Tim Harford The Undercover Economist

Articles published in 2006

Dear Economist on ft.com, free of charge

The latest Dear Economist column is about how to successfully extort money for withdrawing from a job interview, but I won’t post it here because the FT is now posting my columns (both Undercover Economist and Dear Economist), free of charge. There is even an RSS feed, to which I urge you to subscribe.

Undercover Economist columns free at ft.com

The latest Undercover Economist column is about student boozing, but I won’t post it here because the FT is now posting my columns (both Undercover Economist and Dear Economist), free of charge. There is even an RSS feed, to which I urge you to subscribe.

DVDs of “Trust Me, I’m an Economist”

Quite a few kind souls have written to ask about DVDs of “Trust Me, I’m an Economist“. Alas, there is no official DVD and probably will not be unless a second series is commissioned. Lobby the BBC at once!
There may, of course, be illicit downloads floating around on the internet but I am not aware of them.

17th of September, 2006MarginaliaComments off

Shot down in flames

The Undercover Economist – FT Magazine

The FT’s UK business editor has challenged me to solve a tricky problem for a misunderstood species: dragons. The dragons in question populate BBC2’s Dragons’ Den. Part of the fun of the show is watching these five ferocious venture capitalists give bungling inventors a roasting, but it’s equally entertaining to see them haggling over how large a share of a promising business the hopeful owners are willing to sell.

Merely by expressing an interest in a business, the dragons give the entrepreneurs confidence that they may be able to get a better offer elsewhere. Several recent hopefuls have decided that the dragons were too greedy and turned down their cash.

The first lesson for the rational dragon: curb your enthusiasm in public and make an offer in private. Although the rules of the show forbid it, perhaps some dragons already do. Their scornful put-downs could be motivated as much by rational calculation as by a mean streak or a mean TV producer.

The den is, in fact, an auction room by another name. Dragons bid against each other, and against the unknown outside offers that the business may receive, and they should be aware that every bid reveals information to the other dragons and the entrepreneur. This is the point of an auction: the seller gives buyers an incentive to reveal, through their bids, what they know about the prize’s value. The auction also, rather neatly, collects money on that basis.

The dragons should therefore consider what they might learn from each other’s bids. When casino owner Duncan Bannatyne offered to invest in a poker league, fellow dragon Richard Farleigh was quick to follow. If it was good enough for Bannatyne it was good enough for him.

These are familiar lessons to auction theorists such as Oxford professor Paul Klemperer. As one of the masterminds behind a mobile phone licence auction that raised ₤22.5bn, he presumably knows a thing or two about wringing cash out of investors, but he has also studied the way auctions reveal information. The person who wins an auction is the person who bid more than what everyone else thought the item was worth. In retrospect he is likely to be disappointed: economists call this “the winner’s curse”. Professor Klemperer argues that the curse has the ability to kill some auctions stone dead by discouraging sensible bidders from showing up at all.

The winner’s curse is especially severe when one dragon, such as Bannatyne, is a known expert. A rational dragon should never outbid the expert: if you’re paying more than the expert, you’re paying too much. Yet Bannatyne was, in fact, outbid. He may have made a mistake in expressing interest in a business where his expertise was evident to all.

Continued at ft.com

Trust me, I’m an Economist

British fans of “Dear Economist” may enjoy the TV series it inspired, “Trust Me, I’m an Economist”. Starts 7pm BBC2 on 18th August and runs for four weeks.
There is more at the FT site here.

Filling up the corners

Dear Economist,

From time to time I find myself eating a meal with an unlimited supply of food: sometimes an all-you-can-eat buffet, sometimes a more sophisticated meal laid on by a friend or someone trying to impress: weddings, banquets, that kind of thing. I like food but there are limits to how much I can eat. So how should I pace myself for optimal enjoyment of the meal?

Mr M. Newman, Shrewsbury

Dear Mr Newman,

This turns out to be a surprisingly deep problem, and naturally the optimum strategy will also depend on your tastes. (If you are concerned about your weight, fill up on Perrier, celery and lettuce; better yet, stay away from all-you-can-eat buffets.) Nevertheless, I think there are some general principles here.

If the buffet offers you every choice simultaneously, your best strategy is to try a little of every plausible dish so that you can decide what you would really like to eat. Then go back and get properly stuck in: to your favourite dish if you have no taste for variety, otherwise to your favourite two or three.

