Tim Harford The Undercover Economist

Undercover EconomistUndercover Economist

My weekly column in the Financial Times on Saturdays, explaining the economic ideas around us every day. This column was inspired by my book and began in 2005.

Undercover Economist

There is a fine line between stupid and clever

Recently a loyal reader emailed me with a disarmingly simple question: is it better to invest small amounts every month, or in a large lump sum? What seems a narrow topic has broader implications.

The popular argument in favour of regular investment into shares — often called “cost averaging” — has been made by retail investment advisers many times. “Take advantage of their downs as well as their ups,” says one, so that “if you invest a fixed sum every month you will be able to buy more units when a fund’s value falls”.

To see how this cost averaging might work, consider a share that costs $60 half the time and $120 the other half. Investing $600 a month returns 10 shares in each of the six months when it is cheap and five shares in each of the expensive months. At the end of the year, 90 shares have cost $7,200. The average cost per share is only $80, much closer to $60 than $120 and thus excellent value.

The argument is plausible, intuitive, and wrong — both in theory and when tested with hindsight against historical market data.

Here’s the problem with the theory: while it is unclear exactly how best to describe the fluctuations of share prices, they do not simply move up and down in the way my simple example describes. If they did, a far better approach would be to invest only when they cost $60, not when they cost $120.

A more realistic description of the stock market is that it follows a random walk with an upward drift. The random walk implies that we cannot expect prices to tend back towards some average. From any particular point there is no way to say in which direction they will lurch next. That means that we cannot expect that when a share is $120 it is likely to fall, and when it is $60 it is likely to rise.

The upward drift — the simple fact that share prices tend to rise over time — suggests that we should invest everything we plan to invest at the earliest opportunity. Drip-feeding delays profitable investment, and so costs money.

If theory is unkind to the cost-averaging principle, what about the historical evidence? We can ask, with hindsight, when investors with a large lump sum would have done better to drip it gradually into the market over the course of a year. The answer is unsurprising: drip-feeding has done better only when the market then fell, and since markets rise more often than they fall, lump-sum investing is a better bet. Cost averaging worked well in the last bear market, but, with access to that kind of hindsight, an even better strategy in a bear market is to wait until it is over.

Cost averaging, then, is wrong in theory and has not usually worked in practice.

It may, nevertheless, be excellent advice.

The simplest point in favour of drip-feeding is that it reflects the situation of a typical salaried investor. Purists will say that “cost averaging” should only be used to describe a deliberate strategy of delaying investment, but retail advisers often speak of the magic of cost averaging while praising regular investment. The magic may be illusory, but the benefits of regular investment are not.

Many of the empirical tests of cost averaging begin from the premise that an investor is sitting on some vast pile of cash, pondering whether to invest gradually or all at once. That is a pleasant dream to consider, and if you find yourself with a million dollars in your pocket then by all means invest promptly.

If you are nervous about risk, academic research suggests that drip feeding is not the most efficient way to reduce your risk. Better to keep a small portion of your wealth out of the stock market entirely.

But efficiency is a treacherous goal for an ordinary investor.

The strongest argument in favour of cost averaging is simply to ask ourselves what we are likely to do instead. The answer is not pretty. Researchers have found that retail investors tend to make two simple errors: they lose money by trading too much, and they tend to buy high and sell low. Without getting too technical, let me assure you that this is not the aim. If regular investments displace a Gordon Gekko complex, that is enough for me.

While markets do not swing back and forth with the metronomic predictability of my earlier illustration, they do fluctuate a lot, as we have seen in the past couple of weeks. That fluctuation is distressing for most people. If facile arguments for cost averaging reassure small investors and stop them from selling at the bottom, that is no bad thing.

Greg Davies, a behavioural finance expert at Oxford Risk, describes cost averaging as “deliberately doing something slightly inferior, to prevent the likelihood of something very inferior”. Just so. And it is worth looking for other areas where we might benefit from being guided by a slightly inferior rule of thumb — anything from “if it takes less than two minutes, do it immediately” to “never drink alone”. There are exceptions to these rules, but you may be better off just sticking to the rules.

As a wise man once said, it’s such a fine line between stupid and clever. Cost averaging seems clever, but we should recognise that its true value lies in not being stupid.

 

 

Written for and first published in the Financial Times on 19 October 2018.

My book “Fifty Things That Made the Modern Economy” (UK) / “Fifty Inventions That Shaped The Modern Economy” (US) is out now in paperback – feel free to order online or through your local bookshop.

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Does economic growth need to end?

What are the limits to economic growth — and have we already recklessly exceeded them? Such questions were raised (again) recently by (another) alarming report about climate change. Many of my environmentalist friends are convinced that economic growth itself is the fundamental problem.

It was a timely moment, then, to give a Nobel Prize to two economists who’ve tackled that question head on. William Nordhaus and Paul Romer have tried to find ways to understand the invisible and sometimes ineffable causes and consequences of growth.

The modern world produces two things in abundance: carbon dioxide and ideas. Both swirl around, defying our attempts at control. We’d like more ideas but already have more than enough carbon dioxide. The future of humankind may depend on a strange race: can we keep living standards rising yet restrain consumption of resources and production of pollutants?

Economics being economics, Nordhaus and Romer received their prizes for technical achievements in economic modelling. Mr Nordhaus analysed the interaction between climate change and the economy; Mr Romer developed an elegant way to model innovation as an intrinsic part of the growth process, rather than falling from heaven. These are impressive intellectual accomplishments, but my fascination with both men concerns some of their more informal work.

