then with the economist Oskar Morgenstern — was “game theory”, one of the building blocks of modern economics and an important tool in evolutionary biology.

This is an impressive list of ways in which games have inspired us — and we haven’t even touched on the way that computer scientists have used chess as a testing ground for their machines.

But it would do games a disservice to treat them merely as a source of intellectual inspiration. They have inspired us in other ways too. In his new book, Wonderland, Steven Johnson makes a convincing case for the transformative power of play and delight — for example, the Victorian designer of paleo-computers, Charles Babbage, was inspired by a captivating mechanical toy dancer.

This wasn’t the last time that pure fun changed the world of computers. The first video game that mattered, Spacewar!, was designed in the early 1960s by enthusiastic students at the Massachusetts Institute of Technology who wanted to demonstrate just what the latest computers could do. And what they could do went way beyond the technical: they could hijack our attention, trigger Pavlovian responses, even addict us, by providing a compelling and engaging challenge.

Silicon Valley visionary Stewart Brand wrote about Spacewar! in Rolling Stone magazine in 1972. He saw what the game represented: computers that ordinary people would come to love. “I saw them having some kind of out-of-body experience,” he said recently of Spacewar!’s players. “Their brains and their fingers were fully engaged.” That curious compulsion felt by every PlayStation junkie or Instagram addict was felt first by the players of this early game.

Now, researchers at DeepMind, Google’s artificial intelligence outfit, are turning to computer games to train artificial intelligences. The AI is shown the game screen, given access to the score and a controller, and then — with no further information — figures out how to master the game. At first, DeepMind started with simple games such as Atari’s Breakout but it has recently moved on to Starcraft II, a game that requires tactics, military strategy, surprise and economic planning. Like von Neumann’s poker, learning to play Starcraft II is good training for the rigours of reality.

One of Alex Bellos’s puzzling heroes is Hubert Phillips — the man who coined the word “mezzobrow” to refer to “people of the highest intelligence who enjoy such things as crosswords, chess problems, inferential puzzles and parlour games”. Even as a child I knew about Phillips, the author of a veritable bible of card games. Phillips also wrote 200 detective stories, compiled crosswords and championed a number of classic puzzles — including the “logic grid” problems that are such a staple of the genre.

But that is not how Hubert Phillips began his career. He was a noted economist, adviser to the Liberals in the 1920s and the head of Bristol University’s department of economics. All very respectable, but thank goodness he turned to the far more important practice of having fun.

Written for and first published in the Financial Times.

My new book “Messy” is now out and available online in the US and UK or in good bookshops everywhere.

Undercover Economist

Why forecasters failed to predict Trump’s victory

British Remainers watched the US presidential campaign with an uneasy sense that they had seen it all before: brazen lies from a populist movement, experts lining up to attest that all sensible people agree on what should be done … Those of us who saw the EU referendum campaign up close have been well prepared for the possibility of a Trump victory. US Democrats had less of a visceral warning and so were more surprised.

The truth is that once Trump had secured the nomination, a Trump presidency was always a strong possibility. The betting markets seemed to recognise this, offering odds of three-to-one a week or so before the poll. Three-to-one shots happen all the time — or at least, about a quarter of the time. A defeat for Hillary Clinton may be far more consequential than a defeat for Manchester City and, therefore, far more shocking but it shouldn’t be any more surprising. Favourites do not always win.

Forecasting is a tough job but we make it harder than it has to be by committing some familiar cognitive errors. So what are the lessons that we should learn?

First, wishful thinking has struck again. After the Brexit vote, I described the research of the economist Guy Mayraz. At Oxford university’s Centre for Experimental Social Science, Mayraz ran experiments in which participants were told that they were either “farmers”, who would be paid more if wheat prices were high, or “bakers”, who would be paid more if wheat prices were low. They were then shown a graph, purportedly tracking the wheat price, and invited to forecast the future price, with a cash reward for accurate forecasts. Despite the fact that they were being paid for accuracy, the farmer-participants systematically forecast higher wheat prices than the bakers. Everyone predicted what they hoped would happen. Does that sound familiar?

The second lesson is that — as a large experiment conducted by the Good Judgment Project has shown — self-critical, open-minded forecasters do a better job than narrow-minded, overconfident ones. Of course that is obvious — except that open-mindedness is a quality in short supply. Dwelling on our own fallibility is like dwelling on our own mortality: most people find it uncomfortable, so we don’t do it.

Whether you’re sinking a beer with friends or prognosticating on cable news, the social pressure is to make an interesting, confident statement rather than hum and haw about all the ways in which you might be wrong. Confident, eye-catching forecasts are the snack food of analysis and commentary: everybody knows they’re doing us no good but we can’t seem to resist.

It was interesting to see the self-critical dynamic in action at Nate Silver’s political forecasting website FiveThirtyEight. I interviewed Silver at a public event when he was riding high after successful forecasts in 2012. The audience questions were fawning but I was impressed at how Silver kept emphasising that he’d been lucky and future forecasts would be harder.

This time round, FiveThirtyEight botched the analysis of the Republican nomination: the polls said Trump was clearly ahead but nobody could quite believe that. Yet the early failure provoked some introspection. FiveThirtyEight learnt a lesson. While other forecasters were writing off Trump in the presidential race, FiveThirtyEight kept looking at the polls, and continued to declare that it was close.

