Tim Harford The Undercover Economist

Articles published in July, 2011

Darkest Peru? It’s a beacon for business

Between 2009 and 2010, Peru cut the cost of setting up a new business from $685 to $564, the number of separate bureaucratic procedures from nine to six, and the time the whole affair took from 41 to 27 days. It’s an impressive (indeed, world-leading) improvement, and one which presumably will help Peruvian entrepreneurs create jobs, fulfil the desires of Peruvian citizens, and make money into the bargain.

These statistics come from the World Bank’s Doing Business project, which since 2003 has been publishing data on the ease of doing business around the world, with indicators such as how long it takes to establish a business, how easy it is to buy and sell commercial property, or how time-consuming and expensive it is to clear customs. (I should declare an interest: in 2004 and 2005, I helped with some of the superficial details of the Doing Business project.)

Yet the Peruvian good news story feels oddly precise. The Doing Business methodology is a kind of time-and-motion study of the process of establishing a hypothetical business with some quite specific characteristics. Local experts, typically lawyers, examine the standardised case study and figure out all the papers that must be filed, departments that must be notified and official fees to be paid.

The focus on this case study allows the Doing Business project to produce specific, comparable information but the risk is that the experience of actual companies is rather different. The World Bank being a pluralistic place, it also gathers and publishes an alternative measure of the burden of regulation and bureaucracy on local businesses: surveys asking local businesses about the obstacles they face – bureaucratic or otherwise.

Mary Hallward-Driemeier of the World Bank and Lant Pritchett, an economics professor at Harvard’s Kennedy school, have published a discussion paper comparing the results produced by the two methods. Up to a point, they are in accord: countries which look good on paper also perform well in the enterprise surveys – and the more streamlined the rules, the less trouble businesses claim to have.

And yet for most countries (those in the most bureaucratic two-thirds, according to Doing Business) the relationship breaks down: what the case studies show and what businesses actually report bear no resemblance to each other. And there is huge variation within countries: some companies seem to live blessed existences while others are all but under attack from officialdom. Pritchett quotes an Indian saying, “Show me the face and I’ll show you the rule.” In short, when the rules are bad enough (and they are pretty bad, in a large number of countries), the rules cease to be directly relevant.

“If your Doing Business number says it would take you 350 days unless you pay a bribe, you are in a country where nobody doesn’t pay a bribe,” says Pritchett.

Quite so, and it seems plausible that a researcher seeking some direct measure of the costs of silly regulations will do better to consult the enterprise surveys than Doing Business’s hypothetical case study.

Yet the case study approach has great merits. Partly, it has rhetorical power – a fact appreciated by the Peruvian economist Hernando de Soto when he pioneered the time-and-motion approach to regulatory reform in the 1980s. Also, the case studies of Doing Business go beyond identifying that a problem exists and point to specific laws and regulations that are causing trouble and enabling bribery. For example, Doing Business has established that a cheap, politically uncontroversial way to streamline regulations and climb the World Bank’s ranking is to establish an online one-stop shop for registering new businesses. Perhaps it is no coincidence that this is the direction Peru’s reforms have taken.

Also published at ft.com.

In defence of PowerPoint

I am about to do something rash, which is to disagree with Lucy Kellaway. Last week, the fearless observer of business follies went too far: she called for PowerPoint to be banned.

The prosecution’s argument is simple: many PowerPoint presentations are very bad. This is true but it hardly makes the case for a ban. Serviceable tools can produce awful results in the wrong hands, as anyone who has seen me put up shelves can attest. Banning the screwdriver is not the answer.

So it is with PowerPoint. It’s an unromantic, practical piece of kit. It is often used poorly. It is not the most elegant tool, but botched jobs must be blamed on the workman. Many of the bad presentations people deliver with the help of PowerPoint would have been bad presentations in any case. Would it have been better to hear the impromptu ramblings of a nervous speaker in total cognitive meltdown? Or to watch a piece of professionally produced but irrelevant film, in the dark? Many readers will remember corporate life before PowerPoint. It was no lost Eden.

PowerPoint is not the world’s most wonderful piece of software. The built-in templates have long been ugly, the clip-art tacky and the animations risible. As if determined to deliver on the name, it inserts bullet points into text with little provocation. It is harder than it should be simply to make all the letters line up. (I am still using PowerPoint 2003. By all means dismiss this column as the ranting of a corporate shill.)

