Tim Harford The Undercover Economist
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Undercover Economist

Monty Hall and the game show stick-or-switch conundrum

Forget Fermat’s last theorem. The most vexing challenge in mathematics just might be the Monty Hall problem. Monty Hall — born Monte Halparin — presented nearly 5,000 episodes of Let’s Make a Deal, the US game show that inspired the puzzle.

It is an onion of a conundrum; layer after layer, and guaranteed to make you cry. The puzzle is this: a contestant faces three doors. Behind one of them is a big prize such as a Cadillac. Each of the other two doors conceals a booby prize such as a goat.

The contestant chooses a door, hoping to win the grand prize. But just as the door is about to be opened, Hall steps in and halts proceedings. He opens one of the other two doors instead, revealing a goat. Then he turns to the contestant. Would they like to switch to the other closed door? Or would they prefer to stick with their original choice?

The problem was initially posed in The American Statistician in 1975, by Steve Selvin, but achieved national prominence when Marilyn vos Savant wrote about it in Parade in 1990. She suggested that it pays to switch doors. Her reward was a mailbag full of letters assuring her she was wrong — some from prominent mathematicians. John Kay’s inbox also overflowed when he addressed the problem in 2005 in the Financial Times.

What should the contestant do? Mathematically, it seems not to matter: there are two doors now, so surely they face a 50-50 proposition. And as it happens, many people prefer to stick. They have made their choice and would regret switching if it did not work out.

More careful analysis, however, reveals that the contestant should switch. One way to think of the problem is to notice that their chance of picking the grand prize was initially one in three.

Hall’s intervention does not change that, but it does guarantee that if they failed to pick the correct door initially then they will definitely get the prize by switching. Two times out of three, switching will win the prize.

A second way to think about the problem is to exaggerate the underlying process. Imagine 100 doors, but still only one grand prize. The contestant picks a door, probably not the correct one. Hall then opens 98 other doors, revealing no prize.

Should we really conclude that we have learnt nothing about the other door? The first door was picked at random but the one that Hall has left closed was selected with great care. With probability of 99 per cent, switching will win the prize.

A third way to attack the puzzle is to run an experiment. It will quickly reveal what intuition does not: the contestant should switch. In Ms vos Savant’s experience, many mathematicians changed their minds only on the basis of empirical evidence — which is revealing, since the underlying proof, using Bayes’ theorem, is not especially technical.

Some people will find these explanations persuasive, and others will not. Over the years I have concluded that there is something about the Monty Hall problem that makes it wonderfully resistant to our intuitions.

And there is a twist in the tale, too: after Ms vos Savant brought the problem to national attention, the journalist John Tierney visited Hall himself and they began to play the game repeatedly at his dining-room table, with car keys representing the grand prize and a pack of raisins serving as the goat. At first, things went as Mr Selvin and Ms vos Savant had explained: switching won the prize far more often.

Then, suddenly, things changed. At the beginning of a game, Mr Tierney pointed to one of the options. “Too bad,” said Hall, immediately. “You’ve just won a goat.”

He did not offer Mr Tierney a chance to switch. He did not always make such an offer in the game show — why should he make it now?

Hall’s change of approach turns a probability puzzle into what we might call a cheesecake bet. In the musical Guys and Dolls, Nathan Detroit offers Sky Masterson a bet that Mindy’s sells more strudel than cheesecake. Sky is sceptical, and rightly so, since Nathan already knows the answer. For much the same reason, a contestant in Let’s Make a Deal should ask themself: “If it is really such a good idea to switch, then why has Hall offered me the chance?”

I have great respect for the way Ms vos Savant faced down a posse of contemptuous mathematicians. But we must be careful not to confuse a precise mathematical description of a game for the vagaries of reality itself, something Nassim Nicholas Taleb has named the “ludic fallacy”. Rigorous mathematical thinking can be invaluable, or it can leave you blinkered and on the wrong side of a cheesecake bet.