In one of the economics papers I truly love, Mr Nordhaus tracked the price of illumination over the millennia, from the days when people could create light only with a campfire, through the time when they would use beef tallow — or clean, bright-burning spermaceti oil from whales — to the invention and improvement of incandescent bulbs.

Mr Nordhaus chopped and burnt wood, and tested antique lamps with a Minolta light meter. He concluded that in Babylonian times, a day’s hard work would produce enough to light a room for 10 minutes. By the end of the 20th century, the return on a day’s labour had improved from 10 minutes of light to 10 years. That is the kind of progress that gives one hope for us all.

The environmental toll paid for that light has also plummeted, which is good news for the whales and good news for us. Perhaps it really might be possible to enjoy the comforts of modernity without destroying the planet.

Since the early 1960s, UK carbon dioxide emissions per person have almost halved, yet the country’s economic output per person has tripled in real terms. This is partly due to moving production abroad, but most of it is from producing more value with fewer physical resources and a lot less coal.

That is where Mr Romer comes in. Like Mr Nordhaus, he is impressed by our capacity to make (and then take for granted) innovative progress and argues that there is room for much more. Consider the compact, self-repairing, mobile, renewable-resource-powered chemical reactor that we call a “cow”. Courtesy of evolution, it is vastly more impressive than human-designed facilities. This elegance, suggests Mr Romer, tells us that there is plenty of room for us to do things better.

That is also true for the institutions that produce new ideas. While Mr Romer’s prizewinning work makes particular assumptions about who pays for new ideas and who benefits when they are produced, his informal writing and policy work highlights that these things cannot be taken for granted. He wrote not long ago that “only a failure of imagination” allows us to conclude that in today’s universities, intellectual property rules and scientific norms we have perfected the way we develop and diffuse new ideas.

We should constantly be searching for better ways to do things — as Mr Romer himself did with a successful foray into digital learning, ahead of the trend, and later with his bold and controversial push for “ charter cities”, in which a country with weak institutions might outsource the governance of a greenfield city site to Canada or Norway.

In particular, we should do more to encourage innovation that attacks the climate change problem. It is conceivable that we will manage to solve the problem anyway, courtesy of dramatic progress in the cost of solar power and battery storage. If so, that is luck that we have done precious little to earn. The most obvious first step (among several worth trying) is a stiff tax on carbon dioxide emissions. That would encourage everything from clean energy to putting on a thermal vest in the cold.

There is still every reason to believe that material progress is consistent with the survival of the ecosystem. Human ingenuity is astonishing. It would be nice if policymakers tried harder to direct it toward low-carbon energy.

If policymakers matched climate change talk with action, my guess — just a guess — is that we would find that the transition to a vastly cleaner economy is smooth. I realise that my friends mean well when they demand that economic growth must stop, and soon. But I am pretty sure that they are wrong — and that their pessimism merely convinces others to do nothing.

Written for and first published in the Financial Times on 12 October 2018.

My book “Fifty Things That Made the Modern Economy” (UK) / “Fifty Inventions That Shaped The Modern Economy” (US) is out now in paperback, and coincidentally the final, triumphant chapter is all about Bill Nordhaus’s work on the cost of light. Feel free to order online or through your local bookshop.

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Exploitative algorithms are using tricks as old as haggling at the bazaar

A few years ago I received a text message from my mobile phone network informing me of the good news that I was already on the cheapest possible tariff. They should have let sleeping dogs lie: I called their bluff, and within minutes they offered a cheaper one. Another time, I quit only to receive phone calls pleading for forgiveness and offering me an iPad if only I’d come back. It was like being in an emotionally abusive relationship with Santa Claus.

Nobody wants to feel that they are being taken for a fool. It is hardly surprising, then, that the UK business secretary Greg Clark has made some noise about his plans to scrutinise how firms may use big data or other digital tools to produce “abusive outcomes” such as exploiting loyal customers.

Another review is under way courtesy of the UK’s Civil Aviation Authority into how budget airlines “use algorithms” to seat families separately if they don’t pay extra for assigned seats. You and I don’t want to be on the sharp end of an exploitative algorithm, do we?

There seems no harm in having a good hard think about how well competition works in a data-rich age. Customers have new tools at their disposal to find the best deals; companies, in response, can pick off lucrative customers like stray wildebeest, offering hidden discounts to some, even targeting adverts and offers by sex or race.

Yet the striking thing about the concerns of consumer champions is that for all the digital window-dressing, this struggle is as old as haggling at the bazaar.

When companies take time and trouble to make their wares less attractive, we call this “product sabotage”. Printers may come in a high-cost professional version and a lower-cost home version with a chip to slow it down. “Value” supermarket pasta or rice is packaged to look like famine relief. And airlines may split families who do not pay extra — a practice that hardly requires a mysterious “algorithm”.

In each case, the company is seeking a premium from premium customers while grasping for volume by offering low prices to the masses. In order to achieve both goals, it may need to damage the mass-market offering. If the cheap product is insufficiently dreadful, the risk is that even wealthy customers may buy it.

The economist Jules-Emile Dupuit spotted an example in 19th-century France. “It is not because of the few thousand francs which would have to be spent to put a roof over the third-class carriage . . . that some company or other has open carriages,” he wrote of the railways. “What the company is trying to do is prevent the passengers who can pay the second-class fee from travelling third class; it hits the poor, not because it wants to hurt them, but to frighten the rich.”