Yet for all its flaws, PowerPoint performs two useful tasks well enough. It quickly allows one to compose speaking notes and to create slides showing images and graphs. The trouble starts when people confuse the two jobs.

There is nothing wrong with jotting down speaking notes as a memory aid. PowerPoint is as good a way of doing this as any, especially if you have handwriting like mine. For the vast majority of speakers, such speaking notes are preferable to the alternatives, including memorising, ad-libbing on the spot or writing the whole speech out and reading it in a wooden monotone.

The problem is that for some baffling reason, many speakers decide to project their speaking notes on to a wall rather than printing them out, postcard size, and sticking them on to 3×5 inch cards. I often sketch out my speeches with the help of PowerPoint. I just prefer to keep the slides to myself.

The second use of PowerPoint is to project visual aids on to a screen. This it does perfectly well – and the clichéd clip-art of yesteryear is now almost extinct. These days people “borrow” cartoons from Dilbert, or grab photos from the web. The effect is often pleasing enough.

It would be better if people learnt a bit about fonts, and better still if they learnt that by pressing “B” they could temporarily blank the screen. But one cannot have everything.

Lucy approvingly mentions a famous condemnation of PowerPoint by the brilliant information designer Edward Tufte. Professor Tufte attacks PowerPoint partly for its “relentless sequentiality, one damn slide after another” and partly for the asymmetric relationship between speaker and “followers”.

This is odd because Tufte does not acknowledge that he is really assaulting the idea of public speaking itself. What could be more relentlessly sequential than a speech? One damn word in front of another. If you hate the very idea of a speech, fine. But say so.

It would take little to improve greatly the quality of most people’s PowerPoint presentations – far less than it would take to improve the quality of corporate Newspeak. So why call for a ban?

The true problem is far more troubling. It is that in a corporate environment, we are asked to read prose by people who cannot write and watch performances given by people with neither the talent nor the training to perform. For some reason these amateurs are better paid than most writers and performers. There is something depressing about all this, but the blame cannot be pinned on PowerPoint.

I cannot finish without confronting the greatest sin in my version of PowerPoint: the “AutoContent” function, which sketches out a speech if you cannot do it yourself. AutoContent, The New Yorker once reported, was named as a joke, in “outright mockery of its target customers”. The very idea of the function is pernicious indeed but the real horror is that it was created to satisfy a demand.

Fortunately, that demand may have worked itself out, too: AutoContent was discontinued in 2007.

First published in the Financial Times, 25 July 2011

What now for newspapers?

Competition alone cannot guarantee that readers get access to information they need

With the realisation that Rupert Murdoch’s newspaper, the News of the World, had done some loathsome things, MPs realised that they had moved into a looking-glass world. When once it was politically dangerous not to bend the knee to Murdoch, suddenly it was politically dangerous not to stand up to him instead – and standing up to Murdoch is presumably a lot more fun, to boot.

But what now? The presumption seems to be that no future proprietor can ever be allowed to accumulate such a large market share. Newspaper and television markets must be kept competitive for the good of political and cultural discourse. This was the idea behind referring Murdoch’s now-withdrawn bid for BSkyB to the Competition Commission.

As an economist, I’m always banging on about the benefits of competition – but in the case of media, they are less clear-cut than one might expect. Competition is usually a great process for giving customers what they want at a price they can afford. (Although let us not forget that key customers in the newspaper business are advertisers – and it was an advertisers’ boycott that brought down the News of the World.) But in the modern-day newspaper market, price is not necessarily the key issue. Many consumers are getting their news for free from internet sources, and many advertisers have moved online, too. The question is not whether readers and advertisers are being exploited by monopolistic prices, but whether traditional newspapers can survive.

If price is not the issue, then what we are really concerned about is that newspaper readers get access to informative news about the key issues of the day – the kind of thing upon which our democracy depends. But it is foolish to expect this from competition alone. Sadly, we do not value information about how to vote nearly as much as information about which car to buy. We probably value shots of celebs in swimwear more than either.