The solution to the formal Monty Hall problem is counterintuitive and incontrovertible. But the right approach in the game show depended on what Hall himself was trying to do in offering the choice. Was he benevolent, malevolent, or simply aiming for great television?

Alas, we can no longer ask him. Hall died in September. But the Monty Hall problem will live on.

 
Written for and first published in the Financial Times on 6 October 2017.

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Marginalia

The best books about failure

I wrote Adapt: Why Success Always Starts With Failure (UK) (US) several years ago, but I’ve not stopped thinking and talking about the idea. So often we’re told to “learn from our mistakes” or “fail forward”, but the truth is that this advice isn’t easy to take: failure is painful and denial is common.
Here are a few of my favourite books on the topic:

I encountered Little Bets (UK) (US) by Peter Sims just as Adapt was coming out, and loved it. Peter had come to similar conclusions but had a totally different range of examples (from Chris Rock to Frank Gehry, if I recall correctly) and a winning, informal style.

Kathryn Schulz’s Being Wrong (UK) (US) is beautifully written (Schulz later won a Pulitzer prize) and a fascinating discussion of the history and psychology of wrongness.

To go deeper into the psychology of wrongness, try Mistakes Were Made (But Not By Me) (UK) (US) by two academics, Carol Tavris and Eliot Aronson. (Aronson was a research assistant on one of the most famous studies of wrongness, Festinger’s When Prophecy Fails.) The book is highly accessible and full of interesting testaments to the power of denial.

And for a more recent synthesis, try Matthew Syed’s Black Box Thinking (UK) (US), which focuses in particular on the importance of examining and learning from our errors (as with an aeroplane black box).

Happy failing!

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31st of October, 2017MarginaliaResourcesComments off
Undercover Economist

The pendulum swings against privatisation

Political fashions can change quickly, as a glance at almost any western democracy will tell you. The pendulum of the politically possible swings back and forth. Nowhere is this more obvious than in the debates over privatisation and nationalisation.

In the late 1940s, experts advocated nationalisation on a scale hard to imagine today. Arthur Lewis thought the government should run the phone system, insurance and the car industry. James Meade wanted to socialise iron, steel and chemicals; both men later won Nobel memorial prizes in economics.

They were in tune with the times: the British government ended up owning not only utilities and heavy industry but airlines, travel agents and even the removal company, Pickfords. The pendulum swung back in the 1980s and early 1990s, as Margaret Thatcher and John Major began an ever more ambitious series of privatisations, concluding with water, electricity and the railways. The world watched, and often followed suit.

Was it all worth it? The question arises because the pendulum is swinging back again: Jeremy Corbyn, the bookies’ favourite to be the next UK prime minister, wants to renationalise the railways, electricity, water and gas. (He has not yet mentioned Pickfords.) Furthermore, he cites these ambitions as a reason to withdraw from the European single market.

That is odd, since there is nothing in single market rules to prevent state ownership of railways and utilities — the excuse seems to be yet another Eurosceptic myth, the leftwing reflection of rightwing tabloids moaning about banana regulation. Since the entire British political class has lost its mind over Brexit, it would be unfair to single out Mr Corbyn on those grounds.

Still, he has reopened a debate that long seemed settled, and piqued my interest. Did privatisation work? Proponents sometimes mention the galvanising effect of the profit motive, or the entrepreneurial spirit of private enterprise. Opponents talk of fat cats and selling off the family silver. Realists might prefer to look at the evidence, and the ambitious UK programme has delivered plenty of that over the years.

There is no reason for a government to own Pickfords, but the calculus of privatisation is more subtle when it comes to natural monopolies — markets that are broadly immune to competition. If I am not satisfied with what Pickford’s has to offer me when I move home, I am not short of options. But the same is not true of the Royal Mail: if I want to write to my MP then the big red pillar box at the end of the street is really the only game in town.

