Tim Harford The Undercover Economist
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Undercover Economist

The great data debate

‘The idea that we can somehow measure “the thing that matters most” is quite absurd’

As he appeals to the British public to vote him in as prime minister, the leader of the opposition proposes collecting new data to provide a better picture of how the country is doing. “Wellbeing can’t be measured by money or traded in markets,” he says. He adds, “We measure all kinds of things but the only thing we don’t measure is the thing that matters most.”

All of the preceding paragraph is true, except for one detail: the first quotation is from David Cameron, then leader of the opposition, in 2006. The second is from Ed Miliband, the current leader of the opposition, a couple of weeks ago. Both men are united, it seems, by a feeling that the most familiar economic measuring stick, GDP (Gross Domestic Product), just isn’t up to the job. Cameron wanted to gather data on wellbeing or happiness; Miliband wants a “cost of living” index. Few reasonable people can object to gathering timely and authoritative economic and social statistics, yet Miliband and Cameron have managed the impressive feat of being cynical and naive at the same time.

The cynical motives in both cases are plain enough — as were, for example, Nicolas Sarkozy’s when, as French president, he commissioned some alternative economic measures that just happened to be more flattering to France. As the leader of a party with a reputation for liking free markets and low taxes, Cameron wanted to soften his image and suggest a broader, more caring perspective. Miliband is trying to replace a government that is presiding over a sudden uptick in GDP, so naturally he wishes to point the spotlight somewhere else.

The naivety requires more statistical digging to uncover, and it’s in three parts. The first point is that many of these data already exist. The Office for National Statistics asks questions about wellbeing as part of the Labour Force Survey. The ONS also publishes regular data on inflation, while wage data are in the Annual Survey of Hours and Earnings. Neither Cameron nor Miliband was really asking the statisticians at the ONS to do something new, just to do it more often or in more detail.

The second point is that no mainstream politician has ever regarded GDP (or its cousin Gross National Product) as the only worthwhile policy objective, although we are often invited to draw that conclusion. Robert Kennedy’s famous complaint that GNP counts “napalm” and “nuclear warheads” but not “the health of our children” or “the strength of our marriages” was wonderful rhetoric — but surely nobody believes that if only the statisticians had collected different data, divorce would be prevented and the Vietnam war would never have happened.

An acerbic comment in Nature last year complained that, “Despite the destruction wrought by the Deepwater Horizon oil spill in 2010 and Hurricane Sandy in 2012, both events boosted US GDP because they stimulated rebuilding.” But this is only a problem if the Deepwater Horizon spill was in some way caused by the collection of GDP data.

If politicians truly sought to maximise GDP they would immediately abolish all planning restrictions, all barriers to immigration and a good chunk of the welfare state. These ideas are political suicide, which proves that GDP is not the sole objective of public policy — it’s just a way to try to measure the size of the economy.

The deepest piece of naivety is the idea that — in Ed Miliband’s words — we can measure the one single “thing that matters most”. ONS data on median wages are a case in point. According to one measure, the median wage for people in full-time employment rose just 0.1 per cent in the past tax year — well below the rate of inflation. According to another way of calculating exactly the same number, median wages rose by 4.1 per cent, well above the rate of inflation. (The median is the wage earned by someone slap in the middle of the sample.)

How can that be? The lower measure is the median for the entire sample. The higher measure looks at the median wage of people who’ve been in the same job for the entire year — the vast majority. The two numbers would differ if — for example — some high-income people retired and some low-income people joined the labour force (school-leavers? immigrants?). It’s possible for most people to enjoy a decent pay rise while median wages stagnate, and that may be what is happening now. One rather narrow question — “how are things going for people in full-time employment in the middle of the income distribution?” — turns out to have two very different answers. Each one is perfectly justifiable.

We haven’t even got into questions of part-timers, the self-employed, the poorest, the richest, pensioners or benefit recipients. The idea that we can somehow measure “the thing that matters most” is quite absurd.

It’s the duty of our official statisticians to provide a range of timely and objective statistics that will lead to better decisions. That is why so many different types of data must be gathered, analysed and published. It is a hard job, which is why the ONS has better things to do than help our schoolboy politicians score points off each other.

Written for and first published af ft.com.

Other Writing

‘The Organised Mind’, by Daniel J Levitin; ‘The Life-Changing Magic of Tidying’, by Marie Kondo

Two very different books claim they can help us to cope with the excess of information, tasks and belongings

The challenge of “getting organised” is both commonplace and oddly particular. Organising my study is a different problem from organising a library, or organising a drinking session in a brewery. Organising things can be practical to the point of banality (what’s the best way to store socks?) but it can also be philosophically deep.

Consider the Celestial Empire of Benevolent Knowledge, a Chinese encyclopedia conjured up in an essay by Jorge Luis Borges. The oriental tome organises animals into categories thus: “(a) belonging to the emperor, (b) embalmed, (c) tame, (d) sucking pigs, (e) sirens, (f) fabulous, (g) stray dogs, (h) included in the present classification, (i) frenzied, (j) innumerable, (k) drawn with a very fine camelhair brush, (l) et cetera, (m) having just broken the water pitcher, (n) that from a long way off look like flies.”

