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

Messy desks and benign neglect allow ideas to grow

My daughter is about to receive a new desk, so in order to clear space for it we were obliged to hack our way through the undergrowth of a 12-year-old’s bedroom. We found a half-assembled jigsaw puzzle from last Christmas; three separate sets of worn pyjamas scrunched up and stored in diverse locations; and empty sweet wrappers from Halloween. More alarmingly, there were empty sweet wrappers from Easter.

I am trying my best to treat with equanimity the discovery of a novel ecosystem under my roof. This is because I have come to believe that many spaces work a great deal better if subjected to a sustained period of benign neglect.

Consider the office cubicle. Some people pile their desks with everything from old newspapers to unwashed mugs; others are fastidiously tidy. (I fluctuate.) I’m not saying that people with messy desks are more productive, although there’s some evidence that they are; I’m just saying that if your colleague is a messy-desker then he or she should be allowed to get on with it.

Support for this position comes from a study conducted by two psychologists, Alex Haslam and Craig Knight. A few years ago they set up simple office spaces in which they asked experimental subjects to spend an hour doing administrative tasks. Messrs Haslam and Knight wanted to understand what made people productive and happy, and they tested four arrangements in a randomised trial. One was minimalist: chair, desk, bare walls. A second was softened with tasteful prints and some greenery. Workers were happier there, and got more done.

The kicker comes with the third and fourth arrangements. In each case, workers were invited to rearrange the pictures and pot-plants as they wished before settling down to work. But while some were then left to their labours, others were second-guessed by an experimenter who stepped in and found a pretext to rearrange everything.

This, unsurprisingly, drove people mad. “I wanted to hit you,” one participant later admitted. Empowering people to lay out their own space led to happier, more productive workers. Stripped of that freedom, everyone’s productivity fell and some felt quite ill.

The principle of benign neglect may well operate on a larger scale. Consider Building 20, one of the most celebrated structures at Massachusetts Institute of Technology. The product of wartime urgency, it was designed one afternoon in the spring of 1943, then hurriedly assembled out of plywood, breeze-blocks and asbestos. Fire regulations were waived in exchange for a promise that it would be pulled down within six months of the war’s end; in fact the building endured, dusty and uncomfortable, until 1998.

During that time, it played host not only to the radar researchers of Rad Lab (nine of whom won Nobel Prizes) but one of the first atomic clocks, one of the first particle accelerators, and one of the first anechoic chambers — possibly the one in which composer John Cage conceived 4’33. Noam Chomsky revolutionised linguistics there. Harold Edgerton took his high-speed photographs of bullets hitting apples. The Bose Corporation emerged from Building 20; so did computing powerhouse DEC; so did the hacker movement, via the Tech Model Railroad Club.

Building 20 was a success because it was cheap, ugly and confusing. Researchers and departments with status would be placed in sparkling new buildings or grand old ones — places where people would protest if you nailed something to a door. In Building 20, all the grimy start-ups were thrown in to jostle each other, and they didn’t think twice about nailing something to a door — or, for that matter, for taking out a couple of floors, as Jerrold Zacharias did when installing the atomic clock.

As Stewart Brand drily remarked in How Buildings Learn (UK) (US) Building 20 worked because “nobody cares what you do in there”.

If benign neglect works for your colleague’s desk and it works for an entire building, what about a grander scale still? What about a city neighbourhood? Up to a point, yes: even cities benefit from being left alone in certain ways. Of course, potholes must be fixed, bins emptied and charging points for electric vehicles installed. But Jane Jacobs argued in The Death And Life of Great American Cities (UK) (US) that cities desperately need old buildings, and not just glorious masterpieces but “a good lot of plain, ordinary, low-value old buildings, including some rundown old buildings”.

Her reasoning: cities are always in need of new experiments and economically marginal activities. “Neighbourhood bars . . . good bookshops . . . studios, galleries . . . hundreds of ordinary enterprises” all need somewhere cheap.

There’s nothing wrong with new buildings, argued Ms Jacobs, frustratingly for those who hold her up as a Nimby icon. But they should not be built everywhere all at once. Something has to be neglected and run down, or the city has no soil from which new buds can shoot.

There is always a balance to be struck. Every old building was once new. Every desk needs the occasional wipe. And my daughter is currently engaged in an extended programme of supervised room-tidying. Yet neglect is undervalued. Sometimes we need to learn when to leave well alone.

 

The ideas in this column are more fully expressed in my book “Messy: How To Be Creative and Resilient in a Tidy-Minded World”. It’s available in paperback both in the US and the UK – or through your local bookshop.

 

Written for and first published in the Financial Times on 9 November 2018.

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Undercover Economist

The untold career value of a little bit of luck

Almost exactly 20 years ago, fresh out of graduate school, I started work at a smallish strategy consulting firm. It was a poor choice, both for them and for me; I am not cut out to be a management consultant. I was even allergic to my own suit.

When one of my fellow recruits learnt this she pointed out that, in this job, “you only need to do two things: talk shit and wear a suit, and you can’t do either of them”. (I like to think that I have since mastered at least one of those skills.)

In any case, I was miserable and useless. My employers generously suggested that I might want to resign, and that if I did they would happily keep paying me for a while. I followed their advice and found a much more conducive job, most of which I was able to perform without embarrassment, wearing blue jeans. I had been very lucky.

