Monthly Archives: August 2009

It will soon be a year since Lehman Brothers filed for bankruptcy. And two years since the queues began to form outside branches of Northern Rock. The Financial Times felt obliged to pen a defence of markets, before soliciting views on the future of capitalism.

Now that we are no longer staring over the precipice, wasn’t this all just a little excitable? Perhaps not. New research suggests that the crisis may shape the psyche of a generation, even if the crisis now passes quickly.

The evidence comes from economists, Paola Giuliano of UCLA Anderson School of Management and Antonio Spilimbergo of the International Monetary Fund. Giuliano and Spilimbergo rely on answers to the General Social Survey, which has been conducted in the US almost every year since 1972. Because each survey participant has an identified home region, Giuliano and Spilimbergo can compare survey answers with the economic performance of the region in question. (The regions are large: the US is divided into nine.) Regional economic performance can be choppy, so the researchers looked for outliers: when regional growth fell into the bottom 5 per cent of all regions and all years in the sample, the researchers counted this as a severe regional recession. This turned out to be a year in which the regional economy shrank by 3.8 per cent or more.

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

I read that supermarkets are abandoning the 99p price point in favour of a “round pound” as this makes the products appear cheaper and reflects a more honest business practice.
I wonder if pricing psychology played any part in this decision – or is it just a cynical cash grab? After all, if they make an extra penny on every product they sell this year, it will mean tens of millions of pounds in extra profits.
S.C.

Dear S.C.,

This particular pricing decision involves three very different sets of costs and benefits, none of which the article you sent me sets out clearly.

The first is to do with the physical task of giving change. This is time-consuming for staff and shopper alike. However, because it requires that the transaction be registered, it also makes it harder for staff to divert money from the till into their own pockets.

The second is psychological. Do “round pound” prices or those ending in 99p seem cheaper? The article cites the same “expert” supporting both views.

The third is simple price-sensitivity. In classic economic theory, when the price goes up, revenues per item rise but sales fall. This is a straightforward trade-off and it is up to individual companies to find the sweet spot.

But your own theory is almost as confused. You seem to think supermarkets have offered customers a penny discount because they were run by kind people. This season the kind people are no longer in charge – and prices have risen.

I would dismiss your thesis out of hand if … I had a better one myself. Our discussion suggests several reasons for retailers using 99p endings, and several reasons for them using round numbers. It is not at all clear, though, what has changed. If you want my guess: some marketing bright spark tried “round pound” pricing and was surprised to find that it worked.

Questions to economist@ft.com

More More or Less this week: Radio 4 this Friday at 1.30pm BST and Sunday at 8pm BST. You can also listen online, subscribe to a podcast, and read more at the More or Less website here.

This program: lies, damned lies and statistics on rape, the value of a degree, the Ashes, CCTV and much more…

Imagine that your daily earnings were less than the price of this newspaper. Would you consider buying private education and private healthcare?

Before you make up your mind, here are a few considerations: government healthcare and primary education are free; the private-sector doctors are ignorant quacks and the teachers are poorly qualified; the private schools are cramped and often illegal. It doesn’t sound like a tough decision. Yet millions of very poor people around the world are taking the private-sector option. And, when you look a little closer at the choice, it’s not so hard to see why.

Take the doctors of Delhi, who were studied carefully by two World Bank researchers, Jishnu Das and Jeffrey Hammer. These doctors are busy people – the average household visits a doctor every two weeks, and the poor are particularly likely to visit. And, surprisingly, three-quarters of those visits are to private practitioners – despite the fact that public-sector doctors are better qualified. Why?

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

My husband and I are following a tight budget, whereby he is using an Excel spreadsheet to plan our gas usage, spending of store card loyalty points, and so on. (I name just two of the 12 columns.) He has also plotted our petrol use on a graph. However, I became somewhat concerned when I lost a glove and its value was inputted into the “deficit” column – aptly titled column 13 – of the spreadsheet. I challenged this, as the glove was singular and therefore half the cost. It was also actually a gift – or two gifts. Are we down £15 (the approximate price of the pair of gloves), down £7.50, up £7.50, or quids in? This has become a sensitive issue in our marriage.
Mrs, soon to be Miss

Dear soon-to-be-Miss,

That the gloves were a gift is no longer important: the question is whether you are worse off for having lost them. And you are.