Daniel Levitin is a professor of psychology and behavioural neuroscience; Marie Kondo is a professional cleaner. Both have written books that promise to help us get organised, although they are quite different. Kondo’s is a brief and bracing practical guide to tidying up your home. Levitin’s sprawling discussion aspires to provide a comprehensive account of the way we think about organising everything from possessions to friends. Levitin offers enough psychological detail to suggest why our mental categories do not match Borges’s encyclopedia. Yet he also frequently dabbles in the dispensing of practical tips. He has studied not only psychology but “HSPs” (Highly Successful Persons) and with his advice, perhaps you can be an HSP too.

Both books agree that everything should have a place and be put back in that place. Levitin expands on that, explaining that our memory for locations is well developed; hence, the well-known trick of committing a list of things to memory by assigning each thing a place in an imaginary physical space, a “memory palace”.

Yet there is a big difference in approach here. Levitin seems to approve of devising organisational systems for a complex world; Kondo believes that before we organise, we must first simplify. Levitin describes a system in which letters are printed in triplicate to allow filing chronologically, by topic and by correspondent. Kondo suggests that we could do without most of our paperwork: even love letters become a drag if you hoard every one.

Levitin’s approach to computers illustrates this disagreement. He makes the familiar argument that multitasking is a distracting problem. His solution is to buy several computers, each with a single purpose: one is for work, one for domestic tasks, one for social networking, one for reading books and so on. He is apologetic about the cost of this, but one wonders if even a millionaire could make the system work.

First, all these devices use the internet, and the internet is inherently multifunctional. Second, these categories are more porous than they seem: how to categorise an email from a work colleague inviting you to a party? Third, it’s not clear at all that maintaining several distinct email accounts helps anyone process email. Many productivity gurus advise pooling your emails as they come in, and not being too fussy about categorising them on the way out. Simple beats well-organised here, and complex filing systems aren’t worth the hassle. As Borges understood very well, they are inevitably a poor fit for the rich mess of reality.

Kondo declares that too much organisation is a trap. Instead of getting rid of things we don’t need, we buy stuff to organise the stuff we already have. None of this really helps, she claims. Once you get too clever about storage you lose track of what you own, and that way lies bloat and frustration.

Levitin’s approach to organisation seems more rational. He is always willing to throw in some talk about dopamine, the prefrontal cortex or inhibitory neurotransmitters. Kondo, eccentrically spiritual, believes in saying thank you to old socks before discarding them. Pragmatically speaking, though, Kondo is both more radical and more persuasive. To the extent that Levitin offers sensible practical advice, it is well-worn (why not carry a notebook and write down ideas and tasks so you don’t strain to remember them?). And when he admiringly describes the way that Joni Mitchell has a custom drawer for Scotch tape, another for masking tape, a third for string and rope, a fourth for mailing and packing products, and so on, one can only imagine Kondo trying to slap both Mitchell and Levitin into sanity.

This predilection for comprehensiveness weighs on Levitin’s book in another way: it’s long, and while it does contain a great deal to intrigue, the parade of disparate topics makes it less than the sum of the parts. There are tens of thousands of words on topics that are perfectly interesting in isolation (Bayes’ rule; how to estimate quantities; how online dating works) and yet they do not seem to fit together.

Consider each thing, writes Kondo, and ask “Does it spark joy?” Only then should you keep it. Levitin might profitably have taken that advice.

The Organised Mind: Thinking Straight in the Age of Information Overload, by Daniel J Levitin, Viking, RRP£20/ Dutton RRP$27.95, 528 pages

The Life-Changing Magic of Tidying: A Simple, Effective Way to Banish Clutter Forever, by Marie Kondo, Vermilion, RRP£7.99/ Ten Speed Press, RRP$16.99, 256 pages

Written for and first published at ft.com.

24th of January, 2015Other WritingComments off
Undercover Economist

The power of saying no

‘Every time we say yes to a request, we are also saying no to anything else we might accomplish with the time’

Every year I seem to have the same resolution: say “no” more often. Despite my black belt in economics-fu, it’s an endless challenge. But economics does tell us a little about why “no” is such a difficult word, why it’s so important — and how to become better at saying it.

Let’s start with why it’s hard to say “no”. One reason is something we economists, with our love of simple, intuitive language, call “hyperbolic discounting”. What this means is that the present moment is exaggerated in our thoughts. When somebody asks, “Will you volunteer to be school governor?” it is momentarily uncomfortable to refuse, even if it will save much more trouble later. To say “yes” is to warm ourselves in a brief glow of immediate gratitude, heedless of the later cost.

A psychological tactic to get around this problem is to try to feel the pain of “yes” immediately, rather than at some point to be specified later. If only we could feel instantly and viscerally our eventual annoyance at having to keep our promises, we might make fewer foolish promises in the first place.

One trick is to ask, “If I had to do this today, would I agree to it?” It’s not a bad rule of thumb, since any future commitment, no matter how far away it might be, will eventually become an imminent problem.

Here’s a more extreme version of the same principle. Adopt a rule that no new task can be deferred: if accepted, it must be the new priority. Last come, first served. The immediate consequence is that no project may be taken on unless it’s worth dropping everything to work on it.

This is, of course, absurd. Yet there is a bit of mad genius in it, if I do say so myself. Anyone who sticks to the “last come, first served” rule will find their task list bracingly brief and focused.

There is a far broader economic principle at work in the judicious use of the word “no”. It’s the idea that everything has an opportunity cost. The opportunity cost of anything is whatever you had to give up to get it. Opportunity cost is one of those concepts in economics that seem simple but confuse everyone, including trained economists.