True, competition can encourage certain kinds of quality journalism. For instance, the economists Jesse Shapiro and Matthew Gentzkow have pointed out that certain stories – of abuses by US soldiers at Abu Ghraib, for instance – are promoted by media pluralism. CBS had the story and sat on it at the request of the US government (the story was said to be dangerous to US hostages) before broadcasting after it became clear that the story would emerge in The New Yorker.

But competition also promotes gutter journalism and it probably promotes opinionated journalism, too. Fox News, Rupert Murdoch’s hugely influential TV news channel, seems to have become popular by staking out ground as the source of right-wing rabble-rousing, and MSNBC has gained ground as it has moved to the left. Competitive markets give people what they want rather than what is good for them.

Gentzkow and Shapiro have studied this question in the US. Using an objective (if imperfect) measure of bias, they found that newspapers closely match the political biases of their potential readers, as measured by votes cast in the 2004 presidential election, and by the source of campaign contributions to each party. No doubt the causation runs both ways, but one striking result is that the proprietor’s identity seems to make no difference to the bias. The media barons tell us what we wish to hear.

The most disturbing aspect of the phone-hacking scandal, it seems to me, is the reluctance of politicians to challenge Murdoch’s empire, and in particular its cosy relationship with the police. If more competition dispels that sense of fear in future, it will be all to the good. But don’t expect every journalist to suddenly start working on the next Watergate.

Also published at ft.com.

A handbag away from our debt ceiling


“Yes, dear?”

“What do you and Dad keep arguing about late at night?”

“You should be asleep. When Daddy and I have our little chats, it’s past your bedtime.”

“Mum, I’m 15 – a bit old for bedtime. Anyway, I usually ignore your arguments but this one seems important.”

“Well, it is important. We are debating whether to raise the family’s debt ceiling.”

“Debt ceiling?”

“It’s the limit on what we can borrow.”

“Doesn’t the bank manager decide that?”

“Yes, ultimately Mr Foss-Smythe can refuse to lend money to us. But your father and I have a different system. For years and years, we’ve taken a solemn vow never to let our household borrowing exceed £500 without both of us explicitly agreeing to raise the limit.”

“So you were arguing about whether to borrow more than £500?”

“Darling, we’ve already borrowed £500,000. Houses aren’t cheap these days, even in Hackney. The point is that your father and I agreed each time we needed to raise the debt ceiling. But now we can’t agree. Your father wants me to cut back on my spending, or he won’t agree.”

“So, what happens if he doesn’t agree?”

“Then we have to ensure that our household debt doesn’t go over £500,000.”

“Fine. £500,000 is a lot of money. Dad has a point. You buy too many handbags.”

“But darling, the handbags aren’t the point here!”

“Aren’t they?”

“Well, perhaps they are a bit. But even if I did stop buying handbags, we’d still go over the limit. Look – ever since I lost my job I’ve been looking for a new one. I’m sure it’s just a matter of time. But until then our income is depleted.”

“So – stop buying handbags, Mum!”

“It’s not that easy. The percentage of household income spent on handbags has been considerably exaggerated by your weaselly father. Far more important is the mortgage. If we stop the payments, we lose the house.”

“But you’re not actually borrowing more money to pay the mortgage, are you?”

“Actually, we are. We’re taking out loans and using credit cards to pay the mortgage. There are also the payments on the car, your school fees and the money we promised to send every month to Grandma.

“And then there’s stuff like food and electricity – we haven’t promised anybody that we’ll spend that money but life would get pretty difficult if we didn’t. Without my salary, our spending is inevitably higher than our income.”

“Wow. So Dad wants us to do something really drastic?”

“Well – no, not really. He’s just using the debt ceiling as a bargaining chip. We agreed all of this spending and set out the whole budget a few months ago.”

“Was that before you lost your job?”

“No, that was after.”

“Mum, I’m confused. You and Dad knew what your income was going to be and you agreed all the spending. So, basically, you agreed spending that would guarantee that you’d break through the debt ceiling. So you’ve agreed to exceed the debt ceiling.”

“Yes – we agreed to exceed the debt ceiling. But we haven’t agreed to raise it. That’s the problem.”

“But that doesn’t make any sense!”

“It doesn’t matter that it doesn’t make any sense. The point is he has bargaining power now.