Competition does sometimes emerge in unlikely seeming circumstances. British Telecom seemed to have an iron grip on telephone services in the UK — as did AT&T in the US. The grip melted away in the face of regulation and, more importantly, technological change.

Railways seem like a natural monopoly, yet there are two separate railway lines from my home town of Oxford into London, and two separate railway companies will sell me tickets for the journey. They compete with two bus companies; competition can sometimes seem irrepressible.

But the truth is that competition has often failed to bloom, even when one might have expected it. If I run a bus service at 20 and 50 minutes past the hour, then a competitor can grab my business without competing on price by running a service at 19 and 49 minutes past the hour. Customers will not be well served by that.

Meanwhile electricity and phone companies offer bewildering tariffs, and it is hard to see how water companies will ever truly compete with each other; the logic of geography suggests otherwise.

All this matters because the broad lesson of the great privatisation experiment is that it has worked well when competition has been unleashed, but less well when a government-run business has been replaced by a government-regulated monopoly.

A few years ago, the economist David Parker assembled a survey of post-privatisation performance studies. The most striking thing is the diversity of results. Sometimes productivity soared. Sometimes investors and managers skimmed off all the cream. Revealingly, performance often leapt in the year or two before privatisation, suggesting that state-owned enterprises could be well-run when the political will existed — but that political will was often absent.

My overall reading of the evidence is that privatisation tended to improve profitability, productivity and pricing — but the gains were neither vast nor guaranteed. Electricity privatisation was a success; water privatisation was a disappointment. Privatised railways now serve vastly more passengers than British Rail did. That is a success story but it looks like a failure every time your nose is crushed up against someone’s armpit on the 18:09 from London Victoria.

The evidence suggests this conclusion: the picture is mixed, the details matter, and you can get results if you get the execution right. Our politicians offer a different conclusion: the picture is stark, the details are irrelevant, and we metaphorically execute not our policies but our opponents.

The pendulum swings — but shows no sign of pausing in the centre.

Written for and first published in the Financial Times on 29 September 2017.

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Marginalia

Was Luca Pacioli overrated?

One of my favourite chapters in Fifty Things That Made The Modern Economy (UK) (US) is on double-entry bookkeeping. You can read a briefer adaptation of the chapter on the BBC website. Luca Pacioli, Renaissance mathematician admired by the likes of Leonardo da Vinci, is one of the stars of my story. I have read in various places that Pacioli invented double-entry bookkeeping (I won’t embarrass the authors by naming names) but this isn’t true, as I write:

Pacioli is often called the father of double-entry bookkeeping, but he didn’t invent it.

Why, then, give Pacioli a starring role? Because of his grand treatise:

Summa de Arithmetica, Geometria, Proportioni et Proportionalita was an enormous survey of everything that was known about mathematics – 615 large and densely typeset pages. Amidst this colossal textbook, Pacioli included 27 pages that are regarded by many as the most influential work in the history of capitalism. It was the first description of double-entry bookkeeping to be set out clearly, in detail and with plenty of examples…. His book enjoyed a long print run of 2,000 copies, and was widely translated, copied, and plagiarised across Europe.

Pacioli, then, did not invent double-entry bookkeeping but we can trace its influence to his work. Or can we?

Professor Jacob Soll, author of The Reckoning (UK) (US) writes to suggest that I dig deeper. For one thing, was a 2000-copy print run really so impressive? Accounting caught on in England and Holland, but was Pacioli the source? Prof. Soll writes in an email:

The accounting section was extracted and transcribed, but often changed and not attributed to him.  It is more likely than Jan Ympyn’s book was the actual version that fell into the hands of Englishmen and Germans who went to Holland to literally learn complex capitalism. When industrial capitalism rears its head in Britain around 1706, the British manuals are the ones that are the basis of the revolution.  Did they come from Pacioli?  Possibly, a little?  By that time there were so many Dutch manuals and the great accounting teachers were Dutch and then low Churchmen…  It was only later, as historians tried to date these things, that Pacioli is named the father of the tradition.