The problem, then, is more than 150 years old. And it is not clear that the situation would be improved by insisting on equal treatment for all passengers. The railway company (or airline) might then offer only the first-class service at the first-class prices, perhaps even higher.

This is aggravating, no doubt. But the root of the problem is that the company has some market power, which allows it to squeeze customers and raise prices. The product sabotage is the symptom — and not necessarily a harmful one.

What of the idea that loyal customers are exploited rather than rewarded? That was my experience with the phone companies, but the infuriating practice is, again, not new. Every time I shave I can praise King Camp Gillette for inventing the disposable razor blade, and curse him for embracing the pricing model of cheap razor, expensive blades. What is that, if not a penalty for loyalty?

In truth the word “loyalty” leads us astray here. Any profit-seeking company will want to exploit customers who never walk away, so considerable effort is devoted both to identifying those customers and to inducing them not to look elsewhere.

“Loyalty cards”, whether an airline gold card or a rubber-stamped bit of cardboard from your local espresso bar, are designed to persuade high-volume, high-value customers both to identify themselves and to stick around. The result is a less competitive market in which everyone pays a higher price.

It is possible that in the initial scramble to sign up new customers, companies reward them so lavishly as to compensate them in advance for years or decades of locked-in high prices. But it’s not likely.

Who loses out from such behaviour? Understandably, we worry about “vulnerable” consumers. But for the companies, their target is clear: they will try to price-gouge the customers most likely to pay. Often, those customers will be rich and busy, while the ones who enjoy the bargains will be poorer and have more time to shop around. That is no calamity. When the victim is a lonely octogenarian in the early stages of dementia, the cat-and-mouse game between producer and consumer takes on a cruel and tragic edge.

Regulators are right to be vigilant. Still — the very fact that such tricks are as old as commerce itself suggest that we will not succeed in stamping them out. Buyer, beware.

Written for and first published in the Financial Times on 5 October 2018.

My book “Fifty Things That Made the Modern Economy” (UK) / “Fifty Inventions That Shaped The Modern Economy” (US) is out now in paperback – feel free to order online or through your local bookshop.

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Curiosity can save us when lies come dressed as numbers

Judging by all the nonsense that people repeat these days, most of us could do with a refresher course in basic number skills. Whether we are confusing millions with billions, the debt with the deficit, or — as in a recent BBC online article — fretting that a currency has lost 180 per cent of its value, we could do better.

One chronic sign of trouble is the lazy cliché about “damned lies and statistics”, which has been used as an excuse for complacent cynicism ever since Mark Twain misattributed it to Benjamin Disraeli. This may be because we do not trust our own statistical intuition. We are more confident in our linguistic skills: the fact that we are surrounded by lies, half-truths and political braggadocio does not make us abandon words. Yet too many of us feel we do not have the skills to tease apart truth and lies if they come to us dressed up in numbers.

That’s a shame. Accurate numbers let us answer some of the most basic questions about any phenomenon. Is it important? Is it getting better, or worse?

It is impossible to make sense of a complex world without some statistical tools in your cognitive toolbox. As Hetan Shah of the Royal Statistical Society is fond of pointing out, it may be possible to lie with statistics, but it is easier to lie without them.

Perhaps we could start by improving the way statistics and data-handling skills are taught in schools. This is easy to say from the sidelines, but not so easy to deliver.

So what might we do? Some people complain that schools focus too much on “engineering maths” — the calculus required for physics and engineering — and not enough on the statistical skills needed for epidemiology, economics, and social science, or for that matter the data-science skills that are in widespread demand.

Perhaps that is true. Yet Bobby Seagull (maths teacher, researcher and FT columnist) tells me that the situation is changing in the UK, with GCSEs expanding with statistical topics and the discipline becoming a compulsory element of A-level maths. That sounds like good news.

Still, there are only so many hours in a school week, so any honest demand to teach more statistics is also implicitly a demand to teach less of something else. For this reason some reformers focus on quality rather than simply a shift in what the curriculum requires.

Sharon Witherspoon, head of policy at the Academy for Social Sciences, argues that we need more and better-trained maths teachers, along with a greater emphasis on using number and data skills in other courses, from biology to geography. Such changes, of course, require serious political will, money, and a change in the incentives within the school system.

Will Moy, director of the fact-checking organisation Full Fact — and ever the pragmatist — told me that universities might be an easier place to start. He suggests a three-day statistical boot camp as a compulsory requirement for graduation. With almost half of young people in the UK going to university, an improvement in the skill and confidence with which undergraduates handle numbers would be no small achievement.

My own experience is that technical skills are only part of the story. Some of the basic attributes required to handle numbers are virtues such as patience and curiosity.

For example, consider the trait psychologists call “cognitive reflection”. A classic test of this ability is the question: “If it takes five machines five minutes to make five widgets, how long would it take 100 machines to make 100 widgets?”

Almost certainly, an answer popped into your head: 100 minutes. But then you probably paused for a moment and worked out the correct answer.

That moment of reflection is often missing when we deal with politically fraught claims in the media, or in our Facebook feeds. If the claim slots into our preconceptions about the world, we accept it and perhaps repeat it. If it challenges us, we reject it instinctively.

We need to train ourselves to stop and think. That isn’t easy, because neither the dark art of political rhetoric nor the context-stripping of social media is conducive to a reflective state of mind.