A third lesson is that we have to keep an open mind that more than one outcome is possible. Too many people equated “Clinton is the favourite” with “Clinton will win”. That’s an obvious error, but it’s common. Even expert forecasters often treat a strong possibility as though it is a certainty. This tendency is one reason that dart-throwing chimps give the experts a run for their money. The chimps make lots of forecasting errors too, but at least they don’t systematically overrate their chances.

Perhaps the best way to keep more than one outcome in mind is to develop scenarios. I’ve written before about the scenario-planning method: scenarios are persuasive, coherent stories about the future, and like all good stories they have a tendency to stick with the listener. A scenario-planner will create at least two contradictory stories — this helps people to keep an open mind, and to prepare for more than one outcome.

FiveThirtyEight does not quite embrace scenario-planning but it did produce a clear account of the kind of polling error that would be necessary to deliver a Trump win — along with a reminder that such polling errors are ubiquitous. Clinton was the favourite even for FiveThirtyEight, but the site presented its readers with a very clear description of how the less-likely prospect of a Trump win would unfold, if it were to happen.

Scenario-thinking is not really intended to produce better forecasts — although I think it does no harm. What it should deliver is preparedness. Trump’s victory has caught a lot of people napping; that’s strange. We take precautionary measures against far less likely events than the victory of a presidential underdog.

Amid many depressing features of the politics of 2016 has been our failure to prepare for perfectly foreseeable possibilities. If there is a silver lining, it’s this: the uncertainties are not going away, so it’s not too late to learn.

Written for and first published in the Financial Times.

My new book “Messy” is now out and available online in the US and UK or in good bookshops everywhere.

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Undercover Economist

The best ways to combat bias from Airbnb to eBay

Six months ago, tech entrepreneur Rohan Gilkes tried to rent a cabin in Idaho over the July 4 weekend, using the website Airbnb. All seemed well, until the host told him her plans had changed: she needed to use the cabin herself. Then a friend of Rohan’s tried to book the same cabin on the same weekend, and his booking was immediately accepted. Rohan’s friend is white; Rohan is black.

This is not a one-off. Late last year, three researchers from Harvard Business School — Benjamin Edelman, Michael Luca and Dan Svirsky — published a working paper with experimental evidence of discrimination. Using fake profiles to request accommodation, the researchers found that applicants with distinctively African-American names were 16 per cent less likely to have their bookings accepted. Edelman and Luca have also published evidence that black hosts receive lower incomes than whites while letting out very similar properties on Airbnb. The hashtag #AirbnbWhileBlack has started to circulate.

Can anything be done to prevent such discrimination? It’s not a straightforward problem. Airbnb condemns racial discrimination but, by making names and photographs such a prominent feature of its website, it makes discrimination, conscious or unconscious, very easy.

“It’s a cheap way to build trust,” says researcher Michael Luca. But, he adds, it “invites discrimination”.

Of course there’s plenty of discrimination to be found elsewhere. Other studies have used photographs of goods such as iPods and baseball cards being held in a person’s hand. On Craigslist and eBay, such goods sell for less if held in a black hand than a white one. An unpleasant finding — although in such cases it’s easy to use a photograph with no hand visible at all.

The Harvard Business School team have produced a browser plug-in called “Debias Yourself”. People who install the plug-in and then surf Airbnb will find that names and photographs have been hidden. It’s a nice idea, although one suspects that it will not be used by those who need it most. Airbnb could impose the system anyway but that is unlikely to prove tempting.

However, says Luca, there are more subtle ways in which the platform could discourage discrimination. For example, it could make profile portraits less prominent, delaying the appearance of a portrait until further along in the process of making a booking. And it could nudge hosts into using an “instant book” system that accelerates and depersonalises the booking process. (The company recently released a report describing efforts to deal with the problem.)

But if the Airbnb situation has shone a spotlight on unconscious (and conscious) bias, there are even more important manifestations elsewhere in the economy. A classic study by economists Marianne Bertrand and Sendhil Mullainathan used fake CVs to apply for jobs. Some CVs, which used distinctively African-American names, were significantly less likely to lead to an interview than identical applications with names that could be perceived as white.

Perhaps the grimmest feature of the Bertrand/Mullainathan study was the discovery that well-qualified black applicants were treated no better than poorly qualified ones. As a young black student, then, one might ask: why bother studying when nobody will look past your skin colour? And so racism can create a self-reinforcing loop.

What to do?

One approach, as with “Debias Yourself”, is to remove irrelevant information: if a person’s skin colour or gender is irrelevant, then why reveal it to recruiters? The basic idea behind “Debias Yourself” was proven in a study by economists Cecilia Rouse and Claudia Goldin. Using a careful statistical design, Rouse and Goldin showed that when leading professional orchestras began to audition musicians behind a screen, the recruitment of women surged.

Importantly, blind auditions weren’t introduced to fight discrimination against women — orchestras didn’t think such discrimination was a pressing concern. Instead, they were a way of preventing recruiters from favouring the pupils of influential teachers. Yet a process designed to fight nepotism and favouritism ended up fighting sexism too.