“The next mortgage payment is due on August 2; that’s also the same day we send money to Grandma. If he hasn’t specifically approved for us to go overdrawn on our joint account, we have to choose: Grandma doesn’t get paid, or we go hungry, or we skip the mortgage payment.”

“But you have the overdraft limit?”

“Oh yes. In fact we have the overdraft limit agreed with Mr Foss-Smythe. The same bank we have the mortgage with.”

“And he’s happy to lend you the money?”

“Delighted, darling.”

“So he’ll be happy if you borrow money from your current account to pay the mortgage, but not if you just skip the mortgage.”

“Exactly. He will be very unhappy. I’m surprised he’s not more nervous already.”

“Perhaps he should be more nervous that you don’t have a job and that you and Dad are spending far more than you earn, than about some entirely arbitrary debt ceiling that the two of you can agree to waive at any moment?”

“You may be right.”

“Where is Dad, anyway?”

“I think he’s buying himself a treat to relieve the stress.”

Also published at ft.com.

TEDTalk – Trial, Error and the God Complex

Why social marketing doesn’t work

We often overestimate the likelihood of success of viral hits.

In 1948 Harold Lasswell defined the objective of media communications research as discovering “who says what to whom in what channel with what effect”. The difficulty for researchers has been that for the first half-century or so after Lasswell set out the aim, it has been largely impossible.

Perhaps that is now changing. Online social networks generate a huge amount of information about who says what to whom. Economists, computer scientists and sociologists are now digging through these social networks for the answers to long-standing questions – and few answers are as eagerly awaited as the secret of producing a sure-fire hit.

So how do you produce the perfect film or write the perfect book – or compose the perfect tweet on Twitter – in a way that will maximise the chances of catching on? Duncan Watts, a mathematical sociologist at Columbia University and Yahoo! Research, has answers – and I’m afraid they’re not too encouraging. “I’ve been using social media to promote my book,” he says, “and it’s just a waste of time – it has almost no impact at all.”

(I’ll throw him a bone. His book is called Everything is Obvious (Once You Know the Answer).)

Part of the problem, perhaps, is that our expectations are skewed. If you ride on London buses, you may be astonished to discover that many of them are almost empty. The average London bus, according to the UK’s Department for Environment, Food and Rural Affairs, contains only 17 passengers. Clearly most bus-riding people are travelling on the full ones.

It’s a similar story with viral media: we notice the successes simply because they are successful, and overestimate the likelihood of success. And there’s a survivor bias: in our analysis of what works we ignore what fails. “People think it’s all about videos of cats or cute children,” says Watts, “But there are millions of videos that have these attributes but haven’t spread.”

Watts and his colleagues, in a research paper titled Everyone’s An Influencer, place numbers on a specific type of media hit called a “Twitter cascade”. A Twitter cascade occurs when one person’s “tweet” (short message) is repeated by other users (“retweeted”), whose retweets are themselves retweeted further, and so on. Anyone unfamiliar with Twitter can imagine a particularly good joke or piece of gossip spreading.

The first surprise, then, is that the typical Twitter cascade is both rare and tiny. Ninety per cent of tweets are never retweeted, and most of the remainder are retweeted only by a person’s immediate followers, not by those at two or three removes.

The second surprise is that beyond the mind-numbingly obvious, it’s impossible to predict which tweets will start cascades. Simply knowing that a user has started previous cascades tells Watts and his colleagues almost everything they can divine about the likelihood of future cascades – which is not very much. (It is not especially useful to know how many followers a user has if you know about their previous success in starting cascades, because the two pieces of data overlap.)

Duncan Watts would like to see marketing companies running properly controlled experiments to see which messages carry through social networks such as Facebook. But he’s not convinced that they will. “When you do the experiment properly, all the numbers go down,” he says. Watts believes that the likely outcome of such experiments would be to demonstrate how difficult it is for social marketing to have any impact.

I can now barely summon the will to beg you to follow me on Twitter (username: @timharford). But, there it is. Most things fail, and as Watts says, “the curse of being able to measure everything is that you get slapped in the face with this reality all the time.”

Also published at ft.com.

Why cheques have more bounce

“Dad? I’ve heard that they’re going to keep the cheque.”