Consider the following puzzle, a variant of which was set by Paul J Ferraro and Laura O Taylor to economists at a major academic conference back in 2005. Imagine that you have a free ticket (which you cannot resell) to see Radiohead performing. But, by a staggering coincidence, you could also go to see Lady Gaga — there are tickets on sale for £40. You’d be willing to pay £50 to see Lady Gaga on any given night, and her concert is the best alternative to seeing Radiohead. Assume there are no other costs of seeing either gig. What is the opportunity cost of seeing Radiohead? (a) £0, (b) £10, (c) £40 or (d) £50.

If you’re not sure of your answer, never fear: the correct answer (below), was also the one least favoured by the economists.

However dizzying the idea of opportunity cost may be, it’s something we must wrap our heads around. Will I write a book review? Will I chair a panel discussion on a topic of interest? Will I give a talk to some students? In isolation, these are perfectly reasonable requests. But viewing them in isolation is a mistake: it is only when viewed through the lens of opportunity cost that the stakes become clearer.

Will I write a book review and thus not write a chapter of my own book? Will I give a talk to some students, and therefore not read a bedtime story to my son? Will I participate in the panel discussion instead of having a conversation over dinner with my wife?

The insight here is that every time we say “yes” to a request, we are also saying “no” to anything else we might accomplish with the time. It pays to take a moment to think about what those things might be.

Saying “no” is still awkward and takes some determination. Nobody wants to turn down requests for help. But there is one final trick that those of us with family commitments can try. All those lessons about opportunity cost have taught me that every “no” to a request from an acquaintance is also a “yes” to my family. Yes, I will be home for bedtime. Yes, I will switch off my computer at the weekend.

And so from time to time, as I compose my apologetic “sorry, no”, I type my wife’s email address in the “bcc” field. The awkward email to the stranger is also a tiny little love letter to her.

Answer: Going to see Lady Gaga would cost £40 but you’re willing to pay £50 any time to see her; therefore the net benefit of seeing Gaga is £10. If you use your free Radiohead ticket instead, you’re giving up that benefit, so the opportunity cost of seeing Radiohead is £10.

Written for and first published at ft.com.

Undercover Economist

How much is a (micro)life worth?

‘Travelling 28 miles on a motorbike is four micromorts; cycling the same distance is just over one micromort’

The Rand Corporation was established in 1948 as an independent research arm of the US Air Force, itself newly independent and in its pomp as the wielder of the US nuclear arsenal. Rand’s early years were spent wrestling with the mathematics of Armageddon, and it has long struggled to shake off its reputation as the inspiration for Dr Strangelove.

Yet Rand’s most controversial research topic was its very first study — and its crime was to offend not the public but the top brass at the Air Force. Edwin Paxson, one of its top mathematicians, had been asked by the Air Force to think about the problem of an optimal first strike against the Soviet Union. How could the United States annihilate the Soviet Union for the smallest possible expenditure?

Paxson’s research was technically impressive, using cutting-edge analytical techniques. (The project is described in histories by David Jardini and by Fred Kaplan, and in a new article in the Journal of Economic Perspectives by Spencer Banzhaf.) His conclusion, published in 1950, was that rather than commissioning expensive turbojet bombers, the US should build large numbers of cheap propeller aircraft, most of which would carry no nuclear payload and would be little more than decoys. Not knowing which planes held atomic weapons, the Soviet defences would be overwhelmed by sheer numbers.

This conclusion infuriated the Air Force. No doubt this was partly because they viewed old-fashioned propeller aircraft as beneath their dignity. But the key offence was this: Paxson’s cost-benefit analysis gave no weight to the lives of air crew. Ten thousand pilots could be wiped out and it would make no difference to Paxson’s arithmetic. Under fire from senior officers, who had been wartime pilots themselves, Rand quickly adopted a more humble tone. It also diversified its funding by researching non-military topics.

Yet Paxson’s omission is understandable. A sensible strategist must weigh the costs and benefits of different tactics — but once one accepts the need for value for money in military strategy, what monetary value can we put on human life?

One possible approach to the problem is to value people according to some economic proxy — for example, the Air Force might value the cost of training new pilots. Courts have assigned damages after fatal accidents by looking at the economic output the dead person would otherwise have produced. But this suggests that the life of a retired person has no value. It captures the loss of livelihood, not the loss of life.

In the 1960s, a new approach emerged, most famously in Thomas Schelling’s 1968 essay “The Life You Save May Be Your Own”. Schelling, who much later won the Nobel Memorial Prize in Economic Sciences, had spent some productive time working at Rand. His student Jack Carlson was a former Air Force pilot. Carlson and Schelling found a way to finesse the treacherous question. As Schelling wrote: “It is not the worth of human life that I shall discuss but of ‘life-saving’, of preventing death. And it is not a particular death, but a statistical death.”

Rather than asking “What is the value of human life?” Schelling and Carlson asked what we are willing to pay to reduce the risk of premature death by spending money on road safety or hospitals. The value of a life was replaced with the value of a statistical life.

There is good sense in this bait-and-switch. The life of a named individual defies monetary valuation. It is special. Yet the prospect of spending money to widen and straighten a road and therefore fractionally reduce the chance that any one of thousands of road users will die — that feels like a more legitimate field for economic exploration.