Richard Dafforne’s English-language guide to accounting, from 1636, credits the Dutch as his influence.
Moving on from Pacioli to the foundation of management accounting techniques, another loyal reader, Greg Finch, writes:

I hadn’t previously been aware that Josiah Wedgwood used his accounts as a basis for improving his business. However, now I become one of those correspondents who -perhaps irritatingly- disputes one of your points. Doubtless many did follow what they saw Wedgwood doing but I don’t believe management accounting started with him. In Northumberland merchants turned lead miners/processors were using unit cost analysis drawn from their accounts to decide on where to locate smelting mills and to seek cheap sources of ore at least as early as 1680, and had already put in place quantitative ‘KPIs’ they expected managers to report on regularly. I don’t claim this was where it started either -though I am finding Newcastle and the north-east was an interesting hotbed of developing business practice at the time…

My sources included Jane Gleeson-White’s Double Entry (UK) (US), the BBC’s ten-part Brief History of Double-Entry Bookkeeping (which alas is not currently available), and William Goetzmann’s Money Changes Everything (UK) (US). Professor Soll points me towards an authoritative source that I had missed, B. S. Yamey’s Scientific Bookkeeping and the rise of Capitalism.  One of the joys of this project is that I keep on learning.

24th of October, 2017MarginaliaComments off
Undercover Economist

Fatal Attraction of Fake Facts Sours Political Debate

He did it again: Boris Johnson, UK foreign secretary, exhumed the old referendum-campaign lie that leaving the EU would free up £350m a week for the National Health Service. I think we can skip the well-worn details, because while the claim is misleading, its main purpose is not to mislead but to distract. The growing popularity of this tactic should alarm anyone who thinks that the truth still matters.

You don’t need to take my word for it that distraction is the goal. A few years ago, a cynical commentator described the “dead cat” strategy, to be deployed when losing an argument at a dinner party: throw a dead cat on the table. The awkward argument will instantly cease, and everyone will start losing their minds about the cat. The cynic’s name was Boris Johnson.

The tactic worked perfectly in the Brexit referendum campaign. Instead of a discussion of the merits and disadvantages of EU membership, we had a frenzied dead-cat debate over the true scale of EU membership fees. Without the steady repetition of a demonstrably false claim, the debate would have run out of oxygen and we might have enjoyed a discussion of the issues instead.

My point is not to refight the referendum campaign. (Mr Johnson would like to, which itself is telling.) There’s more at stake here than Brexit: bold lies have become the dead cat of modern politics on both sides of the Atlantic. Too many politicians have discovered the attractions of the flamboyant falsehood — and why not? The most prominent of them sits in the White House. Dramatic lies do not always persuade, but they do tend to change the subject — and that is often enough.

It is hard to overstate how corrosive this development is. Reasoned conversation becomes impossible; the debaters hardly have time to clear their throats before a fly-blown moggie hits the table with a rancid thud.

Nor is it easy to neutralise a big, politicised lie. Trustworthy nerds can refute it, of course: the fact-checkers, the independent think-tanks, or statutory bodies such as the UK Statistics Authority. But a politician who is unafraid to lie is also unafraid to smear these organisations with claims of bias or corruption — and then one problem has become two. The Statistics Authority and other watchdogs need to guard jealously their reputation for truthfulness; the politicians they contradict often have no such reputation to worry about.

Researchers have been studying the problem for years, after noting how easily charlatans could debase the discussion of smoking, vaccination and climate change. A good starting point is The Debunking Handbook by John Cook and Stephan Lewandowsky, which summarises a dispiriting set of discoveries.