“Yes, apparently they are.”

“What’s a cheque?”

“It’s a special piece of paper you can use to pay for things. You take a blank cheque and then you write out how much money you want it to be worth, and you give it to the person who wants the money.”

“So, if you wanted to be rich, you could just write a cheque for all the money in the world, like a million pounds?”

“It’s not that simple. You get the cheque from the bank. The bank has your money in what they call a ‘bank account’, and when you write a cheque, the bank takes the money from your account and puts it in the account of the person to whom you wrote the cheque.”

“That sounds like fun. Do the people with the money have big trolleys and bags with dollar bills in them?”

“No. Actually, the money doesn’t physically move. It’s just a computer somewhere keeping track of how much money is in your account. Then when you write the cheque, the computer talks to another computer and your bank account has a smaller number and the other person’s bank account has a bigger number.”

“Then why don’t people just send messages to the computer, like e-mail?”

“Well, lots of people had that idea, which is why there was this plan to get rid of cheques. But some people don’t like computers – usually older people.”

“Like grandpa?”

“No, not really. Grandpa takes computers apart and puts them back again for fun. But some really old people don’t like computers.”

“Like great-granny?”

“Yes. Great-granny didn’t like computers, but then great-granny would be 100 years old now, and she died a while ago. But there are still some people alive who don’t like computers and want to use cheques. A thousand of them wrote letters complaining that either they wanted to use cheques, or they wanted to get money from people who wanted to use cheques, and could we please keep cheques. So we’re keeping cheques. Remember, my love, that while Britain is obsessed with young people like you culturally, when it comes to politics, we’re obsessed with old people.”

“So will I get to write cheques when I am 100 years old?”

“I doubt it. All that happened this week was that banks agreed to keep open the system that allows cheques to be processed. But shops don’t have to accept cheques. So I expect they will die out as soon as most people don’t want to accept them as payment.”

“But wouldn’t shops want to accept cheques so they can sell things to people?”

“Not necessarily. If a shop is selling £10 of goods at a 5 per cent profit margin, then it is making less than 50 pence profit on the transaction. It might figure that it’s not worth the hassle of dealing with the cheque. A charity getting a cheque for £10 gets to keep the entire £10 – no wonder they are more willing to put up with the ridiculous concept. And charities don’t have large queues at the check-out.”

“That’s not fair. I wanted to write cheques like great-granny.”

“You can write all the cheques you want. Just don’t expect anybody to accept them as payment. That’s the thing about payment systems – it takes two sides to make them work. They’re not much use if other people don’t think they’re valuable. Governments can say it’s the law that you have to accept it, but that’s a minor factor. The world is full of alternative types of money. There are digital currencies such as Bitcoins and Linden dollars. Libertarians are trying to find ways to make it easy to carry gold and silver in a wallet-friendly format. There are air miles and loyalty cards and all kinds of alternatives. If people accept them as payment, they’ll work. If not, they won’t.”

“I heard at school that one time in Germany people used to swap coffee and cigarettes instead of using money.”

“Not quite true. In Weimar Germany, cigarettes and coffee weren’t being used instead of money. They were money. People weren’t swapping them. They were using them because they were convenient to carry around and, unlike the official money of the day, people knew what they were worth from one day to the next.”

“Was that when great-granny was a little girl?”

“Yes, it was. I don’t think she was ever fond of cigarettes, though. I think she preferred cheques.”

First published at FT.com

Why there will never be another Da Vinci

Leonardo da Vinci was an artist who became a scientist by asking what underlay the world he so brilliantly depicted. Behind the asymmetric smile of the “Mona Lisa” lay a complex interplay of facial muscles; in sketching a waterfall, Da Vinci became fascinated by fluid dynamics. (Stefan Klein’s thought-provoking book, Leonardo’s Legacy, provides a persuasive account of this process of discovery.) The exact extent of Da Vinci’s innovations are a matter of debate, but surely there is no dispute that he was one of western civilisation’s great geniuses.

Yet there is no escaping the fact that Da Vinci was able to achieve so much, so broadly, because so little was known. It was possible to make leaps forward in scientific understanding armed with little more than a keen eye and a vivid imagination.