A second virtue is that of curiosity, which we might think of as a hunger to know more, coupled with a tolerance for being surprised. Simple questions such as: “I wonder how they know that?”; “Is that better or worse than I might have expected?”; “What exactly do they mean?” often unlock far more insight than narrow technical queries.

Of course, there is more to statistics than emotional maturity. Just as everyone benefits from learning to read, we all have something to gain from learning certain basic technical skills in handling numbers. The world would be in a better place if many senior decision makers had something rather more advanced than that.

Yet for all the concern about how we are teaching our children to deal with numbers, perhaps my own teachers weren’t so wide of the mark with their advice. They always used to tell me: stop and think, check your answer, and explain your reasoning. It was wise counsel. Some lessons stand the test of time.

Written for and first published in the Financial Times on 28 September 2018.

My book “Fifty Things That Made the Modern Economy” (UK) / “Fifty Inventions That Shaped The Modern Economy” (US) is out now in paperback – feel free to order online or through your local bookshop.

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Nominations for a silly economics prize with a deeper purpose

While the Nobel Prizes are no doubt a splendid thing, the Ig Nobels are far more fun. Ig Nobel prizes have been awarded for discovering that every language has a word for “huh?” (Literature, 2015) and for comparing the discomfort of looking at an ugly painting with the discomfort of being shot with a laser beam (Art, 2014), and of course for studying farts (Biology, 2004; Literature, 1998).

They do not seem very important, and indeed Robert May, then the UK’s Chief Scientific Advisor, requested in the 1990s that Ig Nobels not be awarded to British scientists for fear of damaging their reputations.

That seems a little po-faced. It may be better for researchers to laugh at themselves than to let politicians do it for them. The late William Proxmire, a former US senator, relished his “Golden Fleece” awards, a destructive and sometimes inaccurate mockery of research conducted at taxpayers’ expense.

Proxmire did not seem to care that silly research sometimes has serious benefits. The Ig Nobels are designed to “make you laugh, then make you think”, and they have a surprising record of turning up gems. Andre Geim won an Ig Nobel for levitating a live frog, en route to his Nobel Prize in physics for his work on graphene. David Dunning and Justin Kruger received an Ig Nobel prize in psychology for discovering that incompetent people are too incompetent to know they are incompetent. It seemed funny at the time; nobody is laughing these days.

I have been disappointed, however, with the quality of Ig Nobel prizes in economics and business, which have recognised rogue trader Nick Leeson, Lloyd’s of London, Enron, WorldCom, and the entire banking system of Iceland. This is a shame, because if silly-seeming research in physics and biology might lead somewhere intriguing, why not recognise silly research in economics and business?

I have a few candidates in mind. I’d like to nominate Benjamin Scheibehenne, Peter Todd and Rainer Greifeneder for discovering that whether you offer shoppers a choice between a few types of jam, or lots of types of jam, it doesn’t make much difference to whether they buy jam. This finding might seem unremarkable, but the received wisdom in behavioural economics had been that consumers simply stop buying if offered too many choices. Prof Scheibehenne’s team examined 50 studies and concluded that on average, offering more choices made no difference either way.

I also nominate economists Hunt Allcott and Matthew Gentzkow, for studying fake news by inventing fake fake news. They conducted their study immediately after the 2016 presidential election, in an effort to measure how much fake news was around, and how many people had seen it. The use of “fake” fake news was to test people’s recall of “real” fake news stories: some people will say they remember seeing things that they did not, and so Profs Allcott and Gentzkow put fake fake news alongside real fake news and real real news in order to understand what was really going on. Clear?

Perhaps the Ig Nobel committee is concerned that the pair are trespassing on the domain of recent winner Gordon Pennycook (a psychologist) with the economist David Rand. Profs Pennycook and Rand are studying “bullshit receptivity”, a tendency to read profound meanings into randomly generated sentences such as “we are in the midst of a high-frequency blossoming of interconnectedness that will give us access to the quantum soup itself” and “hidden meaning transforms unparalleled abstract beauty”. Highly bullshit-receptive experimental subjects were more likely to believe in fake news headlines, even when part of the study was conducted on April 1.

If all this seems rather obvious, note that there’s an important difference between the kinds of things people believe because they don’t stop to think (for instance, that Pope Francis endorsed US president Donald Trump), and the kinds of things people believe because their political identities depend on it (for instance, that Mr Trump is “draining the swamp”). Anyone trying to restore sanity to political debate needs to understand the distinction. If you think this isn’t an important issue, I have a story about EU cabbage regulations to tell you.

Finally, I nominate Sendhil Mullainathan and Eldar Shafir, for discovering that being “hangry” is a major impediment to economic development. In their book, Scarcity (UK) (US), Profs Mullainathan (an economist) and Shafir (a psychologist) argue that there is a common response to being short of almost anything: money, time, and even food. Scarcity absorbs our mental energies and makes us act in ways that can be deft in the short term but self-defeating over the long haul.

The Ig Nobels glory in the opposite: a surplus of weird ideas that are foolish in the short term but may pay dividends in the end. And if they do not? There’s no harm in being silly.

Written for and first published in the Financial Times on 21 September 2018.

My book “Fifty Things That Made the Modern Economy” (UK) / “Fifty Inventions That Shaped The Modern Economy” (US) is out now in paperback – feel free to order online or through your local bookshop.

