Tim Harford The Undercover Economist

Articles published in March, 2009

Business Life: Wine economics

First published in Business Life Magazine, November 2008

I enjoy a glass of red, but I have to admit I am hardly a connoisseur: a friend once handed me a wine guide and invited me to read it prior to the next time I brought round a bottle. But now I have a secret weapon: the Journal of Wine Economics, official publication of the American Association of Wine Economists. These economists do everything economists do – only for wine. They study market share of wine producers, the impact of globalisation on wine, or the functioning of wine auctions.
There are also economists who use “behavioural economics” – that is, a hybrid of economics and psychology – to understand what we value in wine. The conclusions are intoxicating.
One of the interesting discoveries is the impact of price on the perceived quality of wine.
In a blind tasting, it turns out that most of us actually prefer to drink cheaper wine, as long as we don’t know it’s cheap wine. Oenephiles with some professional training do prefer the more expensive wines in a blind tasting, but just barely.
That might suggest that cheap wines are easily better value, but sadly life is not so simple. We usually know all too well what the stuff cost. This matters: the “neuro-economist” Antonio Rangel, with several colleagues, gave subjects wine to drink, after telling them a price tag. Although the wine never varied, the people who were told that it was expensive thought it tasted better; brainscans even revealed that their brains had a different perception of the experience of expensive wine. If only we could drink cheap wine believing that it was expensive…
The President of the American Association of Wine Economists is Orley Ashenfelter. Ashenfelter is a major figure in economics – editor of the prestigious American Economic Review for nearly two decades – but he also published what might be the most controversial analysis in wine economics, using economic forecasting techniques to assess the quality of Bordeaux wines shortly after harvest, using data on rainfall and average temperatures while the grapes were growing. If correct, the forecast would be valuable because young wines bear little or no resemblance to the mature wines that connoisseurs value so highly.
Ashenfelter recently recalled the controversy in the pages of The Economic Journal. “I decided in 1991 to predict that both the 1989 and 1990 vintages in Bordeaux were likely to be outstanding. Ironically, many professional wine writers did not concur with this prediction at the time…”
Ashenfelter’s predictions had the pros spitting blood instead of Bordeaux. And yet, “there is no virtually unanimous agreement that 1989 and 1990 are two of the outstanding vintages of the last 50 years”.
As I say, I don’t know much about wine. But I know some economists who do.

30th of March, 2009Other WritingComments off

Should I stand by my chauvinistic man?

Dear Economist,
I am an economist, as is my boyfriend. We started dating as students, but after four years we broke up for a couple of months because of differences in our ways of thinking. We always supported each other professionally, but things changed. I got a job in a multinational organisation, but he didn’t like me travelling, going out for business dinners, or even spending time at the office.

His father was head of the family, while his mother stayed at home; both my parents worked. (We live in Paraguay, which is quite chauvinistic.) Probably, he thinks women have to stay at home, yet he fell in love with me because of my aspirations. I’ve said that maybe he needs to marry a woman who wants to be a housewife. I gave him another chance, as I love him. Should I be patient?

Dear L.E.,

The economist Betsey Stevenson has discovered that in US states that liberalised divorce laws, couples became less willing to support each other through expensive courses. That makes sense: easy divorce raised the spectre of being dumped once hubby had spent your money and acquired his law degree.

Your own situation is the reverse. Your boyfriend supported you while you built up your human capital, but now spurns the payoff. You are right to be suspicious, I think. Your boyfriend wrongly thought that you would change; you face a similar disappointment.

There is another, more calculating, explanation. Roland Fryer, an economist fascinated by the causes of African-American under-achievement, theorises that some people find professional qualifications disturbing because they allow a credible exit from any relationship. You’ve given yourself that option; your boyfriend has given you reason to use it.

Also published at ft.com.

28th of March, 2009Dear EconomistComments off

Workplace inequality: it’s all down to the career breaks

Flick through any copy of the Financial Times and you’ll see a lot of chaps in suits. There’s a reason for this: there are many more men than women in the boardrooms of the world’s great companies. Explanations range from the politically correct (women are held back by the oppressive patriarchy) to the sexist (women aren’t up to the job).

Untangling this is difficult, but economists have tackled it with relish, in the process finding evidence to support almost any prejudice. One famous study conducted by Claudia Goldin and Cecilia Rouse looked at what happened when the leading, male-dominated, US orchestras introduced blind auditions for new members. Goldin and Rouse found that blind auditions went a long way towards correcting the gender imbalance. Maybe those pretty little things weren’t such awful musicians after all.