 … 

A new start-up, “Applied”, is taking these insights into the broader job market. “Applied” is a spin-off from the UK Cabinet Office, the Behavioural Insights Team and Nesta, a charity that supports innovation; the idea is to use some simple technological fixes to combat a variety of biases.

A straightforward job application form is a breeding ground for discrimination and cognitive error. It starts with a name — giving clues to nationality, ethnicity and gender — and then presents a sequence of answers that are likely to be read as one big stew of facts. A single answer, good or bad, colours our perception of everything else, a tendency called the halo effect.

A recruiter using “Applied” will see “chunked” and “anonymised” details — answers to the application questions from different applicants, presented in a randomised order and without indications of race or gender. Meanwhile, other recruiters will see the same answers, but shuffled differently. As a result, says Kate Glazebrook of “Applied”, various biases simply won’t have a chance to emerge.

When the Behavioural Insights Team ran its last recruitment round, applicants were rated using the new process and a more traditional CV-based approach. The best of the shuffled, anonymised applications were more diverse, and much better predictors of a candidate who impressed on the assessment day. Too early to declare victory — but a promising start.

Written for and first published in the Financial Times.

My new book “Messy” is now out and available online in the US and UK or in good bookshops everywhere.

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Undercover Economist

Why economics is a discipline in need of diversity

Does economics have a problem with diversity? The example of Janet Yellen, the most powerful economist in the world, suggests not. But she doesn’t have much company at the top: Christine Lagarde at the IMF is a lawyer; Elinor Ostrom, the only woman to win the Nobel Memorial Prize in Economics, was a political scientist. Even when women win the highest elected office in the land, a woman has never run the US Treasury or been finance minister in either unified Germany or West Germany. Economics, it seems, is a particularly male bastion.

A new survey by Amanda Bayer of Swarthmore and Cecilia Elena Rouse of Princeton puts some firm statistics on this general impression. Looking at the US, the academics find that fewer than 30 per cent of bachelor’s degrees in economics are awarded to women — and the percentage is similar for doctorates.

Is this just part of the age-old problem that women do not study mathematical subjects? In the UK, perhaps: girls are less likely than boys to study A-level mathematics. But in the US, the explanation doesn’t stack up. “Stem” subjects — science, technology, engineering and mathematics — now award more degrees to women than to men at both undergraduate and doctoral level. Economics is a clear outlier.

A similar tale can be told for students who identify as belonging to ethnic groups such as Hispanic, Native American or African American. Such minority groups are less likely to receive economics degrees than degrees in other social sciences, humanities, business studies or Stem subjects. The same is true at doctoral level. There’s no getting around it: economics is, almost uniquely, the preserve of white or Asian men.

Why is this happening? One possibility is the self-perpetuating stereotype. As long as economics professors tend to be white men, women and minority students may feel that the subject just isn’t for them. Survey evidence suggests that women in the US are simply not as likely to find the subject of economics appealing.

There’s also the problem of implicit or explicit discrimination. Here, the evidence is mixed: such discrimination exists but it is not confined to economics. For example, one recent study (by Katherine Milkman, Modupe Akinola and Dolly Chugh) sent 6,500 emails to professors from a fictional student, requesting a 10-minute meeting to discuss applying to a doctoral programme. The emails were all identical except for the race or gender of the imaginary applicant. Generally, emails from white men were more likely to receive a response. But this was true for almost all subjects — economics was not particularly blameworthy.

On the other hand, a 2014 study, “Women in Academic Science”(by Stephen Ceci, Donna Ginther, Shulamit Kahn and Wendy Williams) found that academia had in recent years become a much more level playing field for women than was often claimed. But the study singled out economics as an exception, a subject where well-qualified and productive women continue to miss out on promotions.

If women or people from certain ethnic groups are being denied promotions because of discrimination, then clearly that’s unacceptable. But even if the main story is that economics is simply unappealing to women and to various ethnic minorities, that’s a concern. It’s important that everyone is represented in economics. Partly this is because economists tend to be well paid and at least somewhat influential. (You have to be a really prominent sociologist before the news networks want your opinion on anything much.)

Just as importantly, economics itself needs diverse views. Few endeavours ever benefited from an intellectual monoculture. That is an argument for mainstream economics to engage with other disciplines such as psychology, anthropology, evolutionary biology — and heterodox schools of thought such as Marxism and Austrian economics. But it’s also an argument to engage with people who may see the world differently because of their race, nationality, sexuality, disability or gender.

The obvious reason for this is that when a group of very smart people with similar perspectives find themselves stuck, someone who brings a new intellectual tool or a fresh perspective is far more valuable than one more smart guy in the same mould. (This argument has been brilliantly and rigorously explored by the complexity scientist Scott Page in his book The Difference.)

But there are subtle gains from diversity too. For example, when psychologist Samuel Sommers conducted mock jury trials of a black defendant, with some all-white juries and some racially mixed juries, he found that the mixed juries did a much better job of analysing the information placed in front of them. But this wasn’t just because the black jurors brought a fresh perspective. It was because the white jurors felt under pressure to think rigorously and to justify their views.

This is yet another reason why white guys like me should want to see more diversity in the subject that we love. It’s not just about being fair to everyone. And it’s not even just that people with different perspectives can enrich economics. It’s that when we’re forced outside our cosy group of people who think and look just like us, we become better people.

Written for and first published in the Financial Times.