Those times are long gone. Approximately 3,000 scientific articles are published per day – roughly one every 10 seconds of a working day. We can now expect that these papers will, each year, cite around five million previous publications. And the rate of production of scientific papers is quadrupling every generation. (All these estimates are based on data from the Institute for Scientific Information.) The percentage of human knowledge that one scientist can absorb is rapidly heading towards zero. This side of a new Dark Age, there will never be another Da Vinci.

Benjamin Jones, an economist at Northwestern University, has been monitoring these trends for some years. The typical science paper or patent, finds Jones, is now produced by a large team. The specialisation of each of that team’s members, to the extent that it can be deduced, is narrower than before. And the members of the team are also older. All of this follows quite plausibly from the drift away from the world of Da Vinci: as the sum of human knowledge swells, individual researchers must spend longer and longer acquiring ever smaller slivers of it, before they are in a position to make their own contributions.

This means that funding new ideas that matter is almost certainly getting more and more expensive. By itself that fact need not be too disturbing: we can afford to spend more on science, and there are more qualified scientists across the world than ever. But it also suggests that scientific and technological innovation is, more than ever before, an organisational problem – and an organisational problem to which we have probably devoted too little attention.

I think we need to do more to combine the best features of public-sector and private-sector innovation. Governments have the long-term perspective and the financial firepower to fund the really big projects, while small technology start-ups, funded by venture capitalists, have the collective ability to take risks and attempt a huge range of different approaches. It should not be beyond human ingenuity to devise government grants that are more pluralistic and take bigger risks.

But there is more going on here than funding. Benjamin Jones points out that scientific institutions and science policy have yet to catch up with changing trends in science. Peer review, patent evaluations and grants all tend to rely on the expertise of individuals – expertise that is less and less likely to be able to cover the necessary bases. Science has always struggled with cross-disciplinary work, but now that disciplines are becoming so narrow, cross-disciplinary work is unavoidable.

Perhaps the most important discovery in Jones’s work is the ageing of scientists. Scientists may have to wait longer before reaching the frontiers of scientific knowledge – but who will keep them funded and engaged as they make the trip? No wonder Wall Street and the City find it so easy to recruit disaffected young physicists.

Also published at ft.com.

More equity, less risk

How can we make banking safe? A head of steam has been building behind the idea of restructuring banks so that their retail arms are cushioned from riskier activities, and can be plucked neatly from the clammy grasp of any future floundering bank. That is sensible – if easier said than done.

But why leave it there? The simplest way to reduce the risk of a future banking crisis is to force banks to hold more equity.

More equity makes banks safer, other things being equal, because the shareholders who provide the equity have no claim to being paid any particular sum of money. They simply get whatever is left after the bank takes its profits and its losses. That flexibility is what provides room for mistakes – essential in any complex system.

The Basel III accord, unveiled last autumn by banking regulators, was a big step forward in requiring banks to hold more equity. But David Miles of the Bank of England argues that banks should go much further, and recently Tim Geithner, the US treasury secretary, and particularly Daniel Tarullo of the Federal Reserve, have done the same. They are right to do so.

After the crisis, it might seem obvious that Miles, Geithner and Tarullo are right. Why might they not be?

The banks themselves point out that equity is expensive: shareholders demand high returns because they are taking high risks. These returns were previously delivered by keeping the capital cushion as thin as possible: as money from a bank’s investments flowed in, much of it would be paid out to the bank’s creditors. The modest amount left over would still be enough to provide rich rewards to shareholders because equity was so small compared to the scale of the banking operations.

But with much more shareholder equity, the banks claim, there won’t be enough money to compensate shareholders for taking risks. Fewer loans will have to be made, and at higher interest rates. Small businesses and would-be housebuyers will suffer. This is plausible, widely repeated, and nonsense.

Forcing banks to fund themselves more through equity than debt makes shareholders safer, unless they were always safe because of a government guarantee – exactly the situation we wish to abolish. This safety reduces the return shareholders require. If shareholders really want to combine high returns with a high risk of being wiped out, they can always borrow money themselves and use the borrowed money to buy shares in banks. There is no reason that the banks themselves, the basic infrastructure of the world economy, should be allowed to make themselves fragile in order to deliver these returns.

