Monthly Archives: October 2008

David Warsh shouldn’t have to write this:

I have given a pretty good account of how Harvard professor Andrei Shleifer was found to be investing in Russia, along with his wife, deputy, and deputy’s family, in violation of his contractual obligation to provide disinterested advice… but you would never have a clue that any of this had happened from three of the most widely-read economists’ blogs, the Freakonomics site, J. Bradford Delong’s Semi-Daily Journal, or N. Gregory Mankiw’s blog. Why?  Because they are economists, and not committed to “without fear or favor” news, though they deliver plenty of interesting tidbits over the course of a week.

The point is, Warsh’s site, Economic Principals, tells you things you won’t hear elsewhere. It is highly recommended.

Elsewhere, Shanta Devarajan of the World Bank has a new blog about Africa. Recent posts discuss Paul Krugman’s ideas on economic geography and their relevance to Africa.

Also elsewhere, my wife has a blog, How To Make A Difference. Each post is a profile in words and pictures of someone who is changing the world in one way or another.

A reminder that I’m presenting a Radio 4 documentary tonight about Neuroeconomics; 9pm, Radio 4, or online. It’s being podcast somewhere too.

This morning, I had a remarkable experience: I strolled into a delicatessen and bought some delicious Stilton. What made the shopping trip unusual was that I was wearing a brain scanner while I did it.

My costume consisted of an electroencephalograph (EEG) cap, which looks like a polka-dot shower cap with wires plugged into it; a pair of wrap-around glasses with a tiny video camera attached; a clothes peg on one finger to measure my heart rate; two other finger monitors that functioned like a lie-detector; a thermometer patch on a fourth finger; and a satchel to hold a computer gathering the data.

Most of these devices, or their equivalent, can be hidden under clothes or baseball caps so that the wearer looks as if they are sporting only shades and an iPod, but in my case the boffins hadn’t bothered, and so I entered the deli looking like an extra from a 1970s episode of Doctor Who.

The remainder of this article can be read here. Please post comments below.

At the apartment block where I used to I live, I once parked in another tenant’s car bay for a brief period. The tenant called the wheel clampers and landed me with a $120 (£69) fine, despite the fact he doesn’t have a car and there were 30 spare car bays, and despite knowing that the car belonged to me. Up to that point I had had no run-ins with this person.

The tenant gained nothing from this except my bad opinion, and I was $120 worse off. Why did he not either ignore my car, or come up and knock on my door and say: “Look, I’ve got these people on the phone who will clamp your wheels unless you persuade me otherwise.” He could have had a few bottles of beer out of it. But he didn’t. So what was the rational reason behind his action?

Jeremy Cook

Dear Jeremy,

You are right to be puzzled. Clearly, this neighbour did not maximise the value of his bargaining position in the narrow situation you describe. Still, I think there is a certain logic to what happened.

Game theory is the economist’s tool of choice to analyse what happens when two or more people have to negotiate, co-operate, compete or otherwise engage with each other. The essence of game theory is that each side would expect the other side to anticipate and respond to his likely actions.

Game theory shows that there are times when irrationality (real or feigned) is a highly effective strategy. Someone who seems impervious to logic is someone who also gets his own way a lot. Consider, for example, toddlers, terrorists, bosses, dogs and the late Charles de Gaulle.

Your neighbour may have calculated that by demonstrating a willingness to punish you for no immediate personal gain, he will gain in the long term anyway. Irrational perhaps, but rationally irrational.

Questions to economist@ft.com .

Just in case people are interested, there exists a collection of my non-Dear Economist, non-Undercover Economist articles. It includes news stories, occasional freelance pieces and features for FT Magazine.

It is, of course, self-recommending. The Balance Sheet.

A few yards out, something brushes against my leg – a fish? A floating bottle? – causing a reflexive, panicky yelp. Then, as we head out towards the middle of the lake, I feel myself growing in confidence. When I duck my head below the waves, at first I can see the weeds and the water. After a while, there’s nothing down there but shafts of green light disappearing into the darkness. It’s disconcerting to look for more than an instant.I flip between sidestroke and back crawl while Fran, the stronger swimmer, sticks to a confident breaststroke. The wetsuits are a miracle, taking the water’s sting away. We arc out towards the centre of the lake, venturing gradually further from the shore, while the walking party disappears from view behind a ridge.Wordsworth once praised the view from the centre of Crummock Water, but he was in a boat, which is cheating. He was right, though. With dead-flat water all around us, cormorants swooping low over the surface ahead, and the vast bulks of Mellbreak and Grasmoor above, this is the most impossibly beautiful place.

The full article is here. I don’t want to spoil the plot, but it involves me getting wet. Pictures in today’s FT Magazine.