But it is only recently that I realised that some of my luck required being born at the right time. Had I been a year younger I’d have crashed out of my job, not in the spring of 1999 but of 2000, just as the dotcom bubble was bursting.

Pity the babies of 1987 and 1990, then, who left school or university around the time that Lehman Brothers collapsed in 2008. Sending around a CV in the middle of the greatest financial crisis since their grandparents were born cannot have been a whole lot of fun.

Of course the financial crisis made life difficult for a lot of people, not just graduates. It is now over, although the scars remain. So here’s a question: are those people who were unfortunate enough to have been looking for their first job as a recession struck still disadvantaged after the recession itself has passed?

In 2006, an economist called Paul Oyer posed that very question about the young academics he was teaching. Let’s say that two equally able young economists, Alexandra and Betsy, are looking for work. Alexandra arrives on the job market during the good times, when departmental budgets are fat, and is hired by the 30th best university in the country. Betsy is a couple of years younger, tries to find a job during a lean year, and can only get a job at the 60th best university.

The question that Professor Oyer posed is: will this matter in the long run? Will the equally talented Betsy find a better job, given a few years? Or will she be trying to catch up with Alexandra for decades?

Prof Oyer assembled data describing the PhD students graduating from seven excellent graduate schools, and he concluded that Betsy would remain at a disadvantage for a long time. Students who graduate in good years are more likely to find good jobs — obviously — but there is also a strong correlation between getting a good job immediately and still having a good job four, eight or even 12 years later.

This makes some sense; if an economist applies for a mid-career job having already been an assistant professor at (say) the Massachusetts Institute of Technology, employers are unlikely to adjust for whether she secured that assistant professorship in an impossibly difficult year or at a somewhat easier time. The halo will shine, regardless. And regardless of whether it was a good year or a bad one, the young economist will have picked up skills from working at MIT, teaching MIT students and rubbing shoulders with Nobel Prize winners. If you want to work in a top research job, it helps a lot to start out in a top research job.

Prof Oyer conducted a similar analysis for MBA graduates looking for high-paying jobs in finance and consulting in the late 1980s. The results were similar. Could this be a problem only for the young elite — students on such a precision-engineered career path that their fate is sensitive to accidents of timing? Or might it be even more serious for those further down the educational pecking order?

A new study from economists Hannes Schwandt and Till Marco von Wachter suggests that the latter is true. Looking at young people entering the US labour market between 1976 and 2015, every group suffers lasting harm if they have to find their first job during a recession, but disadvantaged groups suffer more and for longer. High school dropouts fare particularly badly, both immediately and several years later, as do those from a racial minority. People with a college education suffer less.

Overall, for a typical recession, the unlucky cohorts can expect to lose the equivalent of seven months’ pay over the course of a decade, relative to their more fortunate peers, who are only a couple of years older or younger. That’s no trivial sum. People who can’t find the job of their dreams end up settling for something else, building up skills and contacts in a field that was never their first choice.

Few people, by now, need reminding that the financial crisis has had a lasting impact and that, in many ways (though not all), it is the younger generation that has been left to count the cost. But this research points towards other lessons. It’s easy to overlook luck; but good or bad, a single piece of luck can last in ways that we find it hard even to notice.

 

Written for and first published in the Financial Times on 2 November 2018.

My book “Fifty Things That Made the Modern Economy” (UK) / “Fifty Inventions That Shaped The Modern Economy” (US) is out now in paperback – feel free to order online or through your local bookshop.

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What the Sydney Opera House teaches us about Brexit

Go down to Bennelong Point and make such progress that no one who succeeds me can stop this going through to completion.” That is how the ailing Joseph Cahill ensured that the Sydney Opera House would be built — at least according to one of his successors.

Excavations for the project duly began at Bennelong Point. Cahill, the premier of the state of New South Wales, died of a heart attack not long after. The Sydney Opera House was indeed completed, but in 15 years rather than five and at a cost of A$102m rather than A$7m — a truly impressive cost overrun of nearly 1,400 per cent.

Brexit, it seems, is also likely to overrun its original schedule, to the surprise of nobody who has been paying attention. I decided to look up Bent Flyvbjerg, perhaps the world’s leading authority on “megaprojects”, large and ambitious endeavours such as hosting the Olympic Games, building a high-speed rail line, or overhauling a big IT system. Such projects often — although not always — go badly wrong.

Is it useful, then, to think of Brexit as similar to a large construction or IT project? Professor Flyvbjerg’s answer: Yes, it’s a very useful analogy indeed. But, given the failure rate of megaprojects, it is not an encouraging one.

Brexiters will point out that some megaprojects live up to their promise, most famously the Guggenheim Bilbao— a tenacious, visionary scheme delivered on time, on budget and with benefits outstripping any reasonable expectations. Remainers anticipate the best-case Brexit scenario to be something more like the NHS National Programme for IT, abandoned after a decade and several billion pounds of wasted money.

Whichever side of this debate you are on, there is much to be learned from studying megaprojects. I gleaned six pieces of counsel from Prof Flyvbjerg to improve chances of successfully delivering a complicated project. Checking the list against what is happening with Brexit makes my heart sink.

First: prepare thoroughly. This one is awkward. Civil servants were banned by David Cameron’s government from preparing for Brexit before the referendum. Then, for her own reasons, his successor as prime minister, Theresa May, scrambled to begin the Article 50 countdown. “Zero preparation”, says Prof Flyvbjerg, “is as bad as it gets”.