One problem that fact-checkers face is the “familiarity effect”: the endless arguments over the £350m-a-week lie (or Barack Obama’s birthplace, or the number of New Jersey residents who celebrated the destruction of the World Trade Center) is that the very process of rebutting the falsehood ensures that it is repeated over and over again. Even someone who accepts that the lie is a lie would find it much easier to remember than the truth.

A second obstacle is the “backfire effect”. My son is due to get a flu vaccine this week, and some parents at his school are concerned that the flu vaccine may cause flu. It doesn’t. But in explaining that I risk triggering other concerns: who can trust Big Pharma these days? Shouldn’t kids be a bit older before being exposed to these strange chemicals? Some (not all) studies suggest that the process of refuting the narrow concern can actually harden the broader worldview behind it.

Dan Kahan, professor of law and psychology at Yale, points out that issues such as vaccination or climate change — or for that matter, the independence of the UK Statistics Authority — do not become politicised by accident. They are dragged into the realm of polarised politics because it suits some political entrepreneur to do so. For a fleeting partisan advantage, Donald Trump has falsely claimed that vaccines cause autism. Children will die as a result. And once the intellectual environment has become polluted and polarised in this way, it’s extraordinarily difficult to draw the poison out again.

This is a damaging game indeed. All of us tend to think tribally about politics: we absorb the opinions of those around us. But tribal thinking pushes us to be not only a Republican but also a Republican and a vaccine sceptic. One cannot be just for Brexit; one must be for Brexit and against the UK Statistics Authority. Of course it is possible to resist such all-encompassing polarisation, and many people do. But the pull of tribal thinking on all of us is strong.

There are defences against the dead cat strategy. With skill, a fact-check may debunk a false claim without accidentally reinforcing it. But the strongest defence is an electorate that cares, that has more curiosity about the way the world really works than about cartoonish populists. If we let politicians drag facts into their swamp, we are letting them tug at democracy’s foundations.
Written for and first published in the Financial Times on 23 September 2017.

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Undercover Economist

Echoes of a bygone age show Britain losing its sense of direction

“It’s that 1970s vibe again,” a senior colleague tells me. This being the Financial Times I presume he is picking up echoes of a bygone economic and political milieu, rather than gleefully anticipating the re-emergence of flares or X-rated movie theatres. Either way, it is hard to venture a firm opinion on the matter: as late as the 1990s, I was still at school. My recollection of James Callaghan is pretty hazy, and I know Edward Heath only through a charming book of Christmas carols that he compiled after leaving office. (Millennials and foreigners confused by the direction this column is taking may be interested to know that both men were UK prime ministers.)

There certainly are parallels: now, as then, politics is dominated by the two big parties; the nation is led by a weak minority government; and Jeremy Corbyn’s views seem politically relevant. There is even an economic echo: the unemployment rate, at 4.3 per cent, is back down to the levels last seen in 1975, when I was in nappies.

But in other ways it feels absurd to compare today’s economy with that of 40 years ago. The uptick in inflation that has attracted some attention this week — to 2.9 per cent on the consumer price index measure — is a molehill compared with the Himalayan peaks of yesteryear, with retail price index inflation rarely slipping below 10 per cent per year and sometimes exceeding 25 per cent. With inflation at 25 per cent, prices double every three years; with inflation at 2.9 per cent the doubling would take a generation. Bank of England base rates then shuttled breathlessly between 5 and 15 per cent — whereas they sit today, as they have done since 2009, at record lows. The price of oil remains of interest not because it has spiked but because it has halved.

And rather than joining the European Economic Community in a desperate attempt to save the British economy, we are now leaving in a desperate attempt to . . . well, I am still trying to figure that one out.

But those are the dry numbers. What of the zeitgeist, the more ineffable spirit of the times? That is a curious question. Dominic Sandbrook, a leading British historian of the 1970s, reminds us of the words of Callaghan to his Labour party colleagues in 1974: “Our place in the world is shrinking: our economic comparisons grow worse, long-term political influence depends on economic strength — and that is running out . . . If I were a young man, I should emigrate.”