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How to burst your political filter bubble

There are certain resolutions that are easily made and easily broken: lose weight; drink less; be mindful. They all seem a cinch compared with the challenge of our age: think less tribally. Try meeting people who disagree with you. Try to understand both sides of the argument. Most of us instinctively feel that this is desirable. Each of us has something to learn from others. And even if we do not, even if the other side of the argument is utterly wrong, how are we to persuade them if we are not on speaking terms? And yet bursting our own bubbles is infuriatingly hard.

Here’s one obvious approach: use social media to follow people with opposing opinions. If you see what they are saying, you can ponder their arguments and try to see the world from their point of view — at the very least, you can understand how best to convert them.

To investigate this idea, a group of social scientists (Christopher Bail, Lisa Argyle and others) recently recruited several hundred people with Republican or Democrat leanings, and gave them a small financial incentive to follow a Twitter bot for a month that would expose them to the opposing point of view. Republicans followed a liberal bot that would retweet 24 messages from elected Democrats, left-leaning media outlets and non-profit groups; Democrats followed a conservative bot.

But the Twitter bot’s efforts at fostering understanding backfired. Being exposed to opposing views on Twitter pushed people away from the centre ground. “Republicans who followed a liberal Twitter bot became substantially more conservative post treatment,” write the researchers. Democrats moved further left — although their moves were not as large nor as statistically reliable.

This is a disappointing finding, but not entirely surprising. Some earlier research has found evidence of backfire effects in other contexts — perhaps because we find contrary views or inconvenient facts discomfiting and may immediately recall or invent reasons to demean or dismiss them. And Twitter is hardly the venue for a deep meeting of minds.

Still, the conclusion is clear enough: if our aim is to find common ground or at least to foster mutual understanding, simply being exposed to the comments of our political opponents will not do it. It leads to aggravation, not understanding, and it is as counterproductive as it sometimes seems.

What, then? Cass Sunstein, an academic who has served in the administrations of Presidents Ronald Reagan and Barack Obama, makes an intriguing suggestion in his new book The Cost-Benefit Revolution (US) (UK). He points out that we can protect ourselves from certain cognitive errors by translating arguments into an unfamiliar form — perhaps a second language, or perhaps a mathematical abstraction. When you see the argument thus rephrased, you are forced to stop and think. Your response is less emotional.

I am persuaded that this exercise would slow me down and force me to think more with my brain and less with my gut. But it would not be easy to force myself to apply a cost-benefit framework as I pondered the appeal of a hard Brexit, say, the benefits of GM food or the winners and losers from restrictions on abortion. Alas, I doubt the prescription has broad appeal.

So we are back to trying to appreciate the other side’s point of view by talking to them, and that probably means talking to them respectfully, attentively and at some length. To understand what is going on in the head of someone who sees the world very differently from me — say, an evangelical Christian, a diehard Trump fan, a Corbynista or a hard-Brexiter — I would need to spend proper, quality time with them. And they would need to spend proper, quality time with me.

Unless one of us had the patience of a saint (and it would not be me), that would require some other social glue. If we could first spend time together as friends, neighbours, colleagues or teammates, we might later have a chance to talk in depth about politics and values. Starting with politics is likely to lead nowhere.

Occasionally — rarely enough that each instance is memorable — I have sat and respectfully disagreed with someone for hours: listening to them, understanding their viewpoint, presenting my own ideas and searching for common ground. Without exception, these heart-to-hearts have been preceded by months of friendship built on some other shared interest or experience. You can have a civil debate with a political enemy, but it really helps if the political enemy is a friend in real life.

It is sobering, then, to ponder the enthusiasm with which various activists on both sides are keen to make everything political. I do not object to anyone, on any side, who believes that there are deep political issues more important than entertainment, sport or music.

But the cumulative effect of the polarisation of everything is not healthy. Paradoxically, a vibrant, thoughtful politics needs some parts of life that are free of politics, free of the idea of them-and-us. Otherwise we stop listening to each other. We often stop thinking entirely.

 

Written for and first published in the Financial Times on 14 September 2018.

My book “Fifty Things That Made the Modern Economy” (UK) / “Fifty Inventions That Shaped The Modern Economy” (US) is out now in paperback – feel free to order online or through your local bookshop.

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Counting the costs of Brexit uncertainty

I recently had a couple of conversations with bright teenagers. One wanted to discuss philosophy — Gödel, Turing, and Wittgenstein. Not a problem. The other asked me to explain Brexit. Not a chance. The Brexit saga is madder than a box of hallucinating frogs.

Most likely, Britain will push its way pigheadedly through the brambles of the Brexit negotiations. The country will emerge scratched and bruised but largely intact, proudly declaring that the ordeal was a brilliant shortcut, then fumbling for a map and compass. But, while that is the most plausible result, the risk of a total train wreck remains. More worryingly, it seems undiminished more than two years after the referendum.

A recent report from the academics at The UK in a Changing Europe think-tank explores the likely impact of a bitter, finger-pointing failure to negotiate an agreement under the Article 50 withdrawal process. This is not the only way in which agreement could fail to be reached, but it is the starkest.

In a truly acrimonious failure to reach a deal, British food would not pass EU import controls. Aircraft would be grounded and border crossings jammed. This would clearly be harmful to the EU and disastrous for the UK, so we can expect good sense to prevail on all sides. And yet, senior ministers in Denmark and Latvia have judged “no deal” to be a 50-50 possibility. It would be unwise, then, to dismiss the contingency as remote.