Second: try to de-bias yourself, noting and adjusting for overconfidence, wishful thinking and other well-known cognitive biases. Alas, most British politicians are wary of seeming negative or timid about Brexit, for fear of implying the electorate was unwise. Instead, both government and opposition have embraced the goal of leaving while enjoying all the benefits of staying — hardly a clear-eyed exercise in spotting obstacles.

Third: choose an experienced team. Hmm . . . Sir Ivan Rogers, the UK’s ambassador to the EU and an experienced negotiator abruptly resigned early in the process.

Fourth: try to break a large project into smaller, standalone chunks, so that the failure of one is not a failure of everything. When everything is interconnected, small obstacles can snowball into major delays. (See also: The Irish border.) The logic of both politics and of diplomatic negotiation for Brexit points in the opposite direction: “nothing is agreed until everything is agreed”.

Fifth: key decision makers should be aligned, with everyone having an incentive to make things move smoothly. Alas, politics (again) pushes in the wrong direction here. Many of the people with power to smooth the way for Mrs May, from opposition leader Jeremy Corbyn to the former foreign secretary Boris Johnson to the EU’s chief negotiator Michel Barnier, have the incentive to make things difficult for her in one way or another.

Finally: have an early warning system so problems can be spotted and fixed before they grow. Yet warnings are routinely derided as “Project Fear”.

Even without political pressures, megaprojects are hard to deliver on time and on budget: their sheer scale opens up a thousand ways for things to go wrong. But they are always somewhat political, and Brexit is more political than most. Even as a pure organisational challenge, it is likely to take far more time and money than advertised.

The Sydney Opera House itself is, of course, a stunning achievement. But unlike the Guggenheim Bilbao it is an achievement built on lies. Those lies came from politicians who decided that an honest account of the likely costs would not achieve their goals. They tarnished the reputation of Jørn Utzon, the architect who became the scapegoat for their impossible promises. Lauded far too late, he received no other major commissions and never saw the finished Opera House. Would the truth really not have served?

As far as Brexit is concerned, we have dashed down to Bennelong Point and started shovelling frenetically, desperate that no one should “stop this going through to completion”. Perhaps one day we will get the Sydney Opera House, although that seems unlikely. At the moment, we’re at the bottom of a deep hole and we are still digging.

 

Written for and first published in the Financial Times on 26 October 2018.

My book “Fifty Things That Made the Modern Economy” (UK) / “Fifty Inventions That Shaped The Modern Economy” (US) is out now in paperback – feel free to order online or through your local bookshop.

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There is a fine line between stupid and clever

Recently a loyal reader emailed me with a disarmingly simple question: is it better to invest small amounts every month, or in a large lump sum? What seems a narrow topic has broader implications.

The popular argument in favour of regular investment into shares — often called “cost averaging” — has been made by retail investment advisers many times. “Take advantage of their downs as well as their ups,” says one, so that “if you invest a fixed sum every month you will be able to buy more units when a fund’s value falls”.

To see how this cost averaging might work, consider a share that costs $60 half the time and $120 the other half. Investing $600 a month returns 10 shares in each of the six months when it is cheap and five shares in each of the expensive months. At the end of the year, 90 shares have cost $7,200. The average cost per share is only $80, much closer to $60 than $120 and thus excellent value.

The argument is plausible, intuitive, and wrong — both in theory and when tested with hindsight against historical market data.

Here’s the problem with the theory: while it is unclear exactly how best to describe the fluctuations of share prices, they do not simply move up and down in the way my simple example describes. If they did, a far better approach would be to invest only when they cost $60, not when they cost $120.

A more realistic description of the stock market is that it follows a random walk with an upward drift. The random walk implies that we cannot expect prices to tend back towards some average. From any particular point there is no way to say in which direction they will lurch next. That means that we cannot expect that when a share is $120 it is likely to fall, and when it is $60 it is likely to rise.

The upward drift — the simple fact that share prices tend to rise over time — suggests that we should invest everything we plan to invest at the earliest opportunity. Drip-feeding delays profitable investment, and so costs money.

If theory is unkind to the cost-averaging principle, what about the historical evidence? We can ask, with hindsight, when investors with a large lump sum would have done better to drip it gradually into the market over the course of a year. The answer is unsurprising: drip-feeding has done better only when the market then fell, and since markets rise more often than they fall, lump-sum investing is a better bet. Cost averaging worked well in the last bear market, but, with access to that kind of hindsight, an even better strategy in a bear market is to wait until it is over.

Cost averaging, then, is wrong in theory and has not usually worked in practice.

It may, nevertheless, be excellent advice.

The simplest point in favour of drip-feeding is that it reflects the situation of a typical salaried investor. Purists will say that “cost averaging” should only be used to describe a deliberate strategy of delaying investment, but retail advisers often speak of the magic of cost averaging while praising regular investment. The magic may be illusory, but the benefits of regular investment are not.

Many of the empirical tests of cost averaging begin from the premise that an investor is sitting on some vast pile of cash, pondering whether to invest gradually or all at once. That is a pleasant dream to consider, and if you find yourself with a million dollars in your pocket then by all means invest promptly.

If you are nervous about risk, academic research suggests that drip feeding is not the most efficient way to reduce your risk. Better to keep a small portion of your wealth out of the stock market entirely.

