Tim Harford The Undercover Economist

Articles published in December, 2007

Sobering thought

Dear Economist,
This Christmas and new year, I expect to encounter a lot of drunks on the road. In fact, I may well be one of them. Should I feel guilty? And should I be worried?
Mr F Jones, London

Dear Mr Jones,

It has always been difficult to test the effect of alcohol on drivers let loose on the roads. The difficulty is this: if half of all crashes involve drunks, that may be because drinking impairs your driving or it may be because there are a lot of drunks on the road – and we can only guess at how many drunk drivers there are.

But the economists Steven Levitt and Jack Porter realised that it was possible to say more, by looking at how often drunk drivers crashed into each other. If 10 per cent of drivers drink, and if drunk drivers are as safe as any other kind of driver and randomly mixed among the sober drivers, then only 1 per cent of two-vehicle crashes should involve two drunks.

Drunk-on-drunk crashes are much more common than one would expect, given the number of drunk-on-sober crashes, allowing Levitt and Porter to reach firm conclusions about the risks of drink driving.

They find a very large effect. Drivers who have been drinking are seven times more likely to cause a fatal crash; those who have drunk over the legal limit (in the US) are 13 times more likely to cause a fatal crash. You might also bear in mind another finding from the paper: “The great majority of alcohol-related driving fatalities occur to the drinking drivers themselves and their passengers.” That should be sobering.

Also published at ft.com.

29th of December, 2007Dear EconomistComments off

Publishers Weekly reviews The Logic of Life

“Financial Times and Slate.com columnist Harford (The Undercover Economist) provides an entertaining and provocative look at the logic behind the seemingly irrational. Arguing that rational behavior is more widespread than most people expect, Harford uses economic principles to draw forth the rational elements of gambling, the teenage oral sex craze, crime and other supposedly illogical behaviors to illustrate his larger point. Utilizing John von Neumann and Thomas Schelling’s conceptions of game theory, Harford applies their approach to a multitude of arenas, including marriage, the workplace and racism. Contrarily, he also shows that individual rational behavior doesn’t always lead to socially desired outcomes. Harford concludes with how to apply this thinking on an even bigger scale, showing how rational behavior shapes cities, politics and the entire history of human civilization. Well-written with highly engaging stories and examples, this book will be of great interest to Freakonomics and Blink fans as well as anyone interested in the psychology of human behavior.”

I’ll try not to post too often about The Logic of Life, but since it’s published in mid-January in the US and early February in the UK, there may be a post or two. You can find out more here.

28th of December, 2007MarginaliaComments off

Business Life: Football

First published in Business Life magazine, August 2007

The new football season is upon us, bringing the traditional complaints that the big clubs are getting ever richer and more successful at the expense of the fans’ enjoyment. Europe’s sports ministers are even pressing for action. Who, after all, wants to see a predictable football match?
Ironically, the European model of sport – global, very open, highly unequal – seems more American than American sport does. American sports leagues tend to be highly regulated, closed to newcomers, and redistributive. Sport does not always imitate life.
Many people intuitively feel that football should be a little more American, with more redistribution of television and gate revenues. Yet our intuition can sometimes deceive us. Both economic theory and the data suggest that an uneven sporting struggle may not be as bad for fans as many of us believe.
The assumption that people value an evenly-matched contest is challenged by the game’s statistics. Think of Arsenal’s unprecedented “invincible” season in 2003-04; the club won 84 per cent of its premier league matches and lost none. Hardly fair on Arsenal’s opponents, but every match was a sell-out. The small chance of a defeat was presumably enough to keep Arsenal’s many fans interested.
In any case, their dominance also allowed them to play great football. That is important: sports fans care about quality as well as the odd surprise.
That’s just one example, but Stefan Szymanski of Imperial College London, one of the world’s leading sports economists, has done a more rigorous analysis of attendance over 25 years at English second-tier football matches. He finds that that in seasons where inequality between the top teams and the bottom teams is higher, the audience for football is not smaller and perhaps a little larger.
That shouldn’t be too surprising: more fans turn up when their team is winning, so in seasons when the bigger teams are winning more often, average attendance should rise.
Similar reasoning suggests that some sport regulator genuinely trying to make the largest number of fans happy would favour the big teams, because the big teams have more fans.
The statistics certainly suggest that the rise of the mega-teams such as Manchester United, Barcelona, and Real Madrid has boosted global interest in the sport rather than killing it. Giant-killing feats are a good story but they disappoint millions of loyal big-club fans. Upsets are necessary but if they happen too often they would not be upsets. And if you really think that football is predictable, the bookies will be happy to take your bets on this season’s champion.

