Tim Harford The Undercover Economist

Articles published in May, 2011

Commissar Osborne grits his teeth

FT Comment – 13 May 2011
Higher inflation and lower growth: the Bank of England’s latest economic forecasts, delivered one day before the UK coalition government’s first anniversary, cannot have been a terribly welcome gift. Like any well brought-up recipient of a hideous hand-knitted cardigan, George Osborne, the chancellor of the exchequer, smiled through gritted teeth and pronounced himself well pleased. Faced with this troubled economy, what should the coalition do next?
Politically, I have no idea: the British are not used to coalitions government, and they have not looked kindly on its junior partners. Having handcuffed himself to David Cameron, the Liberal Democrat leader Nick Clegg has found the prime minister walking safely on the political pavement while he trudges sadly through the gutter, splattered by the muck of every controversy. It seems only a matter of time before the leader of the Lib Dems is flattened by a metaphorical bus. Learn More

The Adapt US and Canada tour

I’m shortly departing for the US and Canada. Here are the public talks I’m giving that have been scheduled so far. If I’m coming to a venue near you, please come and say hello – we’ll have fun.

Washington DC

Thursday 19 May, 6pm Prosperity Caucus 214 Mass Ave NE

Saturday 21 May, 6pm Politics and Prose 5015 Connecticut Avenue NW Learn More

The Adapt Lectures – UK tour, first leg

Please forgive the grandiosity. From my publisher’s press release:

For the week of 6th June 2011, Tim Harford will be embarking on a series of ambitious events tying in with the publication of his new book – Adapt: Why Success Always Starts with Failure. The ‘Adapt Lectures’ will be episodic talks – each on a different day of that week and all at different venues. Seven talks in seven days, with each talk focusing on a different expert area from the book. These are stand-alone talks that make up a whole. Attendees may attend all or as many events as they wish.
From ‘leadership lessons in the War in Iraq’ at Cass Business School to ‘preventing financial meltdowns’ at the London School of Economics, Harford will be drawing on a range of expert knowledge to bring to you the principles you need in business and in life.

It’s going to be lots of fun. Please come to any or all of the events. In my experience events at LSE and the RSA are totally packed out but do your best, and it should be easier to get into some of the other events.

Monday 6th June, 6pm, Royal Society of Arts, Adapt: Why Success Always Starts with Failure – FULLY BOOKED Learn More

Failure: It’s everywhere

I wrote this essay for the Freakonomics blog.

In 1982, the management consultants Tom Peters and Robert Waterman published In Search of Excellence, a colossally popular business title. The book aimed to learn lessons from the world’s best companies, and Peters and Waterman produced a list of 43. But just a couple of years after In Search of Excellence had been published, BusinessWeek ran a cover story with the simple title: “Oops! Who’s Excellent Now?” Almost a third of the companies singled out for praise by Peters and Waterman were in financial trouble.

My aim isn’t to mock Peters and Waterman, but to point out that the rise and fall of business models is an unavoidable part of economic growth. In a complex world, things fail – a lot. Learn More

Adapt in the New York Times

Adapt was published yesterday in the United States, and an unexpected side-effect was that for the first time, I got to be interviewed by a Pulitzer Prize winner, David Leonhardt of the New York Times:

Q. You briefly tell a story about the chef Jamie Oliver. He persuaded schools in one part of London to change their lunch menus to reduce fat, sugar and salt and to increase the number of fruits and vegetables. When two economists studied the children later, they found less illness and somewhat better school performance. That’s incredible. How much confidence should we have that the change in the menus caused the health and academic changes?
Mr. Harford: What really grabbed my attention about this incident was not, “Healthy meals help kids concentrate in school” – it was, “Wow, it takes a campaign by a TV chef to find out something like this.”
The research was carefully done by serious economists, but we could have more confidence in their findings if the project to improve school meals had been designed as an experiment. It wasn’t; it was designed for a TV show. After it started, Tony Blair, the British prime minister at the time, was falling over himself to endorse it. Yet it was a simple idea that Blair’s government could have tested out years before.
One of the main ideas of the book is that the world is full of interesting ideas that might help solve some of our big problems, but nobody really knows which of these ideas will work and which will fail. So policy makers, corporate leaders and social campaigners need to be much more open to all sorts of formal and informal experiments. Jamie Oliver created an accidental experiment. It would be nice if we spent a bit more energy doing this deliberately.

The full interview is here.

Three things you need to know about failure

It’s “Adapt: The Movie.” Well, almost.