Callaghan’s mournful diagnosis cuts deep today. Much of the country knows how he felt. But the curious thing is that half of them believe that the UK was doing just fine until we voted for a once-in-a-generation act of self-harm last June. The other half were as gloomy as Callaghan until the Brexit vote gave them hope. Say what you like about the 1970s, at least their grimness is a fact that we can agree on.

Then, national humiliation was inflicted by the need to approach the International Monetary Fund for help — and everyone could agree that this was not an encouraging development. Now, national humiliation is in the eye of the beholder and we have either broken free of decades of subjugation to Brussels — or voted to make ourselves a laughing stock. I hope the rest of the world is enjoying the joke, at least. Our foreign secretary is Boris Johnson, our prime minister is “strong and stable”, our foreign policy is built on the steadfastness of President Donald Trump, and our back-up plans include Mr Corbyn and the Conservative member of parliament Jacob Rees-Mogg.

Economically, our 2017-era service industries and just-in-time supply chains are highly unlikely to survive a hard Brexit unscathed, despite the gung-ho cheerleading of a few economists who seem to think nothing much has changed in international economics since David Ricardo outlined the principle of comparative advantage in 1817.

Jill Lepore, a Harvard history professor, commented not long ago that she was wary of glib historical comparisons: “Trump is like Andrew Jackson”; “Cryptocurrencies are like the tulip bubble”. Rather than squashing together the past and present like an accordion, she advocates expanding the instrument, “stretch it open as far as you can, so you can see the distance”.

So if we stretch the accordion out, what do we see? A country that becomes more open, liberal, tolerant, wealthy and confident but also more economically unequal. The rise in inequality largely took place in the 1980s, but only became politically salient after the banking crisis of 2007. But also, perhaps, a country that now, as then, has lost a sense of direction. What ever you think of the journey, we travelled a long way under Margaret Thatcher and Tony Blair. But we have been becalmed now for a decade. Where exactly are we going? Ponder again this week’s unemployment and inflation numbers, which reinforce the picture of the UK economy that has become familiar: plenty of jobs, but not a lot of money.
The nation, like its government, is working flat out and going nowhere.

Written for and first published in the Financial Times on 15 September 2017.

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Marginalia

Why Thaler’s Nobel is a well-deserved nudge for behavioural economics

Richard Thaler has won the Nobel memorial prize in economics, an award that had been anticipated for some time. Mr Thaler is a behavioural economist, one of the group of economists who applies insights from psychology, or perhaps plain common sense, into the idealised world of economic modelling.

One trivial behavioural insight that Mr Thaler is fond of mentioning concerns a large bowl of cashew nuts he once served to dinner guests over drinks. Observing his guests hoovering up the contents of the bowl, he removed it to the kitchen so as not to spoil everyone’s appetite. The guests could in principle have stopped of their own accord; nevertheless they were pleased to see temptation removed.

Early in his career, he started making a list of “Dumb Stuff People Do” on the blackboard in his office. The cashew nut example was on the list, and it is a classic piece of Thaler thinking: obvious, trivial, fun and yet completely beyond the scope of traditional economics to model. Mr Thaler’s insight is that such trivia might lead to important analytical and policy insights.

Thomas Schelling, Nobel laureate in 2005, was also a master of these deceptively simple observations of human nature. And Daniel Kahneman — a psychologist, mentor for Mr Thaler, and winner of the prize in 2002 — had with Amos Tversky laid the foundations for behavioural economics.

Mr Thaler advanced the field in two important ways. He campaigned for behavioural economics to be taken seriously within the economics profession. He also brought it into the policy environment with his book Nudge (co-authored with Cass Sunstein) and his support for behavioural policy units in the White House and 10 Downing Street.