But efficiency is a treacherous goal for an ordinary investor.

The strongest argument in favour of cost averaging is simply to ask ourselves what we are likely to do instead. The answer is not pretty. Researchers have found that retail investors tend to make two simple errors: they lose money by trading too much, and they tend to buy high and sell low. Without getting too technical, let me assure you that this is not the aim. If regular investments displace a Gordon Gekko complex, that is enough for me.

While markets do not swing back and forth with the metronomic predictability of my earlier illustration, they do fluctuate a lot, as we have seen in the past couple of weeks. That fluctuation is distressing for most people. If facile arguments for cost averaging reassure small investors and stop them from selling at the bottom, that is no bad thing.

Greg Davies, a behavioural finance expert at Oxford Risk, describes cost averaging as “deliberately doing something slightly inferior, to prevent the likelihood of something very inferior”. Just so. And it is worth looking for other areas where we might benefit from being guided by a slightly inferior rule of thumb — anything from “if it takes less than two minutes, do it immediately” to “never drink alone”. There are exceptions to these rules, but you may be better off just sticking to the rules.

As a wise man once said, it’s such a fine line between stupid and clever. Cost averaging seems clever, but we should recognise that its true value lies in not being stupid.

 

 

Written for and first published in the Financial Times on 19 October 2018.

My book “Fifty Things That Made the Modern Economy” (UK) / “Fifty Inventions That Shaped The Modern Economy” (US) is out now in paperback – feel free to order online or through your local bookshop.

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Does economic growth need to end?

What are the limits to economic growth — and have we already recklessly exceeded them? Such questions were raised (again) recently by (another) alarming report about climate change. Many of my environmentalist friends are convinced that economic growth itself is the fundamental problem.

It was a timely moment, then, to give a Nobel Prize to two economists who’ve tackled that question head on. William Nordhaus and Paul Romer have tried to find ways to understand the invisible and sometimes ineffable causes and consequences of growth.

The modern world produces two things in abundance: carbon dioxide and ideas. Both swirl around, defying our attempts at control. We’d like more ideas but already have more than enough carbon dioxide. The future of humankind may depend on a strange race: can we keep living standards rising yet restrain consumption of resources and production of pollutants?

Economics being economics, Nordhaus and Romer received their prizes for technical achievements in economic modelling. Mr Nordhaus analysed the interaction between climate change and the economy; Mr Romer developed an elegant way to model innovation as an intrinsic part of the growth process, rather than falling from heaven. These are impressive intellectual accomplishments, but my fascination with both men concerns some of their more informal work.

In one of the economics papers I truly love, Mr Nordhaus tracked the price of illumination over the millennia, from the days when people could create light only with a campfire, through the time when they would use beef tallow — or clean, bright-burning spermaceti oil from whales — to the invention and improvement of incandescent bulbs.

Mr Nordhaus chopped and burnt wood, and tested antique lamps with a Minolta light meter. He concluded that in Babylonian times, a day’s hard work would produce enough to light a room for 10 minutes. By the end of the 20th century, the return on a day’s labour had improved from 10 minutes of light to 10 years. That is the kind of progress that gives one hope for us all.

The environmental toll paid for that light has also plummeted, which is good news for the whales and good news for us. Perhaps it really might be possible to enjoy the comforts of modernity without destroying the planet.

Since the early 1960s, UK carbon dioxide emissions per person have almost halved, yet the country’s economic output per person has tripled in real terms. This is partly due to moving production abroad, but most of it is from producing more value with fewer physical resources and a lot less coal.

That is where Mr Romer comes in. Like Mr Nordhaus, he is impressed by our capacity to make (and then take for granted) innovative progress and argues that there is room for much more. Consider the compact, self-repairing, mobile, renewable-resource-powered chemical reactor that we call a “cow”. Courtesy of evolution, it is vastly more impressive than human-designed facilities. This elegance, suggests Mr Romer, tells us that there is plenty of room for us to do things better.

That is also true for the institutions that produce new ideas. While Mr Romer’s prizewinning work makes particular assumptions about who pays for new ideas and who benefits when they are produced, his informal writing and policy work highlights that these things cannot be taken for granted. He wrote not long ago that “only a failure of imagination” allows us to conclude that in today’s universities, intellectual property rules and scientific norms we have perfected the way we develop and diffuse new ideas.

We should constantly be searching for better ways to do things — as Mr Romer himself did with a successful foray into digital learning, ahead of the trend, and later with his bold and controversial push for “ charter cities”, in which a country with weak institutions might outsource the governance of a greenfield city site to Canada or Norway.

In particular, we should do more to encourage innovation that attacks the climate change problem. It is conceivable that we will manage to solve the problem anyway, courtesy of dramatic progress in the cost of solar power and battery storage. If so, that is luck that we have done precious little to earn. The most obvious first step (among several worth trying) is a stiff tax on carbon dioxide emissions. That would encourage everything from clean energy to putting on a thermal vest in the cold.

There is still every reason to believe that material progress is consistent with the survival of the ecosystem. Human ingenuity is astonishing. It would be nice if policymakers tried harder to direct it toward low-carbon energy.

If policymakers matched climate change talk with action, my guess — just a guess — is that we would find that the transition to a vastly cleaner economy is smooth. I realise that my friends mean well when they demand that economic growth must stop, and soon. But I am pretty sure that they are wrong — and that their pessimism merely convinces others to do nothing.