27th of December, 2007Other WritingComments off

In Praise of Queue Jumping

Dear Economist,
My time waiting in a bank queue is vastly longer than standing in a supermarket one. How can I reduce my queuing time?

Dear Ken,

On a personal level, your options are obvious. You could take a collection from those behind you and use it to pay those in front of you to leave. Or you could simply bring a slim paperback and put your queuing time to good use.

But what really matters here is the cost to society. Queues are enormously costly. Imagine a bank queue in which one customer arrives per minute, and one customer per minute is dealt with by staff. All it takes is a cashier on a cigarette break, or a sudden rush of customers, and you could have 10 people in the queue. At that point, each person has to queue for 10 minutes, even though people are leaving as quickly as they are arriving. Somehow the queue must be disposed of.

The solution is elegant and unexpected: new arrivals should go directly to the front, to be served immediately after the current customer. Queues would then be very short, because once a customer was pushed back a couple of places he or she would give up and go home. The economist Refael Hassin has shown that this rule can be socially efficient, while the economics writer Steven Landsburg has advocated its introduction for telephone queues.

This makes sense. In both cases, the same number of people get to use the bank. But under the Hassin-Landsburg rule, queues are much shorter and we all spend less time waiting in line. All that remains is to encourage banks to enforce the system. Since it is perverse and counter-intuitive, they may find it very appealing.

Also published at ft.com.

22nd of December, 2007Dear EconomistComments off

Not just a matter of taste

Let’s get one thing straight: I only bought Mint Chocolate Baileys as research for this column, and not because I like that sort of thing. I won’t be buying it again. The mint-choc aftertaste is so thoroughly sundered from the initial flavour of the Baileys that it is hard to imagine they once inhabited the same bottle.

But presumably somebody is buying the stuff this Yuletide, along with all the other mutations of everyday consumer goods.

Once there was only Coca-Cola; now we have Diet Coke Plus, which has added vitamins and minerals, and according to a press release from The Coca-Cola Company, joins the “Diet Coke family, which includes the flagship Diet Coke, Caffeine Free Diet Coke, Diet Coke with Lime, Diet Cherry Coke, and Diet Coke Sweetened with Splenda.”

Why are there so many new products, and do they do any good to anyone? Katie Bayne of The Coca-Cola Company has no doubts: “Consumers, including Diet Coke drinkers, are increasingly looking for more beverage options.” That sounds like the kind of thing you start to believe if you work too long for The Coca-Cola Company. But what do you believe if you’re an economist?

Economists try to measure how much consumers are willing to pay for these new twists on existing goods. For example, assume that a customer would be willing to pay £15 for a bottle of Mint Chocolate Baileys, but it retails at just £10. Buying the bottle nets the mint-chocoholic a sort of psychic profit of £5, which economists dub “consumer surplus’’. Supplying a million such mint-choc Baileys lovers would produce a total consumer surplus of £5m.

The trouble is, consumer surplus is invisible: it’s all in the mind of the consumer. Intuitively, Mint Chocolate Baileys would be a more valuable innovation if lots of consumers were willing to pay £20 for it than if most consumers were only willing to pay £11. That is the intuition behind consumer surplus – but of course we do not know how much people really would be willing to pay for Mint Chocolate Baileys – or for any product – if they had to.

The products may seem trivial, but the distortion to economic measurement may not be. If, one year, Baileys sells for £10, and the next year, Baileys sells for £10, and Mint Chocolate Baileys appears on the market for £10.50, is inflation zero? Or negative, since consumers have a new product to choose from? Or positive, since some customers are now paying more for a similar product?