Nor are you worse off by a mere half-pair of gloves. Your gloves are, in the jargon, perfect or near-perfect complements. This means that the odd glove is worth little, unless you are holding down a career as a Michael Jackson impersonator. Just as important, the missing glove will be difficult to replace. Your husband is therefore quite right to claim that you have, in effect, lost the full pair of gloves.

But your husband’s competence ends there. His “deficit” column makes no sense in a spreadsheet designed to track expenditure. If you buy a replacement pair of gloves (or a single glove – good luck with that) then that is the moment to make a note in your spreadsheet, not before. You may not feel the need to replace them; it is August, after all.

Let’s be honest, though. This isn’t about the gloves, is it? It’s about your husband’s infuriating attempt to control you through a spreadsheet. Tell him either to put it away, or to add column 14: divorce expenses.

Questions to economist@ft.com

More More or Less this week: Radio 4 this Friday at 1.30pm BST and Sunday at 8pm BST. You can also listen online, subscribe to a podcast, and read more at the More or Less website here.

This program: the Royal Statistical Society queries the government’s statistics on swine flu; we enlist a dynamic programming expert to try to win the Ashes for England (sorry, non-English readers), we ask whether A-Level standards are rising, falling – or whether the question even makes sense. And we interview Terri Duhon, one of the whiz-kids behind credit default swaps.

A brief history of innovation: In the beginning, there were lone inventors who changed the world. John Harrison was one of the most prominent – the clock-maker became famous and (eventually) rich in the 18th century by building a clock so accurate and so resilient in the face of changing temperatures and constant rocking that it could be taken on board a ship and used to calculate the ship’s longitude. In doing so, Harrison pitted himself against the might of the Royal Observatory, which had been established in 1675 by King Charles II in order to solve the longitude problem with an astronomical method. The loner got there first.

As science and technology progressed, innovation became more and more industrialised. Thomas Edison set up perhaps the world’s first industrial research laboratory at Menlo Park, New Jersey, in 1876. Edison set the tone for the 20th century, with expensive research projects carried out on a colossal scale. Among the most famous were government efforts such as the Manhattan Project, to create the first atomic bomb, and the Apollo moon landings.

And then, towards the end of the last century, the tide seemed to turn in favour of the innovation minnows once again. Companies such as Microsoft and Google were set up in spare rooms and garages. Large companies seemed to be abandoning in-house research and buying start-ups. Powerful computers became cheap enough for most pockets.

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

I am assisting a friend who is contesting an Indian election as an independent candidate. We would like to raise campaign funds by getting common people to chip in. One of the problems I foresee is people arriving at a contribution website or collection booth and then not knowing how much to contribute. We could suggest predefined contribution amounts, but we wouldn’t like to see large contributions lost because our suggestions are too small. Neither do we want to turn away micro-contributions from large numbers of people. How should we proceed?
Regards, Gaurav Roy

Dear Gaurav,

Rachel Croson, an economist, and Jen Shang, a psychologist, have been asking themselves a similar question. Croson and Shang teamed up with fundraisers at two American public radio stations to stage a couple of experiments. In each experiment, when listeners called in to donate, the fundraiser casually mentioned a previous donation.

In the first experiment, the donation was either said to be $75, a typical donation, or $300. Callers who were told about the $300 donation tended to give more – more than 10 per cent more, on average. In the second experiment, the donation was said to be either $600 or $1,000. Here, the $1,000 hint raised less money than the $600, perhaps because the amounts were too large to seem relevant.