For those who have not read Schelling’s elegant essay, simply inserting a qualifier into the phrase “the value of a [statistical] life” will not persuade. This presents a serious public-relations problem. From time to time it emerges that government bureaucrats have been valuing human life — outrageous! (The going rate for an individual life in the US is about $7m.)

As Trudy Ann Cameron, a professor of economics at the University of Oregon, comments, it would be helpful for economists to be able to report their research on the benefits of environmental or health policies “in a way that neither confuses nor offends non-economists”.

Here’s a possible solution: use microlives. A microlife is one millionth of an adult lifespan — about half an hour — and a micromort is a one-in-a-million chance of dying.

Sir David Spiegelhalter, my favourite risk communication expert, reckons that going under general anaesthetic is 10 micromorts. Travelling 28 miles on a motorbike is four micromorts; cycling the same distance is just over one micromort. The National Health Service in the UK uses analysis that prices a microlife at around £1.70; the UK Department for Transport will spend £1.60 to prevent a micromort. In a world where life-and-death trade-offs must be made, and should be faced squarely, this is a less horrible way to think about it all. A human life is a special thing; a microlife, not so much.

As Ronald Howard, the decision analysis expert who invented the micromort, put it back in 1984: “Although this change is cosmetic only, we should remember the size of the cosmetic industry.”

Written for and first published at ft.com.

Undercover Economist

Why more and more means less

Status quo bias means that most of your stuff stays because you can’t think of a good reason to get rid of it

Now that Christmas is a brandy-soaked memory, there comes the difficult business of packing away all the gifts that haven’t been broken or eaten. Double-stack the books on the bookshelf, squeeze the woolly sweater into the sock drawer and don’t even think about trying to keep the toys tidy.

Before you blame the decadence of western civilisation for the difficulty of this seasonal clutter, note that the boom in consumer spending each December isn’t new. According to Joel Waldfogel’s brief yet comprehensive book Scroogenomics, Americans were happily splurging at Christmas three or four generations ago with much the same vigour as they do today, relative to the size of the US economy. Nor are Americans exceptional in the lavishness of their Christmas celebrations: Waldfogel reveals that many European countries enjoy an even greater blowout.

No, the trouble with all this clutter, it seems to me, is simple economics. We can afford to buy more and more Christmassy stuff — clothes in particular have been getting cheaper for many years — but the one thing that isn’t getting any cheaper is room to put all the extra stuff in. This is true for most people and it is particularly true for FT readers, who are more likely than most to live in places — New York, London, Hong Kong — where the price of a home can make almost anything look cheap in comparison.

I used to think I knew the answer to this problem: cleverly designed storage space. I am no longer so convinced. Elegantly organised cupboards simply postpone the day of reckoning. The house looks neat for a while but eventually the sheer volume of possessions can overwhelm any storage solution.

Perhaps it’s time for a new approach, and the book that’s been rocking my world for the past few weeks is Marie Kondo’s The Life-Changing Magic of Tidying. If you follow Kondo’s ideas faithfully you’re likely to be driving three-quarters of your possessions to landfill, at which point most of your storage problems should evaporate. The Harford family have all succumbed to the Marie Kondo bug in a big way and are suddenly seeing areas of the floor in our house that we had quite forgotten existed.

Kondo espouses some strange ideas. She unpacks her handbag and tidies away the contents every evening when she returns home. She firmly believes that socks need rest. She advocates saying “thank you” to possessions that are about to be discarded.

Yet despite all this oddness, what really struck me is that Kondo is an intuitive economist. I realised that I had been committing some cognitive blunders, enough to embarrass any self-respecting economist. These errors explained why my house was so full of possessions.

The first mistake was simple status quo bias — a tendency to let things stay the way they are. When you’re trying to clear stuff out of the house, it’s natural to think about whether to throw something away. Perhaps that’s the wrong question, because it places too high a barrier on disposal. Status quo bias means that most of your stuff stays because you can’t think of a good reason to get rid of it.

Kondo turns things around. For her, the status quo is that every item you own will be thrown away unless you can think of a compelling reason why it should stay. This mental reversal turns status quo bias, paradoxically, into a force for change.

My second error was a failure to appreciate the logic of diminishing returns. The first pair of trousers is essential; the second is enormously useful. It is not at all clear why anyone would want a 10th or 11th pair. It’s good to have a saucepan but the fifth saucepan will rarely be used. I love books but I already own more than I will be able to read for the rest of my life, so some of them can surely go.

The trick to appreciating diminishing returns is to gather all the similar stuff together at once. Once every single book I owned was sitting in a colossal pile on my living-room floor, the absurdity of retaining them all became far easier to appreciate.

 . . . 

A third mistake was not fully appreciating the opportunity cost of possessions. There’s a financial cost in paying for a storage locker or buying a larger house or simply buying more bookshelves. But there’s also the cost of being unable to appreciate what you have because it’s stuck at the bottom of a crate underneath a bunch of other things you have.

All this may seem strange talk from an economist, because economics is often associated with a kind of crass materialism. The field no doubt has flaws but materialism isn’t one of them. If anything, the blind spot in classical economics is that the last word on what consumers value is what consumers choose.

Behavioural economics, famously, has a different view — it says that we do make systematic mistakes. But until reading Kondo’s book, I didn’t realise that in every overstuffed bookshelf and cluttered cupboard those mistakes were manifesting themselves.