In March 1959, a promising young Harvard economist delivered a lecture in Boston on “The Theory and Practice of Blackmail”, drawing on the then-young branch of economics and mathematics called “game theory”. Strictly speaking, his subject wasn’t just blackmail – the threat to reveal damaging information in order to get what you want – but the broader practice of extortion or coercion.

The lecturer emphasised a central problem in coercion, which is to make the victim believe that if he or she refuses to be coerced, the threat will be carried out anyway. That is not straightforward, but it is possible. For instance, in December 1958, a “little old lady” walked into a bank, placed a glass of colourless liquid on the counter and passed a note to the teller.

“I have acid in a glass, and if you don’t give me what I want I’ll splash it on you,” said the note. It continued, “I have two men in here. I’ll throw the acid in your face and somebody will get shot. Hurry. Put all the fives, tens and twenties in this bag.”

What would you have done in the teller’s shoes? A quick-thinking teller might well have thought that it was safe to refuse, because the lady’s best option would then be to pick up the glass and walk out in search of another bank. She would have nothing to gain from hurling the acid except a longer prison sentence. Yet the teller handed over a bag full of money. It was, after all, not his. 

The rest of this column can be read here. Please post comments below.

I struggle to wake up in the morning although I sleep, on average, seven and a half hours. As I do have a flexible timetable, I arrive at work at 10am. I would like to start at 9am, but my laziness makes it impossible.

Do you have any advice?
Ruth

Dear Ruth,

Your guide here must be the Nobel laureate Thomas Schelling. Schelling’s expertise as a game theorist was honed by his experiences as a cold war strategist – he advised John F. Kennedy during the Berlin crisis.

Schelling realised that the same bargaining and bluffing techniques that worked against Nikita Khrushchev might also work in an individual’s struggle with herself, to quit smoking, diet or get out of bed in the morning. He called the idea “egonomics”.

Your predicament is a contest between two competitors, Evening Ruth and Morning Ruth. Evening Ruth has fine ideas about an early start, but her late nights impose costs on Morning Ruth, who then stays in bed.

One option is to tie Morning Ruth’s hands, just as Odysseus ordered his sailors to tie him to the mast. Evening Ruth might buy one of those motorised alarm clocks that falls off the dresser and scuttles under the bed, beeping loudly.

An alternative is to recruit a third player. The British government handed over control of interest rates to the Bank of England. Similarly, ask an early-bird friend to call every morning.

Odder still, Evening Ruth could enlist Bad Cop Ruth to punish Morning Ruth for lie-ins by, say, denying her(self) television privileges. Bizarre as it may seem to turn one person’s decision into a three-way inner struggle, Schelling avers that this technique works.

One final point. Your letter was evidently composed by Evening Ruth. Are you sure that Morning Ruth’s preferences are so mistaken?

Questions to economist@ft.com

I wrote here that I was fed up of hearing the irrelevant statistic that “A portfolio belonging to an investor who missed the 10 best days over several decades across all of those markets would end up, on average, with about half the balance of someone who sat tight throughout.”

I wanted to know how much better off you’d be if you managed to miss the WORST ten days. Javier Estrada kindly writes:

Dear Tim,
I wrote the ‘Black Swans’ paper cited in the NY Times. And I agree with your point above: “I could equally make the opposite case by observing how much money you would save by being out of the market on the worst days. I mean, there was the 1987 crash – about 25 per cent. There have been several days of losses in excess of 5 per cent in the past few weeks. Just imagine how much better off you’d been if you had missed the ten worst days of the market…”
That is precisely what I show in my paper. If you take a look at it, across the 15 markets I consider, not only do I establish that missing the best 10 days would have reduced the return by 50.8% (relative to a passive strategy) BUT ALSO that avoiding the worst 10 days would have increased the return by 150.4% (again relative to a passive strategy).
My point in this comment is that the argument is the same in both cases: A negligible proportion of days (black swans, outliers, however you want to call them) have a massive impact on long-term performance.
So it doesn’t matter whether you make the argument in terms of winning or losing, the point is that investors are very unlikely to pick the right days to be in and out of the market; hence, market timing is a goose chase.
Best,
Javier

Quite. Thanks, Javier! Shame the New York Times didn’t report that part of his work.

The Undercover Economist: a guide

Publishing schedule: Excerpts from "The Undercover Economist" and "Dear Economist", Tim's weekly columns for the FT Magazine, are published on this blog on Saturday mornings.
More about Tim: Tim also writes editorials for the FT, presents Radio 4's More or Less and is the author of "The Undercover Economist" and "The Logic of Life".
Comment: To comment, please register with FT.com, which you can do for free here. Please also read our comments policy here.
Contact: Tim's contact address is: economist@ft.com
Time: UK time is shown on posts.
Follow: A link to the blog's RSS feeds is at the top of the page.
Follow on Twitter
FT blogs: See the full range of the FT's blogs here.