Within the profession, Mr Thaler found a pulpit in the Journal of Economic Perspectives, an academic journal supplied to all members of the American Economic Association. His Anomalies column was witty and sharply reasoned, highlighting strange features of the economic and financial world that standard economic theory could not explain, and rigorously debunking unconvincing attempts at rationalisation.

His evangelism for behavioural economics has been successful, at least in microeconomics: it is commonplace to see economic models incorporate psychological realism, and Mr Thaler himself was president of the American Economic Association in 2015.

In the policy world, Mr Thaler’s most famous idea was to use behavioural insights in pensions policy — for example, by enrolling people in a pension scheme by default, while giving them the choice to opt out. The stakes here are much higher than with cashew nuts: default enrolment has, according to the UK pensions regulator, increased participation in private-sector pension schemes from 42 per cent to 73 per cent between 2012 and 2016.

Rational economic man does not care — or even notice — whether a pension is opt-in or opt-out. He simply calculates (instantly) whether it pays to participate and chooses accordingly. Mr Thaler’s insight is not only that people are not perfectly rational (that much is obvious, even to the most traditional of economists) but that apparently small departures from rationality can have outsized impacts.

Mr Thaler’s catch-all advice: whether you’re a business or a government, if you want people to do something, make it easy. This year’s choice of Nobel Prize winner is an easy one to like.

Written for and first published in the Financial Times on 9 October 2017.

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Marginalia

Behavioural economics books to enjoy

Congratulations to Richard Thaler, who has been awarded the Nobel memorial prize in economics “for his contributions to behavioural economics”. Thaler is a worthy winner. In addition to his academic contributions, alongside the likes of Daniel Kahneman and Robert Shiller, he has been the leading evangelist in the profession for behavioural realism in economics.

Thaler’s influence on policymakers has been unparalleled, in part thanks to his book Nudge (UK) (US) with Cass Sunstein. I wrote a quick appreciation of Thaler for the FT (subscription req.) and this much longer piece a couple of years ago asking what lay in store for behavioural economics.

Here are a few of my favourite behavioural economics books:

Daniel Kahneman Thinking Fast and Slow (UK) (US) – now the bible of behavioural economics, full of fascinating experiments and examples.

Michael Lewis The Undoing Project (UK) (US) – a touching biography of Kahneman and Tversky. Skip the first chapter, but the rest is beautiful storytelling and insightful.

Cass Sunstein and Reid Hastie Wiser (UK) (US) – the best book I know about group decision-making and how to overcoming polarisation and groupthink.

For inside stories of behavioural economics try Thaler’s Misbehaving (UK) (US) and David Halpern’s Inside the Nudge Unit (UK) (US).

And for behavioural science to brighten your day, there’s Think Small (UK) (US) by Halpern’s colleagues Owain Service and Rory Gallagher, or How To Have A Good Day (UK) (US) by Caroline Webb.

Enjoy! And if you’d like a reminder that the old rational choice school of thought has some intriguing insights to contribute, may I (ahem) recommend my second book The Logic of Life (UK) (US).

 
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9th of October, 2017MarginaliaResourcesComments off
Undercover Economist

True diversity means looking for the knife in a drawer of spoons

Forget the new year’s resolution: September, not January, is the time for new starts. College freshers are preparing to leave home, graduates are ironing shirts and blouses and dressing up for their first day in the office. Recruiters and admissions tutors are hoping they made the right choices.

So how do we select the best people for a course or a job? It seems like a sensible question, yet it contains a trap. In selecting the best person we might set a test — in a restaurant kitchen we might ask them to whip up some meals; in a software company we might set some coding problems. And then the trap is sprung.

By setting the same task for every applicant we recruit people who are carbon copies of each other. They will have the same skills and think in the same way. Allowing recruiters some subjective discretion might loosen this trap a little, but it might equally make it worse: we all tend to see merit in applicants who look, speak, and dress much like we do. Opposites do not attract, especially when it comes to corporate hiring.