My new book “Messy” is now out and available online in the US and UK or in good bookshops everywhere.

Undercover Economist

Rich the banker? What’s not in a name…

Somebody recently pointed out to me a striking fact: being named Dennis makes people more likely to become dentists. The idea is utterly splendid. It’s also untrue, and has been known to be untrue for five years. The fact that the claim is repeated by knowledgeable people tells us something important about the way that ideas spread.

Back in 1994, New Scientist magazine drew attention to the author of a book about the polar regions, Daniel Snowman. An avalanche of apt names followed: the incontinence experts JW Splatt and D Weedon; Manchester Ship Canal scholar Sue Grimditch; highly paid bankers Rich Ricci and Bob Diamond; prison reformer Frances Crook; and, of course, the former Lord Chief Justice, Lord Judge. The idea of nominative determinism — that your name determines your fate — spread because it was fun.

But then social psychologists started to take the idea seriously. The theory of “implicit egotism” is that people are unconsciously attracted by things that remind them of themselves — and, in particular, to echoes of their own names. Dennis would tend to pursue dentistry, while Laura would be tempted to become a lawyer. Georgina would move to Georgia, and Erica would be more likely to accept a proposal of marriage from Eric than from Bob.

The source of the Dennis/dentist claim is not some urban myth: it’s a peer-reviewed article published in 2002 in the Journal of Personality and Social Psychology. That article found that although Dennis, Walter and Jerry are equally popular names, there are almost twice as many people named “Dennis” working as dentists as there are people named Walter or Jerry. Other studies found that people were disproportionately likely to marry someone with a similar last name, and to move to areas resembling their name. These findings are not only recycled among casual consumers of pop psychology, they’re in leading psychology textbooks.

But, in 2011, the psychologist Uri Simonsohn published a review of the evidence for nominative determinism. Simonsohn, an important researcher in his own right, is increasingly carving out territory as a debunker of shaky ideas in psychology.

Simonsohn found that the Dennis/dentist connection is a statistical artefact — as can clearly be seen by the fact that Dennis is a more popular name than Walter, not only for dentists but for lawyers. This is because while Walter is just as common a name as Dennis, it is particularly common among elderly gentlemen who have passed retirement age. Dennis is not just more likely than Walter to be a dentist; he’s more likely than Walter to have any job at all.

Another curious finding is that George and Geoffrey seem oddly likely to do doctoral research in geosciences. Evidence for nominative determinism? No. These genteel Geo names are even more over-represented in other sciences.

What about marriage? Do people with the same or similar names tend to marry each other? Yes — but not necessarily because the name itself is attractive.

The first thing to understand is that if people married totally at random, we would expect only a few same-surname matches to occur. Because the baseline is low, a few extra matches are enough to provide (possibly spurious) evidence for the implicit egotism theory. What might explain those extra matches? Looking at data drawn from Texas, Simonsohn finds over 200 same-surname marriages based on just four names: Patel, Nguyen, Tran and Kim. These 200 marriages are easily enough to skew the data, and it’s clear enough that what is going on is simply marriage within immigrant communities.

Then there’s the tale of Candi Nehring, who married Stephen Nehring in 2001. The unconscious attraction of the Nehring name? Hardly. It seems that Candi and Stephen had been married before, divorced and remarried. Whatever the emotional dynamic might have been, I am confident that Candi Nehring didn’t marry her ex-husband because she really liked his surname. Other women marry their former brothers-in-law. And clerical errors can also create false cases of matched-surname marriages.

 … 

Enough. Reading Simonsohn’s paper, the big picture emerges long before he has finished his patient dissection of eight separate findings of nominative determinism, and shown that all eight of them appear to be correlations with a more straightforward explanation. The theory of implicit egotism is pleasing nonsense.

So why do people still tell me that Dennis is likely to become a dentist? I think the truth is that nominative determinism hits a mental sweet spot. We chuckle when we hear that a senior judge is called Igor Judge. We’re astonished and delighted to hear that the boffins have gone out and discovered that people really do seek out professions and spouses that echo their own names. It’s a finding that is simple to remember, faintly intuitive and yet surprising enough to talk about to other people. It spreads.

Old ideas die hard — especially when they are interesting and fun. I am told that we live in a post-factual age, and perhaps there are more important things to worry about than whether Dennis is likely to become a dentist. Still, even when the myth is delightful and the truth is dull, the truth still matters.

Written for and first published in the Financial Times.

My new book “Messy” is now out and available online in the US and UK or in good bookshops everywhere.

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Undercover Economist

Trump, Brexit, and predictions in an age of uncertainty

If 2008 was a sharp reminder that banking matters, then 2016 has reminded us that politics matters too — and, in both cases, the reminder has not been especially welcome. How should economists respond?

Until recently, both banking and politics tended to be something of a niche interest in the economics profession. This isn’t quite as insane as it might seem: if you want to analyse a complex world, you’re going to have to make some simplifying assumptions. For a generation or more, in rich countries, both banks and politicians have seemed complicated and not terribly important, so many economists have ignored them.

Development economists have paid closer attention to politics and have been rewarded for their efforts. Daron Acemoglu won the John Bates Clark Medal in 2005, and the late Elinor Ostrom, a political scientist, won the Nobel Memorial Prize in Economics in 2009. The reason for their interest is obvious: malfunctioning political institutions are a major reason that poor countries are poor.