If the dishes are presented sequentially, then you will have to take more risks. There is always the chance that you will take a too-small portion of what later turns out to have been much the best course.

Your best guide, then, is to consider the incentives of the food supplier…

Continued at ft.com. Subscription free.

9th of September, 2006Dear EconomistComments off

Marriage and convenience

The Undercover Economist – FT Magazine

I am back from a brief holiday, and that always brings fresh perspectives. I am noticing new things about life in the office and life at home. In both cases there are the petty annoyances. At the office, I find myself increasingly irritated by the loudspeaker that bellows a pre-recorded and irrelevant security announcement whenever I lock my bicycle to the bike racks. At home, I have to put up with my wife’s predilection for unreasonably healthy eating.

Of course, in both cases there is give and take. In exchange for putting up with the electronic honking of the security system and for the turnip soup, I am allowed to take my own little liberties. My salary is not docked if I turn up to work late after a trip to the dentist, but I wouldn’t want to try the trick if I was billing by the hour.

As at work, so in love. When I was dating I’d work out, brush my teeth after every meal, and always wear clean underwear. Now I’m married I do those things too, of course. Mostly. But I suspect that occasional lapses would, within reason, go unpunished.

What the marriage and the job contract with the Financial Times have in common is that they are long-term arrangements where, in principle, a series of short-term arrangements might do. I have in the past written for the newspaper as a freelancer. Nobody shouted at me for parking my bike, but nobody paid me for going to the dentist either.

There are also many short-term alternatives to “till death do us part”. Some cultures even offer temporary marriages: pagans sometimes marry for a year and a day, renewable by mutual consent, while Shia Muslims can arrange fixed-term marriages. Of course, most people who rent motel rooms for a fixed time don’t bother with the concept of marriage at all.

So why are some partnerships brief and some permanent? Consider – as economist Paul Joskow of the Massachusetts Institute of Technology did in the 1980s – US coal mining and the coal-burning power industry. On the west coast, coal mines and coal-fired power stations married each other, either by merging or by signing 30-year contracts with great detail about how disputes were to be dealt with.

On the east coast, free love prevailed: power stations did not necessarily locate near the mine head and they often bought coal on the spot market or through relatively short-run contracts.

Professor Joskow was in no doubt as to the reason for the difference. All east-coast mines produced very similar coal, were able to operate profitably at a small scale and were linked by a rich web of transport connections. A power station could pick and choose from month to month which mine would supply it.

On the west coast, the mines were much bigger and each one was unique. Power stations had to tune themselves to deal with a specific mine’s output, and would generally be located near the mine head. In such a situation, it would be easy for the mine to exploit the power station by suddenly jacking up the price of coal. The best thing, then, was a merger of interests so that both were on the same team…

Continued at ft.com or subscription free at Slate

The big cost of avoiding risk

From BBC Online

Have you ever been made an offer you felt you couldn’t afford to refuse?

Most of us have had the experience of buying a mobile phone or hiring a car on holiday, to find that suddenly the friendly assistant is talking about frightening risks and offering to protect us from them.

Before we drive our hire cars onto the dangerous foreign streets, we are warned about the excess of 900 euros if something goes wrong.

For just 10 euros a day, we can make that worry vanish.

But before you sign up for your peace of mind, stop and think: economists think you might be making a classic error.

When should you pay over the odds for insurance?

If you pay 10 euros a day to protect yourself from a 900 euro excess, then that’s fair if you crash into something every 90 days.

Of course, if your driving is that bad or the roads are that dangerous, you should probably walk instead.

Even if you crash your car once a year or so, you would be paying four times more than was fair for your car hire insurance.

Whether you should do that or not depends on how frightened you are of risk.

Most of us worry too much about little risks like losing a cheap mobile phone.

One of the major phone companies will insure a cheap mobile phone for 92 pence a week, about £50 a year.

The phone itself will cost £50 to replace.

That is a typical price, but despite all the headlines about mobile phone theft, most phones live peaceful lives and die of old age.

The fair price for the insurance is probably closer to £5 a year.

What is more, most of the people who buy the phone insurance could afford to replace a £50 phone without having to starve.

We are buying protection from a risk that we can afford to take, and we are buying it at an incredibly high price.

You could take the money you would have spent on extra insurance for your washing machine, mobile phone and rental car and put it into a savings account.

For such small risks and such overpriced insurance, it is very likely that the savings account will contain enough money to pay for the occasional phone that falls down the lavatory.

