Tim Harford The Undercover Economist

Articles published in March, 2009

Talk at Waterstones Gower Street, London

For readers in London:

Find reason in a crazy world: join Tim Harford a.k.a ‘The Undercover Economist’ discusses his newest book…
Tim Harford
The Logic of Life
WATERSTONE’S GOWER STREET
Thursday, 19 March 2009, 6:00PM
Tickets £3/£2 – redeemable against the promoted book on the night. Avalaible from the store.

In his bestselling new book, Undercover Economist,Tim Harford – author/prolific columnist and presenter of Radio 4’s ‘More or Less’ explains how there can be logic behind even the most irrational of behaviour. He will answer some of life’s mysteries including, Why is your boss overpaid? Why do people smoke? For more info or tickets call the store or email hidden; JavaScript is required.
Further details: 020 7636 1577

In other words, it’s a free talk if you buy the book. Do come and say hello.  I am also giving a talk in Bath on Friday, and so is Samuel Brittan. (Here for more details.)

16th of March, 2009MarginaliaComments off

For malaria, we just can’t afford to use cheap drugs

There are two ways to take anti-malarial drugs: the expensive way, which helps the world; and the cheap way, which helps only the patient. Most Africans cannot afford the expensive way and, as a result, the world’s most effective anti-malarial drug may lose its potency.

That drug is artemisinin, available either by itself as a “monotherapy”, or with other drugs as a more costly artemisinin combination therapy, or ACT. For now, the monotherapy is excellent from the patient’s perspective. Yet the ACT is greatly preferred by global health wonks, because monotherapies tend to encourage drug resistance in the malaria parasite.

This is no mere theoretical concern: malaria is now highly resistant to a previous wonder drug, chloroquine, and researchers have detected signs of resistance to artemisinin in areas where monotherapies are widely used.

ACTs make it harder for the malaria parasite to develop resistance. “Finding two keys is far more difficult than finding just one key,” says Ramanan Laxminarayan, an economist and epidemiologist at Resources for the Future, a Washington, DC think-tank that has traditionally specialised in developing economic solutions to environmental problems such as congestion and pollution.

To an economist, the problem of malaria resistance looks very similar to the problem of pollution. In the jargon, there is a “negative externality”. The driver of a gas guzzler enjoys the benefits of his vehicle, while strangers suffer most of the costs of the smog, congestion and climate change to which it contributes. Similarly, a Nigerian woman with a sick child, seeking out treatment in a pharmacy in Lagos, will hardly be inclined to ponder her contribution to artemisinin resistance. And who can blame her?

The classic economists’ solution to a negative externality is a tax on the bad stuff, but it would be fatal to price monotherapy out of the reach of Nigerian children. It should be just as efficient – and far more humane – to subsidise the socially superior product, ACT drugs.

This idea was proposed in 2004 by a committee headed by the economist and Nobel laureate Kenneth Arrow. Five years later, the proposal is becoming a reality under the auspices of the donor-funded “Affordable Medicines Facility – Malaria”, usually called AMFm.

Laxminarayan estimates that to flood the global market with cost-competitive ACT drugs would cost around $300m-$400m a year; for now, a less costly pilot will test the idea.

Unlike many grand aid initiatives, AMFm does not try to reshape reality beyond the narrow subsidy. Developers of effective new malaria treatments – there are three in the pipeline at present – should be encouraged by the prospect of tapping into the subsidy. Meanwhile, the proposal does not put too much reliance on public healthcare systems in Africa: most Africans buy their drugs from pharmacists rather than clinics, and the subsidy would do nothing to change that. Instead, by ensuring that the ACT drugs are cheaper than monotherapies on the way into the wholesale markets, donors hope that they will be cheaper over the counter, too.

That is likely, although not guaranteed. The system could, for example, leak at either end – AMFm must ensure that the subsidy does not also benefit producers of monotherapies, while distributors facing limited competition might be able to keep the subsidy profits for themselves.

Still, Laxminarayan is confident. Arrow, now nearly 90, is more cautious, arguing that there is only one way to find out if it works. Big ideas in development aid have often fared poorly, but the record of the aid industry in public health boasts numerous successes. This plan is worth a try.

Also published at ft.com.

Should we move our son to a new school?

Dear Economist,
Our son (aged 14) has been going to a local school and has made friends and settled in. But we are not happy. We think the school is poor, with a high teacher turnover, low expectations, poor exam grades and now a bad report from school inspectors. We’re thinking of moving him to a different school but we don’t want to disrupt his education. What should we do?
John and Julia, London

Dear John and Julia,

The economists Eric A. Hanushek, John Kain and Steven Rivkin have looked at data on Texas schools. They conclude that moving children repeatedly is disruptive both to the child and to his peers, but that a one-off move causes only temporary disruption to studies, especially if carried out at the end of an academic year. The researchers also found that in the cases where children were moved to better schools, they achieved a lasting improvement in academic performance.

A similar conclusion emerges from the research of another economist, Bruce Sacerdote, who looked into the aftermath of the Katrina disaster. After Hurricanes Katrina and Rita, about 200,000 Louisiana children had to switch schools. Unsurprisingly, test scores took a sharp turn for the worse. Yet Sacerdote finds that for those evacuees who left schools in urban New Orleans, which had a terrible reputation, test scores recovered within two years. College enrolment rates also improved. Three years after the disruption, children who began in bad schools ended up doing better than if Katrina had never struck.