If consumers think new products are very valuable, official inflation measures will be overstated because the buyers are getting a better product for the money. If the new products are nothing more than frills, official inflation measures will be more accurate.

The econometrician Jerry Hausman once attempted to measure the contribution to consumer surplus of one new product: Apple Cinnamon Cheerios. His conclusion was that its existence produced about 27 cents per person per year of consumer surplus – the psychic profit – in the early 1990s, which would be nearly 40 cents per person in today’s money. That is not earth-shaking but it is bigger than most economists expected from a new breakfast cereal.

Hausman’s estimate is disputed by some other economists. But if he is right, inflation in breakfast cereals is lower than it seems: price increases that were measured as inflation are in fact the price consumers willingly pay for a valuable new product.

The broader lesson is that inflation elsewhere may also be lower than official measures suggest.

If so, Diet Coke Plus, Apple Cinnamon Cheerios and even Mint Chocolate Baileys can all take some credit.

Also published at ft.com.

Handsome reward

Dear Economist,
My boyfriend spends a lot of time in front of the mirror, prettying himself up. I am pleased to have a well-groomed man in my life but it is a bit unnerving. Should I get him to stop?
PL, Warwick

Dear PL,

Your boyfriend’s disturbing personal-grooming habit offers you financial as well as aesthetic benefits. Economists have known for some time that better-looking people are paid more. This is probably due to a combination of discrimination against the ugly, the fact that some beautiful people have jobs where beauty is an obvious advantage, and the likelihood that better-looking people are more confident.

More recently, economists have discovered evidence that endogenous beauty (make-up, hair-styling) is as important as exogenous beauty (having Bond girl Eva Green’s eyes).

Economists Daniel Hamermesh, Xin Meng and Junsen Zhang have found that spending money on clothes and make-up slightly raises the earnings of Shanghai workers. More recently Jayoti Das and Stephen DeLoach, of Elon University’s economics department, have shown that time spent on grooming substantially improves wages, especially for men.

They estimate that each extra 10 minutes a man spends in front of the mirror will raise his wages by 6 per cent. (Women would have to spend two or three hours to get the same effect.) So if you prefer your boyfriend to be rich, don’t stand between him and his mirror.

I do not know why you’re complaining. Perhaps you’re afraid that your boyfriend is becoming too attractive to rivals. If so, dump him and find yourself someone desperate. An economist, perhaps?

First published at ft.com.

15th of December, 2007Dear EconomistComments off

Sit-up or pay up

Economists rarely make good forecasts, but let me venture one: most readers of this column will eat and drink heavily over the next two weeks (as will its writer), and many of us will, on January 1, vow to do better in future. Can economics provide a little assistance in coping with this annual ritual?
I think it can, and so do three economists at Yale who’ve been helping me out. Professors Dean Karlan and Ian Ayres (who is also a law professor and the author of Supercrunchers), along with Jordan Goldberg, a business-school student, have a cheque from me for $1,000, about £500.

If I do not do 200 press-ups and 200 sit-ups each week, they’ll start sending my money to a charity, $100 at a time. (I chose the hugely deserving DC Central Kitchen.) They will shortly offer the same dubious privilege to countless others via a new company, Stickk.com – customers name their own pledges, sign pro-forma contracts, and put their cheques in the post.

It’s a clever business idea, and a variant on the old theme of making a bet with a friend that you can lose weight or quit smoking. But it doesn’t fit anywhere in classical economics. The odd robotic creature who populates traditional economic models does not need an incentive to stiffen its resolve. In fact, “resolve” is not a concept that translates into the standard model of economic behaviour.

Yet economists have been thinking about these problems for a long time. More recently, they have used behavioural experiments to raise economics to the level of common sense (no mean feat) and perhaps beyond.

One of my favourite examples: participants in an experiment were offered a choice of films to watch. Depending on whether the film was to be watched immediately or in a few days, the subjects chose something light like Mrs Doubtfire, or something character-building such as Schindler’s List. When offered the chance to change their minds at the last minute, many who had signed up for a highbrow experience buckled and grabbed something less challenging.