In the wake of the Brexit vote, Trumpism, the rise of Marine Le Pen and the coming constitutional referendum in Italy, it no longer seems tenable to ignore the economic effects of politics in the western world. But how best to take them into account?

Some economists argue that financial markets are actually an excellent window into politics. For example, Justin Wolfers, an economist at the University of Michigan, tracked US stock futures prices during the first presidential debate. Stocks rose as Hillary Clinton got the better of Donald Trump, and betting markets upgraded the prospect of a Clinton victory. Implicitly, the market was saying that a Trump presidency would knock more than 10 per cent off the profitability of corporate America — and was relieved to see that risk fading.

Several other economists have looked at sharp political discontinuities to estimate the value of political connections — for example, when Senator Jim Jeffords left the Republican party in 2001, handing control of the Senate to the Democrats, this surprise was reflected by a dip in the share price of companies with political connections to the Republicans. And the share price of companies linked to Democrats suffered when a judicial ruling decided the tight 2000 election in favour of George W Bush.

I want to believe that looking at financial markets helps us understand politics and policy — but markets are hardly omnipotent. They struggled to predict the Brexit vote and are now struggling to predict its consequences. The pound did little more than wobble when Leave took a lead in the opinion polls — and the FTSE 100’s collapse, followed by a swift recovery, suggests a knee-jerk reaction rather than cool calculation.

Even if markets were properly pricing in the available information, sometimes that information isn’t much to go on. Trump’s estimated chances of winning the presidency, for example, have gyrated wildly, because the polls have also gyrated wildly, in turn because significant new information seems to burst over the horizon every few days. In any case, it’s impossible to say what he would actually do if elected, because what few policies he has are barely credible.

The UK’s new prime minister Theresa May has also revealed little about her negotiating position regarding Brexit. What little she has said sounds recklessly hardline, but that may merely be pandering to her own party membership. Or not. The scope of possible outcomes is narrower than it seemed on the day after the referendum result — but it is still very wide.

For economists, an alternative response to all this uncertainty is to focus on measuring the uncertainty itself. One option is to use an index such as the Vix, which rises when traders are willing to pay a lot to insure themselves against sharp market moves, and falls when such insurance is cheap.

Or one could turn the mutterings of journalists into hard data: Scott Baker, Nicholas Bloom and Steven Davis have constructed indices of political uncertainty based on an analysis of newspaper articles mentioning relevant terms. The US index has tended to rise since 1960. This may be because journalists write differently, of course — but Baker et al believe it is because the US government has become bigger, more complex and more polarised, meaning that election results are more economically consequential.

A “global” index — based on newspapers from 16 major economies — has been higher over the past five years than it was during the financial crisis, which suggests that, unlike with the Vix, the researchers are picking up something separate from pure economic uncertainty.

All this uncertainty is exciting for political pundits, and presumably satisfying for those voters who rejected the status quo. Is it just noise, or does uncertainty itself have an economic impact? The evidence suggests that it does.

Armed with a variety of different indicators of uncertainty, a separate study by Nicholas Bloom concludes that it tends to spike during recessions. The recession, of course, may be the cause of the uncertainty but Bloom argues that the causation runs both ways: uncertainty also causes recessions because it makes consumers, employers and investors hesitate before spending money. And if we all hesitate, that is exactly what a recession looks like.

Written for and first published in the Financial Times.

My new book “Messy” is now out and available online in the US and UK or in good bookshops everywhere.

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Undercover Economist

The sweatshop dilemma

Every now and then, we remember that there are poor people in the world, and sweatshops become news. Jonah Peretti — the click-accumulating mastermind behind The Huffington Post and BuzzFeed — got his start in viral journalism 15 years ago by baiting Nike with a chain of witty emails requesting that his personalisable Nike trainers be emblazoned with the word SWEATSHOP.

Peretti having moved on to grander projects, the stage storyteller Mike Daisey picked up the baton, delivering a riveting monologue, “The Agony and Ecstasy of Steve Jobs”. It was about Daisey’s heroic unmasking of appalling working conditions in the Chinese factories that make iPads. It made compelling radio when This American Life aired it in 2012. It was even more compelling when This American Life retracted the episode shortly afterwards. Ira Glass, the show’s host, wrote: “Daisey lied to me.”

Economics, of course, offers a less click-worthy perspective. We shouldn’t be surprised if people making sneakers and iPads are paid badly to do tough, hazardous work, because they live in countries where such work is everywhere. And since people are moving away from grinding and precarious rural poverty to work in these grim factories, perhaps they see them as an improvement? The pithiest account of this view comes from the great 20th-century Cambridge economist Joan Robinson: “The misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all.”

But while sweatshops are probably better than nothing, that doesn’t mean that nothing is better than sweatshops. Is there a plausible alternative to low-wage exploitation? Towards the end of her life, Robinson was attracted by Maoism. It’s not an approach that has fared well.

Other alternatives might. One idea is to promote better labour standards. That might help badly paid workers, or it might harm them by encouraging companies to avoid the reputational risk of producing in the poorest countries. Another possibility is to encourage small-scale entrepreneurial enterprises. They’re emotionally appealing — but are they merely a distracting Etsy-fication of the serious process of industrial development?