My conclusion is that your son can thrive after a school move, but only if the new school really is superior. I am not sure what criteria you used to select the current one, but you might want to revise them before choosing the next. If I was your son, I’d be wondering why you think you will be second time lucky.

Also published at ft.com.

14th of March, 2009Dear EconomistComments off

The Logic of Life: Why your boss is overpaid

I never realised how topical this was going to become when I wrote the chapter…


Further reading here.

13th of March, 2009VideoComments off

Six degrees of separation? We can only manage five

Oscar Wilde once commented that a cynic knows the price of everything and the value of nothing. We economists often find this barb directed at us. That is unfair; economists have always argued for an analysis that incorporates the value of everything. It is also ironic, because if new “neuroeconomic” research is correct, economic models manage to incorporate value as well as price, it is the human brain that can’t keep up.

Economists have no problem with the idea that you might value a lazy Sunday afternoon more than a kiss, and a kiss more than a poke in the eye. If so, we say that the utility of the lazy Sunday afternoon is more than the utility of the kiss, which is more than the utility of the poke in the eye. Utility is not an appeal to some warm fuzzy feeling: it’s just a way of describing, in a mathematically convenient way, the fact that you won’t choose the poke in the eye if the lazy Sunday afternoon is on offer. The theory is quite capable of reflecting the range of things that humans value.

In fact, the theory allows for far more subtle discriminations than we seem to be capable of. The human brain simply may not be wired up to deal with lots of different levels of value. A series of psychological experiments, many dating back to the 1950s, shows that we cannot distinguish between more than about five degrees of … well, almost anything: sweetness in a solution; saltiness; the pitch of a note; brightness; the intensity of an electric shock; the length of a line; or the pungency of a smell. The details vary, but the level of consistency is surprising.

Practice does not help. Neither, surprisingly, does varying the gaps in the scale: it’s no easier to distinguish five sounds between “very loud” and “very quiet” than between “fairly loud” and “fairly quiet”. Some people have perfect pitch and can transcend these limits when it comes to musical tones, but there seem to be few other exceptions. No wonder so many reviews use a scale of one to five stars.

Nick Chater, a psychologist at University College London, argues that the human brain doesn’t have an internal scale for these stimuli, nor for “utility” or “value”. Instead the brain makes comparisons: that light was brighter than the previous light. We can just about wrap our minds around the idea of “much brighter” by comparing a recent gap in brightness with some previous gap in brightness. If the brain works in this binary way, it is easy to see why it struggles to compare more than about five different brightnesses – or sweetnesses, lengths, or “utilities”.

When evaluating a meal, we can place it somewhere between “revolting” and “the best food I’ve ever tasted”, with about three intermediate categories. The scale may shift based on recent or otherwise influential experiences with food. This is a problem for conventional economics – and also for fashionable work on “happiness”, much of which asks people to rate how happy they are on a scale of one to seven.

If Chater is right, this might help to explain the housing boom: people were happy to buy overpriced houses, as long as they were not too expensive relative to relevant comparisons – that is, other houses in the area. Certainly, research by Chater and his colleagues, and by the behavioural economists Dan Ariely, George Loewenstein and Drazen Prelec, suggests that our willingness to pay to avoid unpleasant but unusual experiences such as nasty noises or electric shocks, varies markedly, and can be strongly influenced by price cues provided by the experimenters.

All I need now is a way to persuade people that £100 is a perfectly reasonable price to pay for a paperback book.

Also published at ft.com.

What’s the best way of leaving a tip?

Dear Economist,

I have a parking spot in a local garage and want to tip the people who work there so I continue to get good service. Assuming I take the car out once a week, should I tip the attendant $2 every time or pay a lump sum of $104 at the end of the year?
GHD, New York

Dear GHD,

Classical economic theory suggests there is little to choose between the two options. However, recent advances in “neuroeconomics” are providing insights into the way that our brains process different kinds of reward. I asked the neuroscientist Ben Seymour, of University College London, to advise.

He counselled against both of your systems. The Christmas bonus will be diminished because it will tend to be compared with other income and outgoings, and both tend to be larger at Christmas. The regular income makes more sense, but Dr Seymour fears that if you are too predictable, the parking attendant’s brain will start to encode two dollars as “no surprise” and thus dismiss them. If you miss a payment it will seem like spite.

Other possibilities include a steadily rising tip, which the attendant’s brain should simply register as “better and better” – but this plan requires lots of change and can seem odd.

Then there is the “lottery” tip, where you offer the attendant a 1/52 chance each week of receiving $104. (Ask him to pick the Ace of Spades from a deck of cards.) Too shifty-looking, I feel – which is a shame, because many people tend to enjoy such gambles.

The ideal tip would combine security and the excitement of surprise. Why not tip him a dollar a week plus an extra $5 every month or so? Such a policy should maximise the appreciation of your behaviour. Perhaps it is no surprise that it is what most people instinctively do anyway.

Also published at ft.com.

7th of March, 2009Dear EconomistComments off

The Logic of Life: Racial Segregation and Thomas Schelling

I’ve been wanting to make a video explaining Thomas Schelling’s model of racial segregation for a long time. Here it is!

More about Thomas Schelling here in my “Lunch with the FT” piece shortly after he won the Nobel prize.

6th of March, 2009HighlightsResourcesVideoComments off
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