Written for and first published at ft.com.

Other Writing

What if we abolished Christmas?

One possibility is that the economy would be just fine. This is the classic view of macroeconomics, writes Tim Harford

In 1939, Lew Hahn, the head of the Retail Dry Goods Association in the US, noticed something that gave him cause for concern: Thanksgiving would fall on November 30 that year, the latest possible date. Since it was thought poor form to start hawking Yuletide goodies before Thanksgiving was over, this would mean a brief Christmas spending season.

Hahn was concerned that consumers would spend less, damaging an already weak economy, to say nothing of the prosperity of the members of the Retail Dry Goods Association. And so he had a word with the secretary of commerce, Harry Hopkins, who had a word with President Franklin D Roosevelt, who had a word with the nation. He explained that as Thanksgiving was a federal holiday it was the president’s job to select the date — and he was choosing November 23 instead.

The move was controversial. Alfred Landon, the Republican who had been defeated by Roosevelt in the presidential election of 1936, compared FDR’s high-handedness to that of Adolf Hitler, thus beginning a hallowed tradition in US political commentary. For a couple of years, half the country celebrated on the old Thanksgiving date while the other half marked the new “Franksgiving” instead; a couple of states sat on the fence and made both days a holiday.

All this raises a deeper question: what are the macroeconomic consequences of Christmas? The answer depends on your politics. Economic conservatives, from Rick Santorum to Alf Landon to George Osborne, believe Christmas has little effect on the health of the economy; liberals, from Ed Balls to Franklin Roosevelt to Paul Krugman, believe Christmas is macroeconomically invaluable.

I should emphasise that I am making assumptions here. I have not approached any of these people to ask their opinions about Christmas. But the views I am speculating that they hold seem a logical extension of their views on government stimulus spending.

Allow me to explain. Imagine that this Christmas day, the Queen, the Pope and even Oprah Winfrey announced that Christmas would be a purely religious occasion from 2015 onwards. There would be no presents and no feasting. If people respected this declaration, about $75bn-$100bn of extra consumer spending in the US alone would simply not materialise next December. What then?

One possibility is that the economy would be just fine. This is the classical view of macroeconomics: nothing significant would change after the abolition of Christmas. We would retain the same labour force and the same skills, the same factories and the same power stations, the same financial sector and the same logistics networks. The capacity of the economy to produce goods and services would be undiminished, and after a period of adjustment, during which tinsel factories would be retooled and Christmas tree plantations replanted, all would be well.

What would replace nearly $100bn of seasonal consumer spending? Nothing noticeable, but the replacement would happen just the same. The productive capacity freed up by the disappearance of Christmas could be turned to other uses; prices would fall just enough to tempt us to spend our money at other times of the year. Indeed, cancelling Christmas might even provide a modest boost to our prosperity in the longer term, as bunching up all that spending into a few short weeks strains factories and supply chains. Smoothing out our spending would be more efficient.

This classical view of how the economy works is also the view taken by Mr Osborne, the UK chancellor, and by Republicans in the US. Their view is that government stimulus spending does not work; cut it back, they argue, and the economy would adjust as the private sector took up the slack.

On the other side of the debate stands Mr Balls, the UK’s shadow chancellor, as well as American stimulus proponents such as Mr Krugman and Lawrence Summers. Mr Krugman once commented that panic about an attack from aliens would help the economy because it would get the government spending money again. Since aliens are not available, Santa Claus will have to do.

This Keynesian view of how the economy works differs from the classical view in one crucial way: it argues that supply does not always and automatically create demand. When Christmas is abolished (or a financial crisis devastates people’s confidence and their spending power), consumers will plan to spend less. And if consumers plan to spend less, price adjustments may not induce them to change their minds; the price adjustments may not even happen. If Christmas spending disappears, it may take many years for the economy to replace it. Those factories will still be there and the workers will remain available — but they will stand idle.

Who is right? I should confess a bias. I am sceptical about the efficiency of many government spending programmes and of many Christmas purchase decisions. In both cases, too much attention is lavished on appearances and too little on what the recipient might truly want. In the long run, then, I should hope both for a smaller state and for a smaller Christmas.

But that is a matter for the ghost of Christmas yet to come. Despite my own biases, I have to acknowledge that this Christmas interest rates are still close to zero. Until that changes, the liberals will have the better of the argument. Stimulus spending remains effective, regardless of whether the stimulus comes from the Treasury — or from the North Pole.

Written for and first published at ft.com.

24th of December, 2014Other WritingComments off
Undercover Economist

You really, really, shouldn’t have . . . 

There is a vast discrepancy between how we see the world when giving gifts and when receiving them

The Harford girls have given Father Christmas two very different challenges this year. Miss Harford Senior typed a charming yet professional letter, illustrated with clip art, specifying a number of expensive gifts that would be greatly appreciated. Miss Harford Junior hand-wrote a short note saying that she had tried to be good this year and would like a surprise.

The girls raise two questions. Are surprise gifts better than something specifically requested on a wish list? Are expensive gifts a good way to express affection?

Father Christmas might seek guidance from a set of studies conducted by Gabrielle Adams and Francis Flynn of Stanford, and Harvard’s Francesca Gino.