Written for and first published in the Financial Times on 12 October 2018.

My book “Fifty Things That Made the Modern Economy” (UK) / “Fifty Inventions That Shaped The Modern Economy” (US) is out now in paperback, and coincidentally the final, triumphant chapter is all about Bill Nordhaus’s work on the cost of light. Feel free to order online or through your local bookshop.

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Exploitative algorithms are using tricks as old as haggling at the bazaar

A few years ago I received a text message from my mobile phone network informing me of the good news that I was already on the cheapest possible tariff. They should have let sleeping dogs lie: I called their bluff, and within minutes they offered a cheaper one. Another time, I quit only to receive phone calls pleading for forgiveness and offering me an iPad if only I’d come back. It was like being in an emotionally abusive relationship with Santa Claus.

Nobody wants to feel that they are being taken for a fool. It is hardly surprising, then, that the UK business secretary Greg Clark has made some noise about his plans to scrutinise how firms may use big data or other digital tools to produce “abusive outcomes” such as exploiting loyal customers.

Another review is under way courtesy of the UK’s Civil Aviation Authority into how budget airlines “use algorithms” to seat families separately if they don’t pay extra for assigned seats. You and I don’t want to be on the sharp end of an exploitative algorithm, do we?

There seems no harm in having a good hard think about how well competition works in a data-rich age. Customers have new tools at their disposal to find the best deals; companies, in response, can pick off lucrative customers like stray wildebeest, offering hidden discounts to some, even targeting adverts and offers by sex or race.

Yet the striking thing about the concerns of consumer champions is that for all the digital window-dressing, this struggle is as old as haggling at the bazaar.

When companies take time and trouble to make their wares less attractive, we call this “product sabotage”. Printers may come in a high-cost professional version and a lower-cost home version with a chip to slow it down. “Value” supermarket pasta or rice is packaged to look like famine relief. And airlines may split families who do not pay extra — a practice that hardly requires a mysterious “algorithm”.

In each case, the company is seeking a premium from premium customers while grasping for volume by offering low prices to the masses. In order to achieve both goals, it may need to damage the mass-market offering. If the cheap product is insufficiently dreadful, the risk is that even wealthy customers may buy it.

The economist Jules-Emile Dupuit spotted an example in 19th-century France. “It is not because of the few thousand francs which would have to be spent to put a roof over the third-class carriage . . . that some company or other has open carriages,” he wrote of the railways. “What the company is trying to do is prevent the passengers who can pay the second-class fee from travelling third class; it hits the poor, not because it wants to hurt them, but to frighten the rich.”

The problem, then, is more than 150 years old. And it is not clear that the situation would be improved by insisting on equal treatment for all passengers. The railway company (or airline) might then offer only the first-class service at the first-class prices, perhaps even higher.

This is aggravating, no doubt. But the root of the problem is that the company has some market power, which allows it to squeeze customers and raise prices. The product sabotage is the symptom — and not necessarily a harmful one.

What of the idea that loyal customers are exploited rather than rewarded? That was my experience with the phone companies, but the infuriating practice is, again, not new. Every time I shave I can praise King Camp Gillette for inventing the disposable razor blade, and curse him for embracing the pricing model of cheap razor, expensive blades. What is that, if not a penalty for loyalty?

In truth the word “loyalty” leads us astray here. Any profit-seeking company will want to exploit customers who never walk away, so considerable effort is devoted both to identifying those customers and to inducing them not to look elsewhere.

“Loyalty cards”, whether an airline gold card or a rubber-stamped bit of cardboard from your local espresso bar, are designed to persuade high-volume, high-value customers both to identify themselves and to stick around. The result is a less competitive market in which everyone pays a higher price.

It is possible that in the initial scramble to sign up new customers, companies reward them so lavishly as to compensate them in advance for years or decades of locked-in high prices. But it’s not likely.

Who loses out from such behaviour? Understandably, we worry about “vulnerable” consumers. But for the companies, their target is clear: they will try to price-gouge the customers most likely to pay. Often, those customers will be rich and busy, while the ones who enjoy the bargains will be poorer and have more time to shop around. That is no calamity. When the victim is a lonely octogenarian in the early stages of dementia, the cat-and-mouse game between producer and consumer takes on a cruel and tragic edge.

Regulators are right to be vigilant. Still — the very fact that such tricks are as old as commerce itself suggest that we will not succeed in stamping them out. Buyer, beware.

Written for and first published in the Financial Times on 5 October 2018.

My book “Fifty Things That Made the Modern Economy” (UK) / “Fifty Inventions That Shaped The Modern Economy” (US) is out now in paperback – feel free to order online or through your local bookshop.

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Curiosity can save us when lies come dressed as numbers

Judging by all the nonsense that people repeat these days, most of us could do with a refresher course in basic number skills. Whether we are confusing millions with billions, the debt with the deficit, or — as in a recent BBC online article — fretting that a currency has lost 180 per cent of its value, we could do better.

One chronic sign of trouble is the lazy cliché about “damned lies and statistics”, which has been used as an excuse for complacent cynicism ever since Mark Twain misattributed it to Benjamin Disraeli. This may be because we do not trust our own statistical intuition. We are more confident in our linguistic skills: the fact that we are surrounded by lies, half-truths and political braggadocio does not make us abandon words. Yet too many of us feel we do not have the skills to tease apart truth and lies if they come to us dressed up in numbers.