Other studies suggest a different explanation for male-dominated boardrooms: women may avoid intense competition, and cope badly if forced to compete. These studies are intriguing, but usually based on rather artificial experiments, or special cases – such as tennis tournaments. Last April, my colleague Lucy Kellaway wrote: “Men want power enough to hang on to it and women don’t want it enough to make them let go.” I am not sure of that, but I can certainly point to studies that support Lucy.

For my money, the most convincing explanations of the gender pay gap focus on the role of children. An elegant study from Amalia Miller of the University of Virginia finds that if a woman in her twenties waits an extra year before having her first child, her lifetime earnings rise by 10 per cent – a combination of higher wages and more hours worked. The effect is larger still for professional women.

This isn’t a story about high-earning women deciding to have children later: Miller carefully focuses only on non-voluntary changes to the timing of motherhood – miscarriages, problems in conceiving and accidental pregnancies.

Another study by the economists Lawrence Katz and Claudia Goldin charts the dramatic impact of the availability of the Pill: as women were able more easily to delay pregnancy, they enrolled in law, medicine and dentistry in far greater numbers.

Katz and Goldin, with Marianne Bertrand of Chicago’s Booth School of Business, have now produced a new study, examining the experience of Booth’s MBA alumni – a high-flying group from whose ranks one would expect future CEOs to emerge. The outstanding feature of this research is the very detailed data available on this group: their pre-MBA experience, the courses they took and the grades they earned, their career progression afterwards, and the timing of their families. Women did achieve worse grades, and avoided hardcore classes in finance: but the differences were tiny. Far more important was what happened when children came along. If you look only at promotions and earnings, childless women are all but indistinguishable from men. The moment children arrive on the scene, a big gap opens up.

“The penalty for career interruptions is huge,” Bertrand told me in a recent interview. New mothers are derailed from the fast track in investment banking or consulting, and their potential earnings fall by about 40 per cent. The gap is aggravated by the fact that many of these women are married to men so rich that they decide to drop out of the labour force altogether.

The Chicago alumni study throws a spotlight on one big unanswered question: is it really impossible to design a corporate job that can be done in a 40-hour week?

Also published at ft.com.

Talk at the Royal Institution

I am speaking at the Royal Institution on Monday 27 April, 7-8.30pm. Details avaiable here.

27th of March, 2009SpeechesComments off

Would an alcoholic drink less if booze cost more?

Even those addicted to alcohol drink less when costs rise, says economist Tim Harford. Because we all respond to prices – even to the point of the day we die or give birth.

If Chief Medical Officer Sir Liam Donaldson has his way, one day we will have to pay at least 50p a unit to buy booze. That’s £1.50 for a large can of strong lager. Most off-licence and supermarket booze costs less than that, so it would certainly change the cost of a drink.
But would it make any difference to hardened drinkers? Many people think not. After all, a tenner would still pay for 20 units – nearly a week’s safe drinking, or some people’s idea of a good night out.
So many people think this would punish ordinary drinkers without deterring the winos, brawlers and wife-beaters. The government won’t touch it. Conservative health spokesman Andrew Lansley says it’s an idea more to do with economics, than medicine.
The odd thing is most economists will think Sir Liam is on to something. Raise the price of drink, we figure, and people will drink less. That’s because people respond to prices in the most unlikely situations.
Margaret Mitchell commented in Gone with the Wind: “Death, taxes and childbirth! There’s never a convenient time for any of them.”
She was wrong: it turns out that death and childbirth can be, and are, rescheduled thanks to tax incentives.
Eonomists Joshua Gans and Andrew Leigh have discovered that after the Australian government announced that it would abolish inheritance tax, effective 1 July 1979, the death rate fell in late June of that year before surging in early July. Gans and Leigh reckon that half the likely taxpayers managed to escape death long enough to escape the tax too.
More cheeringly, when the Australian government announced (with six weeks notice) a “baby bonus” of about £1,250 for families of children born on or after 1 July 2004, something very strange happened in the labour wards. The number of happy events on 1 July was an all-time record, and twice as many births as on 30 June.
Whether entering this world or leaving it, people respond to financial incentives.
Even so, it’s hard to credit that problem drinkers pay much attention to the price of the next drink. Yet they do. Alcoholics respond more to high alcohol prices than moderate drinkers.
One piece of evidence, gathered by economists Philip Cook and George Tauchen, comes from medical records in the United States.
When taxes on alcohol rise, people drink less overall, but liver damage – a symptom of alcohol abuse – falls much more. That has a certain economic logic: the alcoholic consumes more booze than most of us, so responds more to its price.
Other economists have found that binge drinkers, smokers and cannabis users are all very price-sensitive. A recent University of Sheffield study came to much the same conclusion: faced with more expensive drinks, problem drinkers – who tend to be young or drink a lot, and so seek out the cheapest ways to get drunk – would change their behaviour much more than the rest of us.
Yet Sir Liam doesn’t suggest more tax on alcohol – he suggests supermarkets and off-licences put up prices and keep the profits, making it lucrative to flog cheap booze. Unable to compete on price, supermarkets could compete in other ways – for instance, offering freebies (sweets? football stickers?) with every bottle of strong cider. Making cheap booze a supermarket’s most profitable product is likely to backfire, one way or another. After all, supermarkets respond to incentives too.