Gino and Flynn surveyed married people, asking some to reflect on wedding gifts they had received, and others to think about wedding gifts they had given. Gift givers assumed that gifts chosen spontaneously would be just as welcome as those chosen from a wedding registry. Recipients felt otherwise: they preferred the gifts that had been on the wedding list. Such lists seem charmless but they work.

Gino and Flynn found similar results from a survey about birthday presents: again, givers thought that gifts they’d chosen themselves were more appreciated but recipients preferred the gifts that they’d specifically asked for. The lesson: you might feel that it’s awkward and unnecessary to ask what gift would be welcome but the recipient of the gift sees things differently and would prefer that you asked rather than guessed.

Gino and Flynn conducted a third study in which people created wish lists. Other participants were asked to choose an item on the list to be sent as a gift; a third group were asked to peruse the wish list but then to choose some other present of equivalent value. It’s not surprising to discover that recipients preferred the items from their wish list — but what’s remarkable is that they felt the wishlist gifts were more “personal” and “thoughtful”. We think that picking an item from a wish list is lazy and impersonal but the person receiving that item doesn’t see it that way at all.

For good measure, a fourth study by Gino and Flynn found there was one thing people appreciated even more than an item from their own wish lists: money.

There’s more. Adams and Flynn surveyed newly engaged couples about engagement rings. The givers assumed that more expensive rings were more appreciated. The recipients felt differently. A similar result came from asking people to think about a particular birthday present they had received or given: recipients were just as happy with inexpensive gifts, to the surprise of givers.

In short, there is a vast discrepancy between how we see the world when giving gifts and when receiving them. The gift giver imagines that the ideal present is expensive and surprising; the recipient doesn’t care about the money and would rather have a present they’d already selected. We should spend less than we think, and we should ask more questions before we buy.

All of this makes good sense in light of “The Deadweight Loss of Christmas”, a scholarly piece of research conducted by Joel Waldfogel and published in a leading academic journal, the American Economic Review. It celebrates its 21st birthday this month. (Congratulations, Joel.)

Waldfogel’s work on Christmas is well known to readers of this column but here is a quick summary for those who have forgotten. After surveying his students about gifts they had received over the holiday season, he found that most gifts were poorly chosen relative to what the students would have selected themselves. Gifts from friends and lovers tended to be better chosen than gifts from elderly relatives but, on average, the waste attributable to poorly chosen seasonal gifts was between 15 and 20 per cent of the purchase price of the gift — that’s well over $10bn wasted in the US alone every Christmas. This is a vast squandering of time, energy and valuable raw materials.

The usual response to this is that economists have, yet again, failed to appreciate the true meaning of Christmas. But to me this simply suggests that economists have managed to acquire a toxic brand in matters of human relations.

Were a priest to counsel against materialism at Christmas, nobody would accuse him or her of missing the point; the same message from an economist seems foolish and emotionally stunted.

Coupled with the findings from Adams, Flynn and Gino, the conclusion is plain: there is no need to stop buying Christmas presents but we should spend less and pay more attention to what the recipients might actually want.

So what should Father Christmas conclude when faced with my daughters’ letters? Miss Harford Senior is wise to specify exactly what she wants and Father Christmas should take heed.

Miss Harford Junior is taking a risk asking for a surprise — but at least Father Christmas knows that the last thing he should do to compensate for his ignorance is desperately spend more money.

Tim Harford’s latest book, “The Undercover Economist Strikes Back”, makes a superb seasonal gift.

Written for and first published at ft.com.

Undercover Economist

Women (still) don’t win prizes

‘Something about the culture of UK schools is nudging young women away from economics’

It’s no secret that women have long faced an uphill battle both to achieve success and be recognised for that success. The Nobel Prizes tell the story as well as anything: 860 people have been awarded prizes (including the unofficial Nobel Memorial Prize in economics) but only 5 per cent of them were women. The imbalance is worse still in stereotypically male subjects: only six Nobels for physics or chemistry have been awarded to women, fewer than 2 per cent of the total. Marie Curie won two of them; her daughter Irène won another.

Economics is another subject with a masculine reputation. It does not seem to be a happier hunting ground. The economics prize in memory of Alfred Nobel was launched in 1969 but it wasn’t until 2009 that Elinor Ostrom became the only woman so far to win it. “I won’t be the last,” was her characteristically practical comment.

Ostrom won the Nobel in economics despite not being an economist — her application to study for a PhD was turned away by UCLA’s economics department because she didn’t have the maths. “I had been advised as a girl against taking any courses beyond algebra and geometry in high school,” she commented. This particular piece of sexism ultimately worked in her favour: she became a political scientist instead and ended up approaching economic problems from a fresh perspective.

Curie faced a more immediate form of discrimination: in 1903 the Nobel physics committee planned to award the prize to her husband Pierre and to Henri Becquerel, overlooking Marie’s central role in studying radiation. Pierre insisted that his wife should receive the credit that she deserved. Not every husband of a brilliant wife has been quite so enlightened.

The two stories show the range of possibilities for discrimination to occur. Ostrom’s career path was shaped by negative stereotypes more than 60 years before she eventually won her prize; Curie nearly had the prize snatched away at the moment of triumph.

These are old wounds, and we have made a great deal of progress since then. But gender imbalances remain. In the US, the National Science Foundation’s survey of earned doctorates is not a bad place to look for the state of play. In 2012 women earned 46 per cent of all doctorates, up from 32 per cent three decades earlier. No great cause for alarm there. And women heavily outnumber men in social sciences such as psychology, sociology and anthropology.