The UK’s own trade minister, Liam Fox, says the chance of no deal is even higher, 60-40. Why he wishes to emphasise the risk of a disruptive outcome is unclear; perhaps Mr Fox believes it will serve his political ambitions. It will not serve the exporters it is his job to represent. The trouble is that as businesses and individuals quite reasonably plan for trouble, they will damage the British economy. After an initially bullish response to the referendum result, UK consumers are now borrowing and spending less, with obvious consequences for high-street retailers.

Consumer caution can swiftly be reversed. But the business response to uncertainty may be less easy to unpick. This week, the Federation of German Industries (the BDI), warned about emergency plans being implemented if there is no agreement by mid-November. For a taste of what these emergency plans might entail, ponder Honda’s warning to MPs last year that if the post-Brexit customs process took 15 minutes per truck at Dover, the annual cost of that would be £850,000.

For a company of Honda’s scale, less than a million pounds a year doesn’t sound too bad — until we consider two things. First, the Freight Transportation Association’s estimate that the briefest delay at crowded Dover — just two minutes — would quickly spiral into a multi-mile tailback. At a busy port, short delays quickly become long and unpredictable ones.

Second, the World Bank’s Doing Business database reports that the typical time to clear border checks in high-income countries is not two minutes, nor even 15 minutes, but 12 hours and 40 minutes. This, remember, is not a train-crash scenario but business as usual for most of the rich world. The World Bank adds, helpfully: “It is entirely possible that the border compliance time and cost could be negligible or zero, as in the case of trade between members of the European Union.”

If things go badly, then, companies that have built supply chains on the assumption of frictionless borders will find those chains jammed hopelessly. Or we may decide in the end to remain in the customs union. Businesses simply do not know — and that uncertainty is already damaging.

To see why, simply imagine that you are organising a wedding for — say — March 29 2019. Taking a cue from Mr Fox, your chosen caterer boldly declares that it may be unable to supply the food — the chance of that, in fact, is 60 per cent. Let’s say you love this caterer’s food, prices, and service. Even so — how long before you cancel the contract and hire someone else? Not long. And it will do no good for the caterer to confirm in February that all will be well after all. That is far too late for you.

Businesses trying to trade between the UK and the rest of the EU find themselves in a similar situation. At what point do they decide it is too risky to assume that all will be well? According to estimates published by three Cambridge university economists — Meredith Crowley, Oliver Exton and Lu Han — some companies reached that conclusion two years ago. Several thousand British companies have ceased some exports to the EU, and several thousand more were discouraged from launching a line of exports, simply because the Brexit vote threw the future trade regime into doubt. Unpredictable trade policy is a kind of trade barrier in itself.

Economies can cope with all kinds of shocks, and have sometimes bounced back from hurricanes or earthquakes with astonishing strength and resilience. An utter fiasco in the Brexit negotiations will be survivable, in time. But even if the fiasco never materialises, the prospect is causing damage today. Nobody thought they were voting for an earthquake.

Written for and first published in the Financial Times on 7 September 2018.

My book “Fifty Things That Made the Modern Economy” (UK) / “Fifty Inventions That Shaped The Modern Economy” (US) is out now in paperback – feel free to order online or through your local bookshop.

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Undercover Economist

Did your holiday make you more creative?

A summer of browsing through art galleries continues. After the old masters in Venice in July, I stopped past some humble venues in the Lake District to pay my respects to John Ruskin, Kurt Schwitters and even Beatrix Potter.

The conventional wisdom is that gazing at art improves the soul: it might make me a better person, or at least a better draftsman. It seems absurd to suggest that it will make me a better economist.

Yet perhaps it will. A few years ago, a team of researchers (Jaclyn Gurwin and colleagues) arranged for 18 randomly chosen first-year medical students to take a short course in art appreciation at the Philadelphia Museum of Art. During six 90-minute sessions across a three-month period, the students learnt to study, describe and criticise works of visual art. They were tested against a control group of 18 fellow students before and after the art course.

Each student was given ophthalmologic tasks — observing, describing and diagnosing images of diseases of the eye. The students trained in art showed substantial improvement in these tasks; the control group had actually declined. In this small but rigorous trial, medical trainees became better eye doctors if they spent time studying art. If we want to get better at what we do, then, perhaps we would benefit from taking a break and doing something different. It’s a kind of cross-training for the mind.

The journalists David Epstein and Malcolm Gladwell dub this idea the “Temin Effect”, after the brilliant biologist Howard Temin, a Nobel laureate with interests ranging from social activism to philosophy and literature. It might seem a stretch, and I certainly would not place too much weight on a study of 36 participants. But that study is by no means the only evidence that variety feeds creativity.

Exhibit A: David Bowie. In the build-up to his trilogy of Berlin-based albums, Bowie had collaborated with John Lennon, starred in the film The Man Who Fell to Earth — and worked inconclusively on its soundtrack — lived in Geneva, Los Angeles and Philadelphia, and drafted an autobiography. In Berlin he alternated his own albums with producing and writing for Iggy Pop.

Exhibit B: Michael Crichton. Originally a doctor, in the 1970s and 1980s he wrote novels and directed a mid-budget thriller, Westworld, but also wrote non-fiction books about art, medicine and computer programming. The fruits of all this variety? In 1995 Crichton had achieved the scarcely believable feat of creating the world’s best-selling book (The Lost World), television show (ER) and film (Congo); in 1996 he did it again (Airframe, ER and Twister). I haven’t even mentioned Jurassic Park.