First published by BBC News Magazine.

25th of March, 2009Other WritingComments off

Forbes: This is Your Brain on Credit

As so often, the Sage of Omaha put it best: “Nothing sedates rationality like large doses of effortless money.” These days, it is hard to disagree. Warren Buffett’s warning now looks less like a mere aphorism and more like a sharp summary of the latest research in behavioral economics. Our stone-age brains just don’t seem to be able to cope with digital-age credit products…

Continued at Forbes.com.

23rd of March, 2009Other WritingComments off

The Logic of Life: How economics can get you a date

One of the least important but most enjoyable pieces of research reported in “The Logic of Life”.

Further reading here.

22nd of March, 2009VideoComments off

A brilliant plan to rid sport of useless tossers

“Useless tosser” is a popular epithet for cricket captains with a knack for losing the coin toss and thus allowing their opponents to decide whether to bat or to bowl first. Winning the toss is not always an advantage but, depending on the weather conditions, it can give the winner a significant edge.

Language barriers have prevented the phrase “useless tosser” from crossing the Atlantic, but the problem is familiar. When an American football game goes into overtime, it is a distinct advantage to win the coin toss. The coaches know it: when they win, they almost invariably choose to receive possession of the ball. In 2008, lucky callers won 10 overtime games and unlucky ones only four.

The very existence of the coin toss is an admission of defeat – that there is something irreducibly unbalanced about these games, some advantage that cannot be divided but can only be surrendered to the gods of chance. Chess players cannot both play “grey” – one must play white. Cricket teams cannot bowl simultaneously.

The obvious solution is to take turns to enjoy the advantage. This works perfectly well for chess, where a series of games can go on almost indefinitely, but not so well for cricket and even less well for American football, where TV schedules make it difficult to allow overtime to continue too long.

Economics has a natural answer: against the indivisible advantage of winning the toss, trade something that can be more finely divided. In chess, white could be granted less time on the clock. (Tyler Cowen, an economist and chess expert, tells me this has been known to happen, but is regarded as unnecessary because it is so easy to take turns to play white.)

In cricket, the team with the advantage of choosing whether to bat first could give its opponent a head start in the form of extra runs – “bid byes”. In American football, the team with possession is already penalised by having to start far back on the field; the trouble is that they don’t start far back enough.

This exemplifies a second problem. Once we agree that one team must be compensated (in time, runs, or field position), how large should the compensation be? Here, again, economics has the answer. The advantage should be auctioned off to whoever is willing to concede the most compensation to the opposition. The idea is absolutely equitable, intrinsically more exciting than a coin toss, and puts the emphasis on the judgment of the captains. Thankfully, since not all coin tosses are equally important – especially in cricket – the auction price reflects conditions on the day.

Having once written a thesis on sequential auctions with budget constraints (translation: the kind of auctions you get in a game of Monopoly), I am embarrassed to admit that applying auctions to cricket is not my idea – nor that of my fellow professional economists. Creative sports fans are the trailblazers here.

Two brothers, Chris and Andy Quanbeck – both engineers – proposed the auction idea to America’s football authorities in 2003 with, alas, no success. (I have written about their idea in more detail in Slate magazine.) But they were not the first.