Daniel Read, one of the researchers, and an economist at the London School of Economics, told me that he caught himself behaving in exactly the same way.

He subscribed to a film rental service and kept rearranging his favourites so that highbrow films never quite reached the top of the waiting list. These lapses are not rational. But we can still be rational in anticipating them and taking steps to pre-empt them.

Dean Karlan, one of the men behind Stickk.com, discovered this first-hand in his day job, in which he researches the effectiveness of small financial institutions in poor countries. With two colleagues, he designed a new savings product for a small rural bank in the Philippines. The Seed (save, earn, enjoy deposits) savings accounts paid the standard rate of interest but would not allow withdrawals until either a specified date had passed or a specified amount had been saved. (There were exemptions, for example, for a documented medical emergency, but no savers took advantage of them.)

Karlan surveyed some of the customers, asking hypothetical questions designed to reveal indirectly the sort of preferences that might indicate a self-control problem. He found that women (not men) whose responses suggested a lack of self-control were also more likely to open a Seed account. And a randomised trial found that the Seed accounts did substantially boost saving.

In other words: when we need help with self-control, we tend to know it. I certainly did. Two hundred sit-ups a week might not sound a lot, but it is 200 more than I was doing before. And I can say for certain that if my money hadn’t been on the line, there’s no way I’d be sticking to it.

First published at ft.com.

Business Life: We’re fat

First published in Business Life magazine, July 2007

Let’s face it, we’re fat. Half of all British adults are overweight or obese, which is good news only for the manufacturers of outsize trousers. Other countries are also suffering from rising obesity. So if you wanted to propose a policy to slim down the western world, what would it be?

That depends on what you think the problem is. Trust the economists to have an opinion about that. Armed with a big box of clever statistical tools and a keen sense of the costs and benefits of anything – even a cheeseburger – they have something to say that is worth hearing.

The clever statistics are essential. After all, is a kid who spends 40 hours a week watching television fat because he’s been watching advertisements for fast food, or fat because he isn’t outside playing football? Or is he watching so much television because he was already fat and so doesn’t enjoy playing outside?

The economists Shin-Yi Chou, Inas Rashad, and Michael Grossman realised that local networks all over the United States have different patterns of fast-food advertisements. They have used this difference to show that fast-food advertising does indeed make children, especially teenagers, fatter.

Another neat piece of analysis is from Henry Overman of the London School of Economics, along with three co-authors. They look at the common complaint that sprawling suburbs make people fat because they encourage too much driving. On the face of it, that seems to be true: fat people live in the ‘burbs. But Overman’s team tracked 6000 people over time to show that the suburbs don’t cause obesity. They simply attract overweight people, while compact pedestrian-friendly cities attract the slim and fit.

Obesity even lends itself to cost-benefit analysis, and it does seem that the incentives are starting to push people away from dieting. Because of new cholesterol-busting drugs, it simply isn’t as dangerous to be fat as it once was. (Sure, it’s bad for you, but it used to be worse.) I have heard more than one economist argue that that’s a reason for the rise in obesity: since it’s not such bad news to be fat, why not eat the odd chocolate bar that once you would have resisted?

Add to that the fact that the time and expense of making unhealthy food has plummeted. The Harvard economist David Cutler, with two colleagues, points to the potato as an example. It was once boiled or thrown into stews because making chips was a chore. Thanks to industrial processing, freezing and vacuum packing, we can enjoy chips in seconds and for just a few pennies. If you really want to slim down the nation, perhaps you should forget advertising and worry about microwavable chips.

12th of December, 2007Other WritingComments off

It’s a mug’s game

Recently I was invited to a large, televised debate about how we should deal with climate change. The circumstances were spectacularly intimidating, with Tory grandees Nigel Lawson and John Redwood poised to respond to my remarks. (Despite my nerves, I resisted the temptation to follow the old public-speaking advice and imagine my fellow panellists naked.) I was the first to speak, so stood up and I talked about the cappuccino I’d bought that morning.