Researchers recently published a fascinating study that sheds new light on the sweatshop debate. Chris Blattman, a political scientist at the University of Chicago, and Stefan Dercon, the chief economist of the UK’s Department for International Development, decided to run an unusual experiment in Ethiopia after teaming up with five different employers.

Ethiopia is an example of early-stage industrialisation: still one of the poorest places in the world, it’s been liberalising its economy and growing very quickly for the past decade. International investors from Europe to Bangladesh are eyeing up Ethiopia as a possible base for low-wage manufacturing. But what are these tough jobs like for the workers who do them?

Here’s where the experiment comes in. Faced with a long queue of job applicants, all apparently equally qualified, an employer would normally choose arbitrarily. But guided by Blattman and Dercon, the Ethiopian employers randomly assigned applicants (typically young women) into one of three groups: those given a job offer, those turned down for a job, and a third category that we’ll discuss in a moment.

This randomisation allows for an unbiased comparison of people who got jobs and people who did not. What Blattman and Dercon found surprised them. Despite the fact that there were long queues for these factory jobs, people didn’t stick with them for long. By the end of the year, two-thirds of people offered a job had not just quit that particular job, but quit working in the industrial sector entirely.

“In terms of earnings, industrial jobs are not worse than the alternatives,” says Stefan Dercon. “We just thought they would be better.” The sweatshop jobs offer a mix of benefits and costs: steady work but low rates of pay, even by the standards of Ethiopian companies, and often hazardous conditions — for example, cotton fibres in the air frequently cause breathing problems. Young people often use them as a fallback — a good option to have if you’re low on funds, but not the sort of job you’d want to stick with. And the companies themselves seem content to cope with the turnover. This pattern — treating workers as interchangeable cogs in an industrial machine, to be replaced as they quit — was common 100 years ago in the UK and the US and seems to be a standard feature of this stage of industrialisation.

Could we do better? Perhaps. Remember the third group in the experiment? These were people who applied for a job and were told instead that they’d won a little lottery — $300 with no strings attached, plus five days of entrepreneurship training. The lottery winners, on average, managed to start a business or otherwise get themselves into a position where they were earning substantially more than people who’d been offered factory jobs. Industrialisation will always be a mainstay of a country’s economic development — but it’s worth remembering that with finance and advice, people can prosper in other ways too.

Overall, the experiment suggests that there’s something in the “sweatshop” criticism: these are hazardous, poorly paid jobs that people tend not to stick with for long. But there’s also something in the economists’ instinct that workers can take these apparently exploitative jobs and turn them to their advantage. In short, it’s complicated. Who knew?

Written for and first published in the Financial Times.

My new book “Messy” is now out and available online in the US and UK or in good bookshops everywhere.

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Undercover Economist

The Ig Nobel prizes in Economics – in praise of ridiculous research

Congratulations are in order to Oliver Hart and Bengt Holmstrom, winners on 10 October of the Nobel Memorial Prize in Economics. Even though economics is not a full-fledged Nobel Prize, it has been earned by some splendid social scientists over the years — including a number of people who are not economists at all, from Herbert Simon and John Nash to Daniel Kahneman and Elinor Ostrom.

Yet this week I would rather discuss a different prize: the Ig Nobel prize for economics. The Ig Nobels are an enormously silly affair: they have been awarded for a study of dinosaur gaits that involved attaching weighted sticks to chickens (the biology prize), for studying stinky feet (medicine) and for figuring out why shower curtains tend to billow inwards when you’re taking a shower (physics).

But one of the Ig Nobel’s charms is that this ridiculous research might actually tell us something about the world. David Dunning and Justin Kruger received an Ig Nobel prize in psychology for their discovery that incompetent people rarely realise they are incompetent; the Dunning-Kruger effect is now widely cited. Dorian Raymer and Douglas Smith won an Ig Nobel in physics for their discovery that hair and string have a tendency to become tangled — potentially an important line of research in understanding the structure of DNA. Most famously, Andre Geim’s Ig Nobel in physics for levitating a live frog was promptly followed by a proper Nobel Prize in the same subject for the discovery of graphene.

A whimsical curiosity about the world is something to be encouraged. No wonder that the credo of the Ig Nobel prizes is that they should make you laugh, then make you think. In 2001, the Ig Nobel committee did just that, awarding the economics prize to Joel Slemrod and Wojciech Kopczuk, who demonstrated that people will try to postpone their own deaths to avoid inheritance tax. This highlights an important point about the power of incentives — and the pattern has since been discovered elsewhere.

Alas, most economics Ig Nobel prizes provoke little more than harsh laughter. They’ve been awarded to Nick Leeson and Barings Bank, Iceland’s Kaupthing Bank, AIG, Lehman Brothers, and so on. The first economics prize was awarded to Michael Milken, one of the inventors of the junk bond. He was in prison at the time.

Fair game. Still, surely there is something in economics that is ludicrous on the surface yet thought-provoking underneath? (The entire discipline, you say? Very droll.)

Where is the award for Dean Karlan and Chris Udry? These two bold Yale professors wanted to figure out whether lack of access to crop insurance was damaging Ghana’s agricultural productivity, so they set up an insurance company, sold insurance to Ghanaian farmers, and accidentally got themselves on the hook for half a million dollars if it didn’t rain in Ghana. (Happy ending: it rained. Also, crop insurance is very helpful.)