Adapt” is being published in the US this week, so here’s a sneak preview of some of the ideas.

The devil is in the detail …

To my surprise, the book that inspired this column, The Undercover Economist, has shown enough staying power to merit a second edition, which was published on Friday.

Naturally I spent much of the editing process wincing at the prose and the cheerful overconfidence of my youthful self. But revising the book was also an opportunity to reflect on how the economics of half a decade ago looks from the vantage point of today.

I cannot make up my mind whether this is reassuring or alarming, but there was little that I needed to change in the light of the financial crisis. I removed a chapter on the dot-com bubble – old news – and of course I added a chapter on the banking crash. But what I had written before mostly needed tweaking and updating rather than removing, and the reason was that I simply didn’t say much about the details of high finance.

The strengths and weaknesses of my little book, coincidentally or not, seem to have reflected the strengths and weaknesses of academic economics itself. Economics did not cover itself with glory during the crisis, and its failures were chiefly those of omission, not commission. The crisis did not falsify cherished principles of economic thought, but it did catch most of us napping. For the banking system, the devil was in the details – legal niceties about how credit default swaps worked, or collateral requirements, or CDOs of CDOs – and most economists had no interest in those details.

There is a parallel here with other fields – for instance, structural engineering. Ambitious structures have a habit of falling down, or at least misbehaving, and the culprit is inevitably not some misinterpretation of the laws of physics, but something more mundane such as a failure to appreciate the detailed geology of the rocks under a dam, or the effect of snowdrifts on a roof accumulating unevenly under a cross-wind. Attention to detail matters. So does hard experience.

One of the old tales in the book which has gained new resonance is the economist Paul Klemperer’s warning about the uses and abuses of auction theory. Klemperer was one of the designers of the famously lucrative mobile phone spectrum auction in the UK in the spring of 2000. He pointed out that auction designers shouldn’t be distracted by fancy theoretical results, but should pay far more attention to institutional details. Will the bidders show up? If they win, will they pay? Will they collude with each other? Formal models have a tendency to assume away what really matters.

Three weeks ago, a former student of Klemperer’s, Jonathan Levin of Stanford University, won the John Bates Clark medal, one of the economics profession’s highest honours and one that has often heralded a Nobel prize later in life. Levin’s victory is striking because he combines some high-powered economic theory with a strong empirical slant: among other things he has studied college admissions, seller strategies on Ebay, auctions for timber and subprime loans for cars. Levin began as a theorist, but the sheer volume of data available now, he says, is transforming economics.

Other recent John Bates Clark medallists also mix theory and evidence. Emmanuel Saez, winner in 2009, is one. Susan Athey, winner in 2007, has a formidable line in deep theoretical results (and like Levin and Klemperer is an auction expert), but she’s conducted detailed research on real-world industries and is now chief economist for Microsoft.

This mixture of formal theory and attention to messy reality is fairly recent, and it is encouraging. It’s what distinguishes economics from pure mathematics on one side and history or anthropology on the other. It is also what I have always loved about my field. The logic of economic reasoning is powerful – but the world around us is far too fascinating to ignore.

Also published at ft.com.

How long to wait for the perfect espresso?

Dear Economist,
I just popped out of my office to grab a coffee from the best local place, a minute’s walk away. When I got there I found a sign saying “Back in ten mins”. It’s quite cold, and since I hadn’t expected to be out for more than a few minutes, I’m not wearing a coat. There are several alternative coffee vendors close by, some of which experience shows produce bad coffee, and some of which are untried, but don’t normally have a queue that suggests greatness. There’s nothing useful to do while I wait.
How long should I have waited before defecting to an alternative vendor?
Yours Sincerely,
Dear Tom,
Let’s get the maths out of the way first. If the barista really knew he would be absent for 10 minutes when putting up the sign, you’re equally likely to have arrived just after he leaves, or just before he returns. You’d expect to wait five minutes on average.
The barista may have been cleverer than that, however: knowing that most customers would not arrive immediately after he skived off, he might have given himself extra slack. Perhaps he plans to be absent for twenty minutes, leaving your expected wait at an unacceptable ten.
These seem to be your regular haunts, so in future I advise that you immediately try somewhere else. If the coffee is better – even if that is unlikely – that knowledge will be something you can use every day. If not, at least you will have kept warm.
And if you do decide to stand and wait, make sure you try for a free coffee when the absent proprietor returns.

First published in “Mens Health”