The curious thing about the cappuccino, I observed, is what a remarkably complicated product it is. The milk came from a methane-producing dairy herd, probably somewhere in the UK but perhaps further afield. Behind the scenes stood the farmers, the cattle breeders, the manufacturers of refrigerated tanker trucks and countless unknown others. The coffee was steamed out of Brazilian beans using a machine of Italian manufacture. The machine was electric, although whether the electricity came from coal or gas or tidal power I have no idea. The complexities are endless. (This whole tale is the kind of story economists like to tell each other, originating – I believe – in “I, Pencil”, a 1958 essay by Leonard Read.)

Then there was my choice of where to buy the cappuccino, how to get to the cafe, and whether to buy it at all. Those decisions were shaped by the location of the FT offices and the location of Borough Market.

I droned on about the cappuccino at some length, explaining that to deal with climate change you had to start with the cappuccino. And my opponents being experienced debaters, ribbed me mercilessly. Cappuccinos are small, they observed, while climate change is big.

And so we have big policies. The UK is apparently to reduce carbon emissions by 60 per cent by 2050, a date at which most of the politicians espousing this target will be dead. That dramatic-sounding commitment chimes nicely with the idea that climate change is an existential threat.

But distant targets change nothing.

So I’d like to defend the humble cappuccino as a unit of analysis. Our human economy may have to change substantially to respond to global warming. Yet what is our economy if not the sum of all the cappuccinos?

This is more than a rhetorical point. Our economy – and its emissions of carbon dioxide and methane – is nothing more and nothing less than the sum of all the everyday decisions we make as consumers, producers, entrepreneurs and the rest. If the economy must change, those decisions must change. And a moment’s thought about the cappuccino suggests what a tangled prospect that is.

We could do nothing and hope that climate change turns out to be manageable – broadly the current policy. Or we could put Gordon Brown and David Cameron in charge of telling us what light bulbs we can use, how many flights we can take, or whether our cappuccinos should be made with UHT milk. That bureaucratic approach is not appealing when you add up all the flights and light bulbs and cappuccinos in the country, reflect on the intricacies of their production and the subtle trade-offs that inform our choices to do this or buy that. Gordon Brown and David Cameron just don’t have the information to make our choices for us.

Or the government could set a price for carbon – using taxes or a workable permit trading scheme – and see what happens. The carbon price would influence every decision we make, nudging us towards consuming less and consuming in less carbon-intensive ways. That seems to be the only sensible way to ask the astonishing sophistication of the market to work around the environmental challenge we appear to be facing today. If society must change, so must the cappuccino.

First published at ft.com.

Buy before you fly?

Dear Economist,
My girlfriend and I were planning to fly to Frankfurt on a budget airline. We were offered travel insurance, which I didn’t think was worth the £4.95. Still, my girlfriend insisted on both of us taking the insurance. Assuming the chance of surviving a plane crash is negligible, you do not get to enjoy the benefits of the insurance should a disaster happen. Most likely your family will get paid for your death. So the worst-case scenario is that you’re £4.95 poorer and dead; or at best, alive, but still £4.95 poorer. What is the rationality of taking out the insurance?
Farid Daim, Nottingham

Dear Farid,

I sympathise with your reluctance to pay for insurance but I do not follow your reasoning. There is nothing irrational about life insurance per se (although it is an unattractive product to someone with no dependents – or a selfish disposition). Overall, though, life insurance is one of very few types of insurance it is rational to purchase, because it protects against the risk of a dramatic loss. Another is insurance against catastrophic medical expenses, another role for travel insurance; but you may not be bothered about this, as EU citizens get cheap health-care in member countries.

So it seems to me that you purchased “rucksack insurance”. Petty insurance is highly profitable – which is why it is bundled with cheap flights. But it is unnecessary. Over the course of your life you will earn thousands of times the price of your rucksack and contents. It is better to save on premiums and take occasional losses on the chin – you’ll come out well ahead in the long run. I have.

Take heart, though. You saw the bigger picture, and did exactly what your girlfriend told you. Smart move.

First published at ft.com.email hidden; JavaScript is required

7th of December, 2007Dear EconomistComments off


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