Psychologists Bernhard Borges, Dan Goldstein, Andreas Ortmann and Gerd Gigerenzer found they could construct a market-beating portfolio of stocks by stopping people on street corners, showing them a list of company names, and asking which they recognised. Surely an Ig Nobel in finance?

Another psychologist, Dan Ariely, already shared an Ig Nobel prize for medicine in 2008 for demonstrating that expensive placebos work better than cheap placebos. But in recent research with Emir Kamenica and Drazen Prelec, described in Ariely’s forthcoming book Payoff, Ariely paid people to build robots out of Lego. The researchers’ aim: to examine the nature of the modern workplace by dismantling the Lego in front of their subjects’ eyes, to see if they could dishearten them. (They could.) An Ig Nobel in management beckons.

Richard Thaler deserves an Ig Nobel in economics for his long-running column Anomalies, in which he asked his fellow economists a series of questions that seem straightforward but are enormously difficult for economics to answer. Why do investment banks pay high wages even to the receptionists? Why do people overpay in auctions? Why are people often nice to each other? If the Ig Nobel committee wants to repeat the Andre Geim trick, it should hurry up: Thaler may well win the economics Nobel before his Ig Nobel can be awarded.

But my preferred candidate for an Ig Nobel prize in economics is Thomas Thwaites. A few years ago Thwaites set himself the simple-seeming task of replicating from scratch a cheap Argos toaster (retail price: £3.99). He smelted iron in a microwave, tried to produce plastic from potato starch, and generally made a colossal mess. His toaster cost £1,187.54, resembled a disastrously iced birthday cake and melted when plugged into the mains. (“A partial success,” says Thwaites.)

Thwaites’s toaster project thus tells us more about the brilliance and dizzying complexity of the interconnected global economy than any textbook could. He is a shoo-in for the economics Ig Nobel. Perplexingly, however, the Ig Nobel committee awarded him this year’s prize for biology instead after he attempted to live life dressed as a goat. How silly.

Written for and first published in the Financial Times.

My new book “Messy” is now out. If you like my writing, why not buy a copy? (US) (UK)

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Big decision ahead? Just roll the dice

In the infamous novel The Dice Man, the narrator Luke Rhinehart decides to hand his life over to randomness. The biggest of decisions will be made by dice. In one episode, he leads a mass escape from a secure mental hospital. In another, he tucks his young son into bed and then — after consulting the dice — leaves his wife and family for ever.

It’s an unsettling book, and Rhinehart is an anti-hero whose horrifying behaviour leads to ruin. Yet, most of us could do with a little more randomness in our lives. The roll of a die or the toss of a coin can actually help us make better decisions.

There are two quite different reasons for this. The first is that by pre-committing to follow a random instruction, we can end up making decisions that we should have been making all along. The status quo has a strange hold over us. Stuck in a job that we dislike, or with a romantic partner who is anything but romantic, all too often we stick with the devil we know.

Deciding that “if the coin comes up heads, I’ll leave my boyfriend” may be the only way that some of us have to break through the inertia and make tough decisions. A 50 per cent chance of dumping the oaf is better than no chance at all.

But what evidence do I have that we tend to be trapped by the status quo? In fact, the evidence is better than anyone could reasonably wish for, because a few years ago the idiosyncratic economist Steven Levitt launched a website, FreakonomicsExperiments.com, that was part publicity stunt and part data-gathering exercise. Levitt invited people who were agonising over a life decision to log in to the website, fill in some questions, and then abdicate responsibility to the flip of a digital coin. As the months went past, Levitt followed up, asking people whether they had obeyed the coin or ignored it, and how they were now feeling about the decision. Some of those decisions were weighty indeed: people had been pondering whether to propose, resign, have a baby, seek a divorce, adopt a child or start a business.

It’s an odd experiment, but what makes it powerful is that the coin toss randomly allocated people into two groups, one pushed towards action (the coin came up heads) and one pushed towards restraint. People did indeed tend to obey the coin — not always, but often enough — and those in the “heads” group tended to be happier several months on. When we’re genuinely undecided about whether to change the status quo, that probably tells us a change to the status quo is long overdue.

This isn’t to say that everyone pondering a drastic change in life should leap into action, hiring that divorce lawyer, storming into the boss’s office or searching for a sperm donor. But Levitt’s research suggests that if we’re genuinely undecided about a new direction, we should probably just get on with it. If the coin helps, fine. (In retrospect, if Levitt had used a biased coin, he would have made hundreds of people happier.)

Randomness, then, can prod us into taking actions that we fear. But it can also divert us into taking actions that we might not have imagined at all. A simple example of this emerged in 2014, when some London Underground staff launched a two-day strike that closed about two-thirds of Tube stations.

After the strike, the economists Ferdinand Rauch, Shaun Larcom and Tim Willems looked at data from London’s electronic farecard system, identifying individuals who took the same route morning after morning. [pdf] Most of these regular commuters had to find a different route to work during the strike. But what was surprising was that one in 20 of them stuck to their new routes after the strike was over. Even commuters, whom we would imagine had honed their daily journey to perfection, can find a better route when a random shock forces them to do so. Computer algorithms often use the same basic trick when searching for solutions to complex problems: stirring in a judicious dose of randomness prevents the search from getting stuck down a dead end.