I have three suggestions. First, make your suggested contributions optimistic but realistic. Second, offer a spread of options to catch different types of donor. Third, experiment if you can – perhaps you can program your website to make different suggestions and see which combination works best. An election is not a radio station, and India is not the US, so this is an area where a little extra research may tell you a great deal.

Questions to economist@ft.com

Maligned and misunderstood, statisticians have at last found a spokesman: the Chinese author of a poem celebrating a life swimming in data.

“Why is it that statistics/Put a calm smile on my face?” the poet writes, responding to a morale-boosting campaign dubbed “Statistical Feelings” organised by China’s National Bureau of Statistics. “Because of statistics/ I can rearrange the stars in the skies above.”

Hmm. Slightly awkward, that one. In a week when China’s economic statistics have earned more scepticism than usual, it might not be wise to talk about astronomical manipulation.

Even the state-controlled Chinese media have admitted that 91 per cent of citizens do not believe official Chinese statistics. Statistically speaking, that may not be too bad. Another survey, published in Insight China, reckoned that 7.9 per cent of respondents think prostitutes are trustworthy. This figure seems low, but places prostitutes as the third most trusted group in China, well above politicians and scientists, let alone what China Daily describes as “the least credible category which consists of real estate developers, secretaries, agents, entertainers and directors”.

If you are following the statistical argument, Chinese statisticians are more trusted than its sex workers. Or perhaps I am relying on one of the 82 per cent of statistics invented on the spot. Or one of the 46.79842 per cent of statistics that claim an unjustifiable level of precision.

China’s official statisticians are not the only ones facing scepticism. In the UK, only 36 per cent of people believe that official figures are generally accurate. This is, however, an official figure, so 64 per cent of us would hesitate before placing much confidence in it.

“Some mock me for doing statistics/ Some loathe me and statistics”, writes China’s poet-statistician, but our relationship with statistics is more complex. We feel that no argument is complete without a gesture towards the data, yet few of us understand how they are compiled. We sense – rightly – that statistics are often abused through ignorance, or manipulated.

I am a non-statistician who deals with statistics and statisticians frequently, and in my view statisticians are unsung heroes. Statistics are essential to understanding the world, but statisticians get little credit. We accept the numbers in the news as fact, without considering the skill in producing them from small, non-representative samples.

The most striking statistical story I came across this year was that adding statistical information to a charitable appeal reduces donations. It seems that merely reading a statistic makes us meaner.

This is the kind of obstacle statisticians must overcome. So sing out, poet-statisticians of China. Bean-counters of the world, unite!

The writer is an FT columnist and presenter of BBC Radio 4’s statistical programme, More or Less. His new book, ‘Dear Undercover Economist’ (Little Brown) was published on Friday

Economists might not be an obvious source of advice on parenting, the intricacies of etiquette or the dark arts of seduction. Even seen in the most flattering light, the economist can appear a remote figure: resolutely rational, untroubled by indecision or weakness of the will, a Spock-like creature too wedded to theory to be able to relate to mere human concerns. At worst he can look like a social naïf, if not an outright sociopath; a man (or occasionally a woman) who knows the price of everything and the value of nothing.

At least such is the traditional image of the economist; and who is Dear Economist to demur?

He is not, it would be fair to say, as sympathetic as more traditional agony aunts. He is blunt. He is rude. He loves jargon. When confronted with a woman who enjoys the dating game but worries that she might leave it too late to settle down, Dear Economist offers not a shoulder to cry on but a frank explanation of optimal experimentation theory. When a dinner party guest wonders how much to spend on a bottle of wine, Dear Economist ignores the Good Wine Guide and reaches for the Journal of Wine Economics.

But – and this is the crucial question – is the advice any good? In the six years since the Financial Times entrusted me with the awesome responsibility of answering letters to Dear Economist, I have happily donned the persona and issued my instructions. But I have not asked too closely how they were received – until now.

Over the past few weeks, I’ve been writing to some of my correspondents to ask them what they made of my advice, whether they took it and how things worked out. Here, for the first time, are their responses.

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".
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