If those examples seem a little middlebrow, Exhibit C is Charles Darwin. He rotated between projects over the course of decades. His article “Biographical Sketch of an Infant”, inspired by his baby son, was published in time for William’s 38th birthday. On the Origin of Species was legendarily long in the making, in part because Darwin simultaneously spent nearly 20 years working on creepers and insectivorous plants. His book on earthworms took 44 years to come to fruition. All these projects were completed in parallel.

One can list examples interminably, but are they representative? Several psychologists have studied the working habits of highly creative artists and scientists, using a variety of methods and selection criteria. Perhaps the most respected is Bernice Eiduson’s life-long study of 40 promising scientists, beginning in 1958. After Eiduson’s death, analysis of her subjects (including the chemist Linus Pauling and theoretical physicist Richard Feynman) concluded that those who enjoyed the longest and most productive careers tended to work on several problems at once. They frequently shifted focus in their research. It helps to look at something fresh.

Another study of high-performing artists and scientists, by Mihaly Csikszentmihalyi, found the same tendency to slow-motion multitasking. Slowly switching from one project to another and back again seems to be standard practice for people with an enviable record of originality and creativity.

There are several reasons why this might be so. Different fields cross-fertilise each other. We process ideas unconsciously, once we’ve stopped thinking about them. And sometimes we simply need a rest. In the modern world, this may manifest in twitchy task-switching to another browser window. That is unhelpful. But taking a walk, visiting a gallery, picking up a book or planning a different project — this is often the kind of change we need. Darwin soothed himself by walking circuits of his garden, and by studying those earthworms.

All this suggests that the little study at the Philadelphia Museum of Art may be on to something real. When we take a break from our normal jobs and do something different, we may be being more productive than we realise. Of course, a holiday is worth taking for its own sake and one should not visit an art gallery purely as a means to some other end. But new experiences are useful as well as fun. Why not try something fresh in September?

 

If this topic grabs your interest, there’s much more in my book “Messy: How To Be Creative and Resilient in a Tidy-Minded World” which is now available in paperback both in the US and the UK – or through your local bookshop.

Written for and first published in the Financial Times on 24 August 2018.

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Undercover Economist

Is Twitter more unequal than life, sex or happiness?

Bill Gates has more money than I do. JK Rowling sells more books. Katy Perry has more Twitter followers. Usain Bolt is faster. And I can only presume that Buddhist monk Matthieu Ricard, reportedly “the happiest man alive”, is more cheerful.

The world is an unequal place. Exactly how unequal, though, depends on what we measure and how we measure it.

Researchers concerned about the concentration of money in the hands of a small number of people tend to focus on the income or wealth share of high earners. In the US, the income share of the top 1 per cent has soared from 11 per cent in 1980 to 20 per cent in 2016, according to the World Inequality Report 2018. But in western Europe it has merely moved from 10 per cent to 12 per cent.

The top income share highlights something important, but it misses changes elsewhere in the income distribution. If you want a single number to summarise the whole distribution, the natural choice is the Gini coefficient, which varies between zero (equality) and 100 per cent (one person has everything).

The coefficient of post-tax income in the US is nearly 40 per cent, and has been increasing for years. This rise — alongside the increase in the US top income share — has created a perception that inequality is rising everywhere and by every measure. That is not true.

Globally, the Gini coefficient of income is a shockingly high 65 per cent, but it is falling, helped by strong growth in large emerging economies. In France, the Gini coefficient of income has been broadly falling since the 1950s; it is now about 29 per cent.

In the UK, the Gini increased sharply in the 1980s, but not since; it is around 35 per cent today. And as the website Our World In Data observes, the Gini coefficient was also much higher a couple of centuries ago in the UK, perhaps 50 or even 60 per cent.

So that is the story for income inequality. But the Gini coefficient can be applied to inequality in any set of numbers you like, from the number of storks in each country to the body weights of a family of hippos. For example: authoritative data on sexual activity in the UK are available from Natsal-3, the third National Survey of Sexual Attitudes and Lifestyles. Natsal-3 reports the number of opposite-sex partners we say we’ve had in our lives, and the number of times we say we’ve had heterosexual sex in the past four weeks. (It will surprise nobody to hear that men and women make rather different claims, so I’ve averaged their responses.)

Since I know you may be curious, I have made my own calculations, based on these data. For 35-44 year olds, the Gini coefficient of recent sexual activity is 58 per cent. The Gini coefficient of lifetime opposite-sex partners is lower: 50 per cent. Both are much higher than income inequality in the UK.

Nor are these figures driven by a few outliers with thousands of partners. When it comes to the bedroom, we don’t need to consider extremes to witness considerable inequality: many perfectly ordinary people have had only one sexual partner, or none, and many perfectly ordinary people have had at least 10. Bigger variations exist in income, but only at the extremes of distribution.

Of course, while one can measure income and sex using the same statistical method, that does not mean the moral or political implications are comparable. Most of us wouldn’t mind having more money, but it is far from obvious that we all want more lovers. Who has the time?

I would be pleased if the Financial Times decided to increase my salary, but unsettled if they set up a profile for me on Ashley Madison, the marital affairs site. And while the government can redistribute money, it cannot redistribute consenting adults.

There is more to life than money and sex. What about — well, life itself? Some people die young; others endure.

Researchers have computed Gini coefficients for longevity. The economist Sam Peltzman found that inequality of life expectancy has declined enormously since the mid-19th century. The Gini coefficient was then around 50 per cent in the US, because so many people died in infancy. It is now about 10 per cent.