To the best of my knowledge, the brilliant idea of replacing a coin toss with an auction had previously been suggested in these very pages. Warren Edwardes, a serial entrepreneur based in London, proposed using an auction in cricket, in a letter to the Financial Times in 1999. As so often, FT readers were the first to know. Alas, the MCC informs me that the proposal was considered by a sub-committee last summer, and “found no enthusiasm”. That is a shame. The idea may not be cricket, but it is excellent economics.

Outside Edge: An easy answer to grade inflation

The news that Cambridge university is to demand A* rather than A grades at A-level has provoked yet another frenzy of concern about grade inflation – the name normally given to the process by which C grades become B grades and then A grades and, before you know it, all shall have prizes.

Grade inflation, like real inflation, seems widespread, afflicting not just UK schools but the Ivy League. Stuart Rojstaczer, who maintains GradeInflation.com, reckons that grades at US private universities have risen from an average of 2.3 out of 4.0 in the 1930s to 3.3 today. That rate of inflation, by itself, would be manageable – 22-year-olds do not need to compare grades with 92-year-olds. (Grade hyperinflation would be another matter entirely: students would have to take examinations, be awarded marks and then apply for jobs or university places within a matter of hours, before their grades were devalued.)

Alas, grade inflation is a misnomer. True grade inflation would mean each grade was equally devalued, with A grades superseded by AA, AAA and AAAA as new labels for superlative performance became necessary. One hundred per cent would become 110 per cent.

Yet examiners are reluctant to award 110 per cent and there are no AAAA grades. What we see is not inflation but a classic price distortion. Eventually all students will get A grades and they will be meaningless. A* grades are a small, belated step in the right direction.

Grade distortion is a serious affair. Students and their teachers are forced to switch to grey market transactions denominated in alternative currencies: the letter of recommendation, for example. Like most alternative currencies, these are a hassle.

Grade distortions, like price distortions, destroy information and oblige people to look in strange places for some signal amid the noise. Students are judged not on their strongest subjects – A grade, of course – but on whether they also picked up A grades in their weakest. When excellence cannot be displayed, plaudits go instead to those who deliver pat answers without stumbling – politicians in training, presumably.

The obvious solution to grade distortion is to ration grades so that no matter whether standards are high or low, only the better students can receive the top grades. Unfortunately, like any competitive system, such policies can create ill-feeling towards high-flyers, and even sabotage.

If grade rationing is unacceptable, perhaps grade distortion should be replaced with true grade inflation, freeing grades from the worldly confines of a maximum 100 per cent or A*. As long as everyone understands the game, what harm if the typical student of tomorrow is awarded an AAA grade? The rating agencies might even find a new line of business here – handing out an AAA for nicely packaged dross is something they should be able to master.

Also available at ft.com.

21st of March, 2009Outside EdgeComments off

How much do we want to pay?

Dear Economist,
With the economy slowing down, I have seen an outburst of “pay-what-you-want” options where customers of, say, coffee shops are encouraged to pay what they consider the product or service is truly worth. Is this sustainable in the long term, or will people take advantage of it, gaming the system into failure?
John Wegman, London

Dear John,

While we economists realise that people pay money even when they don’t legally have to, few of us have studied exactly when or why. One exception is Paul F., the “bagel man” made famous by Stephen J. Dubner and Steven D. Levitt, the authors of Freakonomics. Paul F., a retired economist, delivered bagels to offices, along with a box for payment. He specified prices and kept careful track of payment rates – a little under 90 per cent.

Pay-what-you-want goes further than this simple honesty system, and might work better because it stands a chance of persuading affluent customers to pay over the odds. Most retailers devote great ingenuity to this task of “price discrimination”; it would simplify things a lot if customers simply complied.

Yet I am doubtful. A major attraction of pay-what-you-want is free publicity, whether for an ageing rock band or the new café on the block. The more businesses try it, the less publicity each will receive. I wonder, too, whether customers continue to contribute more than they must after the thrill of the new wears off: the economists John List and Uri Gneezy once conducted an experiment to see if temporary workers tried harder if unexpectedly paid a generous wage. The answer: yes, but the gratitude wears off in a matter of hours.

Still, pay-what-you-want has to be worth a try. If the journalists look elsewhere and the customers become ungrateful, it’s a simple matter to install a cash register.

Also available at ft.com.

21st of March, 2009Dear EconomistComments off


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