Many creative types understand this principle very well. Perhaps the most famous example is the Oblique Strategies, a set of cards assembled by artist Peter Schmidt and musician Brian Eno. The cards are full of gnomic instructions — “Change Instrument Roles” or “Twist the Spine” — and Eno deployed them while working with David Bowie on his celebrated Low, “Heroes” and Lodger albums. Great guitarists such as Adrian Belew or Carlos Alomar would find themselves having to play the drums or hopping randomly between chords that Eno was indicating on a blackboard. They did not enjoy the experience: Alomar later compared it to being slapped in the face. But the results were superb.

One can have too much of a good thing, of course, and throw the dice too often. George Cockcroft, author of The Dice Man, experimented with a dice-driven life himself for a while but did the sensible thing and settled down once he found a life he loved. And Eno himself told me that he only used the Oblique Strategies cards when he got stuck.

And did he get stuck often?

“Oh, all the time.”

Written for and first published in the Financial Times.

My new book “Messy” was published yesterday in the US. If you like my writing, why not buy a copy? (Or pre-order the UK edition, which is out very soon). (US) (UK)

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Why central bankers shouldn’t have skin in the game

Pensions campaigner Ros Altmann recently launched an eye-catching attack on the Bank of England for paying generous pensions to its own staff while undermining everyone else’s retirement plan.

 It’s an easy claim to make, and it may well stick. Are central bankers not the Marie Antoinettes of the modern world, recklessly imposing penury on the people while ensuring they are protected from their own ruinous actions?

I don’t see it myself. To start with the most obvious point, it’s far from clear that the Bank really is destroying pensions. It is true that low interest rates make future obligations loom larger in today’s company accounts. This creates a problem for any pension scheme. But, on the other side of the equation, low interest rates have boosted the value of shares, bonds and property and thus the value of most pension schemes. Would pension schemes really be better off had the Bank of England stiffened interest rates in 2008 and tried to engineer a rerun of the Great Depression?

This takes us to a very strange place indeed. Currently, members of the Monetary Policy Committee (MPC) set interest rates without having a strong personal incentive to follow any particular policy. I would have thought that was a desirable state of affairs, but perhaps not. An alternative — presumably the alternative that critics would prefer — is that whenever the MPC cuts interest rates, its members know that they will feel the financial consequences personally.

But we can’t stop by linking senior Bank of England pensions to interest rates. If we are to pay the MPC by results, we must do so in a way that reflects the broader consequences of their actions. Consider unemployment. The MPC is not officially responsible for supporting the job market, but the US Federal Reserve is. And everyone knows the MPC considers the state of the wider economy when setting rates. As the Bank’s chief economist Andy Haldane recently commented: “I sympathise with savers but jobs must come first.”

That is what he says now, but what would Haldane do under the new incentive scheme? He and his colleagues may ignore the labour market unless they have some skin in the game. Perhaps we should draw inspiration from the Roman practice of decimation, where some soldiers in a mutinous cohort would be executed according to the drawing of lots. Execution is harsh, but one could easily make the 100 most senior Bank staff participate in an unemployment lottery. If the unemployment rate is 5 per cent, then five of them — chosen at random — must be punished. If the unemployment rate is 10 per cent, then 10 senior Bank staff will taste the consequences. An appropriate punishment? They shall be condemned to carry out their duties, unpaid, from a queue in the job centre.

Once one starts to spell out exactly how Bank of England staff should be rewarded for each policy triumph or penalised for each misstep, it becomes clear that the whole idea is nonsense. Central bankers will not do a better job if given direct financial incentives to pursue certain policies, and it is quite likely that they will do a worse job. Yes, incentives matter — but they often matter for all the wrong reasons.

The Wells Fargo scandal is a recent example: the bank put pressure on its employees to cross-sell financial products to customers. In response to the pressure, some staff simply opened accounts or set up credit cards for customers without their knowledge. The whole thing is depressingly unsurprising.

The basic principle for any incentive scheme is this: can you measure everything that matters? If you can’t, then high-powered financial incentives will simply produce short-sightedness, narrow-mindedness or outright fraud. If a job is complex, multifaceted and involves subtle trade-offs, the best approach is to hire good people, pay them the going rate and tell them to do the job to the best of their ability.

It would be nice to think that independent central banks could get on with a difficult job without being dragged into politics — but of course that is impossible. Ros Altmann isn’t the first person to try to take a debate about central bank policy into the personal realm. Donald Trump recently announced that Federal Reserve chair Janet Yellen should be ashamed of herself; in the previous US presidential campaign, Governor Rick Perry accused her predecessor Ben Bernanke of treason. Senior Brexit campaigners made similar attacks on Mark Carney.

Central bankers no doubt find such personal attacks vexatious — but they should take comfort in them. When Paul Volcker ran the US Federal Reserve, his policies so enraged building contractors that they mailed pieces of two-by-four to his office; farmers blockaded the Federal Reserve with their tractors. Yet Volcker is now the most respected Fed chairman in history. Effective central bankers inevitably annoy a lot of people; that is why the job is too important to be entrusted to politicians.

Written for and first published in the Financial Times.

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