Across the world — according to Jeroen Smits and Christiaan Monden — longevity inequality is just 18 per cent. Looking only at those who survive to adulthood, it is 12 per cent. Recall that the Gini coefficient of income is 65 per cent globally. Since life cannot be reallocated, it is cheering to see that it is far more equally distributed than income.

I have given into temptation in comparing Gini coefficients across domains. Such comparisons can lead us astray. Yes, Perry has a thousand times as many Twitter followers as I do, but Bolt will never be a thousand times faster, nor Ricard a thousand times happier — not according to the oft-used life satisfaction scale of 0-10, anyway. Does that make Twitter more unequal than happiness? I am not sure.

There lies a statistical lesson: measuring inequality is just a step on the road to understanding it. Or so a Zen statistician might say.

 

Written for and first published in the Financial Times on 17 August 2018.

My book “Fifty Things That Made the Modern Economy” (UK) / “Fifty Inventions That Shaped The Modern Economy” (US) is out now in paperback – feel free to order online or through your local bookshop.

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Undercover Economist

How can we resist the seduction of the mobile phone?

On a recent trip to Venice I saw a striking sight. Of course, I saw many: the Ponte de Rialto at dusk, the ornate glasswork of Murano, the view over the city from the bell tower of San Giorgio Maggiore, and works by Bosch, Titian and Tintoretto. Lucky me.

But the sight that has stayed with me was plain whenever I rode a vaporetto, Venice’s waterborne answer to the London bus. All around were people pecking at screens as they played slither.io or scrolled through Instagram feeds.

A few of them, no doubt, were locals who had grown tired of gawping at their own city. But on a weekend in high summer, my guess is that most were tourists. The vaporetto provided them with a magnificent view of a unique city that is neither easy nor cheap to visit. Yet they felt compelled to look away from the vista they had paid so dearly to gaze upon.

We are hooked. Our devices can, at any moment, demand that we focus upon them by flashing, pinging or even vibrating insistently against our skin. They are constantly evolving to do so more and more effectively. As a result, phone users in developed countries now spend about two hours a day pawing at their little blue screens — a big chunk of our available leisure time.

Recently, the big tech companies, most prominently Apple, have started to trumpet new distraction-fighting features, such as tools that track your usage or remind you to stop watching YouTube videos. While welcome, these features have been halfhearted and slow to arrive.

No wonder. Technology companies, notably Facebook and Google, make money by selling your attention to advertisers. The more attention they have, the more they can sell. There is a limit to how much we can expect them to help us regain control.

So, without letting the technology companies off the hook, the main responsibility for managing our attention has to lie with us. And there is plenty we can do.

The first and simplest principle: if you want your future self to do something, make it easy; otherwise make it hard. So, switch off notifications — of course. Make sure your phone automatically reverts to a silent mode every night, muting incoming calls and messages. My phone is silent between 10pm and 7am; a more aggressive muting might be better.

Set up your phone charging station away from where you sleep (although the London Fire Brigade says don’t charge it at night at all). This is obvious advice, but I can assure you it works. Your phone becomes less distracting without you needing to exert any willpower; I predict that you will recoup the set-up time within 24 hours.

Tristan Harris, a former Google designer and founder of the Time Well Spent movement, suggests taking things further — putting only basic tools such as a calendar and a camera on your phone’s home screen. He hides icons for distracting apps altogether: if you want to use Instagram, you can type “Instagram” into the phone’s search bar. This works because while the search is quick, it requires deliberate effort.

My fellow tourists, I guess, started by taking photographs. Then their attention leaked: they wanted to post those photographs on social media, and from then they slipped unthinkingly into games or newsfeeds. Using Mr Harris’s method might have helped.

A second piece of advice is to notice your own emotional state. On vacation I sometimes found it easy to forget about my phone. The exceptions were instructive: a (small) problem arrived on email; I felt slightly anxious, wanted to send a quick response, wanted to alert the necessary people, wanted to see how they had responded, and suddenly I was checking every few minutes until I noticed my own feelings and got a grip.

Third, keep adapting, because the tech companies certainly will. A few months ago I installed an inbox blocker, a simple plug-in which deflects me from my email inbox by forcing me to click an extra button. After a while I noticed unintended consequences had set in: I had hit a mental block while working, so I would self-medicate by going to check email, where I would be fended off by the inbox blocker and end up checking social media instead. The result: just as much distraction in a less useful form. I have now uninstalled the blocker.

Finally, use social pressure. Platforms such as Facebook, Snapchat and LinkedIn turn reciprocity and fear of missing out into weapons. The most egregious is the Snapchat “snapstreak”, where you need to keep exchanging messages every 24 hours with a friend to keep the streak going. Some kids will do anything to maintain a streak — including giving out their passwords to let others message when they cannot. Adults may sneer, but only because our own phones are subtler in the way they manipulate our social anxieties.

The good news is that social pressure works both ways. Make a point of telling your partner, your friends or your colleagues that you will not look at your phone during a conversation, a meal or a meeting. Ask them to nag you when you fail — and to remind you to look at the view.

 

Written for and first published in the Financial Times on 10 August 2018.

My book “Fifty Things That Made the Modern Economy” (UK) / “Fifty Inventions That Shaped The Modern Economy” (US) is out now in paperback – feel free to order online or through your local bookshop. Yes, the iPhone is one of the inventions.

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