That’s a shame. Accurate numbers let us answer some of the most basic questions about any phenomenon. Is it important? Is it getting better, or worse?

It is impossible to make sense of a complex world without some statistical tools in your cognitive toolbox. As Hetan Shah of the Royal Statistical Society is fond of pointing out, it may be possible to lie with statistics, but it is easier to lie without them.

Perhaps we could start by improving the way statistics and data-handling skills are taught in schools. This is easy to say from the sidelines, but not so easy to deliver.

So what might we do? Some people complain that schools focus too much on “engineering maths” — the calculus required for physics and engineering — and not enough on the statistical skills needed for epidemiology, economics, and social science, or for that matter the data-science skills that are in widespread demand.

Perhaps that is true. Yet Bobby Seagull (maths teacher, researcher and FT columnist) tells me that the situation is changing in the UK, with GCSEs expanding with statistical topics and the discipline becoming a compulsory element of A-level maths. That sounds like good news.

Still, there are only so many hours in a school week, so any honest demand to teach more statistics is also implicitly a demand to teach less of something else. For this reason some reformers focus on quality rather than simply a shift in what the curriculum requires.

Sharon Witherspoon, head of policy at the Academy for Social Sciences, argues that we need more and better-trained maths teachers, along with a greater emphasis on using number and data skills in other courses, from biology to geography. Such changes, of course, require serious political will, money, and a change in the incentives within the school system.

Will Moy, director of the fact-checking organisation Full Fact — and ever the pragmatist — told me that universities might be an easier place to start. He suggests a three-day statistical boot camp as a compulsory requirement for graduation. With almost half of young people in the UK going to university, an improvement in the skill and confidence with which undergraduates handle numbers would be no small achievement.

My own experience is that technical skills are only part of the story. Some of the basic attributes required to handle numbers are virtues such as patience and curiosity.

For example, consider the trait psychologists call “cognitive reflection”. A classic test of this ability is the question: “If it takes five machines five minutes to make five widgets, how long would it take 100 machines to make 100 widgets?”

Almost certainly, an answer popped into your head: 100 minutes. But then you probably paused for a moment and worked out the correct answer.

That moment of reflection is often missing when we deal with politically fraught claims in the media, or in our Facebook feeds. If the claim slots into our preconceptions about the world, we accept it and perhaps repeat it. If it challenges us, we reject it instinctively.

We need to train ourselves to stop and think. That isn’t easy, because neither the dark art of political rhetoric nor the context-stripping of social media is conducive to a reflective state of mind.

A second virtue is that of curiosity, which we might think of as a hunger to know more, coupled with a tolerance for being surprised. Simple questions such as: “I wonder how they know that?”; “Is that better or worse than I might have expected?”; “What exactly do they mean?” often unlock far more insight than narrow technical queries.

Of course, there is more to statistics than emotional maturity. Just as everyone benefits from learning to read, we all have something to gain from learning certain basic technical skills in handling numbers. The world would be in a better place if many senior decision makers had something rather more advanced than that.

Yet for all the concern about how we are teaching our children to deal with numbers, perhaps my own teachers weren’t so wide of the mark with their advice. They always used to tell me: stop and think, check your answer, and explain your reasoning. It was wise counsel. Some lessons stand the test of time.

Written for and first published in the Financial Times on 28 September 2018.

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Undercover Economist

Nominations for a silly economics prize with a deeper purpose

While the Nobel Prizes are no doubt a splendid thing, the Ig Nobels are far more fun. Ig Nobel prizes have been awarded for discovering that every language has a word for “huh?” (Literature, 2015) and for comparing the discomfort of looking at an ugly painting with the discomfort of being shot with a laser beam (Art, 2014), and of course for studying farts (Biology, 2004; Literature, 1998).

They do not seem very important, and indeed Robert May, then the UK’s Chief Scientific Advisor, requested in the 1990s that Ig Nobels not be awarded to British scientists for fear of damaging their reputations.

That seems a little po-faced. It may be better for researchers to laugh at themselves than to let politicians do it for them. The late William Proxmire, a former US senator, relished his “Golden Fleece” awards, a destructive and sometimes inaccurate mockery of research conducted at taxpayers’ expense.

Proxmire did not seem to care that silly research sometimes has serious benefits. The Ig Nobels are designed to “make you laugh, then make you think”, and they have a surprising record of turning up gems. Andre Geim won an Ig Nobel for levitating a live frog, en route to his Nobel Prize in physics for his work on graphene. David Dunning and Justin Kruger received an Ig Nobel prize in psychology for discovering that incompetent people are too incompetent to know they are incompetent. It seemed funny at the time; nobody is laughing these days.

I have been disappointed, however, with the quality of Ig Nobel prizes in economics and business, which have recognised rogue trader Nick Leeson, Lloyd’s of London, Enron, WorldCom, and the entire banking system of Iceland. This is a shame, because if silly-seeming research in physics and biology might lead somewhere intriguing, why not recognise silly research in economics and business?

I have a few candidates in mind. I’d like to nominate Benjamin Scheibehenne, Peter Todd and Rainer Greifeneder for discovering that whether you offer shoppers a choice between a few types of jam, or lots of types of jam, it doesn’t make much difference to whether they buy jam. This finding might seem unremarkable, but the received wisdom in behavioural economics had been that consumers simply stop buying if offered too many choices. Prof Scheibehenne’s team examined 50 studies and concluded that on average, offering more choices made no difference either way.