This is unfair, of course. But it is also — for many but not all tasks — very unwise. Scott Page, a complexity scientist and author of a new book, The Diversity Bonus (UK) (US), invites us to think of people as possessing a kind of cognitive toolbox. The tools might be anything from fluent Mandarin to knowing how to dress a turkey to a command of Excel keyboard shortcuts. If the range of skills — the size of the toolkit — matters, then a diverse team will boast more cognitive skills than a homogenous team, even one full of top performers.

The logic of this toolbox model is obvious in certain contexts: any good heist movie will have the bruiser, the charmer, the hacker, the explosives expert, the strategist and the cat burglar. It is clear why such a diverse range of skills is needed and it is obvious that no single test could recruit such a team: it has to be constructed with diversity in mind from the start.

But within a corporate environment the same logic often tends to be forgotten. Everyone has been recruited using the same cookie-cutter template; everyone is proficient at a similar set of tasks, and the range of thinking skills suffers. The IMF is full of economists. Congress is full of lawyers. Football management is full of ex-footballers. If someone does happen to have hidden talents that will be by accident, not by design.

This homogeneity may not be disastrous. If you want to recruit 10 truck drivers you probably just need the 10 safest, most reliable drivers you can find, because the drivers will be working as individuals, not sparking off each other. But in any situation where a range of problems have to be solved together as a team, diversity can help.

Scott Page’s model of diversity — less a glorious rainbow of superficial attributes, more a toolkit crammed with different skills and perspectives — is a powerful way to appreciate the problem with homogeneity. If recruiters keep looking for the same skillset then an organisation risks, in the words of philosopher-queen Alanis Morissette, having 10,000 spoons when all it needs is a knife.

The standard model of graduate recruitment is almost helpless when faced with this problem. Yes, one can have diversity coaching, checking that certain demographic groups aren’t being discriminated against. But when one candidate at a time is being recruited, it is hard to do much about diversity because diversity is not a property of individuals, it is a property of groups.

So how to solve the problem? Rory Sutherland of Ogilvy, an adman with a keen interest in behavioural science, has suggested recruiting people in groups. If an organisation recruits five people at a time then a couple of vacancies can be reserved for wild-cards — people who don’t fit the mould but have interesting talents. But the definition of “interesting” is itself a tricky one, and not every organisation has the luxury of recruiting in bulk.

What makes matters worse is that we often do not appreciate the value of diversity when we see it. One study of problem-solving (by Katherine Philips, Katie Liljenquist and Margaret Neale) found that groups containing an outsider were far more proficient at solving murder-mystery puzzles than groups made up entirely of friends.

The striking thing about this study, though, was that the successful groups with an outsider didn’t realise they were being successful, while the cosy underperforming groups of friends were complacent, not realising how badly they were doing. Having the outsider around helps us solve problems, but don’t expect us to be grateful, or even to notice anything other than social discomfort.

The hard truth is that to find new solutions to old problems we must often work with people we don’t really understand. I won’t pretend this is easy, but I cannot wait to pull off a heist with Scott Page, Rory Sutherland and Alanis Morrissette.

Written for and first published in the Financial Times on 8 September 2017.

My new book is “Fifty Inventions That Shaped The Modern Economy”. Grab yourself a copy in the US or in the UK (slightly different title) or through your local bookshop.

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Marginalia

Messy – paperback publication day US

messy-us-cover

The paperback of Messy is out in the US! You can order from Amazon here or find out more about the book and other places to buy here – or if you have a good local bookshop then please support it by picking up the book there.

I had a lot of fun – and no small amount of heartache – writing the book. Tyler Cowen says it is my “best and deepest”; Brian Eno comments, “It’s a very very good book, full of wise counterintuitions and clever insights”; while The Economist comments that it “masterfully weaves together anecdote and academic work.”

To get a flavour of what the book is all about, there’s my TED talk here – or you can check out my Messy inspired reading list, too.

4th of October, 2017MarginaliaComments off
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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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