In effect, you are insuring yourself, and at a fair price too.

It can make sense to pay for insurance, even overpriced insurance, to protect yourself from a big risk: your house burning down, or you becoming ill and unable to work for years.

For that kind of risk, there is no way your savings account will ever be big enough.

But that is what insurance is designed for: risks that you cannot afford to take, not risks that you can.

If you can bring yourself to keep cool about little risks, you should insure only the big risks, such as your house burning down.

(What counts as a big risk, of course, depends on how rich you are.)

As for the mobile phone in the lavatory, you will simply have to tell yourself that in the big scheme of things, it is not that important.

That is the closest that economics will ever come to Taoism.

The strange thing is, I only know two other people who actually behave like this.

Both of them are wealthy economists.

Why will the practice never catch on?

Economic psychologists have researched how we respond to risk, and discovered that we find it impossible to put our losses into context.

I should recognise that the value of my home fluctuates every hour by more than the value of the mobile phone I am so worried about losing.

It will not be the house price, but the theft of the phone that upsets me.

And it is the risk of being upset that mobile phone companies will remind me about next time I am in one of their shops.

8th of September, 2006Other WritingComments off

A confession

Dear Economist

A friend of mine was recently in Mumbai where many pirated books from the west were on sale on the street. Along with Harry Potter, there was The Undercover Economist, priced at 3.95 rupees.

It was clearly a counterfeit – it is printed on inferior paper and smells rather gratifyingly of printer’s ink. Knowing that it was a breach of copyright, should my friend have bought the book, thus aiding and abetting a criminal act and depriving you of your royalty? And after my friend had bought it, should I have accepted the gift? And having accepted and read it, should I send you your royalty payment? I have the book and cannot find the chapter which answers this.

Christopher Hird, London

Encl: photograph of counterfeit book

Dear Mr Hird,

Faced with this kind of illegal competition, the publishers tend to move upmarket, offering higher prices and higher quality and presuming that they will not be able to beat the counterfeiters on price. (The illicit copy cost about five pence – less even than my miserly royalty.) Those with scruples lose out, as do I and the publishers.

But that can hardly be your concern. Even though the cheap version is inferior, it is a similar product. You did not, for instance, miss out on the “official” discussion of piracy because it’s not in the legal edition either. So you and your friends cannot be blamed for breaking the law and buying the illicit version…

Continued at ft.com

6th of September, 2006Dear EconomistComments off

Laundry Money

The Undercover Economist – FT Magazine

Young Miss Harford is finally asleep, and I’ve had a hearty supper, but instead of chatting to my wife or curling up on the sofa with The New Yorker, I am sitting at the computer writing this article. My wife is working too. I don’t recall my father working in the evenings very often and I’m sure that his father did nothing of the sort. Strange, then, that economists believe we are enjoying more leisure time than ever.

Thanks to the washing machine and the electric iron, the microwave and dishwasher, we are much more productive at home than our grandparents, and similarly much more productive (and thus richer) at work. Pure economic theory tells you little about what that might mean for our leisure time. It is true that we do not need to work as hard to earn the same income or wash the sheets, but higher productivity can also tempt us to work more. Before washer-dryers, few people would have dreamt of washing their clothes after wearing them for just one day, while part-timers at Goldman Sachs are sacrificing more money than part-timers at McDonald’s.

So economists have turned to data instead, generally based on surveys asking people to describe how they spent the previous 24 hours. There has been a vast outpouring of research on the subject, which the American economist Mark Aguiar helped me untangle. And out of the mass of information there are some clear trends.

First, the typical American works less than he or she used to and has more leisure time. This is a long-standing trend that runs back a couple of centuries or so. Men work fewer hours than they did in 1965 and enjoy six to eight hours more leisure per week. Women also do much less housework than they did, and although they are more likely to have jobs, the typical increase in leisure time is still four to eight hours a week.

My wife might disagree with that last point, but so will many other readers. That is perhaps because FT readers are not typical. The people enjoying all this extra leisure are the couch potatoes at the bottom of the heap economically and educationally. “Enjoying” might well be the wrong word, since two-thirds of the extra leisure time for men is spent by men who have no jobs at all and might well wish they did.

At the top of the pile things are different: economists Peter Kuhn and Fernando Lozano find that skilled, salaried workers are increasingly likely to work more than 50 hours a week in their main job. FT readers who think their jobs are tougher than those of the previous generation are probably right…

Continued at ft.com

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