Yet economics is a different beast: more than two-thirds of economics doctorates are awarded to men. (There is a similar story to tell in physics, chemistry, computing and engineering.) Since nobody under the age of 50 has won the Nobel Prize in economics, one can expect this imbalance in economics PhDs today to ripple through the upper echelons of the profession for many years to come.

There are also hopeful signs. The proportion of economics doctorates earned by women has been growing. The John Bates Clark medal, a prestigious award for economists under the age of 40, was exclusively male until Susan Athey won in 2007, but two other women have won the award since then. That is a sharp shift.

Is the lesson that all we need to do to attract more women to economics is wait? That is doubtful. In the UK, the proportion of undergraduate economists who are women is 27 per cent and falling. This isn’t a problem that will fix itself. So what can be done? The answer to that question depends on where we think the source of the imbalance lies — are we facing Marie Curie’s problem, or Lin Ostrom’s, or something else?

The school environment seems as significant today as it was for Ostrom. A recent study by Mirco Tonin and Jackie Wahba of the University of Southampton examines enrolment in undergraduate economics degrees in the UK. The gender imbalance in successful applicants is much more pronounced among UK applicants than those applying to UK universities from overseas. That suggests that something about the culture of UK schools is nudging young women away from economics.

. . .

That something may well be mathematics. This subject, a vital foundation for economics, is studied by more boys than girls at A-Level. Such a gender gap in advanced high-school mathematics disappeared in the United States 20 years ago.

As for women who already have their PhDs and are looking for careers in academia, the situation in the US is not entirely encouraging. A recent detailed study by a team of economists and psychologists (Stephen Ceci, Donna Ginther, Shulamit Kahn and Wendy Williams) looked at women in US academic sciences and concluded that while “gender discrimination was an important cause of women’s under-representation in scientific academic careers, this claim has continued to be invoked after it has ceased being a valid cause of women’s under-representation”. The playing field, they suggest, is much more level than it once was; a modern Marie Curie wouldn’t need her husband to fight her corner.

But Ceci and colleagues note an exception — one maths-intensive subject at which well-qualified and productive women somehow find it hard to win academic promotions. It’s economics. For some reason, the dismal science remains heavy with the scent of testosterone.

Written for and first published at ft.com.

Undercover Economist

The Christmas card network

‘It is not clear new technologies are expanding our number of genuine friends’

Is the Christmas card obsolete? I suppose the answer depends on what function you think the Christmas card is intended to serve, if any at all. Surely it is no longer intended to convey information. Email and social networks do a more efficient job, and including a Christmas newsletter or family photograph (I do both) will earn you only scorn from any self-respecting British snob.

Some believe that the Christmas card list, where we keep track of old favours and slights, is a sort of passive-aggressive vendetta. There is truth in this. Late in 1974, two sociologists, Phillip Kunz and Michael Woolcott, posted more than 500 Christmas cards to people they did not know. Some of them were “high status” cards, using expensive materials and signed “Dr and Mrs Phillip Kunz”. Others were from “Phillip and Joyce Kunz” or used cheaper stationery or both.

The Kunz family received, along with a complaint from the police, some rather touching replies: “Dear Joyce and Phil, Received your Christmas card and was good to hear from you. I will have to do some explaining to you. Your last name did not register at first . . . Please forgive me for being so stupid for not knowing your last name. We are fine and hope you are well. We miss your father. They were such grand friends.”

But what is most striking is that more than 100 strangers felt obliged to send a signed card in response. That is the power of reciprocity. (Response rates were particularly high if “Dr Kunz” had written on a fancy card to a working-class household. That is the power of status.)

If this is what Christmas cards are all about — mindless reciprocal obligation coupled with some social climbing — then I think we can all agree on two things: we could do without them; and we’ll never be rid of them. Thomas Schelling, a winner of the Nobel Memorial Prize for Economics, once advocated a bankruptcy procedure — wiping clean the list of people to whom we “owe” a Christmas card. If only.

But perhaps the Christmas card also serves other purposes. Consider the exchange, “How do you do?”, “How do you do?” This is phatic communication. It conveys no detailed information but it acknowledges others and implies that there is nothing much to report. “I’m OK, and you’re OK, and lines of communication are open if that changes.”

A Facebook “poke” could achieve the same thing at much lower cost. But perhaps the expense and the hassle is part of the point. If someone invites you for dinner and you say “thank you” as you leave, you may still wish to follow up with a thank-you note to show that you have enough invested in the relationship to take the trouble. If relationships weren’t hard work, they would not be relationships.

There’s a thing called the “social brain” hypothesis: it states that humans evolved large and energy-intensive brains not to do hard sums or design clever tools but because they needed them to navigate the complexities of dealing with other people. Back in 1992, Robin Dunbar — an anthropologist and psychologist now based at the University of Oxford — published a fascinating addendum to that idea. Dunbar had been looking at the social group size and the brain size of different primates, and found that primate species with larger neocortices had grooming relationships with larger social groups. Extrapolating to humans, he produced what has become known as Dunbar’s Number. If our brains are any guide, we’re built to handle a social network of about 150 people.

Dunbar’s Number is both more uncertain and more complex than popular presentations would have you believe. Dunbar himself argues that social networks are nested, following rough powers of three: five people to whom we might turn for substantial emotional or financial support in a moment of true crisis; 15 intimate friends; 50 friends; 150 rather casual friends, and so on.