I also nominate economists Hunt Allcott and Matthew Gentzkow, for studying fake news by inventing fake fake news. They conducted their study immediately after the 2016 presidential election, in an effort to measure how much fake news was around, and how many people had seen it. The use of “fake” fake news was to test people’s recall of “real” fake news stories: some people will say they remember seeing things that they did not, and so Profs Allcott and Gentzkow put fake fake news alongside real fake news and real real news in order to understand what was really going on. Clear?

Perhaps the Ig Nobel committee is concerned that the pair are trespassing on the domain of recent winner Gordon Pennycook (a psychologist) with the economist David Rand. Profs Pennycook and Rand are studying “bullshit receptivity”, a tendency to read profound meanings into randomly generated sentences such as “we are in the midst of a high-frequency blossoming of interconnectedness that will give us access to the quantum soup itself” and “hidden meaning transforms unparalleled abstract beauty”. Highly bullshit-receptive experimental subjects were more likely to believe in fake news headlines, even when part of the study was conducted on April 1.

If all this seems rather obvious, note that there’s an important difference between the kinds of things people believe because they don’t stop to think (for instance, that Pope Francis endorsed US president Donald Trump), and the kinds of things people believe because their political identities depend on it (for instance, that Mr Trump is “draining the swamp”). Anyone trying to restore sanity to political debate needs to understand the distinction. If you think this isn’t an important issue, I have a story about EU cabbage regulations to tell you.

Finally, I nominate Sendhil Mullainathan and Eldar Shafir, for discovering that being “hangry” is a major impediment to economic development. In their book, Scarcity (UK) (US), Profs Mullainathan (an economist) and Shafir (a psychologist) argue that there is a common response to being short of almost anything: money, time, and even food. Scarcity absorbs our mental energies and makes us act in ways that can be deft in the short term but self-defeating over the long haul.

The Ig Nobels glory in the opposite: a surplus of weird ideas that are foolish in the short term but may pay dividends in the end. And if they do not? There’s no harm in being silly.

Written for and first published in the Financial Times on 21 September 2018.

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Undercover Economist

How to burst your political filter bubble

There are certain resolutions that are easily made and easily broken: lose weight; drink less; be mindful. They all seem a cinch compared with the challenge of our age: think less tribally. Try meeting people who disagree with you. Try to understand both sides of the argument. Most of us instinctively feel that this is desirable. Each of us has something to learn from others. And even if we do not, even if the other side of the argument is utterly wrong, how are we to persuade them if we are not on speaking terms? And yet bursting our own bubbles is infuriatingly hard.

Here’s one obvious approach: use social media to follow people with opposing opinions. If you see what they are saying, you can ponder their arguments and try to see the world from their point of view — at the very least, you can understand how best to convert them.

To investigate this idea, a group of social scientists (Christopher Bail, Lisa Argyle and others) recently recruited several hundred people with Republican or Democrat leanings, and gave them a small financial incentive to follow a Twitter bot for a month that would expose them to the opposing point of view. Republicans followed a liberal bot that would retweet 24 messages from elected Democrats, left-leaning media outlets and non-profit groups; Democrats followed a conservative bot.

But the Twitter bot’s efforts at fostering understanding backfired. Being exposed to opposing views on Twitter pushed people away from the centre ground. “Republicans who followed a liberal Twitter bot became substantially more conservative post treatment,” write the researchers. Democrats moved further left — although their moves were not as large nor as statistically reliable.

This is a disappointing finding, but not entirely surprising. Some earlier research has found evidence of backfire effects in other contexts — perhaps because we find contrary views or inconvenient facts discomfiting and may immediately recall or invent reasons to demean or dismiss them. And Twitter is hardly the venue for a deep meeting of minds.

Still, the conclusion is clear enough: if our aim is to find common ground or at least to foster mutual understanding, simply being exposed to the comments of our political opponents will not do it. It leads to aggravation, not understanding, and it is as counterproductive as it sometimes seems.

What, then? Cass Sunstein, an academic who has served in the administrations of Presidents Ronald Reagan and Barack Obama, makes an intriguing suggestion in his new book The Cost-Benefit Revolution (US) (UK). He points out that we can protect ourselves from certain cognitive errors by translating arguments into an unfamiliar form — perhaps a second language, or perhaps a mathematical abstraction. When you see the argument thus rephrased, you are forced to stop and think. Your response is less emotional.

I am persuaded that this exercise would slow me down and force me to think more with my brain and less with my gut. But it would not be easy to force myself to apply a cost-benefit framework as I pondered the appeal of a hard Brexit, say, the benefits of GM food or the winners and losers from restrictions on abortion. Alas, I doubt the prescription has broad appeal.

So we are back to trying to appreciate the other side’s point of view by talking to them, and that probably means talking to them respectfully, attentively and at some length. To understand what is going on in the head of someone who sees the world very differently from me — say, an evangelical Christian, a diehard Trump fan, a Corbynista or a hard-Brexiter — I would need to spend proper, quality time with them. And they would need to spend proper, quality time with me.

Unless one of us had the patience of a saint (and it would not be me), that would require some other social glue. If we could first spend time together as friends, neighbours, colleagues or teammates, we might later have a chance to talk in depth about politics and values. Starting with politics is likely to lead nowhere.