All this is obvious in theory – the theory being the famous Modigliani-Miller theorem, which shows that under certain conditions whether a company is funded by debt or equity makes no difference – but it also seems to be borne out in practice. Miles and his colleagues have produced empirical research showing there seems to be no strong relationship between fat equity cushions and anaemic bank lending.

More equity would not solve every problem in the banking system. For instance, Basel III retains the problematic “risk weighting” concept of Basel II, in which banks can hold less equity if their assets are very safe. Historically, safe assets have included Greek government bonds and mortgage-backed securities. It is easy to see the flaw in this rule, and since there is little cost to funding banking through equity rather than debt, it is hard to see the point of it.

There can be no panacea for banking regulators. No rule change will be without its unintended consequences in such a complex system. But insisting on more equity – much more – is something banking regulators must find the courage to do.

Also published at ft.com.

No, statistics are not silly, but their users . . .

“Dad, when is Mummy’s new baby going to come?”

“Nobody knows, my love. We’ll have to see when the baby decides to come out.”

“But everybody talks about babies being early or late, like buses.”

“Buses are a little different from babies – you wait ages for a bus and then several come along at once, and that’s definitely not the aim here.”

“But babies can be late, like buses?”

“Yes, they can be late.”

“So if they can be late, there must also be a time when they are supposed to arrive.”

“That’s right. The new baby is due on the 15th of July – that’s about two weeks away.”

“But it might be late.”

“It might be late, yes. Or it might be early. But the truth is it will probably be late. You were late and so was your sister.”

“How can you say it will probably be late? Aren’t babies, on average, on time?”

“I’m not sure how you can make that claim. Buses are certainly not on time, on average. They are systematically prevented from being early but cannot help sometimes being late – so on average, they are late.”

“Bus timetables are different. Everybody knows the bus timetable is when the bus is supposed to arrive, not some historical record of when the bus has actually tended to arrive.”

“Good point. In fact, that gives me an idea. Maybe we should rewrite bus timetables based on historical data.”

“But Dad, don’t people want to know the earliest time at which a bus will arrive, rather than the average time?”

“I thought you wanted to talk about babies, my dear. By the way, did I ever tell you that you have more than the average number of arms?”

“But I have two arms.”

“Precisely. The average number of arms is less than two.”

“Don’t you mean fewer?”

“No. I don’t.”

“But everyone has two arms.”

“Not everyone has two arms. Most people do. The most common number of arms is certainly two. And more than 50 per cent of people have two arms, so the median number of arms is also two.

“But if you add up all the arms and divide by the number of people – which is what we tend to mean when we say “average” – you’ll find that the result is slightly less than two.”

“That’s silly.”

“No – that’s statistics.”

“Statistics are silly.”

“Statistics are not silly. But many people use them in a silly way.”

“They seem silly to me. So babies are a bit like arms?”

“A little bit. Some babies come months early, but no baby comes months late, and in any case the doctors have a tendency to get twitchy and whip the little tykes out when they’re a couple of weeks overdue.”

“But doesn’t that mean babies are likely to be early rather than late?”

“No: it means that a few babies are very early but no babies are very late. And this baby is not going to be very early, since it’s almost July and there’s been no sign of it yet.

“Anyway – if a few babies are very early and none are very late, then if you are trying to figure out a due date by adding up all the lengths of all these pregnancies, the very early babies will pull the average to the early side.”

“Is that what happens?”

“Yes. Here – let me consult my copy of The Tiger That Isn’t, by my friends Michael Blastland and Andrew Dilnot.”

“Is it a book about a tiger?”

“Obviously not – since the tiger isn’t.”

“Is it a book about babies?”

“No. It is a book about numbers. Due dates in the UK are calculated by adding 280 days to the date of the mother-to-be’s last period.

“And Blastland and Dilnot say that 280 days is indeed the average. But in fact 50 per cent of mothers wait at least 282 days. And most commonly, the baby is actually born after 283 days. In other words, the typical baby is born two or three days late.”

“But if the typical baby is three days late, is it really late at all?”

“You tell me, my love. I’m just an economist. The doctors say that it is.”

“Doctors are silly.”

“Perhaps they are, my love – at least, sometimes. But I am sure doctors would say that economists are sometimes silly, too.”

Also published at ft.com.


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