Social networking tools let us reach more people, more quickly, and in some detail if we so choose. I can reach 90,000 followers on Twitter but — how can I put this tactfully? — they are not my friends. These new technologies are a great convenience but it is not clear that they are allowing us to expand the number of genuine friends that we have. A recent study by Bruno Gonçalves, Nicola Perra and Alessandro Vespignani examined 25 million conversations between Twitter users, and found that the network with whom people might actually have several reciprocal conversations was between 100 and 200 — Dunbar’s number again. As for close friends, women engage in two-way communication with around six people on Facebook; men with just four.

Much like primate grooming, a Christmas card requires effort, time and expense. An up-to-date Christmas list requires some thought about who matters to you, for reasons noble or ignoble. And a few years ago, two researchers carefully examined how big Christmas cards lists tended to be, once allowing for the fact that a single card could reach several members of a household. The researchers were Russell Hill and Robin Dunbar. And the number of people reached by a typical British Christmas card list? 154.

Written for and first published at ft.com.

Undercover Economist

Learn from the losers

Kickended is important. It reminds us that the world is biased in systematic ways

Can there be an easier way to raise some cash than through Kickstarter? The crowdfunding website enjoyed a breakthrough moment in 2012 when the Pebble, an early smartwatch, raised over $10m. But then a few months ago, a mere picnic cooler raised an extraordinary $13m. Admittedly, the Coolest cooler is the Swiss army knife of cool boxes. It has a built-in USB charger, cocktail blender and loudspeakers. The thundering herd of financial backers for this project made it the biggest Kickstarter campaign to date, as well as being a sure sign that end times are upon us.

And who could forget this summer’s Kickstarter appeal from a fellow by the name of Zack “Danger” Brown? Brown turned to Kickstarter for $10 to make some potato salad; and he raised $55,492 in what must be one of history’s most lucrative expressions of hipster irony.

I’m sure I’m not the only person to ponder launching an exciting project on Kickstarter before settling back to count the money. Dean Augustin may have had the same idea back in 2011; he sought $12,000 to produce a documentary about John F Kennedy. Jonathan Reiter’s “BizzFit” looked to raise $35,000 to create an algorithmic matching service for employers and employees. This October, two brothers in Syracuse, New York, launched a Kickstarter campaign in the hope of being paid $400 to film themselves terrifying their neighbours at Halloween. These disparate campaigns have one thing in common: they received not a single penny of support. Not one of these people was able to persuade friends, colleagues or even their parents to kick in so much as a cent.

My inspiration for these tales of Kickstarter failure is Silvio Lorusso, an artist and designer based in Venice. Lorusso’s website, Kickended, searches Kickstarter for all the projects that have received absolutely no funding. (There are plenty: about 10 per cent of Kickstarter projects go nowhere at all, and only 40 per cent raise enough money to hit their funding targets.)

Kickended performs an important service. It reminds us that what we see around us is not representative of the world; it is biased in systematic ways. Normally, when we talk of bias we think of a conscious ideological slant. But many biases are simple and unconscious. I have never read a media report or blog post about a typical, representative Kickstarter campaign – but I heard a lot about the Pebble watch, the Coolest cooler and potato salad. If I didn’t know better, I might form unrealistic expectations about what running a Kickstarter campaign might achieve.

This isn’t just about Kickstarter. Such bias is everywhere. Most of the books people read are bestsellers – but most books are not bestsellers. And most book projects do not become books at all. There’s a similar story to tell about music, films and business ventures in general.

Academic papers are more likely to be published if they find new, interesting and positive results. If an individual researcher retained only the striking data points, we would call it fraud. But when an academic community as a whole retains only the striking results, we call it “publication bias” and we have tremendous difficulty in preventing it. Its impact on our understanding of the truth may be no less serious.

Now let’s think about the fact that the average London bus has only 17 people riding on it. How could that possibly be? Whenever I get on a bus, it’s packed. But consider a bus that runs into London with 68 people at rush hour, then makes three journeys empty. Every single passenger has witnessed a crammed bus, but the average occupancy was 17. Nobody has ever been a passenger on a bus with no passengers but such buses exist. Most people ride the trains when they are full and go to the shops when they are busy. A restaurant may seem popular to its typical customers because it is buzzing when they are there; to the owners and staff, things may look very different.

. . .

In 1943, the American statistician Abraham Wald was asked to advise the US air force on how to reinforce their planes. Only a limited weight of armour plating was feasible, and the proposal on the table was to reinforce the wings, the centre of the fuselage, and the tail. Why? Because bombers were returning from missions riddled with bullet holes in those areas.

Wald explained that this would be a mistake. What the air force had discovered was that when planes were hit in the wings, tail or central fuselage, they made it home. Where, asked Wald, were the planes that had been hit in other areas? They never returned. Wald suggested reinforcing the planes wherever the surviving planes had been unscathed instead.

It’s natural to look at life’s winners – often they become winners in the first place because they’re interesting to look at. That’s why Kickended gives us an important lesson. If we don’t look at life’s losers too, we may end up putting our time, money, attention or even armour plating in entirely the wrong place.

Written for and first published at ft.com.

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Tim Harford is an author, columnist for the Financial Times and presenter of Radio 4's "More or Less".
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