Occasionally — rarely enough that each instance is memorable — I have sat and respectfully disagreed with someone for hours: listening to them, understanding their viewpoint, presenting my own ideas and searching for common ground. Without exception, these heart-to-hearts have been preceded by months of friendship built on some other shared interest or experience. You can have a civil debate with a political enemy, but it really helps if the political enemy is a friend in real life.

It is sobering, then, to ponder the enthusiasm with which various activists on both sides are keen to make everything political. I do not object to anyone, on any side, who believes that there are deep political issues more important than entertainment, sport or music.

But the cumulative effect of the polarisation of everything is not healthy. Paradoxically, a vibrant, thoughtful politics needs some parts of life that are free of politics, free of the idea of them-and-us. Otherwise we stop listening to each other. We often stop thinking entirely.

 

Written for and first published in the Financial Times on 14 September 2018.

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Undercover Economist

Counting the costs of Brexit uncertainty

I recently had a couple of conversations with bright teenagers. One wanted to discuss philosophy — Gödel, Turing, and Wittgenstein. Not a problem. The other asked me to explain Brexit. Not a chance. The Brexit saga is madder than a box of hallucinating frogs.

Most likely, Britain will push its way pigheadedly through the brambles of the Brexit negotiations. The country will emerge scratched and bruised but largely intact, proudly declaring that the ordeal was a brilliant shortcut, then fumbling for a map and compass. But, while that is the most plausible result, the risk of a total train wreck remains. More worryingly, it seems undiminished more than two years after the referendum.

A recent report from the academics at The UK in a Changing Europe think-tank explores the likely impact of a bitter, finger-pointing failure to negotiate an agreement under the Article 50 withdrawal process. This is not the only way in which agreement could fail to be reached, but it is the starkest.

In a truly acrimonious failure to reach a deal, British food would not pass EU import controls. Aircraft would be grounded and border crossings jammed. This would clearly be harmful to the EU and disastrous for the UK, so we can expect good sense to prevail on all sides. And yet, senior ministers in Denmark and Latvia have judged “no deal” to be a 50-50 possibility. It would be unwise, then, to dismiss the contingency as remote.

The UK’s own trade minister, Liam Fox, says the chance of no deal is even higher, 60-40. Why he wishes to emphasise the risk of a disruptive outcome is unclear; perhaps Mr Fox believes it will serve his political ambitions. It will not serve the exporters it is his job to represent. The trouble is that as businesses and individuals quite reasonably plan for trouble, they will damage the British economy. After an initially bullish response to the referendum result, UK consumers are now borrowing and spending less, with obvious consequences for high-street retailers.

Consumer caution can swiftly be reversed. But the business response to uncertainty may be less easy to unpick. This week, the Federation of German Industries (the BDI), warned about emergency plans being implemented if there is no agreement by mid-November. For a taste of what these emergency plans might entail, ponder Honda’s warning to MPs last year that if the post-Brexit customs process took 15 minutes per truck at Dover, the annual cost of that would be £850,000.

For a company of Honda’s scale, less than a million pounds a year doesn’t sound too bad — until we consider two things. First, the Freight Transportation Association’s estimate that the briefest delay at crowded Dover — just two minutes — would quickly spiral into a multi-mile tailback. At a busy port, short delays quickly become long and unpredictable ones.

Second, the World Bank’s Doing Business database reports that the typical time to clear border checks in high-income countries is not two minutes, nor even 15 minutes, but 12 hours and 40 minutes. This, remember, is not a train-crash scenario but business as usual for most of the rich world. The World Bank adds, helpfully: “It is entirely possible that the border compliance time and cost could be negligible or zero, as in the case of trade between members of the European Union.”

If things go badly, then, companies that have built supply chains on the assumption of frictionless borders will find those chains jammed hopelessly. Or we may decide in the end to remain in the customs union. Businesses simply do not know — and that uncertainty is already damaging.

To see why, simply imagine that you are organising a wedding for — say — March 29 2019. Taking a cue from Mr Fox, your chosen caterer boldly declares that it may be unable to supply the food — the chance of that, in fact, is 60 per cent. Let’s say you love this caterer’s food, prices, and service. Even so — how long before you cancel the contract and hire someone else? Not long. And it will do no good for the caterer to confirm in February that all will be well after all. That is far too late for you.

Businesses trying to trade between the UK and the rest of the EU find themselves in a similar situation. At what point do they decide it is too risky to assume that all will be well? According to estimates published by three Cambridge university economists — Meredith Crowley, Oliver Exton and Lu Han — some companies reached that conclusion two years ago. Several thousand British companies have ceased some exports to the EU, and several thousand more were discouraged from launching a line of exports, simply because the Brexit vote threw the future trade regime into doubt. Unpredictable trade policy is a kind of trade barrier in itself.

Economies can cope with all kinds of shocks, and have sometimes bounced back from hurricanes or earthquakes with astonishing strength and resilience. An utter fiasco in the Brexit negotiations will be survivable, in time. But even if the fiasco never materialises, the prospect is causing damage today. Nobody thought they were voting for an earthquake.

Written for and first published in the Financial Times on 7 September 2018.

My book “Fifty Things That Made the Modern Economy” (UK) / “Fifty Inventions That Shaped The Modern Economy” (US) is out now in paperback – feel free to order online or through your local bookshop.

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